The first quarter of 2016 saw 18.3 megawatts of grid-interactive energy storage installed in the U.S., up 127 percent year-over-year and marking the largest first quarter in the history of the nation’s energy storage market, according to GTM Research’s Q2 2016 U.S. Energy Storage Monitor report. Encouraging growth is occurring in the residential segment within the U.S. In fact, only the residential segment saw growth in megawatt terms over deployment compared to the massive Q4 2015, albeit at a modest 5 percent quarter-over-quarter.

Historically, California has dominated residential energy storage deployments in the U.S. In Q1 2016, however, GTM Research observed growing deployments in a number of emerging state markets across the U.S., including Kentucky, Nevada, Utah and Vermont. While these individual markets are still quite small, collectively they accounted for the largest share of residential energy storage deployments in Q1 2016, surpassing even California and Hawaii. Energy storage system vendors are beginning to expand into “nontraditional” markets where few, if any, deployments have occurred before. Activities in these new markets speak both to customer interest and improving economic cases for storage. It’s unlikely that any of these state markets will come close to rivaling states like California or Hawaii in the near future, but nevertheless we’re witnessing an expansion of energy storage influenced by factors including new business cases for behind-the-meter storage.

FIGURE: U.S. Residential Energy Storage Quarterly Deployments (MW)

Source: GTM Research / ESA U.S. Energy Storage Monitor Q2 2016

In particular, interest in aggregation of behind-the-meter assets is growing. Several U.S. utilities have already partnered with energy storage system vendors to pursue business models that offer the opportunity to leverage a fleet of residential energy storage systems to provide grid services. Green Mountain Power in Vermont begun shipping Tesla Powerwalls early in 2016, offering the option for customers to allow utility access to the systems in exchange for electricity bill credit; Green Mountain Power plans to utilize these storage systems to reduce capacity and transmission costs, as well as to provide energy arbitrage. Additionally, Sunverge has partnered with Glasgow Electric Plant Board in Kentucky to explore opportunities to leverage residential storage to provide services to the grid. Sunverge and SunPower are also working with Con Edison in New York to deploy residential storage as part of a virtual power plant trial project within the New York Reforming the Energy Vision (REV) program with the goal of exploring a new business model for utilities.

Aggregated storage offers utilities the opportunity to procure grid services through new channels, while simultaneously providing new services for their customers, unlocking an additional revenue stream for the utility. As utility business models evolve within the U.S., utilities will increasingly pursue behind-the-meter energy storage as a new avenue for income.

A changing policy landscape will also influence residential storage uptake. Changes in net energy metering (NEM) policies are being discussed, and in several cases are occurring in a significant number of U.S. states. Reduction in monetary compensation for exported solar PV-generated electricity improves the business case for storage, though the extent to which storage economics develop is reliant on both the new level of NEM compensation and electricity rate structures within the utility’s territory. For example, Hawaiian Electric currently offers two options for new solar PV customers: Self-Supply, which encourages solar-plus-storage, and Grid Supply, which allows for solar export at the wholesale rate. However, the Grid Supply option has a cap which, once filled, will require new customers to go on Self-Supply, encouraging greater deployments of residential storage.

Additionally, residential demand charges have been proposed by a number of utilities, including APS in Arizona. Demand-charge management, a value stream that involves discharging stored electricity during periods of peak demand in order to reduce peak electricity consumption, can offer additional opportunities for storage (demand-charge management is already an attractive value stream for commercial and industrial customers in a few markets). The extent to which demand-charge management becomes viable under these new tariffs is dependent upon the new tariff structures; low demand charges may not significantly augment the viability of residential storage. However, if demand charges are high enough, storage can play a valuable role by reducing peaks for residential customers, increasing the attractiveness of residential storage in these markets.

FIGURE: U.S. Residential Energy Storage Quarterly Deployments (MWh)

Source: GTM Research / ESA U.S. Energy Storage Monitor Q2 2016

Furthermore, HR 5350 was recently introduced in the U.S. House of Representatives and seeks to allow energy storage systems to claim a 30 percent investment credit. While the bill seems unlikely to pass for at least a year, its introduction nevertheless strikes a moral victory for storage, indicating federal interest in tax credits for standalone storage. Energy storage is already able to claim the Investment Tax Credit (ITC) when paired with new solar PV systems, though it is subject to restrictions, including a “cliff” which requires that at least 75 percent of electricity delivered to the storage system is generated by the attached solar PV system.

The ITC extension at the end of 2015 increased GTM Research’s projections for energy storage market growth by 0.5 gigawatts through 2020, compared to the previous case. Establishing a tax credit for standalone storage would significantly improve the economic case for energy storage, contribute an even greater upside to future energy storage deployment in the U.S., bolstering opportunities for the technology across market segments much the same way the original ITC did for solar PV. In particular, a tax credit for standalone storage would offer greater opportunities for energy storage systems retrofitted to existing solar PV systems.

The U.S. residential energy storage market is still small, but it is undergoing rapid growth. Evolving business models and changing policy structures, along with expected declines in system pricing, will encourage greater uptake of storage in markets beyond California. What state markets become viable and when storage becomes economically attractive in these markets is highly tied to changes in electricity rate structures and policies around NEM compensation. Nevertheless, early storage adopters are generally unconcerned with system economics, and thus a trickle of deployments has already begun in new state markets. As the storage market grows and evolves, residential storage will grow in prominence in a greater number of U.S. states.

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Brett Simon is an energy storage analyst at GTM Research, focusing on both U.S. and international energy storage markets.

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