Musk plots energy storage fix where utility industry failed

SAN FRANCISCO -- Billionaire Elon Musk thinks he can pave the way to a better energy future by turning the mattress-shaped batteries in Tesla’s electric car into upright pillars so they can be used to power homes, businesses and even utilities. Musk will lift the veil Thursday on a new generation of batteries designed to store growing volumes of solar and wind energy.

If he gets it right, Tesla Motors Inc. will have spun a significant second business off the technology originally designed for its electric vehicles — and will gain a toehold in a business projected to generate tens of billions of dollars in a decade. Nobody in the power industry has yet been able to come up with a cost-effective way to store large volumes of energy for later distribution. Tesla is making a bet that its huge $5 billion “gigafactory" currently under construction near Reno, Nevada, will enable the mass production needed to drive down the cost of batteries and make them competitive for a broad range of customers, including traditional suppliers of electricity.

Tesla has scheduled an event Thursday at its design studio in Hawthorne, California, to announce both a Tesla home battery and what it called last week in a note to investors “a very large utility-scale battery.”

Eagerly Awaiting

“Whatever Tesla announces on Thursday is just the beginning,” said Peter Rosegg, spokesman for Hawaiian Electric Co., where 12 percent of the utility’s customers have rooftop solar panels. “Tesla doesn’t have to go after the market — the market will come to them. We’re very eager to see what they have to say.”

Tesla, based in Palo Alto, California, has its eye on a business that’s poised for tremendous growth. As homes, businesses and utilities use more renewable energy generated by sunshine and wind, the need to provide reliable power grows. Batteries can be used to store electricity during peak production times, and then dispense it later when the sun isn’t shining or the wind isn’t blowing. Musk tweeted a teaser about the Thursday announcement: “For the future to be good, we need electric transport, solar power and (of course) ... the missing piece,” he posted on Twitter Tuesday. Tesla rose 0.9 percent to $232.45 at the close in New York.

Global Growth

A January report from Navigant Research estimates that worldwide revenue from grid-scale energy storage may exceed $68 billion by 2024 as renewable resources multiply and electricity grid operators seek to balance the mix of generation assets.

Tesla is already supplying batteries to homes and commercial businesses such as Wal-Mart Stores Inc. through pilot projects and a supply agreement with SolarCity Corp., a relationship that generated $2.7 million in revenue for Tesla in 2014, according to a recent regulatory filing. That’s less than 1/10 of 1 percent of the automaker’s total for last year.

But Tesla is thinking much bigger, saying in job postings that its energy-storage business will soon grow to billions in sales. Musk plans to combine the strengths of the company’s patented lithium-ion batteries, which currently can run a car for about 265 miles (426 kilometers) a charge, with its expertise in power management software.

Green Trio

Musk’s green power ambitions involve three inter-connected enterprises: SolarCity, where he serves as chairman, the battery factory in Nevada, and the Tesla car business. With the move into energy storage, Tesla can help green the grid that fuels its cars while offering solar customers a way to store any excess electricity in batteries for use during hours of less sunlight and greater demand. An even larger potential market will be utilities that have traditionally generated power with coal and natural gas.

“Tesla isn’t just going to sell batteries to SolarCity,” said Ben Kallo, an analyst with Robert W. Baird & Co. “They are going to sell to project developers, wind and solar developers, and directly to utilities. The residential product isn’t going to be a huge needle mover in the near term, but the numbers are very big on the utility side.”

Tesla will face competition from other battery makers such as Korea’s LG Chem Ltd., legacy U.S. power providers such as AES Corp. and startups such as JLM Energy Inc. It will have to navigate regulatory hurdles in a state-by-state market with varying degrees of subsidies and incentives for the technology.

Moving Slowly

Utilities, cautious by nature, have been slow to adopt storage on their own. “Storage doesn’t neatly fit into transmission, distribution or generation categories so it can be tough for utilities to justify investing in storage projects,” said Brian Warshay, an analyst for Bloomberg New Energy Finance. “Some utilities, like the California investor-owned companies, are getting into storage because their regulator basically told them they have to.”

In Tesla’s home state, a groundbreaking energy-storage mandate requires PG&E Corp., Edison International’s Southern California Edison and Sempra Energy’s San Diego Gas & Electric to collectively buy 1.3 gigawatts of energy storage capacity by the end of 2020. New York is also pushing utilities to use storage to relieve congestion on transmission lines and plans for the potential retirement of the Indian Point nuclear power plant. Entergy Corp., owner of Indian Point, is applying for a federal license to keep its reactors open through the end of the next decade.

Utilities in California and New York are potential customers for Tesla. The automaker also has been in talks to provide its batteries to Oncor Electric Delivery Co., the largest power-line owner in Texas.

“Batteries really are kind of a panacea for the grid,” said Don Clevenger, senior vice president of strategic planning for Oncor. “They provide better reliability.”

Copyright 2015 Bloomberg

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