Until recently, this tidy, quiet town in central Massachusetts was best known to outsiders for its eight-acre corn maze out by Davis Farmland, and for a little statue near the corner of Main and Park immortalizing the lamb that is said to have followed young Mary Sawyer to school one day in 1812, inspiring a well-known poem. Lately, however, Sterling welcomes visitors from far away who don’t come for outdoor fun or nursery rhymes.
“As soon as it came on-line, they started rolling in—Japan, Switzerland, Sweden, Brazil, Colombia—13 different countries so far,” says Darren Borge, operations supervisor at the town’s light department. The visitors come to peek inside a single shipping container placed in late 2016 at the power substation on Chocksett Road. There, twin rows of what look like post office boxes pack lithium-ion batteries that together can hold two megawatts of power. That’s enough to make Sterling, population 8,000, the country’s per capita energy-storage leader—and a glimpse of the future of the electricity business.
High-power batteries have already infiltrated the chain-saw aisle at Home Depot and are poised to disrupt the car industry in the decades ahead. Now, they are quickly multiplying across the U.S. power grid. In Sterling, those two megawatts are enough to provide savings and resiliency—to smooth out power demand and avoid peak charges, and in the event of an outage, run the nearby police department and fire dispatch for more than a week.
Last year, the nation installed half a gigawatt of energy storage—equal to 250 Sterlings. Over the next eight years, the country will add more than 35 gigawatts of storage, or 17,500 Sterlings, predicts the Energy Storage Association, a Washington, D.C., industry group. That’s enough to save $4 billion in yearly operating costs. Stephen Byrd, a utility analyst for Morgan Stanley, calls that storage forecast credible. He reckons the U.S. storage market will eventually be worth at least $20 billion, and $35 billion under more bullish assumptions.
That’s excellent news for many stakeholders. Consumers stand to save on power and see fewer disruptions. Towns can cut pollution and add jobs. Some utilities will enjoy lucrative growth opportunities by, for example, combining renewable power with storage, while others could be left behind, generating costly coal and nuclear power while prices fall around them. Right now, stock valuations across the utility sector aren’t especially differentiated, providing an opportunity for investors.
Sterling is one of a few dozen Massachusetts towns that operate their own power companies rather than rely on investor-owned utilities, and it was an early and eager adopter of solar power through purchase agreements from a nearby provider. But solar power, like wind power, comes with a timing problem. The sun shines brightest at midday, and the wind blows strongest at night, while consumers use the most electricity around dinnertime. With too much solar, surplus electricity can feed back onto the transmission operator—a dangerous condition. If there isn’t enough solar power, customers are forced to pay peak prices to power wholesalers, eclipsing their savings.
Solutions were few as recently as several years ago. But as smartphone sales boomed around the globe, the costs of lithium-ion batteries fell. Companies such as Tesla (ticker: TSLA) and LG Chem (051910.Korea) poured research dollars into batteries large enough to power electric vehicles. Each EV battery can supply roughly three times the power used by a typical household in a day, making automotive battery breakthroughs applicable to utilities, too.
Two years ago, the town of Sterling turned to nearby NEC Energy Solutions for batteries, management software, and know-how. The facility took two months to set up and cost $2.5 million. This past April, the town published a case study estimating that storage cut $400,000 from its power bill in the first year. At that rate, it will pay for itself in less than seven years—2½ years after factoring in state grants.
A few recent developments have made Sterling’s experience suddenly relevant to large-scale power players. The cost of renewable power, especially wind, has fallen low enough to attract the interest of profit-minded businesses rather than just do-gooders (see table on page 21). Last year, in fact, it became profitable for the first time for the owner of a typical coal plant to build a wind farm to replace it, according to a yearly analysis by Lazard, an investment firm. Storage has become a cheap and useful add-on for renewable power projects. Bids for a project in Colorado published late last year showed that developers were willing to build combined wind and storage capacity for $21 per megawatt-hour, compared with just over $18 per MWh for wind alone.
New business models are popping up. Stem, based just outside of San Francisco, provides batteries, software, and artificial intelligence to corporate customers for a fixed subscription price, and says it can cut power bills by 10% to 25%. Software maker Adobe Systems and Amazon.com’s Whole Foods Market unit have signed on, as has a Wet ’n’ Wild water park in Honolulu. AES (AES), a power generator, last year announced that it was shedding 30% of its coal-fired capacity and formed a storage joint venture with Siemens (SIE.Germany), called Fluence. This year, it began marketing a combined solar/storage platform.
“If you have a gas plant that gets fired up only to meet peak demand, you might operate it at less than 10% of capacity,” says AES chief Andrés Gluski. “If you use batteries, they’re online 100% of the time. They stabilize the grid, so you get more advantages than you pay for.”
NEC Energy Solutions, meanwhile, is thinking much bigger than its project in Sterling. “Imagine that platform and 50 just like it were aggregated on our system, and could bid into markets,” says CEO Steve Fludder. He recently built a 48 MW storage facility in Jardelund, Germany, that is Europe’s largest, and will sell capacity to transmission-system operators through weekly auctions.
In Washington, D.C., storage is finding support for more than its environmental or commercial benefits. “I’m fairly immune to politics because we focus on national security, and that cuts across politics,” says Bruce Walker, assistant secretary at the Office of Electricity at the Department of Energy. “Having run grid control centers for most of my life, I’m absolutely convinced there’s a key role for storage to play in security.”
Just across the National Mall from the Department of Energy is the Federal Energy Regulatory Commission, which in February issued Order 841. Among other things, it paves the way for storage to compete in the wholesale market with gas-fired plants used for peak demand. “This was a watershed moment,” says Kelly Speakes-Backman, the CEO of ESA, the storage industry group.
Wind and solar are still relatively small players, at 6% and 1% of U.S. electricity generation, respectively, versus 32% and 30% for natural gas and coal. The Department of Energy forecasts 139% growth in renewable power generation, mostly wind and solar, through 2050, with healthy growth for natural gas, too, and modest declines for coal. But the department has a record of overestimating the cost of wind and solar and underestimating the pace of technological improvement, says Daniel Cohan, associate professor of environmental engineering at Rice University.
The Department of Energy assumes modest growth for wind after key tax credits expire in 2020. But wind costs are declining due to technology advances as basic as making turbine blades longer, suggesting plenty of room for future declines. “Apples-to-apples, if I’m deciding whether to run an existing gas plant or buy power from someone building a new wind farm, the gas plant still wins on cost,” says Hugh Wynne, a utility analyst at Stamford, Conn., research boutique SSR. He says the combination of renewables and batteries could compete with existing gas plants in six or seven years.
Whether renewable power is the horse and batteries are the cart, or the other way around, is debatable, but both appear poised for rapid growth. For investors looking for exposure, some of the obvious choices come with downsides. Electronics company Panasonic (6752.Japan) is a key supplier of lithium-ion batteries, but collects more of its revenue from appliances. LG Chem, another battery leader, comes with plenty of exposure to petrochemicals. Lithium miners have been hot— Sociedad Química y Minerade Chile (SQM) stock has tripled in price in three years—but as new supply comes on-line to meet demand, returns there could be volatile. Tesla’s battery business comes with a car maker on the side. There’s an exchange-traded fund that lumps together the whole motley bunch and more, Global X Lithium & Battery Tech (LIT). Yearly expenses: 0.75%.
A better bet for conservative investors is to select relative winners, and avoid relative losers, within the utility sector. The entire group has taken a hit this year on concerns that rising bond yields will make stocks with steady dividends less attractive by comparison. The Utilities Select Sector SPDR ETF (XLU) has fallen 8% year to date, while the S&P 500 index has climbed 4%. But growth prospects for many players are picking up.
Even though electricity storage promises to bring customer costs down, especially when combined with renewable power, it can be a moneymaker for regulated utilities that take advantage of it. That’s because these utilities are typically permitted to earn set percentages on the assets they put in place. Naturally, they want to spend money to increase their asset bases, but doing so unwisely would make customer bills go up and prove unpopular.
“What they’re looking for are assets that are so economically efficient that the increased spending brings down customer bills,” says Morgan Stanley’s Byrd. “Look to Midwest players with lots of wind potential, which brings plenty of opportunity for storage.”
Xcel Energy (XEL), based in Minneapolis, is a regulated electric and natural-gas utility that historically relied heavily on coal, and is rapidly shifting to wind, solar, and gas. It plans to retire two coal-fired units a decade early in Colorado. The company’s goal is to increase renewables from 23% of electricity generation today to 45% by 2027. Its shares, down 11% year to date, come with a 3.5% dividend yield and have a record of 6% average payment growth over the past five years. Even after the recent selloff, the stock has outperformed the S&P 500 over the past decade, tripling investors’ money.
American Electric Power (AEP), based in Columbus, Ohio, has more than five million customers in 11 states, including Texas and Michigan. Coal has fallen from 70% of generating capacity back in 2005 to 47% last year. Long term, the company has plans to bring its exposure to coal down more, sharply increase wind and solar, and hold gas steady. One proposed project in Oklahoma, called Wind Catcher, will cost $4.5 billion and be the country’s largest onshore wind farm, using some 800 turbines to supply power to Oklahoma, Louisiana, Arkansas, and Texas. A recent poll shows that 75% of Oklahomans support the project, which will add more than 8,000 jobs during construction. Shares of AEP yield 3.9%. The company’s long-term goal is to provide enough earnings growth and dividends to support low-double digit stock returns, on average.
Beyond utilities, wind developers stand to benefit from storage, too. NextEra Energy (NEE) in Juno Beach, Fla., owns Florida Power & Light and recently announced the acquisition of two more regulated players in the state, Florida City Gas and Gulf Power, but it also develops wind and solar facilities across the country. One recently signed deal will put 100 MW of solar with 30 MW of battery storage just south of Tucson, where it can turn afternoon sunshine into evening power. NextEra has a smaller dividend yield than some pure-play utilities, at 2.8%, but expects to increase its payments faster through 2020, at 10% to 12% a year.
Not all utilities will be winners, of course. Ones to be cautious on are those that sell coal and nuclear power in deregulated markets, says Byrd. Examples include Exelon (EXC) in Chicago and Public Service Enterprise Group (PEG) in Newark, N.J. Such companies don’t get guaranteed rates of return, and they could come under price pressure. That might be less obvious with nuclear plants, which are viewed as expensive to build and cheap to run, but they can carry surprisingly high ongoing costs.
For example, Indian Point, a Westchester County, N.Y. nuclear plant that is owned by Entergy (ETR) in New Orleans and is slated to close by 2021, employs about 1,000 workers earning average salaries of more than $100,000 apiece. Contrast that with AEP’s Wind Catcher in Oklahoma, which will need just 80 to 90 full-time operations workers once construction is complete.
A spokesman for nuclear-heavy Exelon calls the company the “nation’s largest producer of emissions-free energy” and says it’s committed to “the development of new battery storage technology.”
One wild card: A Trump administration memo leaked earlier this month contemplates extending support to coal and nuclear plants at risk of early retirement, citing national security. Depending on what form that support takes, the result could be a quick rise in near-term profits for disadvantaged utilities, including Public Service Enterprise and Exelon.
