Tesla, the electric car maker, is betting big on its battery business, hoping to ride the nation's eventual shift to renewable energy. In that push, the Silicon Valley-based company might be setting its latest sights on Texas, where it could change the way commercial buildings are powered.
Tesla's renewable energy products include solar panels, commercial-scale batteries for businesses and utilities, and batteries to power cars and smaller devices. In the past two years, Tesla has been making a more concerted push to expand into energy storage with utility-scale battery projects in California, Hawaii, Vermont, Canada and Australia that turn wind and solar energy into a reliable and affordable competitor to fossil fuels. In the process, it's touting itself as the world’s first vertically integrated sustainable energy company.
Tesla has asked the Electric Reliability Council of Texas, which regulates electricity in the Lone Star State, to clarify regulations tied to integrated battery storage systems, or self-contained batteries that utilities can integrate into the electric grid. The move comes as Tesla is considering an industrial property site in Austin, Texas, as well as an undisclosed location in Oklahoma, to build a major automobile plant that is expected to make the company's first battery-powered truck as well as other products.
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Falling battery costs and policy changes promoting renewable energy are expected to put the U.S. battery storage business into hyper drive over the next decade. The battery storage industry could grow tenfold in the next five years in the United States to $7 billion, according to global consulting firm Wood Mackenzie.
“Energy storage is one of the true signposts of the energy transition; it’s very rapidly evolving because of the cost declines, because of the policy. The grid is going to start looking very different in the next decade and energy storage is the vanguard of that,” said Dan Finn-Foley, an analyst with Wood Mackenzie, in an interview with CoStar News.
The growth in battery storage could help owners of manufacturing and commercial buildings shift to a more sustainable, reliable and less expensive source of energy, proponents say. Energy can represent up to one-third of operating expenses for owners of a commercial building, with office building owners spending an average of about $2.14 per square foot on energy consumption, according to a report from the Building Owners and Managers Association International in collaboration with research firm Kingsley Associates.
Battery energy storage projects are often paired with solar energy farms. In January, for example, Google struck a deal with NV Energy to add 350 megawatts of solar generation and up to 280 megawatts of energy storage to serve a planned Google data center in Henderson, Nevada.
This is how battery storage works: Operators can buy electricity when prices are low, such as at nighttime, and then sell it for later use during peak energy demand around midday, said Ed Hirs, an energy fellow and professor at the University of Houston. Proponents argue battery storage could replace traditional coal and natural gas plants that are currently used to back up U.S. grids during peak demand.
Battery storage facilities can also be built anywhere on the grid, which in the future could reduce the need for expanded transmission lines or generation capacity to meet growing electricity demand, said Hirs.
"This becomes essentially a subterfuge that attacks not only conventional legacy generation resources, coal, gas and nuclear, but it attacks the transmissions companies,” Hirs said. “The battery guys will claim that by adding them to the grid they will be able to reduce costs to consumers because they charge when electricity is cheap, they displace old legacy coal and gas power plants, and they are located where power is needed and avoid future costs of new transmission.”
Tesla is now just one of the many players in this game-changer industry. Last year, the United States had a record year for new battery storage installations, with 523 megawatts deployed, and new battery storage endeavors proposed this year could dwarf 2019 numbers. Battery energy storage costs have plummeted 58% in the past five years and 85% in the past decade thanks to advances in technology, according to Wood Mackenzie.
“It’s been absolutely remarkable,” said Finn-Foley with Wood Mackenzie.
Utilities are rapidly expanding their solar-plus-battery storage investments, which are expected to help states such as New York, Massachusetts and Hawaii meet ambitious sustainability goals. For example, Hawaiian Electric Company Inc. selected Engie EPS in May to build a massive solar and battery farm in the state. Hawaii has a 100% renewable energy goal for electricity by 2045. New York also has an initiative to increase energy storage capacity to 1,500 megawatts by 2025 as part of its ambitious target to get to 50% of electricity from renewable energy in the next five years.
Tesla’s Big Battery Play
Battery storage makes up less than 1% of the power generation capacity in Texas, which is the largest energy-producing and energy-consuming state in the nation, according to the Energy Information Administration. The industrial sector, including refineries and petrochemical plants, accounts for half of the energy consumed in Texas. Battery storage capacity in Texas is expected to more than triple this year to 350 megawatts from 104 megawatts last year, according to the Electric Reliability Council of Texas.
Tesla is asking the Electric Reliability Council of Texas to treat battery storage as a form of wholesale storage instead of a form of power generation as it is now treated in Texas’ system, according to regulatory filings. The lack of clarity in the way the state treats integrated batteries is preventing developers from investing in new technologies that could be added to Texas’ grid as early as 2021, Tesla argues in its filing with the state.
Power generators in Texas must comply with additional, often more costly, regulations compared to wholesale storage facilities, Hirs noted. For example, during peak demand, a power generator could be forced to sell electricity at rates that don’t cover the cost of generation in some scenarios. And if generators agree to sell electricity into the grid but back out of the agreement last minute, they still have pay for that power, he said.
Wholesale storage facilities don’t have some of the same requirements, which could lower their cost of business. Calpine, a major utility in Texas, is opposed to Tesla’s request because it argues changes to the rules could disadvantage owners of generators, including Calpine, according to filings.
The Electric Reliability Council of Texas is expected to introduce compromise language and plans to discuss Tesla’s request at a workshop later in June, a spokeswoman said in an email.
If approved, Tesla argues the changes could “provide regulatory certainty for ongoing projects and spur investment in energy storage technologies," which will serve the Electric Reliability Council of Texas' "imminent needs for capacity and reliability services.”
Even if the request isn’t approved, Hirs said Tesla could still have an economic reason to expand its battery storage presence in the Lone Star State along with dozens of other companies.
“We have seen an inflection point in interest for utility level storage, primarily driven by progress in reducing costs. At the moment, the demand level for this product remains above our capacity,” Tesla said in its first-quarter earnings statement. “Our order book continues to expand due to multiple projects in the pipeline."
Tesla did not respond to emails requesting comment on its plans for Texas.
Tesla founder and billionaire Elon Musk is betting energy storage could one day eclipse electric vehicles in terms of growth for the company that ranked No. 124 on the Fortune 500 list this year of largest U.S. public companies, generating revenue of $24.5 billion.
“I expect Tesla Energy to be of the same or roughly the same size as Tesla's automotive sector or business. This is the most under appreciated group,” Musk told investors during the company's third-quarter 2019 earnings call. The energy storage is part of Tesla’s overarching strategy, “which is effectively to become a giant distributor, global utility on the energy side,” Musk said.
Meanwhile, there are 44 states with grid-integrated battery storage projects either proposed or installed, according to the global consultancy IHS Markit. Seven states offer direct financial incentives for system owners to install battery storage, including Arizona, California, Florida, Maryland, Nevada, New York and Wisconsin, according to IHS Markit. In addition, there are some federal credits for battery storage as well as other local and state incentives.
“Tesla has been championing the battery storage for many years and we’re seeing the energy industry get to the point where not only Tesla can do this economically but many of the large energy companies can do it economically,” said Travis Miller, a utility analyst at Morningstar. “As a country, we are not going to get to the aggressive clean energy goals without having some type of reliable renewable energy source.”