Batteries powering our residential homes

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Batteries powering our residential homes

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Batteries powering our residential homes
Batteries powering our residential homes?

 Key Takeaways

  • The combination of more solar houses and installed batteries will have a large impact on demand for grid-electricity - which could be as much as 15% over five to ten years. We estimate that by 2025 there will be in the range 31-35% of households with solar panels, of which between 10-15% will have batteries. On this basis, we estimate that total on-grid electricity consumption will fall by around 15% on current levels;
  • Market commentators and forecasters expect solar photovoltaic (PV) penetration will ultimately rise to around 50-55% of all Australian households (from 21% in 2018).  Whilst there is no market consensus on the time frame in which this will be achieved, with some saying we will get there in around ten years and others saying it will take until 2050. Venture Insights estimates that solar PV will reach 31-35% penetration or more than 3.5 million households over the next 5 years
  • The adoption of batteries remains early stage, but we believe that a drop in the price of batteries over the next couple of years will result increased adoption rates; Only 0.6% of solar homes have installed batteries, mostly as a result of the investment payback period being to long. Once they go below around $300 / kWh (5 year payback) we believe mass adoption will arrive. Consumer financing at this point will emerge, further fuelling uptake
  • Most of the key drivers for the uptake of solar and batteries favour widespread adoption. The ongoing decline in battery prices, lower feed-in tariffs and increased government intervention will result in a sharp uplift in the installation of batteries, which will ultimately be sold as part of a bundle with solar panels. Government is doing its best to control retail electricity prices but ultimately cannot control the attractiveness of cheaper renewable electricity

Introduction

The cost of retail electricity is a hot topic in Australia, exacerbated by more frequent and volatile weather events and a rapid shift from traditional fossil fuels towards renewables. Considering that residential solar panels have reached 20% penetration, and this is set to grow to 50% over time, we believe that they have reached ‘mainstream’ market adoption with steady growth in panel installations likely to continue. As such, the discussion now shifts to the installation of batteries which will further shift the energy supply mix toward renewables in Australia. With the price volatility of retail electricity, there is an increased focus by governments and households on different ways to cut costs across the energy supply chain, from distributors to end users. This report looks at how and when battery technology will be adopted and forecasts the potential impact this could have on the consumption of ‘grid’ electricity.

Residential battery storage market

Uptake of solar panels in Australia

There are currently around 2 million or 21% of Australian homes with solar PV panels installed on their roof. Venture Advisory estimates that this will reach around 4m homes or 36% penetration by 2030. Reductions in the price of panels and related technologies are the primary reasons we believe that  solar roof top penetration can increase substantially over the next five to ten years. Figure 1 below illustrates the price declines of a 5kW solar system over the last 7 years across Australia, with prices falling from $2.50/kWh to less than $1/kWh.

Figure 1. 5kW solar system price trends ($/W)

SOURCE: Solar Choice

Current uptake of batteries in solar homes

Australia has seen an exponential increase in the uptake of solar PV panels with over 2 million households having installed them[1]. This phenomenon has created residential demand for energy storage technology such as batteries, which allow households to manage their energy supply independently and reduce costs in the long term. Today, there are 12,400 batteries installed in houses that also have solar panels, representing 0.6% of all solar households in Australia. As shown in Figure 2, leading the charge is the Australian Capital Territory (ACT) with 2.6% battery penetration, followed by New South Wales (NSW) with 1% battery penetration.

Figure 2. % of solar homes with concurrent battery installations in 2018

SOURCE: Venture Advisory Analysis based on concurrent battery installation data & residential rooftop solar installations by CER

Value of residential batteries to solar households

Though penetration rates for battery systems are seemingly low in comparison with solar PV, the demand for batteries is expected to increase as prices come down and as households are made aware of the potential cost savings they offer. Batteries allow cost savings to be achieved by ‘time shifting’ energy generated during the day (sunlight hours), for use during peak hours (in the morning and evening). These cost savings (daily or annualised) need to be weighed against the cost of buying and installing the batteries, which we assess using the ‘payback’ period for the battery. We believe that batteries will hit a ‘tipping point’ when the payback period reaches around 4-6 years – which can come about by either by a lower cost of batteries (which continues to happen) or via higher grid electricity prices.

The rationale for batteries - time-shifting of electricity

Electricity time-shifting is the ability to store energy when its price is low and subsequently use the low-cost stored energy when its price is high[2]. In other words, batteries can store electricity generated by solar PV panels during peak generation (when sun light is strong and residential usage is typically low) for use during peak usage hours (which is before and after work – when sun light is either low or it’s dark).

This means that households with an integrated battery and solar PV system can manage a significant portion of their energy supply and costs, as well as maximise electricity produced by their solar panels. Figure 3 illustrates this idea of electricity time-shifting for a ‘double peak’ energy consumption pattern, whereby the excess solar energy produced between 8am and 7pm can be stored in a battery for consumption or sold back to the grid during peak periods at night (between 6-9pm) when demand and prices are high.

Figure 3. Consumption of stored energy on a typical summer day

SOURCE: Energy sage

Reducing electricity bills

A major point of consideration for most households when deciding to invest in a battery is whether doing so can meaningfully reduce their electricity bills. An average residential customer’s annual bill in 2017/18 was $1,522, of which 44% was network costs and 39% wholesale costs. Unless a household goes ‘off the grid’ it cannot avoid the ‘fixed costs’ embedded in the bills. As such, the average household can only reduce the variable cost component which is around $600 per year.

Having a battery system can reduce bills through the ability to engage in electricity time-shifting. However, this is most cost effective for households that already have solar panels installed, smart or interval meters and Time of Use (TOU) tariffs. Smart or interval meters can record electricity usage every half hour allowing a consumer to monitor their energy use (kWh) and to receive varying electricity rates for usage at different times of the day, also known as TOU tariffs. This allows a household to engage in tariff arbitrage where it can sell the stored solar energy back to the grid during peak periods when feed-in tariffs are high. However, the magnitude of cost savings a household can accumulate depends on its electricity load throughout the day, the capacity of its solar PV and battery system, relative cost of drawing electricity from the grid and preference on storage versus selling solar energy back to the grid.

Key economic drivers of battery uptake

Costs versus savings, and the payback period of batteries

A household’s decision to install batteries depends on both financial and non-financial factors.  Non-financial decisions may include the absence of any alternative in regional areas or environmental reasons.  We have focused this report on financial or economic decision making and as such, the key factors that determine whether it is economically feasible to deploy batteries include:

  • The cost of the battery. Cost of purchasing and installing the batteries and associated equipment, along with an implied financing cost for the capital investment (e.g. typically the cost is added to a mortgage);
  • The savings available to the battery owner. The relative ‘grid’ electricity costs and whether the household can offset this cost via feeding electricity back into the grid. Typically, the ‘feed in tariffs’ offered by electricity companies are lower than the cost of taking electricity out of the grid. The individual household’s usage patterns and the ability to time shift their generation and usage to avoid the purchase of expensive ‘grid electricity’.

The economic decision to install batteries is feasible when the savings from installing the batteries is greater than the cost of the batteries. Given that the savings are measured as a regular operating cost (normally annualised) and the purchase of batteries is a one-off capital cost, we have assessed the economic incentives of installing a battery using the ‘payback’ period methodology which measures the number of years it takes to recover the capital outlay of the investment.

Current and expected level of retail electricity prices

The last two years saw a 14% increase in retail electricity prices, primarily due to wholesale cost volatility following the retirement of the Northern and Hazelwood power stations. This event also marked a transformative shift in the National Electricity Market (NEM) as it is now moving away from a large-scale, centralised system to one that is decentralised, distributed and consumer-focused[3]. As illustrated in Figure 4, in the first half of 2018, average retail electricity prices were 30.24c/kWh in comparison with 26.48c/kWh in 2016. This, along with an increase in overall electricity consumption, means households have faced rising electricity bills, creating a need for cheaper energy supply and storage alternatives. However, the Australian Energy Market Commission (AEMC) forecasts that prices will dip between 2017/18 and 2020/21 from 30.24c/kWh to 29.2c/kWh due to decreases in wholesale costs and overall demand for on-grid electricity as solar PV and battery uptake rises[4]. We also note that a fall in wholesale costs could place downward pressure on feed-in tariff rates, which would incentivise households to store solar energy in a battery for self-consumption as opposed to selling it back to the grid. Inversely, if retail prices were to increase, feed-in tariffs could rise, incentivising households to sell electricity back to the grid.

Figure 4. National average representative residential retail electricity prices over time

SOURCE: AEMC Residential Electricity Price Trends 2018 Report

The declining cost of batteries

To illustrate the declining cost of batteries we have outlined the retail prices of Tesla’s Powerwall 1 versus the Powerwall 2 and 3, along with their technical specifications. Though the Powerwall 2 is more expensive, its capacity is twice that of the Powerwall 1, bringing the cost per kWh (under warranty) down to $0.25 from $0.43 – which is slightly lower than the current average retail electricity price of $0.29. The total cost of the Powerwall 3 is speculated to be around $9,250-$11,250, making it cheaper than the previous model due to its 20kWh capacity. This implies a cost per kWh (under warranty) in the range of $0.13-$0.15, assuming a 10-year warranty. However, if we consider the useful life of the Powerwall 1 and 2, the cost per kWh decreases to $0.31 and $0.17 respectively. In the context of the residential battery storage market, lithium-ion battery prices have been steadily declining in the last decade from a high of US$1,800/kWh to US$900-1000/kWh. Though this is still in the pricey range, the Smart Energy Council forecasts that prices will drop by a further 45% by 2020[5].

Figure 5. Tesla Powerwall features

SOURCE: Canstar Blue. Tesla Website, Venture Advisory Analysis

Payback period of lithium-ion batteries

A key driver for the uptake of batteries is the payback period, which represents the time it takes for the cost savings to cover the technology installation costs. CSIRO estimates that integrated battery and solar PV systems have a payback period of 10-16 years[9]. This number varies according to daily electricity consumption, the cost of buying and installing batteries and tariff rates. In Figure 6 below we illustrate the payback periods under two scenarios: 1) Households that install an integrated battery and solar PV system and 2) Households that retrofit a battery into an existing solar PV system. This analysis also considers the useful life of batteries as opposed to warranty life, varying daily electricity consumption, different battery capacities and for households that install both solar and batteries, the cost of solar panels according to system sizes. Our analysis generates similar results to that of CSIRO’s analysis in that the payback periods for households that install both batteries and solar is between 10 - 17 years.

Furthermore, our analysis shows that it is not logical for households that consume, for example 5kWh per day, to purchase a 25kWh battery, in the same way it would not make economic sense for a household that consumes 30kWh per day to purchase a 5kWh battery. This implies that it is important for battery capacities to be flexibility to incentivise more households to install batteries (e.g. batteries could be sold in 2.5kWh cells that can be configured into an array).

Figure 6. Investment payback periods for installing an integrated battery and solar PV system

SOURCE: Venture Advisory Analysis

Note: the largest residential battery on the Australian market is the 13.5kwh Tesla Powerwall 2 and thus, the payback period illustrated for batteries with capacities of 15kwh and above are based on estimates of useful life and future prices.

The payback period for batteries retrofitted into solar households tells a different story – it is far more value accretive to a consumer to purchase a battery if they have existing solar panels as payback periods fall to as low as 5.5 years. For households consuming between 16kWh-20kWh, purchasing a battery with capacity of 10kWh or more results in payback periods below 10 years.

Figure 7. Investment payback periods for retrofitted battery systems into existing solar panels

SOURCE: Venture Advisory Analysis

Note: the largest residential battery on the Australian market is the 13.5kwh Tesla Powerwall 2 and thus, the payback period illustrated for batteries with capacities of 15kwh and above are based on estimates of useful life and future prices.

If prices were to decline as forecast, the payback period of battery technology would decrease further. Figure 8 below summarises the payback period, cost per kWh and ROI at various battery prices, assuming 6.4kWh of capacity is charged through solar energy and a household has a ‘double peak’ consumption pattern (i.e. peak consumption between 6-9am and 6-11pm[10]). This analysis shows that if battery prices fall to $200/kWh, the payback period would be 4 years with an ROI of 22%. The Powerwall 3 (said to be released at the end of 2019), is expected to fall within the $300-$500/kWh range with a payback period of 5-6 years (or less given its 20kWh capacity). This could be a game changer and possibly drive battery uptake as the expected cost per kWh over the battery’s useful life is significantly lower than the average retail electricity price of $0.29/kWh.

Figure 8. Payback period and ROI of a Tesla Powerwall 1 if prices decline

SOURCE: Solar Choice, Venture Advisory Analysis

Currently, batteries are starting to make economic sense for households consuming more than 20kWh per day which in Australia, based on household data, represents 25% of all households. This potentially means that we are on the cusp of widespread uptake – but what will tip this in the right direction?

Key policy drivers of battery uptake

Feed-In Tariffs

Feed-in tariffs (FiT) are a premium rate paid by either the government or, most commonly retailers, for electricity fed back into the grid from solar PVs. These tariffs come in two forms; gross FiT, whereby all the electricity generated is purchased in bulk by the retailer and net FiT, whereby only excess renewable energy is purchased[11]. Through government regulation, each state is required to maintain a minimum FiT of approximately 7-11c/kWh, with retailers controlling market rates, based on wholesale electricity costs[12]. In Queensland and Victoria, time-varying tariffs were recently introduced, allowing households to receive rates as high as 14c-29c/kWh during peak periods.

The main implication of a FiT on residential battery uptake is its effect on the payback period of a battery system. In the context of batteries being value accretive to consumers, FiTs can represent a large component of a household’s cumulative savings on electricity bills. This however depends primarily on the current tariff rate and how much, and at what time of day, the electricity stored is transported back to the grid[13]. For households to see the economic value of having a battery system, the annual cost savings from using off-grid or stored electricity at night should be more than the annual total revenue earned from FiTs. This is very much plausible for households with access to time-varying FiTs due to the time lag between peak hour solar generation and peak hour defined by retailers. For example, the peak hours defined in Victoria are weekdays, 3pm to 9pm with a corresponding FiT rate of 29c/kWh, and solar panels generate the most electricity between 8am and 3pm[14]. This implies that a large majority of households that are sending electricity back to the grid are doing so during off-peak or shoulder periods at rates as low as 7c-10c/kWh. With battery storage, a solar household would be able to store the excess solar energy produced during off-peak periods to sell back at a higher rate between 3-9pm, increasing their total savings and effectively decreasing the payback period.

State government renewable energy schemes

The future of the residential battery storage market will be, in part, orchestrated by current and future state government renewable energy schemes and funding in the form of subsidies and rebates. The table below summarises the current policies and incentives in place to drive residential solar and battery adoption across Australia. It is evident that state governments in ACT, QLD, SA, TAS and VIC are vigorously pushing battery uptake, which could explain the higher battery penetration rates in these states.

Figure 9. Policy and incentives for battery uptake across states

SOURCE: Smart Energy Council Energy Storage Market Analysis 2018 and Government websites

Solar PV and battery market outlook

We forecast that by 2030, 27% of households will have batteries installed and 36% of all households in Australia will have solar PV systems. This is aligned with the Clean Energy Council’s forecast that by 2025, battery prices will be around $200-300/kWh[20] which brings the payback period of a battery to 4-5 years, which is 2x the warranty period of current batteries in the market. Once the payback period falls between the 4 to 5-year range, we believe that battery uptake will increase exponentially in the next two years.

Figure 10. Solar PV and battery forecast to 2030

SOURCE: Venture Advisory Analysis, Climate Change Council Report

Implications for retail energy consumption in Australia

An average household in Australia consumes between 16-20kWh of energy per day and the average solar household has a 5kW solar PV system that produces, assuming 80% energy efficiency, 16kWh per day. Based on ‘double peak’ consumption patterns, approximately 34% or 5kWh of the solar energy produced is used for self-consumption during the day, leaving an excess of 11kWh. For solar households without batteries, this 11kWh of electricity would be sold back to the grid, but assuming a household installs a Tesla Powerwall 2 with a capacity of 13.5kWh, 11kWh could be stored in the battery for later use during the night, reducing the on-grid electricity consumption of a household by 16kWh per day if they have both a 5kW solar panel and a 13.5kWh battery. The sensitivity table below illustrates, based on various solar PV and battery penetration rates, as well as the assumptions outlined above, the resulting percentage decline in on-grid electricity consumption. Based on our forecasts to 2025, if 31% of households have solar panels, of which 15% have batteries, the resulting decline in on-grid electricity consumption is between 13-15%.

Figure 11. Sensitivity table showing % reduction in on-grid electricity consumption according to battery & solar PV uptake

SOURCE: Venture Advisory Analysis

Conclusion

We expect that the ongoing decline in battery prices, lower feed-in tariffs and increased government intervention will result in a sharp uplift in the installation of batteries, which will ultimately be sold as part of a bundle with solar panels. Our conclusion is that by 2025, there will be in the range 31-35% of households with solar panels, of which between 10-15% will have batteries. On this basis, we estimate that total on-grid electricity consumption will fall by 13-15%.

[1] Clean Energy Regulator (CER): Small-scale solar installations

[2] Energy Storage Association (ESA): Electric supply benefits

[3] Australian Energy Market Commission (AEMC): Residential electricity price trends 2017

[4] Australian Energy Market Commission (AEMC): Residential electricity price trends 2018

[5] Smart Energy Council: Australian energy storage market analysis

[6] A range based on media speculation given as the battery is yet to be released

[7] Includes installation and supporting hardware

[8] Calculation: (no. of cycles x capacity)/(365 x capacity)

[9] Commonwealth Scientific and Industrial Research Organisation (CSIRO):  Projections for small-scale embedded technologies

[10] Solar Choice: Batteries: When will they be a 'no brainer' investment

[11] Parliament of Australia: Feed-in tariffs

[12] Commonwealth Scientific and Industrial Research Organisation (CSIRO):  Projections for small-scale embedded technologies

[13] Australian Energy Council: Solar report 3Q 2018

[14] Canstar Blue: Time-varying solar tariffs explained

[15] ACTSmart: Household battery storage

[16] Queensland Government: Battery grants drive next renewable wave

[17] Government of South Australia: Home Battery Scheme

[18] Aurora Energy: TEELS

[19] VIC Premier: Solar batteries for 10,000 homes

[20] Clean Energy Council (CEC): Unlocking energy storage in Australia