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Published on March 25th, 2014 | by Giles Parkinson

20

Going Off Grid Nears Tipping Point, Morgan Stanley Reports

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March 25th, 2014 by  

Originally published on RenewEconomy.

Investment bank Morgan Stanley says it has been overwhelmed by the response to its recent analysis which suggested that the falling costs of both solar modules and battery storage presented a potential tipping point that would encourage huge numbers of homeowners and businesses in the US to go off grid.

The initial report, published earlier this month, has been followed up by a note from Morgan Stanley highlighting the extent to which investors had been unaware of these mega trends, which threaten massive disruption in the trillion-dollar utility business.

Sure, they had heard that solar was proving popular, but had no idea of the size of the market that Morgan Stanley had identified. And while most had been sceptical of the potential impact of battery storage, they were intrigued by the potential cost falls that could be achieved by Tesla, the electric car company, and its ability to monitor power levels in batteries and schedule a battery swap in the case of depletion.

More importantly, the investors were particularly focused on how utilities might respond. Solar, they suggested, should be seen as an opportunity and utilities should look at ways of becoming enablers of these technologies, rather than barriers.

Addressable distributed solar market in US could be 415GW

But first, back to the original report. There were a couple of major takeaways in this: One, the addressable solar market in the US is way bigger than anyone had previously imagined; and two, the Tesla gigawatt battery manufacturing facility could bring down the cost of storage quicker than anyone had imagined.

Even without the continuation of the 30 per cent investment tax credit – and taking into account the fact that many homes are unsuitable for solar – Morgan Stanley says its “base case” addressable market for distributed solar in the US is 240GW within five years.

morgan solar market

In its bull case – where a 10% tax credit remains and there are lower grid charges, it estimates the addressable solar market at 415GW. That compares to just 6.2GW of residential and commercial solar installed to date.

Another takeaway – and one that might be of interest to the policy makers and utility economists in Australia and elsewhere – is Morgan Stanley’s assessment that, the higher the fixed grid charge required of distributed generation customers, the more likely they are to buy batteries and go off the grid.

And this is where Tesla, and its new “gigafactory” for battery storage manufacturing, will play a critical role.

“There may be a “tipping point” that causes customers to seek an off-grid approach,” Morgan Stanley writes.  “The more customers move to solar, the remaining utility customer bill will rise, creating even further “headroom” for Tesla’s off-grid approach.”

It says that for every $25/kWh reduction in the cost of Tesla’s batteries, it estimates the all-in cost of power to customers will fall by $.01-$.02/kWh, or 15-30 per cent of the residential customer price for grid charges in some US states.

“Tesla’s off-grid, battery-based option will, post-construction of its Gigafactory, be in our view at approximate parity with the cost of the utility grid in higher-cost states, and over time we believe this will move in Tesla’s favor.”

Morgan Stanley expects customers to take one of three potential approaches – and they are remarkably similar to the scenarios painted by the CSIRO, in its Future Grid publication on Australia.

The first is solar customers staying on the grid, but net zero grid power usage. In this scenario, a customer produces more power than needed during the day, but draws from the grid at night time.

Under this approach, homeowners might not use batteries to a large extent, because the grid is effectively acting as a battery and power management system, ensuring customers have power when they need it. However, Morgan Stanley says this will likely push up bills for remaining utility customers, creating more “rate headroom” for off-grid approaches.

The second scenario is using no grid power, even at night, but having the ability to seek emergency grid service in the event of a home power system failure. In this approach, the homeowner would purchase significant battery storage capacity to draw down power at night stored in their batteries that was produced during the day from their solar panels. Customers would, however, remain connected to the grid, and could seek “emergency power service” from the utility in the event that the home power system fails.

The interesting question about this approach is the cost of that service. It would be likely, Morgan Stanley says, that the utilities would set a high emergency access fee, providing a further incentive for  customers to go fully off-grid.

That leads to the third approach – Fully off the grid. Customers choose this approach because to have any grid access would require a large non-bypassable, fixed-grid charge.

The key variable in this approach is the cost of power storage; Tesla’s Gigafactory for battery production, given it could reduce the cost of batteries to levels significantly below other storage options, would have a significant impact on the extent to which customers pursue this “off grid” approach.

Tesla could provide emergency power service by monitoring the power levels in home batteries and delivering replacement batteries in the event home batteries run out of power. (Read more about that here).

morgan off grid

But it is not just solar that is providing off-grid options. Morgan Stanley notes that the Stirling engine product being developed by NRG (these provide power from natural gas) could be cost competitive with solar, particularly in those states with less favourable solar conditions.

These stirling engines, coupled with batteries, would have a low capital cost, would allow households to use waste heat from the generator for heating the air and water in the home, and would run around the clock.

Morgan Stanley’s short and medium term distributed generation scenarios

So here’s how Morgan Stanley sees the market playing out over the next decade.

Over the next three to four years, solar penetration will continue at a rapid rate in Hawaii, the West and Southwest and  solar service providers such as SolarCity will continue to expand their scale and geographic scope, and solar installed costs will come down.

Utilities will react by imposing fixed grid fees on distributed generation customers, but these fees will not significantly slow down the adoption of solar in the “sun rich, rate high” areas of the US.

Tesla will build its Gigafactory and reduce the cost of storage further, and Tesla and SolarCity will  integrate storage into a complete home/office energy management system to allow customers to go off-grid, building off their existing joint venture.

Hawaii, currently at 10 per cent solar penetration, may experience levels of solar penetration that begin to substantially impact remaining utility customer bills, and impact grid functionality. As a result, the “rate headroom” for remaining customers to go off-grid will rise, and  customers might choose a “solar + batteries” off-grid approach.

Utility bills will continue to rise, as utilities continue significant capex levels, driven among other things by changes to the grid from the increase in renewables and gas-fired generation and coal plant retirements

Morgan Stanley’s scenario for five to eight years from now:

California and other Southwestern states will reach solar penetration levels above the 10% level currently experienced by Hawaii. Solar and storage costs continue to fall, but at a lower rate.

There may be an economic “tipping point” for solar in “sun rich, rate high” states, driven by the confluence of increasing utility bills, greater grid charges borne by remaining grid customers, falling costs of storage and solar, and greater sophistication regarding off-grid solutions.

“Given the incentive for customers to move to solar, more customers in the West/Southwest will in our view seek to do so,” it says. “If it becomes challenging for solar customers to secure utility approval to interconnect to the grid, we believe customers would likely pursue an off-grid approach offered by companies such as Tesla and SolarCity.”

However, under a “changing utilities scenario”,  utilities take steps to enhance the ability to integrate large amounts of renewables onto the grid. The idea would be to ensure solar customers stay on the grid and contribute to the cost of maintaining the grid, rather than lose solar customers to off-grid business models.

This might work in states where grid charges are relatively low and sun conditions are not as favorable as in the West/Southwest, but in the sun-rich, higher rate Western and Southwest states, this approach will likely not succeed  – “because, as per the prior bullet point, the penetration level of solar could grow to be extremely high and a “tipping point” would be reached in which remaining grid customers would have very high bills relative to solar customers, and the customer incentives to go fully off-grid could be high.”

One wonders what Morgan Stanley make of Australia. It has all the ingredients of the US south-west, but with even higher retail electricity costs, and higher network charges, and with distributors looking to increase their grid fixed fees. All it needs is a Tesla Gigafactory.

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About the Author

is the founding editor of RenewEconomy.com.au, an Australian-based website that provides news and analysis on cleantech, carbon, and climate issues. Giles is based in Sydney and is watching the (slow, but quickening) transformation of Australia's energy grid with great interest.



  • yu tube

    I can see one effect of increasing solar is the utilities separating transmission from power generation for billing purposes. Only total OTG (no connection at all to the grid so no selling back) will avoid paying the transmission portion.

  • REWonk

    One factor not discussed by Morgan Stanley is the likelihood that people will first put grid-connected solar on their rooftops and will later buy battery storage systems, at which time they may consider going off-grid. I think this is likely because solar power is currently a good investment in many states (with current subsidies, tax credits, RECs, etc.), while batteries are still expensive, so the solar market should get really big while storage lags behind.

    So you’ll have a big segment of the market that is generating all of its power needs with solar, but is still connected to the grid. At peak power times, many of these systems will be helping to power their neighbor’s homes on the distribution line where they’re tapped in, so this is a significant load that the utility no longer “sees”–unless of course they have a smart grid in place.

    Then some affordable storage solution (perhaps the Tesla gigafactory, maybe not) comes along and these solar power generators defect in droves. Now suddenly the utility is struggling to provide power to these other loads on the feeder lines; substations could be overloaded, new investments needed, just as the customer base is dropping off. So the utility death spiral is even worse than others have predicted.

    By the way, I don’t really see the future of storage as following the current model, where you have some big energy storage system in your house. People are already buying big battery packs that are mobile–we call them “electric cars.” ;>) Once “vehicle to home” technologies are available (Nissan already sells a system in Japan), it makes a lot of sense to use your vehicle for storage. Of course, that means leaving your car at home during the day, but it also depends upon better battery packs that can be charged and discharged daily without going bad.

    • Bob_Wallace

      I think you’re overly concerned about future grid overload. Right now the grid is sized to supply all connected buildings at their maximum draw. The grid has to supply power during the post-Sun peak hours.

      When a new commercial building or housing project comes on line the grid connection has to be large enough to provide 100% of the potential power draw. No under-sizing happens because someone might be installing solar.

      Overall I don’t see a utility death spiral. I see some very rough patches ahead for utility companies that own coal and nuclear plants.

      I see some rough patches for all utilities as the rate of end-user solar increases and efficiency improves, dropping demand. But I suspect those demand decreases will soon be offset by electric vehicle charging.

      We may see some people install storage and run (mostly) off their own solar power, but I don’t think a significant portion of the population will. Think about all the people who live in apartments/condos, who rent, who own their home but generally “can’t get their stuff together”.

      My guess is that storage will be cheaper on the utility side of the meter.

  • Clem Roberts

    There’s a new kid in town. CGE Clean Green Energy to merge with MKBY forming a super green power company that provides wind, solar, geothermal, biomass, and Cree LED Lighting retrofits at no cost to the facility. The facility simply pays for on site generated power at fixed rates lower than their current utility bill and power generated that is not used is sold back into the grid meaning the power company pays you. YMCAs of Ohio and Michigan just signed PPAs for all their youth camps to be 100% energy independent through these green energy methods.

  • Jouni Valkonen

    I guess that this is seriously buy $TSLA!

  • spec9

    I would NOT want to go off grid because that would make charging an electric car very difficult. The grid is good! It allows supply & demand to be balanced out.

    • Steve Grinwis

      Why is charging an electric car difficult off grid? You need more panels, and more storage…. But it’s not difficult. I suspect in the coming years, it’ll be cheaper than the grid to…

  • austrian tesla fan

    There is 2 kinds of storage needed.1. Day night storage will soon be operated by batteries and 2. a seasonal storage . There will be need for a storage system that can take huge amounts of power within minutes to regulate the grid by cutting the tops. I think the easiest and cheapest solution will be concred. Heating up concred to 800 celsius stores 400kw/h per m3(2,2 to 2,5 tons)in huge reservoirs. Using stirling engines when deloading in wintertime could produce 2/3 heat and 1/3 electricity with over 90 percent of efficiency.

    • Doug Cutler

      What the heck is concred? Can’t find it anywhere. Do you mean concrete?
      Your concept is interesting, though. I’m keeping my eye on a $20M pilot project in UK very similar to this touting crazy low storage costs.

      • austrian tesla fan

        Dear Doug Cutler,
        Please excuse my english. Of course I mean concrete(cement). The biggest problem of germanys wind and solar energy is the lack of storage. In Austria, this is due to the mountains and water storage a minor problem. There is times in Germany when Energy-providers get electric power for free because there is so much wind and solar power on the grid, that they don`t know where to put it. The same problem exists in Chicago when the wind blows .
        I am an orthopedic trama surgant , but one of my jobs during my studies was installing night storage heatings. those heatings had a central isolated cement and magnesit nucleus that was heated up during nighttime when power was cheap and heated during daytime.
        (max. Temp was about 500° C). Today comunity-heating is quite common normaly powered by a coal or gas(I refuse to call it natural gas) powered heat and electricity combination power plant. Those power plants cold be operated in wintertime by a big concrete block loaded by solar and wind energy when cheap over the year. In southern regions this combination cold be used for thermal desalination.

        Back to the Question of the grid, I think we should keep it and not go compleatly of grid but the grid will transforme from a delivering to an exchange commodity.
        Greating from Austria

        • Doug Cutler

          The test project I mentioned: The firm is called Isentropic Energy out of the UK. Their system is similar to what you envision. Two large insulated silos of gravel sit side by side. Argon gas fills the remaining air space. One silo is heated up the other cooled down. The heat differential between the two drives a heat engine for energy recovery. UK government recently granted $20million for a scaled up pilot test. Isentropic claims very high efficiency and VERY low cost. We shall have to see if it pans out. Here’s the link:

          http://www.isentropic.co.uk/

    • jnffarrell1

      Best way to avoid blackouts and or speed recovery/minimise-damage from extreme weather is to have 40% of supply solar with a full 100% of a day’s use stored on site. Winter and summer storms are followed by cold/warm fronts and clear weather ideal for producing solar electricity. Assuming that PUCs (pronounced pukes) continue to fund grids designed to fail-dangerous, Walmart’s and homeowners will have to operate through bad weather on their own.

      Byproducts of businesses protecting perishables and utilities no longer pulling the plug on grandma will be: 1) lower likelihood of blackouts 2) safer neighborhoods 3) faster recovery from calamities.

      While considering perishables, the pukes might consider making schools capable of operating through disasters to protect children and provide refuge for families.

    • JonathanMaddox

      For seasonal storage, fuel synthesis is frequently mooted. It has several reasonably-sized pilots and could well be a winner. http://en.wikipedia.org/wiki/Power_to_gas

  • Doug

    A large utility should always be competitive with small projects because of economies of scale. If they can’t compete with off grid, the utilities will suffer the consequences if their poor economic decisions.

    While rates may rise for those customers that are stuck with the utility, I don’t see how off-grid users can be fairly blamed. If I go on vacation for a month and use no electricity – or install more efficient lightbulbs – I will pay less to the utilities too. Does this make me responsible for higher rates for everyone else?

    The utilities have been sitting fat, dumb and happily profitable in their low risk, high dividend world. Now it’s time to take them out for a jog around the block and get them back into shape.

    • http://zacharyshahan.com/ Zachary Shahan

      Well said. :D

    • yu tube

      To be fair, if you don’t like the rates charged contact your state’s board of public utilities. It is the board that sets the rate the utility can charge, it also must approve any cost increases.

      • Vulcanator

        Yes but the rate board also has to deal with reality. Most regulated utilities aren’t making massive profit margins like Apple. Just because consumers gripe doesn’t mean costs will decrease.

        • yu tube

          My point exactly, utilities are charging (mostly) fair and competitive rates. They are not rolling in profits.

  • JamesWimberley

    The focus on Tesla alone as home battery purveyor seems a little myopic. All ev manufacturers are more or less forced to get into this market. as car batteries degrade with time, and many will have to be swapped under warranty, but can have a second life as home storage devices. Tesla is the first to announce a move into GW battery production but you can be sure that Nissan, GM and BYD are also keenly studying the option. It’s a risky move, as you risk being locked into the wrong technology, but Tesla have raised the stakes and the others must match or fold.

  • http://www.llano.us/ RJ “Baja” Sharpe

    I first became interested in OTG solar while living near San Antonio. The city has an aggressive rooftop solar program. I bought my first PV panels a few months ago and am using them to power a shed, just to get some practical hands-on experience. I ran the numbers and got a 3.5 year payoff on my project (the alternative was to trench and run a line to the shed). So far, so good. The house is next. We are interested in becoming one of those families Morgan Stanley wrote about.

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