Battery Subsidies Reflect Poor Energy Policy

In a recent earnings call with investors, Tesla CEO Elon Musk announced plans to produce lithium-ion battery packs for use by homes and businesses equipped with rooftop solar generation. Tesla fanatics were quick to spread the news that this could enable customers to disconnect from the power grid and achieve personal energy independence. Before we rush into becoming a nation of single-home power companies, it is important to understand why this idea is unlikely to succeed and is generally a bad idea.

Taxpayer Subsidies for Batteries

Examining the source of the proposal is a good place to start. Without taxpayer subsidies, there would likely not be a Tesla. Tax credits and government incentives, rather than solid business fundamentals, have fueled Tesla’s growth.  Consumers would undoubtedly have less interest in purchasing a Tesla luxury electric car if not for the $7500 federal tax credit and additional state tax credits. Now Tesla wants to extend its subsidy-dependent business model to the home electricity market. As with its luxury electric cars, Tesla’s concept for home batteries will appeal primarily to higher-income households.

Tesla recently broke ground on its $5 billion battery factory (Gigafactory) near Reno, Nevada. Nevada won a five-state competition for the factory by coughing up $1.25 billion in tax breaks for Tesla. Nevada was also the only state of the five that agreed to allow Tesla to sell its cars directly to customers. Tesla admits that it lacks experience with manufacturing lithium-ion cells but it is collaborating with Panasonic in hopes of refining the production process. This seems like a tremendous gamble on a company with a business model based on taxpayer subsidies.

Grid Disconnection Impractical

People are quick to draw analogies to the telecom industry. Cellular phone technology essentially killed the pay phone industry. More importantly, the number of landline subscribers continues to decrease as customers opt for Internet phone services or just use their cell phones. However, while most parts of the country have alternatives to landline telephones, not everyone has a roof configuration suitable for solar generation. 

The basic premise is that rooftop solar generation produces more electricity than the home needs during daylight hours and then produces nothing at all when the sun is not shining.  If the homeowner connects a lithium-ion battery to their solar array, they could store any excess daytime electricity for use at night. The homeowner would also snag a nice 30% federal energy investment tax credit for the cost of the battery as long as the battery connects to the solar array.  While this sounds great, the realities are much more complicated. 

Completely disconnecting from the grid is impractical for most homeowners. Consecutive cloudy days would leave the homeowner with no power whatsoever. There are a number of likely scenarios where homeowners will still need power from the grid. Therefore, homes will need to stay connected to the grid for backup power. This means they will (and should) pay a share of the cost of maintaining the utility distribution system. There goes Tesla’s dream of enabling homeowners to stick it to their utility.

Merely Switching Masters

Finally, you have to consider the battery technology itself. Lithium-ion batteries, as their name implies, depend on the alkali metal lithium. According to the USGS, there is currently only one active lithium mine and one lithium-ion battery recycling facility in the United States. Unlike other energy and mineral commodities, the United States is not a player in lithium. Most lithium used in battery production comes from Chile, Australia, and Argentina. Huge reserves in Bolivia have analysts wondering if that country or Chile could become the “Saudi Arabia” of lithium. 

While geographical concentration of lithium reserves is a problem, the concentration of lithium production among a handful of firms is an even greater concern. Collectively, the largest four companies account for almost 95% of global lithium supply. These firms include Albemarle, SQM, FMC Corp, and Chengdu Tianqi Industry Group. Advocates of energy independence from foreign sources will not find comfort in the lithium market.  Those who envision the demise of fossil fuels will find that the lithium supply oligopoly has an even greater consolidation of market power than the major oil producers do in the global oil market. 

Rational Thought Needed

Given that the home lithium-ion battery concept requires taxpayer subsidies, is impractical, and relies on a tightly held foreign commodity, why are some media outlets fawning over the concept instead of asking hard questions? The reason is that consumers like the idea of having choices and feeling independent. Utilities represent one of the last consumer markets with limited or no customer choice. Utilities tend to be bureaucratic and have a quasi-government feel. These factors make utilities easy targets for reformists. However, state regulators provide oversight to ensure utilities provide service in a cost-effective manner and utilities generally provide reliable service. The concept of a regulated utility is not that much different from a governmental entity that builds and maintains roads for common use.

Becoming overly dependent on lithium-ion technology on a grand scale is not good energy policy. There is a role for electricity storage technologies in our efforts to optimize and conserve scarce energy resources. However, selling the dream of personal energy independence through taxpayer-subsidized batteries is not the answer.

Charlie Hewitt is the founder of ElectricityMatch and has 25 years of experience in energy with a focus on electricity markets.

In a recent earnings call with investors, Tesla CEO Elon Musk announced plans to produce lithium-ion battery packs for use by homes and businesses equipped with rooftop solar generation. Tesla fanatics were quick to spread the news that this could enable customers to disconnect from the power grid and achieve personal energy independence. Before we rush into becoming a nation of single-home power companies, it is important to understand why this idea is unlikely to succeed and is generally a bad idea.

Taxpayer Subsidies for Batteries

Examining the source of the proposal is a good place to start. Without taxpayer subsidies, there would likely not be a Tesla. Tax credits and government incentives, rather than solid business fundamentals, have fueled Tesla’s growth.  Consumers would undoubtedly have less interest in purchasing a Tesla luxury electric car if not for the $7500 federal tax credit and additional state tax credits. Now Tesla wants to extend its subsidy-dependent business model to the home electricity market. As with its luxury electric cars, Tesla’s concept for home batteries will appeal primarily to higher-income households.

Tesla recently broke ground on its $5 billion battery factory (Gigafactory) near Reno, Nevada. Nevada won a five-state competition for the factory by coughing up $1.25 billion in tax breaks for Tesla. Nevada was also the only state of the five that agreed to allow Tesla to sell its cars directly to customers. Tesla admits that it lacks experience with manufacturing lithium-ion cells but it is collaborating with Panasonic in hopes of refining the production process. This seems like a tremendous gamble on a company with a business model based on taxpayer subsidies.

Grid Disconnection Impractical

People are quick to draw analogies to the telecom industry. Cellular phone technology essentially killed the pay phone industry. More importantly, the number of landline subscribers continues to decrease as customers opt for Internet phone services or just use their cell phones. However, while most parts of the country have alternatives to landline telephones, not everyone has a roof configuration suitable for solar generation. 

The basic premise is that rooftop solar generation produces more electricity than the home needs during daylight hours and then produces nothing at all when the sun is not shining.  If the homeowner connects a lithium-ion battery to their solar array, they could store any excess daytime electricity for use at night. The homeowner would also snag a nice 30% federal energy investment tax credit for the cost of the battery as long as the battery connects to the solar array.  While this sounds great, the realities are much more complicated. 

Completely disconnecting from the grid is impractical for most homeowners. Consecutive cloudy days would leave the homeowner with no power whatsoever. There are a number of likely scenarios where homeowners will still need power from the grid. Therefore, homes will need to stay connected to the grid for backup power. This means they will (and should) pay a share of the cost of maintaining the utility distribution system. There goes Tesla’s dream of enabling homeowners to stick it to their utility.

Merely Switching Masters

Finally, you have to consider the battery technology itself. Lithium-ion batteries, as their name implies, depend on the alkali metal lithium. According to the USGS, there is currently only one active lithium mine and one lithium-ion battery recycling facility in the United States. Unlike other energy and mineral commodities, the United States is not a player in lithium. Most lithium used in battery production comes from Chile, Australia, and Argentina. Huge reserves in Bolivia have analysts wondering if that country or Chile could become the “Saudi Arabia” of lithium. 

While geographical concentration of lithium reserves is a problem, the concentration of lithium production among a handful of firms is an even greater concern. Collectively, the largest four companies account for almost 95% of global lithium supply. These firms include Albemarle, SQM, FMC Corp, and Chengdu Tianqi Industry Group. Advocates of energy independence from foreign sources will not find comfort in the lithium market.  Those who envision the demise of fossil fuels will find that the lithium supply oligopoly has an even greater consolidation of market power than the major oil producers do in the global oil market. 

Rational Thought Needed

Given that the home lithium-ion battery concept requires taxpayer subsidies, is impractical, and relies on a tightly held foreign commodity, why are some media outlets fawning over the concept instead of asking hard questions? The reason is that consumers like the idea of having choices and feeling independent. Utilities represent one of the last consumer markets with limited or no customer choice. Utilities tend to be bureaucratic and have a quasi-government feel. These factors make utilities easy targets for reformists. However, state regulators provide oversight to ensure utilities provide service in a cost-effective manner and utilities generally provide reliable service. The concept of a regulated utility is not that much different from a governmental entity that builds and maintains roads for common use.

Becoming overly dependent on lithium-ion technology on a grand scale is not good energy policy. There is a role for electricity storage technologies in our efforts to optimize and conserve scarce energy resources. However, selling the dream of personal energy independence through taxpayer-subsidized batteries is not the answer.

Charlie Hewitt is the founder of ElectricityMatch and has 25 years of experience in energy with a focus on electricity markets.