Elon Musk announced Tesla’s home / business battery today. tl;dr: It’ll get enthusiastic early adopters to buy. The economics are almost there to make it cost effective for a wide market. And within just a few years, it almost certainly will be cheap enough to be cost effective for a broad market. Not a complete game changer today, but a shot fired in an incredible energy storage disruption.

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[If you want to understand the overall energy storage technology race and market, read this: Why Energy Storage is About to Get Big, and Cheap.]

Here are the specs, from Tesla’s Powerwall site.

$3500 is, as some people online have noted, less than a fully decked out Mac. There will be some set of early adopters who buy this because they love the idea, because they dislike utility companies, because they’re committed to solar, or because they love Elon Musk. Indeed, across my feed, I’ve seen quite a large number of people already announce that, at $3000 or $3,500, they’re just going to buy it, and ROI be damned.

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There’s also an economic case for anyone to whom outages are extremely expensive and cutting off even one or two outages in the lifetime of the battery is worth the purchase price. (Movie theaters are one set of customers I’ve heard are looking closely at this.) As competition against a backup generator, the battery has huge advantages. [Seamless, no fueling, less maintenance, can save money on day-to-day operations, etc...] That alone may power early sales.

Beyond that, is the battery cheap enough to make storing your self-generated solar power worthwhile for hundreds of thousands or millions of homes across the US and overseas? If not, how close is it?

As I’ve written before, the number that really matters is the round-trip cost of electricity over the lifetime of the battery. How much do you pay for every kilowatt-hour put into the battery and then retrieved later? We can talk about this as LCOE (levelized cost of electricity).

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Here are two ways we can calculate the LCOE of the Tesla Powerwall.

1. Rule of Thumb: 1,000 Full Charge Cycles. This gives an LCOE of $0.35 / kwh. That compares to average grid electricity prices in the US of 12 cents / kwh, and peak California prices on a time-of-use plan of around 28 cents / kwh.

2. 10 Year Warranty + Daily Shallow Cycles. Tesla is offering a ten-year warranty on these batteries, which is bold. Yet evidence shows that Tesla automotive batteries are doing quite well, not losing capacity fast. Why? It’s because they’re rarely fully discharged. Most people drive well under half of the range of the battery per day. So let’s assume 10 years of daily use (3650 days, if we ignore leap days) and 50% depth of discharge on each day. Using the 7kwh battery, that gives us a price of around 23-24 cents / kwh.

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Both of those prices are the price to installers. It’s not counting the installer’s profit margin or their cost of labor or any equipment needed to connect it to the house. So realistically the costs will be higher.

Tentative Conclusion: The battery isn’t quite cheap enough for most in the US to buy on a purely cost-benefit basis, yet. Unless outages are extremely expensive.

In Sunny Countries: Bigger Impact, Drives Solar

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Outside the continental US, the batteries economics look far better, though. 43 US states have Net Metering laws that compensate solar homes for excess power created during the day.

In some of the sunniest places in the world, though, retail electricity prices from the grid are substantially higher than the US, plenty of sunlight is available, and Net Metering either doesn’t exist or is being severely curtailed.

Here’s a map from BNEF of sunshine vs grid electricity rates. Countries above the 2015 line have cheaper solar electricity than grid electricity today. But a number of those countries, including Australia, Spain, Italy, Turkey, and Brazil have no or severely limited ability for solar home owners to sell extra power back to the grid. In those sunny, policy-light countries, Tesla’s batteries make more economic sense today, and will help drive rooftop solar.

Even Germany, I’d note, gets enough sun that the price of rooftop solar is below that of grid electricity. And in Germany, feed-in-tarrifs to homes that put solar on the grid are plunging.

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The real prize, though, would be India. Northern India is sunny. The power grid struggles to provide enough electricity to meet the daytime and early evening peak. India is now rolling out Time-of-Day pricing to residential customers and reports indicate that retail peak power prices are edging towards 20 cents / kwh in some cities. (Most commercial customers in India are already on Time-of-Day pricing.) For now, the solar + battery economics aren’t quite there for Indians that have access to the grid, though with outages there so frequent, high-income urbanites and commercial power users may find that the reliability value puts it over the top.

Back to the US

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For most of the US, this battery isn’t quite cheap enough. But it’s in the right ballpark. And that means a lot. Net Metering plans in the US are filling up. California’s may be full by the end of 2016 or 2017, modulo additional legal changes. That would severely impact the economics of solar. But another factor of 2 price reduction in storage would make it cheap enough that, as Net Metering plans fill up or are reduced around the country, the battery would allow solar owners to save power for the evening or night-time hours in a cost effective way.

That is also a policy tool in debates with utilities. If they see Net Metering reductions as a tool to slow rooftop solar, they’ll be forced to confront the fact that solar owners with cheap batteries are less dependent on Net Metering.

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That same factor of 2 price reduction would also make batteries effective for day-night electricity cost arbitrage, wherein customers fill up the battery with cheap grid power at night, and use stored battery power instead of the grid during the day. In California, where there’s a 19 cent gap between middle of the night power and peak-of-day power, those economics look very attractive.

And the cost of batteries is plunging fast. Tesla will get that 2x price reduction within 3-5 years, if not faster. See below for a Nature Climate Change view of the pace of battery price declines.

Net, I think this battery will sell quite a lot of units to early adopters and those with a low tolerance for outages. As a substitute for a backup generator, it has huge advantages. And those early adopters will fund the price continuing to decline. Tesla’s strong brand, and the compact, convenient nature of lithium-ion will help sell this into enthusiastically pro-solar homes.

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That said, for large scale grid deployment (outside of the home), it still looks like flow batteries and advanced compressed air are likely to be far cheaper in the long run.

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There’s more about the exponential pace of innovation in both storage and renewables in my book on innovating to beat climate change and resource scarcity and continue economic growth:The Infinite Resource: The Power of Ideas on a Finite Planet

This article was first published on April 30th on Ramez Naam’s website.