Home solar and batteries – an investable match?

Yesterday we started a titanic fight, which will determine the future of energy. Today, it’s round two.

In one corner, we have Tesla’s Elon Musk – who believes that every roof will be a solar power station. In the other, we have Harvard’s Professor David Keith – who believes that large solar farms are the future for solar. They can’t both be right, and today is our deciding round.

Keith’s edX course showed that domestic solar is costly and inefficient. What’s more: it’s kept afloat by subsidies that force utilities to buy unwanted, expensive power. Surely that’s enough to put Musk on the ropes?

But into the ring comes an additional complicating factor: batteries. This changes everything, and it’s central to Tesla’s game plan. Home batteries so revolutionary, they’ve helped push Musk’s piffling little car company to be worth more than motor giants like Ford.

Why do batteries matter?

Utilities hate being forced to buy power from householders – using a scheme known as “net metering”. Power companies have to pay a fortune for this power, even when they don’t need it. Understandably, they’re getting peeved.

Batteries are a game-changer, here. A home battery allows a householder to store excess solar energy, instead of pushing it on to the grid. Accordingly, the grid no longer needs to provide an expensive “virtual storage” function for solar-equipped householders. With a battery installed, net metering becomes almost the same as real metering. Utilities might grizzle about lower overall consumption, but that’s a separate problem.

But why would householders buy pricey batteries?

As with solar, a range of reasons is important in making this decision. The savings a user gets for buying off-peak electricity needs to be added to the benefits of more reliable power. In fact, just a few minutes ago, I was checking the prices of the Tesla Powerwall 2 battery for my own home – so let’s run the numbers:

A Powerwall 2 is warrantied for ten years. I get a few power outages a year, and it would be worth me killing this risk – for maybe £100 per annum. So that’s £1,000 benefit, over ten years. A battery would also let me buy off-peak electricity. An average yearly bill is about £500. As that’s mostly incurred at peak rates, I’d save about £200 on that – so £2,000 over ten years. That gives me about £3,000 benefit over ten years. At those prices, it’s still too expensive to get a Powerwall 2. They’re just over £6,000, installed – but prices are falling fast. They’re also much cheaper in the US, coming in at a similar price in both dollars and sterling. Even in the UK, we’re only going to need a 50% fall in cost before I hit breakeven. That might sound a lot, but it’s going to take just a few years based on current trends. My analysis also ignores the benefit I’ll get after the warranty has expired. This could be as much again, if the battery lasts reasonably well. (Of course, it’s also necessary that the peak/off-peak price differential doesn’t change much.)

As metering becomes more sophisticated, the fundamental economic case for a battery will improve dramatically. There are always times where the householder can get an attractive price for their electricity, even if they are only paid the same rate as large power stations. When the spot price spikes, it’s feasible to push power from the battery on to the grid. Typically that happens in the early evening. Occasionally, spot prices go absolutely bonkers – hitting around 25 times normal rates. Bearing in mind a Powerwall holds roughly a day’s power, you could earn a month’s free energy in one shot. That’s a great deal – provided you’ve got a battery to provide the power and a meter that’s smart enough to deal in real-time prices.

Likewise, utilities are sometimes desperate to get rid of electricity. If there’s too much power on the grid, it can cause chaos. Being about to switch on a big load, like a battery, can do your utility a favour – and it’s one that they’re increasingly looking to pay for. Yes, negative electricity prices are an actual thing.

Getting paid for free power? Yep, I’ll have some of that.

Crucially, the above analysis doesn’t even require me to have solar. However, the householder’s business cases for solar and batteries combine – giving them a whole new way of handling electricity. Overall, when we consider all of the factors together, we can see a strong advantage for householders to install in combination.

With a solar and battery installation, the householder doesn’t need net metering any more. They’re future-proofing, against expected changes in the market. Further, they’ll get a reasonable degree of energy independence — at least enough to enjoy a modest power supply during any catastrophes that might befall the grid. That’s something I’d definitely pay extra for. I don’t fancy losing power for a week if a huge storm takes out a major power line.

So, if our high-energy fight went to a judge’s decision, who would win? Harvard’s David Keith or Tesla’s Elon Musk?

I’m certainly no naysayer on farm-scale solar. That said, I’m with Musk. Solar makes sense for householders, even if they have to pay for it. Energy independence has real value. Furthermore, there are wily profit opportunities for those who set up their solar with a battery, to make the most of grid pricing. That isn’t going to change, when net metering is finally culled by the utilities.

But remember: Tesla’s new tiling system is competitively priced, compared to the cost of an ordinary roof. So, why wouldn’t you want one? I just can’t see any good reason at all.

Musk’s solar roof tiles are a game-changing technology. Even if you are from Harvard, bet against the man at your peril.

Please store the thoughts you generate at home – then send them in the early evening, when the spot price spikes: andrew@southbankresearch.com.

Best,

Andrew Lockley
Exponential Investor

Category: Energy

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