The Shifting Reality of Residential Energy Storage

By Alex Eller, Navigant Research

The residential energy storage industry has gained significant momentum during the past year. Yet while there has been substantial progress, recent high-profile product launches have led to media attention that overestimates the current state of the industry. Despite the potential of residential battery energy storage systems to drive transformation in electric power systems, they are an economical investment only in select markets today.

Going forward, utility involvement in the residential energy storage system (RESS) market will be a turning point for the industry as utilities look to own, distribute or access these storage systems. This article explores the evolving economics of RESS, how utility involvement is rapidly shifting market dynamics and the potential for this technology to lay the foundation for the distributed energy revolution.

Evolving Economics

Residential storage is a flexible resource that provides benefits for both utilities and their customers. These systems are typically installed to help homeowners save money on monthly bills, improve the economics of new or legacy solar photovoltaic (PV) systems and act as a backup power source. In addition, RESS technology is increasingly being recognized for the grid services it can deliver. Benefiting from economies of scale from the consumer electronics and electric vehicle (EV) industries, RESS lithium ion battery costs have come down dramatically. By some estimates, costs have come down by 80 percent for an installed system in leading markets in the past 18 months. This industry’s growth is directly tied to a number of interrelated factors that will dictate residential storage economics, as well as market size in a given country.

One of the most significant factors that will dictate the residential energy storage industry’s growth is how domestic customers pay for electricity around the world. Adjusted compensation paid for excess solar PV generation, time-of-use pricing and the implementation of residential demand charges can quickly change the economics of RESS for a given customer. The reduced compensation paid for excess PV energy sent to the grid has been the foundation of the residential storage business case in leading markets. Due to the growth of the solar PV industry, compensation programs (including net metering and feed-in tariffs) are being phased out or replaced with alternatives.

When these types of programs are eliminated, or when compensation for exported energy falls below the retail price of electricity, a RESS can help homeowners save money on electricity bills. In markets such as Hawaii, Germany and Australia, the residential storage industry is fueled by the decrease in PV compensation. As electricity rate structures evolve to include more time- and demand-based pricing, the value of RESS will continue to increase.

Utilities Getting in the Game

RESS’s ability to provide services to utilities and grid operators is one of the technology’s more complex value propositions. When properly coordinated, RESS benefits can be shared between system owners and grid operators. Capturing this value for both the network and consumers will be the key to success for the residential storage industry. The foundation for unlocking the ability of a RESS to provide grid services is aggregation through a virtual power plant platform that allows a network of small systems to act as a single large resource on the grid.

Utility involvement in this space has been a key market driver since 2015 and will be crucial to unlocking the full value of these systems as the technology matures. Many utilities are embracing RESS’s rise because their customers demand it. Utilities also see an opportunity to add flexibility and reliability to the system and resolve stability issues resulting from PV and EVs. Meanwhile, thanks to successful marketing campaigns, residential customers are aware of RESS products and continue to create market demand for it.

One of the primary benefits that a RESS delivers to utilities is the ability to reduce peak demand on the grid, which reduces costs to customers by limiting the need to run expensive peak power plants. In addition, the coordinated operation of an RESS allows for the deferral of costly infrastructure upgrades as load growth approaches maximum capacity of certain circuits’ equipment. Finally, a RESS controlled by grid operators can solve issues resulting from high levels of solar PV penetration by ensuring voltage and frequency remain at acceptable levels and excess electricity is absorbed onsite. Utilities in New York, Kentucky, California, Vermont, Australia and Germany are exploring ways to cost-effectively deploy RESSs on their network for the mutual benefit of customers and the grid.

Transformation Underway

While the residential storage industry remains nascent outside of a handful of markets, momentum is building rapidly as major industry players launch products. The RESS is a key piece in the restructuring of the electricity industry toward the energy cloud. This transition requires a much greater reliance on distributed energy resources (DER) and greater levels of coordination and communications between diverse grid resources. Though the transition is only just beginning, history demonstrates that innovative technologies can rapidly disrupt incumbent industries as new use cases and revenue streams emerge. Technological advances and changing regulations can allow DER to capture an array of revenue streams that are not yet fully available but could radically restructure the relationship between utilities and their customers as customers become prosumers.

Although residential batteries are likely to become an increasingly standardized product, the technology as a platform can facilitate the development of entirely new businesses. This approach consists of optimizing whole home energy management, including generation and storage, maximizing the value of the RESS by providing services to grid operators and ensuring local energy networks take advantage of all available resources. The potential of the RESS to incite development of entirely new business models has captured the attention of both utilities and major technology providers worldwide. With growing momentum due to increasing levels of investment and competition between major multinational corporations, dramatic growth and innovation is expected in the residential energy storage industry.

Alex Eller is a research analyst in Navigant Research’s Energy Technologies program, leading syndicated research for the Grid-Tied Energy Storage research service, as well as supporting the Advanced Batteries, Microgrids, and Distributed Renewables research services. Eller specializes in global market analysis and competitive assessments to evaluate new technologies, company strategy and forecast market growth. Eller has worked in the clean energy industry for four years both at Navigant Research and other market research firms. He has worked with diverse clients, including utilities, Fortune 500 companies, technology start-ups. Prior to joining Navigant Research, Eller served as a client relations manager at Energy Acuity, where he was also the lead analyst for a research project on the investment strategies of U.S. power utilities. Eller, who is proficient in Spanish, holds a bachelor of science degree in business administration in international business from the University of Denver.

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