Tesla recently announced it is discontinuing its backup power battery. Sized at 10 kWh with a capability of 500 cycles, they found there was no demand for it in the market. Tesla finally recognized what I discovered at SunEdison in the fall of 2015, as soon as we built a residential storage financial model. The real economic value in residential storage is in daily load shifting which requires cycle life measured in the few thousand, not hundred.
This example underscores the importance of understanding the economics of a product’s target market. While some energy storage manufacturers have become much more sophisticated, too many continue to focus just on their technology, without adequately understanding their target markets. They often appear to be focused on building “the most technologically superior battery,” when in fact they need to be building “the most competitive battery.”
Additionally, I see articles stating that storage becomes economic when the price reaches a specific price per kWh (e.g. 10 ₵/kWh). While that is a good metric for an "Energy" product, it’s ultimately misleading in this case since the primary near-term economic application for storage is "Capacity," which is typically measured in $/MW-day (or $/kW-mo). Batteries now are competing against generation plants that provide electricity during peak hours of the day or deferring transmission and distribution system upgrades. Both are measures of Capacity.
If you look at the rules that govern how the major Independent System Operators (ISO) structure the Capacity markets, and take into account how project finance works, that leads you to the conclusion that the most competitive product would be a short-duration battery, one with a three to five year life, a capability of 1,000 to 2,000 cycles, minimum of 1 hour discharge, and a cost around $10/kW-mo. Here’s why:
1. Project finance and contracted revenue. Many of the storage projects built to date are sitting on the balance sheet of major corporations. Except for the regulated utilities, that approach is both expensive and limited. Major third party investors capable of providing lower cost project finance at volume are going to require contracted revenue, credit-worthy off-takers and a good warranty.
2. Short-term nature of Capacity Markets. The ISOs are credit-worthy, but Capacity Markets are generally short-term, typically offering a maximum of 3 to 5 year contracts. Aligning the shelf-life of the battery with the duration of contract would be an ideal solution, at least while LiOn is the leading bankable technology. By definition, lower finance costs require lower risk, which means either all of the revenue needs to be contracted or it will be heavily discounted. A frustrating exercise that solar developers know all too well.
3. Sizable markets. Most of the energy storage projects built to date on the East Coast of the United States operate in the Ancillary Services market, specifically frequency regulation. While that has helped launch companies, ultimately Ancillary Services only represents about 1% of the total value of energy markets. Capacity typically represent approximately 30% to 40% of the total market.
4. Declining costs. In an environment of rapidly dropping costs as manufacturing capability scales, and (comparatively) low installation costs for containerized storage, it makes economic sense to plan for replacement sooner rather than later.
While Tesla may have found there was no market for their residential backup battery, I expect their reconditioned EV batteries will sell like hot cakes.