Why Tesla Batteries Are Cheap Enough To Prevent New Power Plants

Last year, analysts hired by Oncor Electric Delivery Company were toiling away on a study of the costs and benefits of installing enormous batteries on Oncor's grid in Texas. The benefits would surpass the costs, they calculated, if Oncor could buy batteries for $350 per kilowatt hour of capacity—or less. That was the break-even point.
At the time, the cheapest utility-scale batteries cost twice that much, the analysts noted, and some cost nearly ten times that much. But prices were falling, and the analysts predicted batteries might reach the $350 point in 2020.
They didn't have to wait nearly so long.
Tesla's utility-scale Powerpack battery, unveiled late Thursday night, will sell for $250/kWh.
"There's nothing remotely at these price points," said Tesla product architect Elon Musk.
Earlier Thursday night, I was covering a Northwestern University debate on the future of nuclear energy, in which the nuclear critic Arnie Gundersen predicted Tesla's new utility-scale battery would render new-build nuclear plants obsolete. The battery would solve the reliability problem of intermittent solar and wind, he predicted, providing a cheaper alternative to nuclear power's 24-hour output.
Gundersen predicted the cost of the utility-scale battery would fall to 2 cents per kWh of the electricity that passes through it, which in coming years would render renewable energy with reliable storage cheaper than a new nuclear plant. (Nuclear plants currently under construction will deliver electricity costing an estimated ¢16-¢19 per kWh). Gundersen focused on the utility-scale battery, which we would soon learn to call the Powerpack, but most of the press attention in the wake of Musk's announcement has focused on the home battery, the Powerwall, which is both more expensive per kWh and less poised to reap benefits.
Some observers noticed both batteries.
"The Tesla battery is better than I thought for homes," wrote the author Ramez Naam in a review of Tesla's new battery line. "And at utility scale, it’s deeply disruptive."
At Tesla's price, utility-scale batteries have the potential to perform better than 2 cents per kilowatt hour where it counts the most: on the customer's electric bill. The capital cost of utility-scale batteries may be more than offset by their benefits, according to the Texas study, and if deployed at the grid level, they could actually lower electric bills .
Even modeling batteries $100 more than the Tesla, the Texas analysts concluded that storage arrayed across the grid should cause a typical consumer's electric bill to fall slightly—from $180 per month to $179.66. That's not a remarkable number if one is looking for savings, but it's a remarkable number if one expects new capital expenditures on batteries to increase electricity bills.
"Considering both the impact on electricity bills and improved reliability of grid-integrated storage, total customer benefits would significantly exceed costs ," the analysts, from The Brattle Group, found.
Here's why, according to their study:
1. Power Purchase Cost Savings. Utilities without sufficient storage often have to purchase power during system peaks, and those purchases are billed directly to customers. Batteries eliminate those charges.
2. Customer Bill Offsets from Storage Merchant Value. Utilities would make batteries available to independent companies participating in regional wholesale energy markets, auctioning off battery capacity and returning most of the proceeds to customers by reducing their bills.
3. Avoided Distribution Outages. By preventing blackouts, batteries would save residential customers about $10 a year and commercial customers an average of $700 a year. (An example: SoCore, a Southern California Edison subsidiary, is installing Tesla batteries at two Cinemark Theaters to keep them in business when the power goes out.)
4. Deferred Investments. Typically, utilities need enough power plants to serve their customers at peak hours, not at average hours. By using batteries to serve peak loads, they can invest in fewer power plants. They can especially avoid firing up expensive "peaker plants," which are usually fast-starting but inefficient natural-gas plants. They can also build fewer peaker plants in the future. By deploying batteries along the grid where peak loads are greatest, they can also defer investments in transmission and distribution infrastructure designed to serve peak loads. (An example: Southern California Edison installed a battery in Orange, Cal., and found that it both improved reliability of the grid and allowed the utility to defer replacement of a circuit for 5 to 7 years).
"The combined value of these benefits exceeds the costs of storage by a substantial margin across a range of deployment levels," the Texas study concludes. And remember, that's with hypothetical batteries up to $100 more expensive per kilowatt hour than Tesla's.
"In this analysis, we assume that customers would pay for the storage investments just as they pay for transmission and distribution investments. Customers would then receive offsetting reductions in retail electricity costs from the storage in the form of deferred investments, refunds from the wholesale market auction proceeds, and reduced power purchase costs. Customers would additionally benefit through increased system reliability from avoided distribution outages. Other customer benefits that we have not analyzed include improved power quality and support for customer-side renewable energy usage."
Tesla's Powerwall and other batteries for the home should produce similar benefits, but not as powerfully: "while individual customers would be able to capture backup-power benefits of storage, they are not likely to directly monetize the larger grid-wide and wholesale power market benefits."
Tesla is offering the utility-scale batteries in 100kWh battery blocks that are grouped in packs from 500kWh to 10MWh+. The Texas analysts recommended up to 15MWh for Oncore's grid. Installation costs are uncertain, but installations are likely to be performed by utilities in-house and therefore seem unlikely to approach the dimension of home installations, which will reportedly increase the capital cost of the Powerwall 17-29 percent for one utility's customers.
The Texas study could be unique to Texas, but the results are consistent with other findings. A study by the Electric Power Research Institute found the benefits of grid-level storage exceeded costs in nearly all examined scenarios.
Utilities expect similar results.
Green Mountain Power, among the first utilities offering the Tesla Powerwall for homes, is also purchasing Tesla's grid-level batteries.
"We will also be using the Tesla grid-scale system, which we know will also offer cost savings to our customers," Dorothy Schnure, GMP's corporate spokesperson, told me in an email. Schnure couldn't say how big or small those promised savings will be: "We know there will be savings and are still evaluating what that might be, so I don’t have a number for you yet."
In its press release last week, Tesla named Southern California Edison as a partner for grid-level storage.
"There are a few opportunities which we believe are economical today," a Southern California Edison spokesman told me via email, "but as prices decline for energy storage, we expect a substantial broadening of the economically viable projects."
Opportunities should blossom as prices fall and also as batteries improve. Gundersen based his 2¢ estimate in part on improvements in cycling—the number of times a battery can be drained and recharged—that Tesla is known to be working on, and that have already begun to appear in other batteries.
Analysts often assume batteries will cycle once per day, 1,000 times. The Michigan company Xalt Energy markets a lithium-ion battery that it says can cycle 4,000 to 8,000 times. Some lithium-ion batteries used to back up data servers are designed to cycle up to 10,000 times. These achievements are likely to be exceeded soon by the next generation of batteries coming down the pipe.
More cycles mean longer battery life and lower cost per kWh.
"Both solar and batteries are not 'fuels' but rather technologies," Gundersen said. "The extraction cost of fuels continues to rise, while technology costs continue to fall. My Doctoral contacts at battery companies are confident that 2 cents is indeed here in the lab and on the horizon commercially. It is all about the number of cycles that can be pulled from a battery."
We still don't know what cycling improvements Tesla has bundled into the Powerpack, if any, and Tesla has not responded to a request for comment.
Ramez Naam thinks that both Gundersen's optimistic 2¢ (for the Powerpack) and my Forbes colleague Chris Helman's pessimistic 50¢ (for the Powerwall) are outliers in the range of possibilities for the cost of electricity flowing through Tesla batteries. If utilities get the same 10-year warranty Tesla offers to home customers, Naam estimates the Powerpack's cost per kWh will be 7¢, he told me via Twitter. Even at twice that price, he said, grid-level batteries offer utilities a return on investment now:
"That batteries bring positive ROI at such a price surprises lots of people."
And it means windmills + batteries may be cheaper than nuclear plants right now, with solar panels + batteries likely to follow.
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