Tesla’s Powerwall May Herald an Era of Residential Demand Charges
Categories: Distributed Energy Resources, Net Energy Metering, Pricing, Rate Design
May 14, 2015 - Brad Wagner
Tesla CEO Elon Musk recently announced Tesla Energy, a new division of his car company.* Its flagship product is the Powerwall, a battery targeting residential electricity consumers. A 7 kWh version** of the product, priced at $3,000, tolerates daily cycling and is intended for consumers with rooftop solar photovoltaic (PV) facilities. While we’ve seen numerous breathless discussions of the launch, our interest lies in the curious economic case of Tesla’s Powerwall and its implications for the future of solar. The long-term success of either is not guaranteed, and utilities and residential solar advocates often find themselves at odds over the pricing of solar electricity. The Powerwall has the potential to align the interests of these two groups. It may herald the beginning of the end for volumetric distribution charges.
The recovery of the fixed cost of the electricity grid via volumetric distribution charges, commonplace in residential rates, is inherently inefficient. Because the electricity grid must be built to a capacity that withstands its peak load, a household’s maximum demand (kW) would be a better measure than its total usage (kWh) for pricing distribution. When the prices customers pay don’t reflect the costs they create, some customers end up subsidizing others. Current residential electricity bills split out the per-kWh energy charge from a per-kWh distribution charge. Net metering, in which solar PV households pay for the net of the power taken from the grid less power returned, creates a strong pro-PV subsidy. Utilities rightly pay power-producing customers for the kWh they create, but they also implicitly pay customers to use the distribution service, though the power now flows from the home to the grid.
Utility economists understandably bristle at the arrangement. Solar advocates, long frustrated by the implicit fossil fuel subsidy caused by the absence of pollution costs in energy pricing, understandably resist pricing changes that make green generation technologies less attractive. Some economists warn that solar subsidies could produce societal pushback from the unsubsidized majority. Into this arena steps Tesla’s Powerwall. Both utilities and solar advocates should rally around it. When outfitted with a battery, solar installations are more capable because households can time-shift their solar power into hours of high demand (e.g., cooking dinner) or low production (e.g., at night). Even without solar, customers could store power at night, when production is cheap, and consume it during peak hours, when production costs are high. Powerwall owners would be less costly for utilities to serve than similar owners without battery storage.
Unfortunately, volumetric, net-metered distribution rates stand in the way. They remove important financial incentives to improve a solar installation through a battery storage system.*** SolarCity, where Musk himself is chairman, isn’t yet offering a storage product with its installations, as there is no reason to own a 92% efficient battery when instead you can be paid 100% for power placed on the grid. SolarCity’s Vice President of Communications confirmed as much to Ars Technica: “If you’ve got solar, you’re getting that [net] metering, you get credit for that solar electricity, even if you put it back on the grid, from a financial equivalent.”
Status quo residential electricity rates might also be a boon to Powerwall’s eventual competitors. Tesla’s marketing materials hint at a software algorithm that acts as a traffic cop at the intersection of the solar panels, the battery, the household, and the grid, deciding where electricity is to flow. This algorithm will be benevolently load-smoothing, relying less on the grid to both buy and sell power. By contrast, one can envision a competitor product that exploits inefficiencies embedded in outdated utility rate structures to minimize its owner’s electricity bill. For instance, the battery might discharge all its remaining electricity into the grid at four in the morning in anticipation of a new, sunny day, taking the net metering subsidy and inundating a low-demand hour with unwanted energy. What if many households in a neighborhood behaved in this way? It would be ironic if the Powerwall, currently embraced by those willing to pay extra for renewable, independent power, lost in the marketplace to a product that implicitly ignored energy efficiency and increased engagement with the grid, acting only to maximize dollars and cents.
Efficient ratemaking would solve the issues of Powerwall’s negative return on investment and the risk of exploitative competitors. Replacing per-kWh distribution charge pricing with distribution charges based on the customer’s peak demand (e.g., the maximum individual hourly usage during a month) would create a direct economic incentive for customers to invest in a Powerwall, based on efficient pricing principles. It would encourage battery storage to fulfill the promise to reduce distribution costs by ensuring that peak demand remains low, reducing demand charges. Installed Powerwalls without PV systems would improve the economic case for PV, and vice versa. Utility customers would also become less costly to serve in the long run, as the distribution system gradually configured to meet a new, less volatile pattern of customer demand. Net metering on energy consumption may survive, but residential demand charges would be a superior option for both utilities and solar advocates.
Residential customers have grown accustomed to per-kWh distribution charges, but this pricing structure is more convenient than appropriate. The technology to produce, store, and consume electricity is outpacing the politically constrained evolution of electricity pricing, even as new technologies to appropriately track and price electricity become feasible. The Powerwall in particular exposes the flaws in current pricing mechanisms, as it discourages solar customers from adopting Powerwalls, and may encourage battery storage to behave in ways that add to power system costs. Mass adoption of battery storage systems can be a boon to both utilities and solar advocates, and both should work together to build efficient rates that get the pricing right.
Brad Wagner thanks Fernando Alvarado, Kelly Eakin, Dan Hansen, Laurence Kirsch, and Rita Sweeney for their review and contributions to this post. Despite Brad’s enthusiasm, all the products discussed here remain well outside his willingness to pay.
Further Reading
For more on distributed energy resources, distribution pricing options, and net metering, please see:
For a considered, if not rosy, overview of 20 years of energy deregulation, please see:
The MIT Energy Initiative’s report, The Future of Solar Energy, is alluded to above and particularly germane to the discussion. In particular, the policy proposals collected in the executive summary are an economic and political idealist’s how-to guide for wide deployment of solar power.
Notes
* The new product line fits neatly into the “Secret Tesla Motors Master Plan,” whose long-term vision is sustainable personal transportation. The plan proceeds on two fronts. On the first, Tesla leverages economies of scale in battery production to make electric vehicles affordable. To that end, Tesla is building a battery “gigafactory” with an annual production capacity of 35 GWh that may drop per-unit costs, recently estimated at $30,000 per vehicle, by 30%. Some analysts believe the gigafactory’s capacity exceeds what’s needed to produce batteries for Tesla’s future EV sales, and the Powerwall would help cover that gap. On the second front, solar photovoltaic cells become common household additions. One of the leading players in the industry is SolarCity. Each Powerwall sale would reduce the average unit cost of a Tesla car while perhaps increasing the value of a SolarCity installation.
** This post, like most other writing on Tesla’s battery storage line, focuses on the residential Powerwall product. But the real action might be in the Powerpack, which is targeted at businesses, many of which already have demand charges. Tesla is also offering grid-scale storage solutions to utilities, who could conceivably use them to relieve the costly intermittency of other renewable energy sources like wind. They might also defer construction of new generation and provide important grid reliability services.
*** There exists an interesting paradox in the booming Powerwall sales as related to net metering. The pricing inefficiency of residential distribution charges has fostered a consumer class of PV early adopters willing to pay extra for clean, independent power. So even though Powerwall is currently noneconomic, current PV households generally assign high value to green power and energy independence, and they are ordering Powerwalls in droves. In a conference call this week, Musk admitted that they were surprised by the demand, and that production capacity is fully committed to present orders through mid-2016. Tesla Energy can begin by courting early adopters willing to pay a premium to invest in green power. For residential Powerwall sales to break into the mass market, however, the Powerwall product line must provide a return on its significant investment.