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Michael McDonald

Michael McDonald

Michael is an assistant professor of finance and a frequent consultant to companies regarding capital structure decisions and investments. He holds a PhD in finance…

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Energy Storage Just Got A Massive Vote Of Confidence

There has been a lot of skepticism about the future size of the energy storage business especially amid Tesla’s announcement earlier this year that it was entering the storage battery business. Detractors assert that energy storage is still an infant industry and that Tesla and other storage product makers are not going to see substantial demand for their product anytime soon. Given those concerns, the enormous vote of confidence in energy storage being made by NextEra Energy raises interesting questions.

NextEra Energy is a $45 billion behemoth in the utility industry and its management is well regarded, as reflected in its relatively robust valuation (for a utility large cap). CEO Jim Robo noted recently that NEE wants to be “the largest, most profitable clean energy provider in the United States.” Related: Against The Odds, Libya Reopens Major Oil Export Terminal

NextEra appears to be embracing the changing energy markets and the rise of renewable energy. The rise is reflected in the rapidly increasing share of U.S. energy production derived from renewable sources, especially solar. Issues like the possible expiration of solar credits may slow that rise, but given increasing public interest and the rapidly falling cost of renewable components like solar panels, it’s hard to imagine renewables not continuing to grow over time as a share of overall production.

The rise of renewables is made more feasible by increasing opportunities in energy storage. Mr. Robo and NextEra Energy appear to see energy storage as a major growth opportunity in the future. Robo said energy storage is one of “three growth platforms” at the company and that the firm is “starting to make very good progress in our energy storage business.” Related: Can The Panama Canal Fulfill Its Global LNG Promise?

The opportunity in energy storage is intricately linked to renewables but energy storage is not entirely dependent on renewables either. Most renewable power sources face the problem of inconsistent generation versus more or less constant demand (at least on a day-by-day basis though not an hourly basis). Battery storage, like the products being created by Tesla and others, offers a solution. As the NextEra CEO noted, “Battery storage is the holy grail of the renewables business … If we can deliver firm power to renewable customers at a cost-effective rate, you’ll see renewables explode even faster than they already are.”

NextEra indicated that it expects to deploy $100 million in energy storage products in the next 12 months, not only for frequency regulation but also in the form of a 4-hour project and reliability related projects at substations. Robo indicated that NextEra expects battery storage costs will experience a substantial fall in prices over the next decade. That is consistent with statements by Elon Musk indicating that battery costs will fall considerably once the Tesla Gigafactory comes online. Related:How Russia Is Deploying Its Military In Syria

Even beyond renewables though, energy storage has the potential to replace the need for gas peakers and other peak demand production approaches, which is a particularly expensive form of electricity generation. The reality is that, just as factories are most efficient when producing at consistent levels of output, electricity costs are lowest when power demand and production are synced. But there are certain days out of the year when demand surges (think afternoon on a hot summer day) and extra capacity is needed. It is expensive to maintain a natural gas power plant for those handful of days when it is needed. Battery storage can alleviate this problem by allowing for the use of stored up energy when it is most needed.

None of this is new of course, and many analysts have pointed out the potential for energy storage before. Yet when one of the world’s largest utility companies says they see a technology as a growth opportunity and that they are prepared to invest 9 figure sums in the next year in that technology, that changes things dramatically. Investors should wake up and take notice of opportunities in the space from certain General Electric divisions to Tesla and all firms between.

By Michael McDonald of Oilprice.com

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