What Does Tesla's PowerWall Mean For India ?

There’s an evolution in energy technology which is challenging the conventional use of energy via fuel. Will India be able to utilise it? If yes, how?

The response to Tesla’s battery systems which can store electricity from solar panels or furnish with battery backup if the grid goes down has been truly overwhelming. As India’s quest for self-sufficiency in energy continues, it shows the need to back ‘technologies’ over ‘fuels’, even if that means incentivizing the creation of long-term domestic assets.

“We have the handy fusion reactor in the sky called the sun. It shows up every day and produces ridiculous amounts of power…Combined with a relatively small number of solar panels, primarily on rooftops, battery systems could enable the world to eliminate its dependency on fossil fuel-generated electricity…

With 160 million Powerpacks, we could power the United States and with 2 billion, the world.”

– Elon Musk, Tesla Energy Keynote Address

This marked the entry of Tesla Energy into the field of stationary storage, which promises to be a watershed in the adoption of renewable energy, especially the off-grid distributed solar energy systems. While the science has always been supportive, with the amount of solar energy falling on the earth’s surface in 40 minutes equalling the total annual global energy consumption, the costs of technology and storage have obstructed Solar PV’s grid parity, thereby impacting its commercial deployment.

Solar PV accounts for a relatively small proportion of the total global capacity. Nonetheless, over the last decade, Solar PV has been the world’s fastest growing power generation technology. Driven by a combination of on-going rapid reductions in solar technology costs and aided by supportive government policy and favourable regulations, like net-metering, feed-in tariffs, Renewable Energy Certificates (RECs) and investment subsidies; they have been the principal drivers of growth.

In this high growth phase, most solar installations have been in the grid-connected systems. Off-grid decentralized energy installations have been far less than grid-connected installations because energy storage costs have been the principal constraint.

Energy storage is a critical variable in the evolution of renewable energy. This is because energy demand requires consistent energy supply but supply from renewable sources is intermittent and lacks consistency. For instance, solar energy is not available at night or on cloudy days. Wind energy is a function of the supply of wind. The grid has thus been playing the part of the default storage mechanism for grid-connected installations with net-metering and feed-in tariffs regulations aiding their growth.

As long as power from solar and wind is a small fraction of the overall grid power, the conventional generation techniques can adjust their output for variations in renewable energy production to maintain grid balance. However, as the proportion of the variable renewable power grows, grid-tied installations start posing challenges in the management of the grid. This challenge was demonstrated in Germany on May 11, 2014, when the quantum of renewable power supplied to the grid met ~75% of the energy demand, forcing conventional power producers into a fire-sale with energy charges briefly dipping into negative territory.

As the proportion of solar power in the overall energy mix increases with rapid growth in grid connected solar installations, it may necessitate a review in the net metering policies. Caps can be introduced either on the prices of supplying solar energy or on the amount of solar energy that can be supplied, or both. As this realization grows with the ramp up in solar installations, battery storage solutions will begin to look attractive, thus opening the market for it.

However, opening of the market is a sufficient but not necessary condition for the adoption of a technology. Cost of storage, specifically the Levelized Cost of Energy (LCoE), which factors in an energy system’s capital costs, operating & maintenance costs and the round-trip power efficiency over its useful life, will be the main variable that will swing the adoption of battery storage.

Technologist Ramez Naam points out that we are on the verge of three significant developments which will feed off each other:

• First: Plummeting price of energy storage technologies;
• Second: Cheaper storage that will lead to massive expansion of the market;
• Third: Expanding scale that will bring down the storage costs further.

According to Naam, three main storage technologies are being commercially developed: Lithium Ion (Li-Ion), Flow Batteries and Compressed Air Energy Storage.

The rise of solar energy in the mix of energy systems has been an underestimated phenomenon over the last 5–7 years. Rapidly-falling solar PV costs is leading to grid parity in many parts of the world. Studies show that “solar energy has become cheaper much more quickly than most experts had predicted and it will continue to do so”.

But the other part of the renewable ecosystem — storage — has been the missing link in the drive towards de-carbonizing the energy ecosystems globally. As this piece of the jigsaw puzzle falls in place, renewable energy can target higher reliability, fewer outages and lower costs. While lead- acid storage battery system is the dominant technology in the storage applications, it is on the wrong side of the technological evolution curve while Li-Ion battery technology is the emerging storage technology widely expected to dominate the storage systems. Powerpack and Powerwall positions Tesla Energy at the forefront in this race as a leading player.

Tesla Energy launched 2 stationary storage products — 1. Powerpack for utility, industrial and large commercial scale applications and 2. Powerwall for the residential and small business applications. The 100 kWh Powerpack “for utility scale systems grouped to scale from 500kWh to 10MWh+ are capable of 2-4hr continuous net discharge power using grid tied bi-directional inverters.” Powerwall is available in 10kWh ($3500) optimized for backup applications, or 7kWh ($3000) optimized for daily use applications. Both can be connected with solar or grid and both can provide backup power. The USP of Powerwall is that it is a wall-mounted storage system and buyers won’t need a separate battery room filled with storage batteries.

The biggest positive surprise for the industry and its observers came from the announcement of the cost of the batteries. Before the official announcement of the cost, the industry was abuzz with speculative estimates pegging the price point upwards of $10,000. While the Powerwall can be used primarily for load shifting in the advanced markets, there is visible excitement about the utility scale Powerpack. A study of cost-benefit analysis conducted last year by Oncor Electric Delivery Co. on installing utility scale batteries on their Texas Grid concluded the break-even point for Oncor’s battery installation would be at a capacity of $350kWh. The study predicted that $350kWh price point could reach by 2020 since the cheapest available utility scale batteries cost at least 2 times of their break-even calculation for Oncor.

According to Tesla’s CEO Elon Musk, the cost to utilities of Tesla Powerpack works out to $250kWh. While this should sufficiently please Oncor, for renewable energy companies it will be music to the ears, as having a cost effective storage capacity translates into overcoming the key hurdle of being an intermittent and unpredictable power source.

While it is early to form an opinion on the sustainability of the initial early adopters driven sales numbers, Tesla Energy products will certainly enhance the energy storage awareness especially among the household residential quarters globally. Morgan Stanley Auto Analyst’s note is instructive in this regard —

“We too easily forget that Tesla is much more than just the Model S. In the past week, I have been asked by more friends, colleagues, clients and relatives about the virtues of the residential Powerwall product for their own personal household use than I’ve been asked about any vehicle manufactured by any auto company I’ve covered in my 18 years as an auto analyst.”

What about the costs? SolarCity blog highlights that “using Tesla’s suite of batteries for homes and businesses, SolarCity’s fully-installed battery and solar system costs are one-third of what they were a year ago.” So has Tesla Energy cracked the cost curve to ensure mass adoption? Not yet. The blog further points out , ” We expect costs to continue to decline as manufacturing scales, and over the next 5–10 years, these cost reductions will make it feasible to deploy a battery by default with all of our solar power systems.”

With the average US household consuming around 20–30 kWh of energy daily, multiple batteries requirement will distort the economics in most US states where the grid-connected energy rates are far cheaper. According to Musk, Tesla has received within a week, reservations for 38,000 Powerwalls (1.5 to 2 per installation) and 2,500 Powerpacks (at least 10 Powerpacks per installation). Assuming these reservations convert into final orders, Tesla’s stationary storage productions facilities are booked for the next 18 months, implying very limited annual production capacity.

But therein also lays the promise of a falling cost curve as production ramps up with other players too joining in Tesla’s “open source” battery technology. With Tesla’s Nevada 500,000 Gigafactory taking off in 2017, the stationary storage business scale is set to get a huge boost. According to George Washington University Solar Institute’s Amit Ronen, Li-ion will represent ~3/4th of the market within five years since it can power anything from an Apple watch to a corporate data centre.

How severe is the threat of battery storage disruption to the conventional grids? Until battery systems can scale up and become cost competitive for mass adoption, not much. Until then, batteries will continue to complement the electricity grids. Near-term residential applications of stationary storage will, in all likelihood, remain constrained to banking excess energy generated by solar panels for utilizing it during power outages or peak pricing hours.

Nonetheless, with industry-wide costs of Li-ion battery packs falling at 14% CAGR (65% lower) over 2007–14, from $1000 kWh per to $410 per kWh, the implications for energy markets, especially for the utilities, are immense. Assuming the 14% CAGR in cost reduction continues for the next two years until Gigafactory production commences, Li-ion battery packs will be 75% lower than in 2007. Unsurprisingly, German utilities like Eon have initiated the restructuring of their operations and business models. Simon Skillings, former Director of Strategy and Policy at Eon UK opines, “The Eon restructuring recognizes the new industrial logic of a transformed energy system and it is inevitable that other utilities will need to respond accordingly.”

While the rationale of no grid-defection applies well for advanced economies having robust grid connectivity and high energy consumption, can the Powerwall economics work for developing economies like India with inadequate grid connectivity, high T&D losses and inadequate power capacity leading to low energy consumption?

India’s household energy consumption lacks the averages of developed economies with average daily consumption of 2.5 kWh compared to ~10+ kWh in the latter.

However, given that ~33% of overall households and 45% of rural households are not electrified, averages don’t accurately indicate the potential energy requirement of electrified households.

Let us assume that, as electrification improves, the average annual household energy requirements (while not accounting for income disparities) would be ~450 kWh i.e ~15 kWh/ day. A 1 KW solar panel generates ~4–5 kWh energy daily, implying 20% solar panel efficiency.

Since India is well-bestowed with solar insolation, commercial solar panel efficiency ranges between 19% and 22%. Given the requirement of 15 kWh/day energy, a 3 KW solar plant should suffice the requirements of the household. The table below shows that the LCoE for a solar plant before the battery storage cost comes to ~Rs.5/kWh. Average expected life of a solar plant is at least 20–25 years. This can go up to 30 years at times. If we consider the Tesla Powerwall Battery pack as the storage solution, the LCoE comes to ~Rs.8/kWh (Lead acid battery storage solutions will be cheaper).

Third party testing reports of Tesla Powerwall batteries have confirmed that the daily cycling capacity of Powerwall should last for at least 5000 cycles i.e. ~14 years. Tesla, accordingly, gives a warranty of 10 years on its products. With LCoE of ~Rs.5/ kWh, standalone solar power (ex storage) has already become quite competitive vis-a-vis conventional electricity.

The table below details the monthly final consumer electricity bill at 450 kWh across the top 15 Indian cities. Effective cost includes taxes, wheeling charges, various and differing state levies etc. to arrive at the cost per unit for consumers.

Clearly, solar energy is reasonably competitive. In Mumbai, solar energy has achieved grid parity independently on the energy costs. But given the low reliability score of solar power, solar plus net-metering will be more effective for the next few years.

Current installed capacity of solar power in India stands at 2.6 GW (Jan 15), barely one percent of the total installed capacity of 259 GW (Jan 15). Hence, the grid connectivity challenges like those faced in Germany are still some years away. Additionally, grid-tiled rooftop solar plants technology can be scaled up and widely installed, aiding in achieving the target of 100 GW Solar by 2022, which is almost 38x of the current solar capacity.

For non-urban areas, while the LCoE of solar plus battery storage at Rs.8/ kWh seems high, the figure to compare is not the cost of grid power but of diesel-generated energy through diesel-generated power sets. Depending on the cost of diesel, the cost of diesel-generated power ranges from Rs.15–20/ kWh (in this cost comparison, we are keeping the carbon costs outside the purview).

Much of the opposition comes from quarters opposed to the government incentivizing one energy technology over another and the costs associated with such a policy in the form of incentives and subsidies. While those arguments may or may not be valid in advanced economies, the Indian reality is different.

As per the 2011 census data, ~31.4% of Indian households uses kerosene and/or diesel as their primary source of lighting/power. Since India subsidizes kerosene and, till very recently, was also subsidizing diesel, apart from transportation costs, it was subsidizing the lighting requirements of almost 1/3rd of urban households and ~50% of rural households. The following table illustrates the diesel/kerosene subsidies and under-recoveries in India through the last decade.

According to a study of Petroleum Planning & Analysis Cell and Nielsen, almost ~15–17% of the non-transportation diesel sales go towards power and lighting requirements:  DG sets, telecom towers, agri-pump sets etc. Relevant data for kerosene sales isn’t available since tracking its end use is challenging. However, given that ~31% of households depend on kerosene for lighting, it can be conservatively assumed that 5% of the total sales are diverted for lighting application.

In the absence of sufficient electricity penetration and supply, diesel and kerosene substituted for electricity and after conservative estimates, India subsidized power and lighting requirements to the tune of at-least Rs.750bn over the last decade. The subsidized energy source costs Rs.15–20/ kWh today. More importantly, these subsidies did not create any long-term energy assets in India.

To put this conservative figure of ~Rs.750bn in perspective, let us assume a hypothetical “What-If” scenario whereby these tax funded subsidies are diverted to incentivize residential solar installations at the present day costs as illustrated in the Solar Plant + Battery Model illustration. Assume 30% capital subsidy which was offered at the utility & commercial level solar installations until recently was extended to residential installations whose energy requirements are assumed at 15kWh/day. The upfront capital subsidy for the capital expenditure (of a 3KW Solar Plant + First Powerwall battery) works out to ~Rs.0.15mn.

At one end, the capital subsidies reduce the LCoE of from ~Rs.8/kWh to Rs.6.8/ kWh, while on the other, it will incentivize the installation of ~15,247MW of “Off-Grid Solar capacity”, almost 5.8x the current installed Solar Capacity in India!

While the above analysis of India was centred around Tesla’s Powerwall, it is Powerpack that is likely to be more disruptive for the energy ecosystem. Perhaps the sharpest observation comes from Arnold Gundersen,

“Both solar and batteries are not ‘fuels’ but rather technologies. The extraction cost of fuels continues to rise, while technology costs continue to fall.”

Considering India’s quest of energy self-sufficiency, India should back technologies over fuels even if it entails incentivizing creation of long-term domestic energy assets, as these will facilitate the re-engineering of the transfer of domestic wealth within India, rather than its transfer outside India to the oil-producing nations.