Consulting Firm McKinsey Predicts Accelerated 'Grid Defection' Due to Cheap Batteries

The consulting firm McKinsey & Company recently released a report noting that energy storage prices are falling faster than anyone expected, with battery costs down to less than $230/kWh in 2016 from almost $1,000/kWh in 2010. The falling costs for batteries, coupled with the spread of solar power, presents a growing threat of disruption for utility business models.

The combination of rooftop solar and battery storage is now affordable enough that the electricity industry is seeing a rise in what the McKinsey report calls “partial grid defection.” This is a scenario in which “customers choose to stay connected to the grid in order to have access to 24/7 reliability, but generate 80 to 90 percent of their own energy and use storage to optimize their solar for their own consumption.” This potentially could lead to “load loss” and less revenue from that customer for the utility.

The adoption of battery storage enables solar customers to circumvent the tools utilities have been experimenting with to respond to the rise of net metering, which pays solar users for the power they return to the grid. While net metering has played an important role in the growth of residential solar power, it has also posed significant challenges to utilities. The more rooftop solar customers generate their own power, the more utilities have to charge other, non-solar customers to cover their cost-plus-returns.

In ongoing battles across the country, utilities have responded to rooftop solar by moving to time-of-use pricing structures, implementing demand charges, or trying to reduce how much they pay customers for the electricity they produce that is returned to the grid. However, battery storage makes these strategies less effective. In fact, storage creates a new opportunity for solar customers to effectively play the electricity market.

If utilities move to time of day and location rate structures, batteries would enable solar customers to arbitrage, storing power when it is cheap and selling it back to the grid when it is worth more. If utilities reduce the amount they pay customers for rooftop generated solar power, batteries still allow those customers to increase their self-consumption by generating more of their own power. This creates significant challenges for the utility faced with flat or declining customer demand. Even if utilities start charging fixed grid connection fees to all customers, they can push customers toward full grid defection if those grid connection fees get too high.

The McKinsey report notes that full grid defection—enabled by a trio of technologies consisting of solar, storage and small-scale energy generators—will make economic sense in a matter of few years, especially for customers in states with high electricity rates such as Hawaii. Taking the hypothetical example of Arizona, the report estimated that partial grid defection could be financially worthwhile for solar-plus-storage customers by 2020, with full grid defection by the late 2020s. States with high electricity rates and strong rooftop solar penetration such as Arizona, California, Nevada and New York could see the highest rates of partial grid defection in the coming years.

Low-cost battery storage has the potential to be even more disruptive to the utility business model than rooftop solar has been thus far. Utilities have to rethink a different way of operating the grid and find other ways to make money by providing different types of services. As the report succinctly says, “In effect, utilities need to disrupt themselves—or others will do it for them.”