I started my career with a stint in oil and gas tax law in the early 80s, so I've always had a soft spot in my heart for promoters who know how to game the system. Over the years, that fondness has been tempered by experience that taught me the games can't continue forever and loopholes invariably get closed when the nature of the game is widely understood. The changes are rarely sudden, but they are as unavoidable and inevitable as sunrise in the east.
A couple weeks ago, Barron's reported that analysts at Barclays had downgraded electric utility bonds across the board because "a confluence of declining cost trends in distributed solar photovoltaic (PV) power generation and residential-scale power storage is likely to disrupt the status quo," posing a significant threat to bond investors. I darned near fell off my chair when I got to the part that said; "In the 100+ year history of the electric utility industry, there has never before been a truly cost-competitive substitute available for grid power. We believe that solar + storage could reconfigure the organization and regulation of the electric power business over the coming decade."
My overall reaction can be summarized with a single word - Balderdash! I'm incredibly bullish on energy storage, and have devoted almost six years to a blog about investment opportunities in the sector, but I know first-hand that energy storage is not the Holy Grail.
The reason for my decidedly contrarian viewpoint is simple. I understand how leading providers of PV solar components, systems and services, including First Solar (NASDAQ:FSLR), SolarCity (SCTY), SunEdison (SUNE), SunPower (NASDAQ:SPWR), Canadian Solar (NASDAQ:CSIQ), Trina Solar (NYSE:TSL) and a host of lesser lights are ruthlessly gaming the system, instead of making substantial contributions.
Barclays was right in its assessment that the investment risks are gargantuan, but those risks lie with stockholders of residential PV solar promoters, not utility bondholders.
I recently wrote that an industrialized society can't function properly without three critical shared resources - clean water, clean air and clean electric power. Solar panels create electrons without air pollution, which makes them highly attractive from the perspective of our shared air resource. From the perspective of our shared electric power resource, the electric current generated by residential PV solar is filthy, because it's inherently variable, intermittent and unreliable.
If the electric grid was a mountain stream, the current from PV solar would be like adding raw sewage. If the electric grid was clean air, the current from PV solar would be like a dung-fired power plant without scrubbers. We are catastrophically polluting one shared resource in the name of protecting another from real and imagined harm. It's a widely ignored tragedy of the commons that ideologues, demagogues and hucksters would rather sweep under the rug.
The costs utilities pay to smooth and stabilize the filthy electric current from residential PV solar and provide standby facilities for the inevitable cloudy, rainy, gloomy days are huge. Sadly, the residential PV system owners who created the instability in the first place do not pay the costs of intermittency abatement. Instead, those costs are simply folded into the rate base and paid by the utility's other customers. It's a great deal for the PV solar system owner and abusive for all other users of electric power.
A second tier of abusive practice arises from differences in the ways business customers and residential customers are charged for electric service. In most parts of the country, utilities charge commercial customers a "demand charge" of $10 to $20 per kW based on the highest 15 minutes of power use during the billing cycle, plus an "energy charge" of $.08 to $.12 per kWh. The demand charge represents the utility's fixed infrastructure costs, while the energy charge represents the variable cost of buying and distributing power.
Residential customers have historically paid a combined flat rate per kWh that includes both demand and energy components, because variation from house to house was minimal.
When a residential utility customer makes a business decision to invest in a capital asset so that he can become a part-time power producer, that decision undermines the rationale for offering a flat rate in the first place, because his power production and consumption patterns will be very different from all his neighbors. Whenever utilities give residential PV solar systems the benefit of a residential tariff for their mixed residential and commercial use of the grid, the PV solar system owners end up grossly underpaying their share of infrastructure costs. Once again, it's a great deal for the PV solar system owner and abusive for all other users of electric power.
A third tier of abusive practice arises from net metering schemes that give PV solar system owners full residential tariff credit for their excess day-time power. PV solar system owners don't pay for the infrastructure that redistributes the solar power they don't consume, and they don't pay for the infrastructure that delivers the conventional night-time power they do consume. Once again, it's a great deal for the PV solar system owner and horrid for all other power users.
A final tier of abusive practice arises from giving residential PV solar system owners a 30% Investment Tax Credit for buying a capital asset that generates long-term tax-free income in the form of avoided utility bills.
Historically, ITCs were only available for productive assets used in a taxable trade or business. The theory was that encouraging investments in capital equipment with a 10% tax credit would create new jobs that increased overall economic activity and gave rise to multiple taxable income streams that would more than offset the ITC. None of those benefits arise from the purchase of residential PV solar systems. The hardware is bought and paid for once, and the jobs impact of post-installation maintenance is beyond insignificant. The tax-free savings to the system owner are directly offset by lost utility revenue, and the societal economic impact is a zero-sum game.
With a stunning record of four abject failures on four tests of fundamental fairness, there's a very good argument that residential PV solar is more trouble than it's worth, unless the owner acts responsibly and adds enough storage to abate his intermittency.
Shortly after Thomas Edison commissioned the world's first electric grid, promoters began over-selling batteries to a gullible public. The scam worked like this. A promotional company that claimed to have proprietary power and lighting technology sold the 19th century equivalent of franchises to investment syndicates that were organized for the purpose of providing electric light in a limited area. The promoters charged up-front fees for license rights, and then sold the syndicates all of the necessary equipment and materiel. The syndicates were dismal failures, but the promoters made a fortune and raised the current dollar equivalent of $700 million in the UK, before taking their scam on the road and migrating to the US with an insidious new twist - in addition to selling license rights, generators and materiel, the promoters added batteries to the mix, so that the syndicates could run their generators during the day to charge batteries in their customers' homes and run their generators at night to power even more electric lights.
Mr. Edison's reaction shocked many. He started by explaining to a New York Sunday Herald reporter that he patented the idea of combining generators, batteries and electric lights in 1879, but batteries were the weak link. After explaining the technical and economic challenges, Mr. Edison offered these blunt observations that I find increasingly apt and timely:
"The storage battery is, in my opinion, a catchpenny, a sensation, a mechanism for swindling the public by stock companies. The storage battery is one of those peculiar things which appeals to the imagination, and no more perfect thing could be desired by stock swindlers than that very selfsame thing.
Just as soon as a man gets working on the secondary battery it brings out his latent capacity for lying.
Scientifically, storage is all right, but, commercially, as absolute a failure as one can imagine."
The key takeaway is that using batteries to store electrons for their energy value was a money-losing proposition in 1883, and it's still a money-losing proposition.
When I started blogging in July 2008, my core thesis was that energy storage is the beating heart of cleantech, and is destined to become an investment mega-trend that will endure for decades. Storage is an essential enabling technology for wind and solar power, an efficient smart grid and emerging transportation applications. It's also a tough industry that's constrained by laws of chemistry, and requires massive volumes of commodity metals for raw materials. We can expect slow incremental progress, but the game changing "Moore's Law" advances we enjoyed in information and communications technology are not going to happen in energy storage.
This article is the third installment in a series of articles that will explore the investment opportunities and risks of grid-scale energy storage. The two earlier installments are:
I hope you'll follow the discussion and pay particular attention to reader comments. I'm only human, and I can only speak from the perspective of the shoes I stand in. That makes informed comment from readers doubly important. I only ask that readers remember it's possible to disagree without being disagreeable, and emotion that isn't supported by documented fact has limited utility to serious investors. Let's keep things civil and figure it out together.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.