The energy storage industry is positioned for some huge growth in the coming decade, but it's already starting to take off in some surprising places.
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In this week's episode of Industry Focus: Energy, Sean O'Reilly talks with Motley Fool contributor Travis Hoium about the budding market for energy storage. Tune in to find out where the energy storage industry is the most active today, where it might grow in the future, a few companies that investors can look into if they want exposure to the space, how power pricing in the continental U.S. is affecting the growth of residential power storage, and more.
A full transcript follows the video.
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This podcast was recorded on Feb. 23, 2017.
Sean O'Reilly: Welcome to Industry Focus, the podcast that dives into a different sector of the stock market every day. Today isThursday, Feb. 23, 2017, so we're talking about energy, materials, and industrials. I'm your host, Sean O'Reilly,and joining me today via phone is Motley Fool energy and industrials contributor,Mr. TravisHoium. What's up, Travis?
Travis Hoium: Hey, Sean! How are you?
O'Reilly: Very good! How's life in Fool Land for you?
Hoium: Going well, it's busy insolar and energy storage,as always. I'm excited to talk about this a little bit.
O'Reilly: We'renot talking about it today, but what did you think ofTesla's (NASDAQ: TSLA) earnings release? Did they shedenough light onSolarCityfor you?
Hoium: Theydidn't give us a lot of insightinto SolarCity, and now they're bunching solar in with theirenergy storage business. Just aquick look at it, it looks like margins are pretty low,although they did say that theSolarCity side was cash positive. We're not getting a lot of information as to what they soldto generate that cash. It'sa little bit murky right now. But we'll see how that plays out.Manufacturing will be really bigin the next six months. If they get their Gigafactory 2 online, that'll be really big. We'llsee how that plays out.
O'Reilly: Verygood.I wanted to have you on the podcast todaybecause you're kind of my solar guy. That lends itself, of course, to something we don'thear about a lot in the cultural nexus, even here at The Fool,becauseit's going to be a big deal, we think, but, it's energy storage. I wanted to talk to you aboutthe companies that are trying to solve the riddle of energy storage. For the last 10 years,ever since renewables started their ramp up, I remember,even when I was in high school and Buffettstarted investing in those wind farms, andyou realize that it sounds like a great idea to build a bunch wind turbines, toput them in the middle of nowhere andtransport the power to the East Coast or the West Coast,but you lose a lot of energy. It's not terribly efficient.T. Boone Pickens had that Pickens plan, and you just lose all this energy. Really quick, can you give us a bit of background on how you view energy storage, and lead in what a listener mightneed to know at this point?
Hoium: Yeah. Toput it into three different buckets,we have residential, commercial, and utility scaleenergy storage right now. Those aredeveloping in different ways. Residential would be things like the Powerwall thatTesla introduced a couple years ago. That'sgoing to be storing energy for your use at home. There'snot really a financial justification yet. There's a lot of ways thatcould be used, but there's not a lot of them in the field yet. Commercial energy storage issomething that would be at a commercial building,maybe a factory. What they're going to try to do is reduce their demand charges. Commercial buildings have a little bit different rate structure than the typical homeowner has. So, they're charged based on their peak demand. If they can lower that peak, they can save money, therefore justifying anenergy storage system. Utilities is really the bigmarket that's growing right now. They have a lot of justifications like gridreliability, frequency regulation, they can delaycapital expenditures that they might have to put into place. So, that's a big one to watch right now. Everybodyis pretty much using batteriesas it stands right now. What you're talking about with transporting energy from the middle of the country to the coast may or may not be something that batteries would help with. Thatmight be something that's a little bit longer term, like hydrogen. But,right now, batteries is pretty much dominating this market, andresidential, commercial, and utility are really the threedifferent places that I'm watching right now.
O'Reilly: So, with the commercial -- commercial/residential,I remember when Elon Musk did the big press conference about the Powerwall, and he came out on stage, and this whole thing? Thenthere was the surprise, they're like, "Oh,by the way, the building has been running on a bunch of Powerwalls." Is thatwhat you're talking about with commercial? Or is that too small? That'swhat I'm wondering right now.
Hoium: You could do that on a limited basis. You would have to install a ton of batteries.
O'Reilly: There area bunch of them behind them, as I recall.
Hoium: Yeah,and you can do itfor a short amount of time. But it'svery unlikely that the building they're in is running 24/7 on energy created just for that building. Theidea would be, you combine solar with storage, you can cut your ties to the grid. That's not quite where we're at today. You may be able to, if you have a factory andyou're running full bore between 12 and 4 every day, andthat's when your peak electricity consumption is,that's when you might use energy storage. So,you might store some energy overnight, and use your energy during those hours to reduce your peak charge for your facilities. So, that's really, in thecommercial space, the applications that we're looking at right now.
O'Reilly: Awesome. So,how big is this market? I was surprised when you said thatutility energy storage is really where it's at right now.
Hoium: Yeah. According to GTM Research --they do the best work in this space --
O'Reilly: That stands for Green Tech Media, right?
Hoium: Yeah, Green Tech Media. They said that in 2016, we put about 260 megawatts ofenergy storage into place. That's expected to grow to478 megawatts in 2017. So,if we compare that to the solar industry, the solar industry put in about 14.6 gigawatts. So,this is a really small market. Most ofwhat was installed in 2016 was really just a couple of very large project. TheAliso Canyon, remember that natural gas leak they had, theybasically had energy storage come in,Tesla and a couple other companies were involved inputting in some energy storage that wouldbe able to allow them to hit their peak demand times. But you take out that project and acouple other big ones, and the marketalmost doesn't exist anymore. So, it's really small, but it'sexpected to grow by almost 10X in the next five years. So, this is something that's really on the horizon, we know it's coming,it's just sort of undefined,what exactly it's going to look like. Likeyou said, utilities are the ones that are seeing the mostfinancial justification today,but that'll be coming down the line with commercial and residential projects, as well.
O'Reilly: Got it. So, as things stand now, it'sentirely utility-scale installations. Just for the layman, what does this look like? Is it abuilding with a bunch of batteries in it, and it'sright behind a field of solar panels? What does it look like?
Hoium: That can be the case. Tesla has built,and I think is building anotherproject in Hawaiiwhere they're combining a large solar installationwith energy storage so they can provide energy that looks a little bit more like a baseload energy source than the existing peaks and valleys that come out of solar or wind farms right now. Whatthey're doing mostly at the utility scaleis basically locatingtransformers at their bases ofinfrastructure. So,it's being tied into the grid, and thenbecomes part of the grid asset. I thinkthat's really the way that utilities are going to look at this.
O'Reilly: Youmentioned that it's not really being used for renewable?
Hoium: Yeah.Renewables aren't really directlyjustifying energy storage today. Utilities are really looking at this as a part of their energy mix. They don't really care, necessarily, if it's tied to a solarproject or wind project. They're looking at this as, if we have a peakdemand in the middle of the summerin the middle of the day, how are we going toprovide that energy? Are we going to build apeaker plant? Are we going to install some energy storage and be able to provide that energy that way? So,it's really a more holisticapproach that utilities aretaking this energy storage look at,whereas with renewable energy companies,it's easy to tie those two together, buteconomically it doesn't reallynecessarily make a lot of sense for a power plant to also addenergy storage. So utilities are kind of just --not to mention, they would love to have another item they could rateand that regulators are going to approve. So, that's really the way that they're looking at this today.
O'Reilly: Right. So,if I'm reading this right, just bring everything home,it's not so much what I originally said, which is,having a bunch of batteries in a building behind a bunch of solar panels. It's moreindustrial-scale storage, and then, you have all these wind turbines andsolar panelsthat all your customers may or may not have,and you have this natural gas that's building electricity, and all that'shappening during the day. And most people are home at nightwhen they're using the electricity. So you wantto have the power that you generated during the day for the systemso it doesn't get overloaded, or cost a ton of money, or something like that?
Hoium: Yeah,exactly. Renewable energy has this weird impact on the grid. InCalifornia, they have thisphenomenon known as the duck curve.
O'Reilly: The duck curve? Likethe bird in the water?
Hoium: Yes,exactly. What the duck curve is is,it's basically what theutilities see as theirelectricity demand throughout the day. If youthink about it, in the morning,the sun isn't out but you could get up and turn your lights on, do some things around the house, yougo to work. The sun comes out,the rooftop solar you might have on your roof is creating energy,that's being sent to the grid. So,from the grid'sperspective, demand actually goes downin the middle of the day. Andat the end of the day, the sun goes down, you get home, turn on your lights again, maybe turn the air conditioning on, anddemand spikes. So they have this realproblem developing now that theyneed to accommodate those spikes. That may be a place where energy storage fits a need that fits withrenewable energy, but you wouldn't necessarily have to have an energy storage system in your house or your garage. But they do, sort of, fit together. Bututilities are really just trying to provide electricity and use energy storage as one of their tools.
O'Reilly: Awesome.So, Mr. Hoium, to recap,I'm surprised that this is more of utility-scale thing,as opposed to residential. I had pictured everybody going gangbusters andputting a Powerwall in the back of their garage. Buteverybody's disappointed, I guess. So,which of these markets do you thinkis going to grow the most quicklyin the years ahead? And, this isThe Motley Fool, we like investing occasionally. What should investors be watching?
Hoium: Likewe talked about,I think utility makes the most sense right now. Actually, if you look at Tesla'senergy-storage business, they'reproviding a lot of the batteries that are being put in place in the utility space. Another fewcompanies to watch,that are at least dipping their toes into the businesseven if they don't have a big presence today are companies likeABB, GE [General Electric], BYD is another one that will be providing batteries. That'sreally going to be a big driver. The biggest benefit that utilities have is they have financial justification. So,they can justify some sort of cost savings and get regulators to rate base those assets. That'ssomething that a homeowner might not have, or even a business might not have. So, we're seeing alittle bit of traction in the commercial market, and it really depends on the jurisdiction.Stembuilt aninteresting virtual power plantand a lot of commercial buildings recently in Hawaii.
O'Reilly: Who built that?
Hoium: Stem. They're a leader in the commercial space. But they're still private. But,they have some partnerships withSunPower(NASDAQ: SPWR) to work in that commercial space. So, there'sstarting to be some ties between these innovative, small companies and the public companies that are going to be providing services or products for them. So, yeah,I think those are some interestingmarkets. Residential is still probably years away from being a significant market. I know Elon Musk and Tesla like to talk about that being a really big market, but I just don't see that having a huge impact on them for a while. SunPower has put some work into that, and so hasSunrun. Those are a couplecompanies to watch inproviding energy storage services. But, it's just going to be asmall piece of their business that they'rebasically doing pilot programs on for now. We'llsee how that develops, but it may not be the big impact that the headlines would like to make you believe.
O'Reilly: Yeah,I'm actually both surprised and disappointed. In your view, it's just not economical -- you picture a guy that has a little bit ofextra disposable income, but, they own a model S, and they have some solar panels on their roof, they may or may not have a Powerwall in the back of the garage. Right now, it just doesn't make sense to have the solar panels on the roofcharging up a Powerwalland then driving your Tesla home andcharging it up with the free energyfrom your solar panelsthat are stored in the Powerwall?
O'Reilly: That was a mouthful, by the way.[laughs]
Hoium: [laughs] Yeah. But, if you think about it, energy investments have to have some sort of financial justification. I think that's something that, when you combine tech with energy, you sometimes lose sight of that. But the reason that solar took off,especially in the residential space, is that itprovided a direct cost savings. So, when SolarCity was booming, they wouldn't sell their solar systems to peoplejust because they were solar. They would go to them and say, "Hey,we can save you moneyon your electricity bill, and set your costs for the next 20 years." That'show they were selling their product. If you think about energy storage, there's no real way to do that. You could dosome sort of energy arbitrage,if you have time of use pricing, but time of use pricingjust started in California,Hawaii is moving to that,there's a little bit more justification for energy storage in Hawaii. But, therearen't a whole lot of places around the countrywhere you can even do arbitrage. And then,residential homes don't have things like demand charges tojustify cost savings with. So, really, your onlyjustification is energy back ups, and I don't know,I'm not going to spend $7,000 on a Powerwall just to have back-up energyin case the lights go out.
O'Reilly: [laughs] So,what you're talking about with the arbitrage is,during the day when no one is home, my energy costs$0.10 or whatever,and then it cost $0.20 at night. Andthat's not the case right now, so why bother?
Hoium: Exactly. Even in theContinental U.S.,energy prices are so lowthat's a potential arbitrage opportunity is still years, if not a decade, away. Ifyou go to a place like Hawaii, whereelectricity prices are about triple what they are in the Continental U.S. -- they'vechanged their rates and such a way thatif you're exporting solarelectricity to the grid, they'regoing to pay you about$0.15 per kilowatt-hour. If you're buyingenergy from the grid, you're going to pay $0.30 per kilowatt-hour. These are ballpark numbers, not quite exact. But, that$0.15 arbitrage,it wouldn't, maybe, make sense,for you to store your solar energy during the day and use it at nightbecause you're saving yourself $0.15 every day. But, that just doesn't exist in most states, because energy only costs about$0.12 per kilowatt-hour across the U.S.
O'Reilly: Got it. One of the other reasons, near as I can tell, that solar took off is, it got way more efficient and cheaper. Where is this energy storage technology headed in the future?
Hoium: That'sprobably the best analogy toenergy storage today.
O'Reilly: Solar panels, you mean?
Hoium: There are a lot ofopportunities that will open up as energy storage costs come down. We're just still not there. It'ssort of the same thing with electric vehicles. If the cost of the battery in anelectric vehicle was one-quarter of what it is today,we would probably have a lot more electric vehicles on the road. Now, that's coming. AndI think if you look at investing in companies like Tesla, that's something that you're seeing on the horizon. The challenge with energy storage is,we have to have those costs come downbefore companies are able to build a business model. And we don't know quite how that's going to work out. I think of it like a snowball rolling downhill. We know it's going to get bigger, but we don't know how big it's going to get, and we don't know where it's going to land.
O'Reilly: Got it. So,before we head out of here,I want to give you the last word. Are you investing in energy storage in any way? How are you viewing the landscape right now?
Hoium: I'm invested in SunPower. I think they have, at least, aninterestingstrategy and energy storage. It's something that'll be basically adding to their portfolio. But they'retechnology-agnostic andsupplier-agnostic right now. So,I think that's an advantage. If we learnedanything in the solar industryover the last decade, it's that building out a ton of capacity to supply a market that you think is going to grow can end up backfiring, because technology changes,cost structures change. So, companies that are able to buy batteries fromcommodities suppliersare going to be in a really good position,because then they can build a business model on top of that. That's really the only investment I have that would be exposed to that space. But I'm keeping an eye on a lot ofcompanies. Tesla will be really interesting to watch. They've taken a much more aggressive approach into energy storage than anybody else. So,I'm interested to see, is their cost structure competitive, are they able to generate a high margin, or arethey just going to be competing with a commodity product with other companies? That'skind of undefined right now. It's a space that'sdeveloping very rapidly,there's a lot of innovation,a lot of it is happening at private companies right now. So,that's something I'm keeping an eye on, but we don't cover a lotat The Motley Fool. But, everybody should keep tuned,because this is coming, this is like solar was a decade ago. It's going to change a lot in the energy space, we just don't know quite how, or who's going to win.
O'Reilly: Awesome. All right, Travis, I can't thank you enough for your timeand giving us a call in.
Hoium: Yeah,thanks a lot.
O'Reilly: That is it for us, folks. Besure to tune in tomorrow for thetechnology show with Dylan Lewis. We also want to give aspecial shout-out to our special guest producer,Heather Horton. We can't thank you enough.If you're a loyal listenerand have questions or comments, we would love to hear from you. Just email us at firstname.lastname@example.org. As always,people on this program may have interestsin the stocks that they talk about,and The Motley Fool may have formal recommendations for or against those stocks, so don't buy or sell anything basedsolely on what you hear on this program. For Travis Hoium,I am Sean O'Reilly,thanks for listening and Fool on!
Sean O'Reilly has no position in any stocks mentioned. Travis Hoium owns shares of General Electric and SunPower. The Motley Fool owns shares of and recommends Tesla. The Motley Fool owns shares of General Electric. The Motley Fool has a disclosure policy.