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Residential Energy Storage: Another Chance for Utilities

As energy storage solutions continue to decline in cost, it is largely inevitable that distributed energy resources (DERs) will be a critical part of the future electricity grid. In the residential markets, U.S. utilities were slow to embrace the opportunity presented by rooftop solar. They now have a chance to shape the unfolding DER evolution with energy storage. Instead of ignoring or fighting the transition, utilities need to proactively find ways to lead the deployment of these new grid resources for their most vocal and visible customer base: residential customers.

Current DER market traction is largely a result of entrepreneurs and capitalists addressing electricity market inefficiencies. It started with behind-the-meter solar addressing high retail rates. Now energy storage can further decrease customer costs by optimizing behind-the-meter assets and consumption for local tariffs. As with solar, many utilities view this as a challenge to their business. But DERs have been proven to provide valuable benefits to utilities, operators, and the larger grid if planned and coordinated by the grid operator at the distribution level. These benefits include load shaping through additional supply-side and demand-side resources, improved grid resiliency, reduced emissions, and lower cost ancillary services. Indeed, utilities would likely be embracing DERs if frameworks were in place for them to share in — and get compensated for — the benefits DERs provide.

It is hard to deny that utilities have been very successful in delivering low-cost reliable power to customers. But in the U.S., consumers always want more, including cleaner energy options, more reliability, energy independence, and the opportunity to further reduce their electric bills. Better solutions are being made possible by several factors, including the emergence of low-cost renewable energy generation technologies, a digital communications infrastructure, software, low cost hardware, and, as mentioned above, massive market inefficiencies. This last point is worth focusing on and is a big reason why there is so much opportunity for energy storage and DERs.

The very nature of electricity, as well as the way it is delivered, consumed, and paid for, have given rise to inefficiencies. In the past, these were tolerated because alternatives did not exist or were not cost-competitive. That has changed. DERs including rooftop solar, energy storage, smart appliances, energy management software, and electric vehicles are turning customers from passive consumers to active energy managers.

Many utilities have responded to the initial wave of DERs by revising their tariff structures. An excellent report on rate design published earlier this year by the Rocky Mountain Institute (A Review of Alternative Rate Designs) reviews the complexities of this approach. Regardless, last year 61 utilities in 30 states proposed rate design changes that would increase monthly fixed charges on all residential customers by at least 10 percent per the NC Clean Energy Technology Center. The median increase requested in these cases was 62 percent. Early adopters of behind-the-meter energy solutions should take notice — tariff corrections from utilities are a reflexive response and such changes can blow up the economics of the DER you just installed.

But addressing market inefficiency with rate design changes may not be the best response. It is the equivalent of utilities playing whack-a-mole with innovation, and it’s a game they cannot win. Innovation moves too quickly and regulatory responses take too long to implement. Applying time-of-use tariffs or demand charges to residential customers may temporarily counter some of the challenges of dealing with behind-the-meter solar, but recent energy storage innovations will soon expose the weaknesses of such a strategy. It doesn’t have to be this way.

In the residential energy storage markets, which are just getting started, utilities have an opportunity to preempt third party aggregators and create value themselves. Their tremendous advantages include low cost of capital, wide customer reach, billing infrastructure, and call centers for customer service, among others. Indeed, utilities can strengthen their business and become stickier to residential customers by embracing DERs instead of waiting.

Many utilities already have direct experience with sharing behind-the-meter assets through electric water heater demand response programs, which have been around for years. Here’s one simple way such programs can now leverage energy storage: utilities can own (rate-base), install, and partially control peak shaving batteries at residential sites. In return for hosting the asset, the residential customer gets blackout protection, for which they might even be willing to pay a monthly fee (backup power is the current killer app for residential energy storage provider Sonnen at 90 percent of use cases). The utility gains a DER asset, has visibility and control of the DER, and the customer is less likely to view the utility as the adversary. There are many scenarios like this where the utilities and residential customers can partner to integrate DER with benefits for all.

With energy storage costs coming down significantly, the economic case and technology options are only improving. A database by IBESA shows over 230 lead and lithium-based residential energy storage products currently offered in the US by 33 different vendors. In such a competitive market, the economics for storage will continue to improve, as evidenced by the 14 kWh Tesla Powerwall 2.0 now priced at $5,500 uninstalled.

Progressive utilities are embracing DERs and see residential energy storage as an opportunity to shape the distributed energy future and capture more of the value before third parties rush in with solutions. Examples include energy storage pilot programs by Green Mountain Power (Tesla), Glasgow Electric (Sunverge), and Con Edison (Sunverge & SunPower). The results of these pilots will help utilities understand the challenges and opportunities ahead, and will provide the data to properly respond to — and advocate for — market and regulatory changes that are needed to manage a more distributed grid.

In the U.S., market inefficiencies are eventually exposed and addressed, and that will continue to happen in the residential electricity markets with DERs, as technologies develop and prices fall. Third party providers and aggregators are already hard at work developing solutions with — and without — utility participation. There will be winners and losers, but the utilities that embrace the distributed energy transition will most likely succeed and thrive.