by Julian Spector
June 08, 2018

OK, Residential Storage, let’s talk.

I haven’t always had the most faith in you, it’s true. Your flashy hype cycles, your cavorting with Elon Musk and promising massive shipments and changing the world. All that froth made it difficult to take you seriously.

And for a while there, despite all the thousands of rumored preorders, you were only shipping like 200 units a quarter across the whole United States. Your products were too expensive to offer an economic payback in almost any market, so you relied on early adopters and the emotional appeal of clean backup power.

Any reasonable person, I think, would agree that those factors don’t describe an industry that’s earned a seat at the big kids’ table.

But let me be the first to acknowledge, you’ve proven things are different now.

Your performance in Q1 was nothing short of exemplary. You beat out Commercial Storage, and very nearly outperformed the mega-projects that make up the utility-scale segment.

And did you seriously post 3,833 percent year-over-year growth in megawatts deployed in California, your biggest market? That’s the real Ludicrous Mode right there.

You’ve earned a re-evaluation of your relationship with the broader storage industry, due to the following accomplishments. But you’ve still got some growing to do too.

Numbers don’t lie

For a while there, you only delivered a few dozen grid connected systems per quarter. Then it was a couple hundred. Last quarter you hit 2,622 deployments.

Let’s say an average home storage system sells for $10,000. This means the little residential industry pulled in $26 million for the quarter. Profit margins might be slim to none at this point, but more importantly, the pie has grown substantially from even a year ago.

There might actually be enough money there to support the bustling vendor ecosystem, which seems to keep growing each quarter. At the very least, this growth lends credence to the story you’ve been telling your investors about the massive sectoral growth that’s just around the corner.

There’s still room to diversify geographically. A full 74 percent of all systems installed last quarter went to California and Hawaii. Breaking out of those strongholds will give you more insurance against local market swings or policy changes.

But you’re doing a hell of a lot better than commercial storage, which delivered 98 percent of its capacity in California. Clustering exclusively in a state that hands out substantial subsidies might convince the cynics out there that the commercial business model can’t work elsewhere.

You’re already dismantling that critique.

New markets opening

Storage benefits from exposure. The more people have it, the more neighbors and friends learn about it and wonder if they should get some too.

Your aggressive entry into new markets expands the pool of customers who can buy and broadens the map for incidental exposure to the product.

New England increasingly comes into play. That should accelerate when Massachusetts launches its SMART solar incentive with a storage adder later this year, and in New Hampshire, depending on what happens with its storage pilot (more on that later).

Florida is opening up too.

The state still prohibits third parties from selling electricity, which has blocked the growth of third-party-owned solar.

Despite that obstacle, Sunrun in April secured regulatory approval for a modified solar lease that technically leases the equipment, not the power. And other companies are following suit. This week, Sunrun launched its BrightBox offering as a service product in Florida, with messaging about how it frees customers from monopoly utilities and protects them from storm-related outages.

Nevada and Colorado are making positive movements for their storage markets as well.

Keeping it organic

Above all, Resi Storage, you can be proud that this growth has happened organically. You didn't rely on the kinds of event-based opportunities that have bolstered the storage industry in the past.

Grid-scale storage set its records thanks to the unique circumstances spurred by the largest natural gas leak in U.S. history. Another gas leak could spark a new round of battery procurement (let’s hope not!), but that's not something an industry can count on.

You, on the other hand, have set five consecutive quarterly deployment records just by conducting business as usual. Barring some unexpected setback, that trend should continue in the months to come.

Your success helped push GTM Research to increase its five-year cumulative deployment forecast by 12 percent compared to last quarter’s projection. That’s a big jump!

Special opportunity: California solar mandate

California’s already your biggest market, but it’s about to get even bigger.

The California Energy Commission recently approved a rooftop solar requirement for new homes under three stories starting in 2020. That’s obviously a boon to the solar industry, but you’ll enjoy a major upside as well.

As you may have seen, my colleague Julia Pyper compiled the comprehensive treasury of solar mandate knowledge. The mandate includes a host of building efficiency requirements, but it waives some of those if a builder includes storage. That adds to ongoing market drivers for storage, such as the switch to time-of-use rates.

GTM Research predicts the influx of solar installations from the mandate will drive a 26 percent upside in California’s storage outlook from 2020 to 2023 (the furthest extent of GTM’s projections). That amounts to 345 megawatts of additional residential storage.

That could prove wildly conservative.

There’s considerable variance in estimates of exactly how many new homes will be built in 2020, and it’s not clear how many of those will end up complying with the mandate.

That said, the CEC’s expectations for the number of homes complying (see “New-home market potential”) greatly exceeds what the GTM Research analysts factored into their calculations. If the regulators’ optimistic projections bear out, California could see two or three times more units adopting solar than were accounted for in the GTM storage analysis, which would bring an even bigger upside for the storage industry.

You can achieve a force multiplier by partnering with homebuilders to incorporate storage into the design process for entire housing developments, in the way sonnen did with Mandalay Homes in Arizona.

Once every new home has to have solar, batteries can give developers competitive differentiation from their peers. And storage will never be cheaper to install than at the neighborhood scale when it’s built into the blueprints from the get-go.

You’ve got a few years of cost declines before the policy goes into effect, so let’s see how low you can go by then. Depending on how you do, maybe one day there will be a residential battery requirement too.

Unfinished business

You’ve got a lot to be proud of, Residential Storage. One might even say you’ve come of age, but I’d say you still have some growing to do.

One growing pain is the ownership question, which came up this week in New Hampshire, of all places.

Liberty Utilities there wants permission to launch a 1,000-unit residential storage pilot. It would own batteries in customer homes while testing out a time-of-use rate so the customers can save money on their bills. Meanwhile, Liberty would aggregate those units to reduce its system peak, offsetting more expensive grid upgrades via the non-wires alternative.

Sounds like a storage advocate’s dream, especially compared to utilities that aren’t even planning for storage. But Sunrun, really the loudest voice in residential storage advocacy these days, is fighting to stop the program as currently designed.

To abstract from this case, there’s a broader debate unfolding about the best method to introduce distributed storage onto the grid.

One camp says utilities should own and rate-base the batteries, leveraging their scale, resources and customer relationships to deploy lots of systems that work together to avoid more costly grid investments.

The other camp says third-party competition ensures the best deal for customers and for ratepayers at large. Utilities don’t know as much about installing and operating home batteries as the home battery companies. Instead of utility control, there should be open competition for third parties to provide services from home batteries to utilities.

This debate happens to break down along the lines of Tesla versus Sunrun: The former likes to sell large numbers of Powerwalls to utilities, while the latter likes to retain ownership of its assets and make money on the services they can provide.

From a pure deployment perspective, letting the utilities own it could clear the way for faster adoption in the short term. The risk is that deployments get constrained to when the utility chooses to pursue them, leading to a lumpy, inconsistent market.

In the long run, competitive marketplaces for third-party battery vendors seems like the more efficient and sustainable system. The question is, how long-term is that? New York’s been working on it for four years and counting. Redesigning energy markets takes a mind-numbing amount of work.

Food for thought, as you increasingly look for growth beyond the Golden State.

In the meantime, Residential Storage, you’ve earned a celebration. Have some fun, don’t burn the house down, and let’s see what you pull off next quarter.

Your humble observer,

Julian Spector