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Apr 15, 2014

The Urgent Need for Innovative Business Models

Could RMI’s Economics of Grid Defection base case and more aggressive scenarios actually have been conservative?

 

Earlier this year RMI and partners Homer Energy and CohnReznick Think Energy released The Economics of Grid Defection, a report that predicted when and where solar-plus-battery systems might reach parity with retail electric prices. In other words, it identified the times and places that customers could defect from the grid by installing an off-grid solar-plus-battery system to get their electricity as cheaply and reliably as from their utility.

The report discussed not only a base case scenario—which assumed no drastic changes in technological price, capability, or customer behavior—but also several more aggressive scenarios: one in which the price of solar-plus-battery systems drop drastically from today’s costs and faster than our base case projections, another where the solar-plus-battery systems are bundled with investments in efficiency and load flexibility, and a third that considered both of these scenarios together.

Yet, evidence from the marketplace suggests that our aggressive scenarios may be tracking reality more closely than our base case.

The Accelerated Technology Scenario

Consider these significant changes and market developments that have taken place since The Economics of Grid Defection released at the end of February:

For example, Bloomberg New Energy Finance, whose battery cost forecasts we cited in our base case, lowered its projections in favor of faster cost declines—by nearly $200/kWh!—from 2012 through the first quarter of 2014 alone.

Our report modeled lithium-ion batteries as a storage technology, the same type of battery found in most electric vehicles (EVs) on the road today. As more vehicle manufacturers race to release hybrid and all-electric vehicles to meet customer demand for cars that are cheaper to drive and that can meet stricter government mileage standards, battery prices are expected to drop via economies of scale to meet that demand. The Electric Vehicle Initiative’s 15 member governments found that EV sales more than doubled between 2011 and 2012 and that battery costs dropped by over 200 percent from 2008 to 2012. Extrapolating forward, and realizing the incredible innovations being made by the likes of Ambri and others, a $125/kWh battery might not be so far off.

To wit, Tesla is targeting battery prices in line with our accelerated technology scenario. The EV company recently released details of a high-volume lithium-ion battery manufacturing “Gigafactory” that will produce more batteries annually by 2020 than all of the batteries produced in 2013. Tesla plans to use this plant to support its mass-market car, supply batteries for up to 500,000 vehicles per year, and drive down the battery per-kWh cost by 30 percent—matching the $125/kWh target used in our accelerated technology scenario. With partners like Toyota and Daimler already using Tesla’s batteries in their vehicles, it isn’t hard to imagine the macro effect this factory will have on the industry and battery prices overall.

Furthermore, no-cost financing for batteries will cause a surge in grid-ready battery storage systems for homes and businesses alike, as no-cost financing already has done for solar systems. Offerings by companies such as Green Charge Networks have already shown utility bill reductions of 15 percent or more.

Finally, the Department of Energy’s SunShot Initiative aims to make solar energy fully cost-competitive with traditional energy sources by 2020, which is what the report assumed could happen in its Aggressive Technology Improvement scenario. JinkoSolar, a Chinese manufacturer, already reached the SunShot goals of sub-50 cent per Watt solar modules

Adding in efficiency and demand-side flexibility—the power of integrated design

Designing a property to use as little energy as possible from the start allows the occupant to install a much smaller battery and PV system, which lowers the overall upfront cost and brings the possibility of cutting the utility cord much closer.

 

While the idea of economically going off-grid using clean and abundant energy might be exciting for some, each prospective “defector” should consider right-sizing their energy needs first. Through deep efficiency investments and intelligently timing the use of appliances, the need for electricity can be drastically lowered. Since electric need is lowered, the energy-producing systems—in this case the PV array and battery storage—can be made much smaller and hence radically cheaper. In fact, the report found that efficiency and demand-management measures lowered the battery size requirement from the base case by 35 percent and 63 percent in the commercial and residential scenarios, respectively. Similarly for PV, the efficiently designed cases showed that systems were 31 percent smaller for both the commercial and residential cases.

The 2.9 cents/kWh cost of energy for efficiency measures used in the report was a national average. This means some regions and programs have considerably lower or higher costs. A new American Council for an Energy-Efficiency Economy report showed that energy efficiency costs utilities two to three times less than fossil fuel sources at an average cost of only 2.8 cents/kWh. And a recent Lawrence Berkeley National Laboratory study of energy efficiency programs found an average cost of 2.1 cents/kWh, and just 1.8 cents/kWh for residential energy efficiency.

Plus, as was alluded to above, technologies are generally improving faster than they’re being installed, tending to reduce average costs. Combining this with integrative design and financial innovations shows promise of still further cost reductions, making PV and storage needs smaller and hence deployment cheaper.

Putting it all together

Market trends favoring the accelerated technology goals are already beginning to materialize, while integrative design can be included at any time as business models evolve. Importantly, these two scenarios are not mutually exclusive; our combined scenario lays out even more dramatic results.

So if parity is coming even sooner than we thought, it is more urgent than ever for utilities and regulators to act quickly. Utilities and regulators need to evolve business models and policies so we can live in an electricity future in which grid-connected solar-plus-battery systems are optimized for individual customer and societal benefit.

Image courtesy of Shutterstock.
 

Join the Discussion


Showing 1-2 of 2 comments

April 23, 2014

I feel for utilities, but I won't cry for them. Businesses need to adapt, and even more important, evolve and embrace future trends. I met with Ed Kjaer at Southern California Edison back in 2008 and he told me of the importance for utilities to move away from energy production to energy management. They need to change their business model to meet the new demand. It's not good enough to throw in a bit of alternative energy into the mix, they need to also have a concrete action plan to upgrade the grid and turn it into a smart grid. All of this costs a lot, and I'm sure they are biting their nails wondering why they never raised the price of electricity more and spent more on their maintenance budget.

It's a tough challenge for these companies, and I hope they won't drag down tax payer money into the survival mode some are cornering themselves into.


July 25, 2014

Excellent.
Dr.A.Jagadeesh Nellore(AP),India

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