Independence from the electricity grid, clean energy, cost savings and flexibility in power source — all of that may have gotten a boost last week. The catalyst was San Carlos, Calif.-based Tesla Motors, which launched a line of energy storage batteries that it will sell directly to consumers. Elon Musk, Tesla’s CEO who is best known for pioneering Tesla’s electric cars, has now surprised industry watchers with the pricing for the storage batteries. They are set to get cheaper as production scales up — a crucial hurdle to making battery storage technology affordable — although it is too early to tell where the market will level out.

Tesla’s Powerwall brand of batteries are priced at $3,000 for a capacity of seven kilowatt-hours (kwh) and $3,500 for 10 kwh, excluding costs of an inverter and installation. The battery is designed to be used as a backup during grid outages for residential users, but it could be just as useful for commercial users and serve as an alternative for energy utilities.

A Paradigm Shift

“The paradigm shift we are seeing now is that consumers have stopped being this dumb agent, where they receive a fixed electricity price and then consume at will,” said Ruben Lobel, Wharton professor of operations and information management. “But this [storage battery] along with other innovations like the smart grid are putting the consumer in the forefront as a smart agent.”

The storage battery industry now has the potential to leapfrog from annual revenues of $200 million to become a multibillion dollar industry, according to Madhur Behl, a doctoral candidate in University of Pennsylvania’s School of Engineering and Applied Science.

“The paradigm shift we are seeing now is that consumers have stopped being this dumb agent, where they receive a fixed electricity price and then consume at will.” –Ruben Lobel

Lobel and Behl discussed the implications of storage battery innovations for residential and commercial users, and utilities, on the Knowledge at Wharton show on Wharton Business Radio on SiriusXM channel 111. (Listen to the podcast at the top of this page.)

Lobel explained that storage battery innovations can help make for smarter customers as they can respond to grid outages or help make choices in consumption during peak and off-peak hours. “The grid [cannot] just push whatever it wants on the consumer. Utilities are scared of losing that power,” he noted.

Is the Price Right?

The concept of using batteries for residential and commercial buildings and even utilities has been around for some time now, said Behl. “The real question is, have they gotten the price point right, and have they managed to make it into a package that is really affordable and scalable?” He added that the total cost could swell to twice the battery price, including the costs of an inverter and installation.

Adoption of storage batteries could get a boost from lower prices, which increased production could facilitate. Lobel noted that Musk had committed a third of the capacity at Tesla’s Gigafactory in Nevada to storage batteries (with the rest for car batteries). The $5 billion factory is now under construction and planned to be operational in 2017.

Lobel said consumer demand for storage batteries will vary by market and local regulations. For example, the batteries could be a useful alternative in markets where solar panel users can sell excess electricity to the local grid at retail prices. In some markets, solar panel users face resistance from utilities who try to push back with extra surcharges, he explained. “With these batteries you can rely less on the grid,” he said.

The storage batteries will find more success in markets with high energy prices, Lobel noted. “In California, this will probably be viable given the high electricity prices in the top tiers. [However,] in Texas with [energy costs of] four cents per kwh, maybe it won’t pay for itself just yet.”

Behl expected the storage batteries to see the highest adoption among large commercial buildings, although there could be some early adopters in the residential sector as well. He explained that large commercial buildings typically face a “demand charge” from power generation companies, or a levy proportionate to their consumption during peak hours.

“The real question is, have they gotten the price point right, and have they managed to make it into a package that is really affordable and scalable?” –Madhur Behl

Overcoming Uncertainty

“There is a saying in electricity generation circles — ‘All kilowatts are not created equally,'” said Behl. “As the load increases through the day, the generator has to rely on older and more inefficient sources of electricity, which is why it is more expensive.”

Such users could charge their storage batteries at night or during off-peak hours and then use that storage during peak hours, Behl explained. They could also participate in demand-response programs many utilities offer where they pay users incentives to curtail peak-time energy consumption.

The University of Pennsylvania participates in such a demand-response system, said Lobel. Whenever electricity prices spike, it gets a call from its regional transmission operator and responds by reducing the use of high-energy devices like chillers and so forth. “The thermostats of the entire campus get adjusted to respond and reduce the load on the system.” Businesses can similarly respond to demand spikes, and the batteries will help as alternatives, he added.

Lobel and Behl also agreed with Musk’s observation that battery technology could trigger fundamental shifts in how people think of energy use. “In the long term, battery storage is good for the grid,” said Behl. “Solar or renewable energy sources are erratic. There is no guarantee, although [as Musk] said, the sun shows up on time every day. What we don’t know is whether or not there will be clouds.” Similarly, wind power facilities face uncertainty in that the wind can die out, he noted.

“Putting a battery at the end-user’s point will smooth out this uncertainty,” said Behl. Any electricity such users generate and do not use during the day can be backed up and become available night, he added. He noted that the advent of storage batteries could be good news for utilities as well. “They might not like the fact that the consumer is not buying electricity from them all the time, but it makes the demand less volatile,” he said.