Battery Storage And The Future Of Residential Solar

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Includes: TSLA, VSLR
by: Simple Investment Ideas

Summary

The residential solar industry has always been held back by a lack of a cost-effective energy storage device.

The residential solar industry's current dependence on utilities is slowing down its potential growth, due to time and money wasted on regulatory battles with the utilities.

The intense focus on lithium-ion battery cost reductions is a positive development for residential solar companies hoping to attain grid independence.

The integration of cost-effective storage devices into the residential solar industry could change the landscape of the entire energy industry.

While residential solar has been growing at an unprecedented rate, the lack of cost-effective storage devices has been a constant issue plaguing this industry. Regardless of all the amazing cost-reductions experienced by solar panels over the years, without a cost-effective energy storage device, the residential solar industry will always be at the mercy of the utilities. Leading residential companies such as SolarCity (SCTY) or Vivint Solar (NYSE:VSLR) are largely bound to utilities, with the exception of a few of SolarCity's customers opting to buy very expensive storage batteries.

The good news is that lithium-ion battery innovation has been speeding up in recent years, and is poised to accelerate in the coming years. This is largely thanks to Tesla's (NASDAQ:TSLA) electric cars, and consequently Tesla CEO Elon Musk's Gigafactory ambitions. Although the Gigafactory was built for the express purpose of producing significantly cheaper lithium-ion batteries for Tesla's electric vehicles, it will, coincidentally, have the side effect of providing residential solar companies with more cost-effective storage devices.

While it is unknown if Musk built the Gigafactory also with residential solar storage as a key motivator, the Gigafactory is nonetheless hugely synergistic with the residential solar industry. It would not be surprising if Musk did indeed have residential solar storage in mind when he was coming up with his Gigafactory plan -- he is also the chairman of SolarCity.

Lithium-ion batteries are by far the most promising energy storage technology

Source: Autobloggreen, Eric Love.

Limitations of Current Residential Solar

Currently, residential solar is reliant upon the utilities for electricity in the times when the sun is not out. This has been a major source of problems for solar residential companies such as SolarCity or Vivint Solar, as it gives the utilities a huge position of power. Although there are many regulations mandating that utilities accept residential solar and even buy back unused electricity from residential solar generation(net metering), there is still a natural pushback against the residential solar companies from the utilities. This pushback has taken the form of utility surcharges on solar companies and other policies designed to squash the budding residential solar sector.

As a result of the residential solar companies' dependence upon utilities, there have been constant regulatory battles between the residential solar companies and the utilities. In fact, SolarCity (the largest residential solar company by far) has whole teams of employees dedicated to the sole purpose of fighting and lobbying against the utilities. The utilities are trying to get rid of residential solar friendly laws, and residential companies are fighting back tooth and nail. All of these regulatory battles mean that a disproportionate amount of time, energy, and money is wasted on the residential solar companies' parts, as they are just a fraction of the size of utilities. This means that the sooner these companies can become grid independent, the better.

Without grid support and a source of electrical backup, residential solar would largely be uneconomical and unfeasible. Even if the total price of solar systems were to keep dropping precipitously as it had been in the past, this price drop would essentially be meaningless if there is no method of storing the extra electricity produced by the solar panels. While the residential solar companies are viable for now due to net metering laws, it will be a constant struggle to keep these net metering laws alive. Despite residential solar's seemingly unavoidable reliance upon the utilities, storage technology is quickly starting to reach a point of becoming economical.

Implication of Economical Battery Storage

With electric cars vehicles serving as a major catalyst, battery storage is set to experience massive cost-reductions in the near-term future. In fact, SolarCity had stated that within the next 10 years, all of their systems will come with battery storage, effectively ending the company's link to the utilities. This means that utilities will no longer have the power to control the destiny of residential solar users, and could experience something akin to a death spiral in wake of customer defections to residential solar.

Although some people do not think battery storage will be viable anytime time, they are clearly underestimating the will and desire for cheaper storage devices. The exponential growth of electric cars and residential solar will accelerate battery technology innovation. Case in point is Tesla, who is planning to build a $5 billion Gigafactory for the sole purpose of creating significantly cheaper energy storage devices in the form of lithium-ion batteries. Elon Musk estimates that when the Gigafactory is fully operational in a few years time, it will be able to reduce battery costs by 50% of its current cost. This two-fold price reduction will go a long way in residential solar companies attaining the goal of grid independence.

Despite the prohibitive cost of wide-spread battery storage for residential solar, SolarCity already as a pilot program of sorts for energy storage with Tesla batteries. While only a small percentage of its customers are using these storage devices, it has proven to be a viable concept, albeit at a currently high cost. With the somewhat exponential price decrease in battery storage technology, SolarCity and companies like it should be able smoothly integrate these storage devices into their product mix in the near-future.

Risks

If the lithium-ion battery cost reduction roadmap plays out like residential solar companies plan, the already fast paced growth of distributed solar would only accelerate. Of course, things don't always go to plan, and it could be no different in the case of the Gigafactory's cost reduction schedule. Elon Musk has proven himself over and over again, his lithium-ion cost goals are still wildly ambitious by any measure. While potential future misses in battery cost-reduction goals will certainly have negative consequences for residential solar companies, such as delayed grid independence, it will by no means be devastating.

Regardless, the is little to no doubt that energy storage technology will get substantially cheaper with time. Even if storage cost reductions are slower than expected, residential solar companies will still have an enormous amount of potential. With the exponentially decreasing solar cost curve, adoption of residential solar will only continue to expand in the future.

Conclusion

Truly cost-efficient energy storage has always been the holy grail for residential solar companies. If companies like SolarCity or Vivint Solar eventually become successful in integrating storage devices with residential solar, the whole electrical industry landscape could change. With a potential addressable market of approximately 100 million residential homes in the U.S. alone, residential companies have nearly limitless opportunity ahead of them. With the exponential adoption of solar and extremely low residential solar market penetration (<1%), leading residential solar companies such as SolarCity and Vivint Solar are extremely undervalued. Not many individuals recognize the true value of distributed solar generation, as it has massive disruptive potential.

Disclosure: The author is long SCTY.

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.