Investment bank Morgan Stanley says the global electricity utility industry is still underestimating the potential of EV maker Tesla to achieve a dramatic reduction in battery storage costs, luring more and more consumers to go “off-grid.”
In a detailed report released in late July, Solar Power & Energy Storage, Morgan Stanley said that energy storage, specifically that being developed by Tesla in its so-called “giga-factory” could be disruptive in US and Europe, and elsewhere.
It does not mention Australia in the report, but Australia has all the ingredients of a market perfect for such disruption – excellent solar resources and high electricity costs, and more specifically, high network charges.
“Given the relatively high cost of the power grid, we think that customers in parts of the US and Europe may seek to avoid utility grid fees by going “off-grid” through a combination of solar power and energy storage,” Morgan Stanley’s leading energy analysts write in the report.
“We believe there is not sufficient appreciation of the magnitude of energy storage cost reduction that Tesla has already achieved, nor of the further cost reduction magnitude that Tesla might be able to achieve. once the company has constructed its “Gigafactory,” targeted for completion later in the decade.“
This, of course, has massive implication for the incumbent utilities, not to mention for other consumers. The immediate response for networks has been to seek to raise fixed charges to protect their revenue, an option that Morgan Stanley says will be counter-productive.
In Australia, the network operators have been warned that they might have to cut their value of their gold-plated investments to compete on costs with new technologies, but the operators are arguing against this, saying such a move would increase the cost of capital. Effectively, they say, the “sunk costs of the grid” are there to stay.
The importance of Morgan Stanley’s analysis is, however, that while the costs of the networks are fixed, and rising, the costs of these new disruptive technologies will continue to fall, and quicker than the incumbents realise.
Most battery manufacturers, it notes, have a capacity of around 40MW to 50MW per annum. Tesla is proposing one of 1,000MW – and perhaps many more. This, says, Morgan Stanley, will slash the capital cost of Tesla’s battery from the current $250/kWh to $150/kWh by 2020, whereas its closest competitor will be at a cost of ~$500/kWh.
In the US, Morgan Stanley says there may be a “tipping point” that causes customers to seek an off-grid approach.
“Higher fixed charges to distributed generation customers are likely to drive more battery purchases and exits from the grid. The more customers move to solar, the remaining utility customer bill will rise, creating even further “headroom” for an off-grid approach.
“For every $25/kWh reduction in the cost of lithium-ion batteries, we estimate the all-in cost of power to customers falls by about $.01, or about 15% of the residential customer price for grid charges.”
It notes that, historically, power storage costs have been too high to realistically allow customers to disconnect from the utility power grid. However, given the prospect of a reduction in battery production costs to $125-$150 per kilowatt-hour of storage capacity, and perhaps lower (a few years ago, a typical battery would cost >$500/kWh), it expects see the potential for customers to decide to move off-grid.
“For example, in California the typical annual residential cost for fixed utility grid costs was ~$500 in 2012. California rates are projected to increase materially, likely 4-6% through 2020 in our view.
“Given that most of the rate increases in our view relate to “wires” costs (rather than to the cost of power production from large power plants), we believe the grid charge in California could grow faster than 4-6%. If grid charges grew by 5% annually, by 2020 the typical fixed grid cost for a California utility customer would be ~$750.”
The higher the fixed charge required of distributed generation (primarily solar) customers, the greater the potential that customers purchase batteries on a large-scale and go completely off the grid.
Even in Europe, high utility bills could encourage relatively greater numbers of customers to disconnect from the grid by using solar power coupled with energy storage, although they are more likely to want to consume more self-produced power but remain grid connected.
This is likely to lead to faster development of a residential energy services model, and that could be a positive for utilities that successfully develop it. Some incumbent utilities, such as RWE, have been focused on this space, but Morgan Stanley warns that “the big winners come from outside the utility space.”
Morgan Stanley canvasses three types of approach to the arrival of storage:
On the grid, but net zero grid power usage. Under this approach, a customer’s solar panels produce excess power during the day (which is sold back to the grid), and at night the customer draws power from the grid. This approach could result in low or net zero usage of power produced by large-scale power plants attached to the grid.
On the grid, partial grid power usage. This approach is often taken in Europe, where solar panel systems are not sized to fully allow customers to eliminate their net usage of power from the grid, and where economics and regulation mean moving fully off-grid is very unlikely. It is thus unlikely that such customers pursue a fully off-grid approach.
Fully off the grid. In this approach, consumers fully depend on their on-site power generation, using storage and a power management system to provide power to the home when needed. Consumers could choose this approach for a number of reasons. For instance, in select markets, customers who choose to “net meter” as in the “on-grid” approach described above, have to pay a large non-bypassable, fixed grid charge; these consumers have an incentive to go fully off the grid.
The question is what return are households/investors seeking?
Morgan Stanley says households would accept a low IRR (internal rate of return) given prevailing interest rates.
“It may be that any IRR above zero is acceptable,” it notes. And it could also be that some financing solutions become available in order to reduce the upfront capital costs.
Right now, Morgan Stanley estimates that a typical solar/battery home system (5kW solar panels with a 12.5kWh battery) costs around €25,000 in Europe. That is a material outlay for many families but Morgan Stanley expects that by 2020 this will declines (based on a 5kW panel and 12.5kWh battery) to just €12,500, which is much more manageable.
Morgan Stanley says it is the scale of Tesla’s battery production, even for its own use as an auto manufacturer, that thrusts the company into ‘key player’ status for grid storage.
“Tesla’s current Model S production (assuming 80 units per day with an 80kWh average battery capacity – i.e., 80% of Model S’s delivered with 85 kWh packs, 20% with the 60kWh) is equivalent to 6.4 MW hours of battery capacity per day.
“At that rate, by our calculations Tesla’s Model S production could produce a combined vehicle population with as many MW of battery storage for the US grid as exists today (304 MW), including all chemistries.
“By 2028, we estimate Tesla’s 3.9 million units NA car population (or “park”) will have an energy storage capacity of 237 GW (443 GW globally), equal to 22% of today’s US production capacity and nearly 10x larger than the entirety of US grid storage that exists today. These figures exclude any recycled (2nd life) battery after EV use.
Tesla Model S (85 kWh) can store enough energy to power the average US household for 3.5 days.
By 2020, it estimates Tesla’s 690k unit US fleet will contain the stored energy capacity to provide 1 full hour of electricity to 1.6% of US households.
By 2028, it estimate Tesla’s 3.9m unit US fleet will contain the stored energy capacity to provide 1 hour of electricity to 8% of US households.”