Growth Drivers In The North American Residential Energy Storage Markets

by: Livio Filice

Technology, policy and cost reduction remain critical components.

Residential energy storage's role in Net Metering 2.0 programs.

Different opportunities on how to play this emerging niche market.

A combination of low-cost solar PV systems, increasing number of electric vehicles being built, and changes in policies is encouraging the mass deployment of residential energy storage systems. Although the industry is still in its early days, all the necessary components have already begun to fall into place, ensuring a very bright future for the industry.

Until recently, solar PV could only be used to offset a home's electric requirements when the sun was shining. Beyond this time frame, the home would need to call upon the electrical grid to fulfill the balance of its energy, and when the solar PV array would overproduce, additional electricity would be exported back into the grid. This setup makes it absolutely ideal to go solar.

However, a number of components are changing the face of the residential solar PV market. The three changing critical components are: technology cost, innovation, and policy.

Policy - Across the United States, there is a growing number of utilities which have hit their renewable energy requirements and have begun to push back against homeowners who want to export electricity when they are not home to use the power. Utilities across the board have begun to dismantle programs which incentivize homeowners to go solar. This is achieved by decreasing the value of the exported electricity which ultimately prolongs the payback period of a solar system. There are also a number of utilities which have introduced residential time of use and demand charges or no longer allow homeowners to export electricity back into the grid creating a net zero export limitation. The following are a number of scenarios which are driving sales today:

  • Net Metering 2.0 - Removal or change of net metering programs across the country and various Caribbean islands in order to control PV saturation, grid stability, a fair distribution of transmission cost, and utility revenue.
  • Devaluation of Exported Solar PV - A shift to wholesale or an avoided cost for exported electricity such as seen in muni, rural cooperatives, small and large utilities.
  • Net Zero Export Limitations - Hawaii has been the first market to adapt such standards due to high day time PV load penetration rate at certain feeders which is becoming increasingly common along with many areas in the Caribbean.
  • Time of Use Rate Structures - The implementation of various rate structures which will place the highest cost electricity during evening time frames until late in the evening.
  • Buy All, Sell All Programs - Several regions are moving towards a buy all electricity which is produced from homeowners which seriously devaluates the value of solar PV and forces the homeowner to sell his electricity for less than retail.
  • Residential Demand Charges - implementation of demand charges in the residential rates as first seen on a broader scale in the Phoenix Metro area.
  • Net Metering Credit Expiration - In some regions, net metering credits accumulated are non-transferable and expire at the end of the calendar year.

Technology - Nearly all major global automotive manufacturers are in the market with a lineup of electric or plug-in hybrid vehicles which has spurred a tremendous amount of capital being deployed in the battery manufacturing space. Lithium battery prices have already significantly decreased. Although there will be much discussion on future battery price decreases, there will be a shift in focus to the balance of system components specifically power electronics along with system packaging, design and form factor.

Functionality - Due to the increasing number of changes in utility rate structures, the functional capabilities and requirements of residential energy storage systems have begun to dramatically change. Historically, residential battery systems have been dominated by lead acid product serving as a backup power source for when the grid goes down. Today, residential energy storage systems are being deployed to capture excess solar capacity for use at a later point and to optimize the solar PV production against residential demand charges and time of use rate structures. Of course, many homeowners are still very interested in using their solar asset in the event of a grid failure.

2016 was a record year for advanced lithium-based residential energy storage systems as the industry began to ship moderate volumes of equipment. Based on my knowledge of the industry, between 2,000 and 2,500 residential storage systems were deployed. In 2017, the market is expected to increase to around 5,000-7,000 pieces while 2018 will act as a true tipping point for the industry as tens of thousands of systems will ship into the residential market. The combination of policy and rate structure changes, lowering technology costs and an increase in system functionality will drive growth in primary markets such as Hawaii, California, New York, Massachusetts, Arizona and Texas. Between 2017 and 2020, the industry will see very high attachment rates of solar plus storage systems. The primary drivers:

  • Hawaiian market will open up due to the self-supply limitations (net zero export)
  • Renewable energy targets met by utilities leading to the devaluation of exported solar
  • Implementation of various rate structures and demand charges
  • An increase in utility-driven projects both behind and in front of the meter
  • Product innovation and cost reduction will hit the market by the end of 2017, early 2018
  • Successful reopening of California's Self Generation Incentive Program (SGIP)

It is highly probably that by 2025, there will be a solar plus storage attachment rate of 1:1 in all major US and Caribbean solar markets. As we look forward, the primary value of residential energy storage is the ability to use solar produced during the day at a later point such as in the evening when electric prices are higher. Essentially, residential battery systems will allow homeowners or a community to create their own net metering program.

Other opportunities including net zero homes are quickly becoming a popular trend where state-level mandates are coming down on home builders and residential micro grids, which is the possibility to implement solar, battery + diesel systems. Today, these types of systems are becoming increasingly practical, and becoming a potential alternative or supplement to a grid tie in a scenario specifically for island regions such as Puerto Rico.

With a tidal wave of demand arising over the next years, there are various investment theses which can be drawn for different players throughout the lithium supply chain. Panasonic Corporation (OTCPK:PCRFY) actively sells battery cells to Tesla Motors (NASDAQ:TSLA) which has been aggressively ramping up production at the "GigaFactory". Other component suppliers include heavy hitters such as Samsung Electronics (OTC:SSNLF), LG Chem (OTCPK:LGCLF) and light weights such as Electrovaya, Inc (OTCQX:EFLVF) and Enphase Energy, Inc. (NASDAQ:ENPH).

Although there is a long list of hardware suppliers, I do not have confidence in recommending or purchasing equity in any of them. Rather, I prefer ownership in the lithium carbonate supply side, which will benefit from the mass adaption of stationary energy storage systems, the electrification of the transportation industry and growth in various other applications. In a recent article (Power Up With Shares In Orocobre - Buy Recommendation Reiterated), I provided exposure to Orocobre (OTCPK:OROCF) which is presently ramping up production at its Argentine-based lithium brine.

Disclosure: I am/we are long OROCF. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Author has been employed in the residential energy storage market and clean technology space for the past decade.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.