No the game changer is not the 2015 Tesla Model S in the picture above. It’s the white device shaped like a medieval-shield that is blending into the wall behind it. It is a wall-mounted lithium-ion home battery system designed to store energy from rooftop solar panels. It can hold up to 10 kilowatt-hours of energy, enough to power a typical home for about 10 hours. It would enable homes to be powered by solar energy during the day and by battery during the night time.
It’s called Powerwall, and in 5 years it could be a major cash cow for Tesla
When Powerwall was released in April this year, it received largely negative press. The press assessed that Powerwall at the current price point was uneconomic for the average user, who gets fairly cheap electricity from the grid. Tesla took the negative feedback to heart and came back in June with double the specs with no change in the price. In doing this, Tesla raised the bar on price competitiveness in battery storage marketplace to a whole another level.
Correct as the original assessment by the press may have been, it was incomplete. The economics associated with Powerwall may look entirely different in 5 years time than it does today, making it a game changer for Tesla. 3 mega-trends are shaking up how we consume energy today –
1. Storage Battery Prices are Plummeting Exponentially
The chart above shows a projection that a well- known industry expert made in 2014 regarding the cost of lithium-ion batteries over the next 15 years. Tesla dramatically fast-forwarded this projection by 5 years with the launch of Powerwall in 2015, delivering the rate that was expected in 2020. Once Tesla’sGigafactory becomes operational next year, the price of a Tesla Powerwall could come down even further to half of what it is today by 2020, which the projection above estimated to happen in 2030!
2. Solar Energy Prices are Dropping Dramatically
The chart above shows the past trend and a future projection made by an MIT professor for solar pricing. If this projections holds, the price of solar energy could come down to one fourth of what it is today by 2020. This projection does not even include the subsidies and buy-back programs that governments around the world are offering to encourage the use of solar energy, which could further reduce the prices in the future.
3. Public Support for Alternative Energy is Very Strong
The global Ipsos survey above shows that there is a strong support for alternative energy sources across the world. A Pew survey also shows that Millennials and Gen X, who will become the primary decision makers of public and private policy as Boomers retire, display a much higher support towards alternative energy sources in comparison to previous generations. The support is not only strong, but growing, and solar finds the highest favor in surveys.
Bringing it all together
The coming together of these 3 mega-trends – drop in price of storage batteries, drop in price of solar energy, and strong and growing public support for solar energy – indicates that we are on the cusp of a rooftop solar + Powerwall revolution, and there is a good chances it will kick off in California.
California is currently in the process of replacing its electricity pricing structure from usage-based (tiered rates – use more, pay more) with time-of-use (same rate for all – higher during day, lower at night), which will become a default by 2019. This will make this market ripe for Californians to use Tesla Powerwall for day/night arbitrage. Under time-of-use pricing, the gap between on-peak rate and off-peak rate will be substantial enough that Californians could fuel up their Powerwall during the night and drain it during the day to save money.
Californians will flock to get a Powerwall when time-of-use pricing becomes default
Even today, Powerwall is a good deal because its all-in lifetime cost of 15 cents/ kWH beats the gap between off-peak rate and on-peak rate (20 cents/ kWH). However, with the opening of the Gigafactory, if the all-in cost of a Powerwall were to drop in half of what it is today, purchasing it would become a no-brainer for Californians. Time-of-use electricity pricing is a rising trend across the world and Tesla is all set to sell a lot of Powerwalls in the coming years.
The real play for Tesla will however come into place by 2020 when the 3 mega-trends merge. If these dramatic price drop trends for solar and battery hold, it is likely that rooftop solar + Powerwall combinations could become highly competitive with the power grid electricity in terms of price. The fact that solar finds incredible public support globally would imply that early adopters for rooftop solar + Powerwall could begin to emerge by 2020. The fact that many of these early adopters might already have a Powerwall, which they were previously using for day/night arbitrage, would only make the transition more sealess.
By the year 2020, rooftop solar + Powerwall could match regular electricity from non-renewable sources in pricing
Having said that, rooftop solar + Powerwall is not the same thing as “off-the-grid”. We are used to flicking the switch and having the lights turn on. Rooftop solar + Powerwall would not always be able to promise that, say during a rainy week, or at least not within reasonable cost constraints. However, it could be possible for residents in sun-rich areas to derive as much as 90% of their annual electricity needs from solar + Powerwall. The power grid could always be there, but as a backup, in case rooftop solar + Powerwall cannot meet the needs.
The transition from early adopters to early majority could also be incredibly rapid. As more and more people transition to rooftop solar +Powerwall, the prices of grid electricity would rise, pushing even more people to make the transition. Obviously, power companies could also take advantage of this phenomenon by moving towards large scale solar and industrial battery installations themselves, opening up a whole another market for Tesla.
An inexpensive Powerwall will be a force multiplier to a much cheaper solar energy
As solar energy becomes exponentially cheaper with each passing year, inexpensive batteries will add flexibility to the overall energy system. It is a massive disruption waiting to happen over the next 5 to 10 years, and Tesla is already in the box seat. Other competitors may emerge to challenge Tesla’s ascendancy, but the company has a significant first-mover advantage in both scale and technology, not to mention that they have an incredible brand image.
The true beneficiaries of this disruption will obviously be the environment and the future generations. For each house that would move from grid electricity to rooftop solar, we would be able to prevent 25,000 lbs of greenhouse gas emissions, or equivalent of taking 3 cars off the road a year. Rooftop solar + Powerwall is a disruption whose time has come, and as the economics rapidly start working in its favor, it is poised to change the world for the better!