Illustration – Tom Miller
Despite some rose-colored projections for the global energy storage market, residential contractors know that storage systems don’t yet pencil out for many consumers. At the 2016 US Energy Storage Summit, Greentech Media’s Shayle Kann led a discussion about moving residential storage away from selling “fancy boxes to rich dentists.” Yes, battery costs are coming down. But the market has a way to go.
This article will cover drivers and headwinds for behind-the-meter storage growth. Even if storage is an inevitability in the grand scheme of things, every business must decide for itself when the time is right to make a significant investment. Jump too soon and you’ve sunk precious resources into an immature market. Idle too long and you’ll soon be racing to catch the competition.
Some industry analysts say that storage cost reductions, net metering program changes, and an expansion of time-of-use utility tariffs will drive behind-the-meter deployments to surge in the next five years. We’ll explore these growth drivers one by one.
But look closely at residential storage cost components. There’s no silver bullet for reducing all costs at once. Shaving cost from lithium-ion batteries will help. In residential solar-plus-storage systems, they account for about 10 percent to 20 percent of the total system. What about the other hardware components, like the bidirectional inverter and the conductors, circuit breakers, and DC charge controllers that make up the electrical balance of system? And how about customer acquisition, installation labor, and permitting, inspection, and interconnection? Together, these components represent 4 to 5 times the cost of the lithium-ion batteries. We’ll explore these headwinds one by one, helping to explain why there are still good reasons to be skeptical about a fast-growing residential storage market in the immediate future.
Growth drivers for residential storage
Two leading energy storage industry market research firms, Greentech Media and HIS Markit Technology, are projecting that behind-the-meter storage deployments will surge in the next five years. IHS predicts that behind-the-meter storage will exceed 50 percent of worldwide storage deployments by 2023. That’s a significant jump, considering that customer-sited storage now accounts for about one-third of US storage deployments. In 2017, the US installed 3,049 behind-the-meter storage projects with a cumulative storage capacity of 150 megawatt-hours (MWh).
Why are analysts optimistic? Julian Jansen, a senior market analyst at IHS, says, “I believe that the declining costs of storage, changes to net metering programs and new tariff structures will significantly improve the value of self-consumption and energy time shifting with behind-the-meter storage systems.” Let’s explore each of these factors.
Battery prices have fallen steadily in the last few years, outpacing previous predictions. An updated model released by UC Berkeley professor Daniel Kammen in July 2017 predicted that residential solar-plus-storage would be widely competitive by 2020, so long as the solar industry meets the Department of Energy’s goal of deploying PV for $1 per Watt—as it already has in certain markets. At $1 per Watt for solar, solar-plus-storage offers a levelized cost of energy of $0.11 per kilowatt-hour. The continued growth of utility-scale storage also gives behind-the-meter storage a boost, helping to drive down costs as manufacturers increase the scale of production.
Changing net metering policies
Changing net metering policies and new tariff structures in several states, such as Hawaii and California, are making storage more valuable to consumers. In Hawaii, an end to the state’s longstanding net metering policy in 2015 meant that consumers were no longer allowed to sell excess energy back to their utility at the retail rate, making self-consumption a more sensible option for any new solar customers.
New utility tariff structures
Many changes to net metering policies involve the introduction of new tariff structures that have made solar-plus-storage more valuable than solar alone. In California, the time-of-use tariff introduced in the state’s new Net Metering 2.0 policy in 2017 means that consumers now have a much greater incentive to practice energy time-shifting, wherein consumers store energy when prices are low to feed into the grid later when prices are higher.
Headwinds for residential storage
The drivers of market growth that we’ve discussed so far don’t apply evenly across all markets. In fact, high manufacturing costs and state policies that undervalue energy storage remain significant obstacles in most parts of the country. Meanwhile, contractors must contend with genuine limits on how much the industry can cut cost for lithium-ion batteries, other hardware, and soft costs in the years ahead.
Lithium-ion battery costs
The National Renewable Energy Laboratory’s latest installed cost benchmark for residential solar-plus-storage systems, based on data from early 2016, reports lithium-ion battery costs of $500 per kilowatt-hour (kWh). Manufacturers saw significant reductions in lithium-ion costs over the past two years, but there are two factors that will mitigate the impact of battery cost reductions going forward. First, residential storage system manufacturers don’t necessarily get access to the lowest battery prices that we see in electric vehicles and large-scale storage systems. Second, battery cost reductions are projected to slow down in the years ahead. Even if manufacturers can procure batteries for $250 per kWh—half the cost from 2016—they would have to find substantial savings elsewhere.
Other hardware costs
According to the NREL cost benchmark, the lithium-ion battery is either the fifth- or sixth-biggest cost component in residential solar-plus-storage systems using a relatively small 3 kW, 6 kWh battery. The bidirectional inverter adds more cost to the system than the battery itself, and electrical balance of system component costs trail battery costs by only 1-2 percent. Opportunities exist for manufacturers to streamline power electronics for storage and standardize around a single system architecture, where the market is now split between AC-coupled and DC-couple systems. But this will take time. GTM projects that storage inverter prices will fall only 12-15 percent per year.
Together, the bidirectional inverter and electrical balance of system components add a little less than 25 percent to residential storage system costs. Soft costs—including customer acquisition, installation labor, and permitting, inspection, and interconnection—account for more than 25 percent of the cost. Any way you slice it, soft costs represent one of the biggest obstacles to growth. Unfortunately, we’re dealing with a chicken-and-egg problem here. The market needs to drive down soft costs, but contractors will need to scale up residential storage operations before they can meaningfully drive soft costs down. Expect to see hardware cost reductions outpace soft cost reductions for the foreseeable future.
The bottom-line is that this continues to be a rapidly changing, dynamic space that every solar installer needs to watch very closely in the context of your regional market to make the best decisions for your business. Consider your BayWa r.e. account manager a resource to provide details about trends and available products.