I've assumed for some time that there will be many components to the energy transition from fossil fuels to renewable energy, and of course, that is true. But suddenly things are crystallizing around some combination solutions. A key solution seems to be providing evening peak power, and solar PV + batteries are now outcompeting other technologies. Here I review the space and indicate that First Solar (FSLR) looks to be planning to be a big player in this space. Rooftop solar PV combined with batteries is another emerging trend.
Conservative commentators had a lot of fun demonizing how small the world's biggest battery (Tesla-Neon's 100MW/129MWh) installation is, saying it would keep South Australia's grid alive for a very short time. Of course, this completely missed the point. Now that the battery is operating, even enthusiasts have been surprised at how significant even one large battery installation has been in the Australian energy market. It isn't exaggerating to say the result has been an earthquake, with a number of dramatic impacts. It has been used to help meet peak demand and to provide grid stability services, such as frequency stabilization when old fossil fuel plants suddenly drop out (as they do, especially in hot weather). The initial response to a power drop occurs within milliseconds with the Tesla-Neon battery and this occurs across the Australian grid.
Before the Tesla-Neon battery, AES (AES) Energy Storage had the record for largest battery with a 30MW/120MWh battery in California. AES has now teamed up with Siemens (OTCPK:SIEGY) in a new company named Fluence, which will give the AES operation more capacity, including its own financing through Siemens' financial services unit. To show that the new company has big ambitions, it recently won the contract to build for Edison International (EIX) unit Southern California Edison a 100MW/400MWh battery to be located in Long Beach, California. This will set the new record for world's biggest battery.
Whether this is just the start of a "bigger is better" race, or whether smaller batteries of around 50MW capacity distributed throughout the grid will be preferred, only time will tell.
Just about everyone is getting into this area. Innogy (OTCPK:INNYY), the renewable energy side of German power company RWE's former business, has recently acquired BELECTRIC Solar & Battery Gmbh, and now it is flexing its muscles in Australia with acquisition of two major solar PV projects (total of 460MW) that are in advanced development in New South Wales. To indicate how quickly these big projects can be built, Innogy expects to start construction this year, with full commercialization next year. Expect the next announcement to include a battery storage component.
And then there is Total Eren, which involves a 23% stake by Total (TOT) in the French renewable energy group Eren Re, with possible acquisition of the group after five years. This is another investment by Total to leverage its low carbon capacity through outstanding companies, where Total provides a substantial capital injection to rapidly grow capacity. An Australian example of this is that Total Eren announced approval for a large (up to 100MW/380MWh) battery to be added to its newly announced solar PV project of 200MW capacity in northwest Victoria. The solar PV aspect of this project, in turn, might be increased to 350MW.
I've focused on Australian solar PV + battery developments, which no doubt are leveraging off the success of the Tesla-Neon big battery (although the Tesla-Neon battery is coupled to a wind farm). The combination of solar and batteries is starting to happen all over the world. Eren, for example, has focused on Latin America, Africa, and Asia for its renewable energy developments since formation in 2012, and no doubt batteries are now being considered as add-ons or integrated project proposals.
Australia has massive adoption of domestic solar PV with more than 30% of households in Queensland and South Australia having solar PV panels, and this is beginning to be coupled with substantial home battery storage. In Australia, home storage increased three-fold year-on-year from 6,750 new installations in 2016 to more than 20,000 in 2017. This amounts to 170MWh of storage, which is more than the Tesla-Neon big battery in South Australia (129MWh). Costs of home storage batteries have fallen 80% since 2010 and costs may halve again by 2025. 74% of Australians polled expect household batteries to be commonplace in the next decade. Indeed Metricon, a major Australian homebuilder, is offering 5kW rooftop solar and a 13.5kWh Powerwall Tesla battery system along with the usual accessories such as air conditioning system and oven. Metricon, which builds around 1,000 new homes annually, indicates 50-60% uptake of this offering. Between 40 and 50 new home builders are offering this kind of package. Tesla claims that its success with the big battery is leveraging sales of its residential Powerwall 13.5kWh battery.
And of course, in typical Elon Musk fashion, a just-announced partnership with the South Australian Government, involves pulling together 50,000 households to build a 250MW/650MWh virtual power plant. This isn't quite the "build it in 100 days plan" that the big battery was, but it is visionary and involves starting out with a social housing project that will give low income families 5kW rooftop solar PV and a 13.5kWh Tesla Powerwall 2 battery system.
While the US lags far behind Australia in rooftop solar PV (and of course household battery combinations), a 2016 NREL report makes clear that 39% of US power (1,118 GW capacity and 1,432 TWh of energy generation) could be generated by putting solar PV on US rooftops. With more efficient solar PV panels, this amount is likely to be closer to 50% today. Clearly, combining this with residential battery storage provides massive storage potential and this storage exists at the site of power generation (reducing the need for poles and wires).
News just in reports that First Solar's (FSLR) first foray into solar PV plus storage will be a 65MW solar farm coupled with 50MW/135MWh of battery storage in Arizona. The significant thing about this project is that First Solar outcompeted peaking gas to provide afternoon/evening (3-8pm) peak power. Arizona Public Service, a subsidiary of Pinnacle West Capital Corp. (PNW), has signed a 15-year power purchase agreement with First Solar. Arizona Public Service was technology neutral in seeking proposals. The First Solar solar PV + batteries bid beat "cheap" gas, and standalone solar PV, standalone batteries, and gas peaking bids. The FSLR combination is being described as a new standard "a solar peak power plant." Solar power will charge the battery during the day and deliver the early phase of the power needed, with later power requirement coming from the battery.
The news release made clear that this is the first of what is expected to become many successful bids by First Solar for "solar peak power delivery."
First Solar doesn't have the space to itself as Tucson Electric Power (owned by Fortis (FTS)) did a similar deal last year for 100MW new solar PV + 30MW/120MWh of battery storage for an astonishing overall cost of $0.045/kWh. Xcel Energy (XEL) also reported last year the results of many astonishingly low bids for a variety of combinations of renewable energy plus storage. In all, there were 87 bids for solar + batteries ($0.036/kWh) which compared with $0.048/kWh for combustion turbine/IC engine. Wind alone was bid at $0.018/kWh.
The pace of change in cost reduction and implementation of solar PV and wind power is extraordinary, but even more extraordinary is how quickly these developments are being integrated with lithium batteries at significant scale. This is rewriting the rules about the exit from fossil fuels and transition to a carbon-free economy. What might surprise many is that this is not just about replacement of coal, as peaking gas is having trouble competing.
Investors wishing to consider this emerging space have some homework to do, but there are some big players entering this space. How this industry might emerge is starting to take shape. First Solar is a clear player, but whose batteries it will use isn't clear. Perhaps some relationship with Fluence? At the risk of attracting the Tesla haters, I think you have to take Tesla seriously. There I said it. Then there's Total, which is a majority shareholder in SunPower (SPWR) and now with a stake in Eren. This isn't the wild west anymore, but still not traditional investor territory.
I'm not a financial advisor, but I do follow closely the dramatic changes happening in the energy and transport sectors. If my commentary helps you rethink your energy and transport portfolios and gives some insight into risks of fossil fuel investment plus opportunity for renewable energy investment, please consider following me.
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Disclosure: I am/we are long FSLR, SPWR. 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.