The battery storage space has been on a roll recently. While the entire decarbonization space is still recovering from the aftermath of Trump’s election, startups that are focused on installing battery storage are still rapidly expanding. And for most of these startups, Texas, with its deregulated, laissez faire electricity markets, is ground zero.
Every week sees a new battery storage prop up in Texas. These startups seem to have a little bit of differentiation but mostly focus on setting up utility scale battery storage sites that can generate attractive economics by helping the Texas Grid (ERCOT) balance its supply and demand .
Element Energy and Goodpeak Energy are a couple of recently formed startups that are pursuing this strategy but there are plenty more established players doing the same thing. But setting up a utility scale standalone battery site often involves lengthy permitting delays. It can often take years to get hooked up to the grid when the actual installation work for the site requires just a few days. Base Power seems to have found a clever workaround by eschewing the utility scale model in favor of installing plus size batteries in residential homes. As opposed to utility storage sites, residential homes don’t face lengthy permitting delays and can get hooked up pretty quickly. You trade away the economies of scale inherent in utility storage in return for super fast deployment times at residential homes. Paddy McKormick’s blog has a very detailed write-up on Base Power’s strategy and we recommend it for folks who have a little bit of time on their hands.
In short, Base Power’s strategy is to deploy batteries to offer price certainty to customers in volatile electricity markets like Texas. They get customers on board by requiring very little in the form of upfront cost (batteries are expensive and typically require customers to spend $10k+ up front). Customers can get a battery for a low up front payment of $800 per year, and an annual fee of $225 per year. They also require you to enter into a 3 year contract where they supply the electricity at a rate of 9 cents per kWh (this excludes transmission and distribution costs). Base owns and controls the battery while the customer gets the benefit of predictable electricity costs.
All of this sounds great, Base is clearly getting a ton of traction, but are the economics sustainable over the long term? We decided to drill down into the Base’s unit economics for you so you can get a better idea.
Cost of the Battery
Their biggest capital expenditure is obviously the battery. They offer two systems, a 25 kWh system and a 50 kWh system. We know that a Tesla powerwall costs around $1,000 per kWh, so a 25 kWh system costs around $25,000. If you assume that they get 100% of the 30% investment tax credit, that brings the net installed cost to around $17,500 (=70% x $25,000). This is the net capital expenditure that they will have to recoup from all their revenue sources
Sources of Revenue
Now that we have a handle on their capital expenditure, we can look at how much revenue they generate. Given that it’s a consumer facing business a some of their revenue figures are publicly available.
Fixed Revenue
A – Upfront Payment: ~$800 or about $80 per year (assuming a 10 year life for the battery)
B – Annual Fee of $225 per year
C – Electricity Spread – This isn’t a fixed fee per se but a guaranteed spread that Base Power makes by buying low priced electricity and selling it at a higher price to the customer. With Texas wholesale electricity prices typically averaging 3-5 cents per kWh, Base Power likely makes a spread of approximately 4-6 cents per kWh on electricity sales. For a typical Texas household consuming 12,000 kWh annually, this generates ~$600 in annual revenue from the electricity spread alone.
So including A, B and C, that’s about $925 in (almost) guaranteed revenue per customer, which isn’t that bad!
Variable Revenue
This is where it gets a bit tricky. Base Power is going to be aggregating all the residential battery storage systems and bidding them into ERCOT which pays for the value they get from battery storage. This could include discharging electricity (and thereby increasing electricity supply) during periods of peak demand. Sometimes it includes helping ERCOT manage the frequency of the grid. Battery operators also get paid for curtailing demand (or for not charging!) when peak demand is high.
The revenue generated from these services is tied to the volatility of the grid system. Generally speaking, the more volatility and imbalances there are in the grid system, the more arbitrage opportunities there are for battery operators to provide a service balancing the system and getting paid for it. And with renewables continuing to expand significantly in Texas, grid volatility will only increase, and with it monetization opportunities for battery operators like Base.
With all that being said, we’ve provided below some basic estimates for Base Power’s variable revenue.
Energy Arbitrage Revenue: Its pretty hard to model this out but we can make some simple assumptions.
Lets assume the average daily arbitrage in electricity prices is about $30/MWH or 3c per kWh for every day of the year except for the 90 days of summer. If you have 275 instances in a year where the battery discharges fully for an hour during the day, the total revenue generated will be 275 x $.03 x 25 kWh or $206 per year.
For the remaining 90 days of summer, lets increase the spread to about $200/MWH, the total revenue generated in summer will be around 90 x $.20 x 25 kWH or $450 per year.
That’s a combined total of $656 in energy arbitrage revenue generated during the year. It could be a lot higher if Texas has one of those extreme demand events with electricity prices shooting up to $5,000/MWH like they just did in August of last year. On the other hand, it could decrease if a) there is less variability in prices and b) if more and more batteries come online.
Ancillary Services Revenue: It’s not just energy arbitrage, ERCOT also pays participants for frequency regulation, spinning reserves, and other grid services. All these services help ERCOT manage the grid and keep it running seamlessly. We estimate that a residential battery can earn ~$500 annually by providing these services when aggregated with others.
All in, that is a total of about $1,150 in annual variable revenue that is available to a 25 kWh system. If you add in the fixed revenue, that’s a total of ~$2,075 that one residential battery storage system can generate. That’s not bad! It implies a conservative payback period of 8-9 years which isn’t bad, but if they have a few high volatility years, they could shorten that payback period to 5-6 years.
If all they do is generate $2,075 for 10 years thats a 4% unlevered rate of return (unlevered rates of return assume they don’t borrow money to fund the batteries). If they beat that $2,075 revenue projection by just 25% every year ($2,600 vs. $2,075) that cash IRR increases to 10%.
Base requires a minimum three-year contract requirement so every customer will more or less generate at least $6,250 in revenue. This three year commitment is not long enough to make bankers comfortable but it’s short enough to get customers hooked on to it. Its hard to imagine customers wanting to get rid of their batteries once they get used to it.
Now all of this analysis above excludes the soft costs associated with the business like salaries paid to all of its employees. We know that they have more than 100 employees, so @ $150,000 in annual cost per employee, that’s almost $15 million per year in just employee costs that they will have to recover.
Base Power’s Capital Raise
Base Power’s capital raise stood out for several reasons. First, they chose the absolute worst time to raise money but managed to do incredibly well even with all the uncertainty surrounding EVs and batteries. This is probably due to their momentum with them installing thousands of batteries in just a few months. They are now installing up to 20 batteries a day which is no mean feat. Being in Texas, which has one of the most active construction markets and partnering with homebuilders like Lennar must also have helped.
Second, they’ve managed to raise a $200 million round which is extremely large for a non utility scale battery storage play. They are going to require a ton of money just to buy batteries so this money is going to be eaten up quickly. They will use some of the new funds to accelerate development of a battery factory in Texas which implies that they are going to be in the market raising more money in the near future.
Third, the list of participating funds reads less like climate tech wonky fund and more like Silicon Valley tech royalty. a16z, Thrive, Valor and Altimeter are more famous for investing in “asset light” software companies and in AI. Their participation, while surprising, is a welcome change for climate tech infrastructure. Of course, these tech funds are not investing in the sector out of the goodness of their hearts, but because one of the big limiting factors or bottlenecks for the AI buildout is now our ability to deploy energy infrastructure quickly and at scale.
Final Thoughts
Base Power is an exciting company and they’ve got momentum on their side. They are well positioned in terms of capital and talent as well and are focused on the right market in Texas.
What’s going to be interesting is their cost of customer acquisition. Convincing residential homeowners to install a large battery in their garage is not an easy task. It’s going to take a lot of online marketing, in person visits and inspection site visits. Their customer acquisition process has to have some similarities to the solar industry which is infamous for their high sales and marketing costs.
They also have a ton of competition from companies like Tesla, Sunrun / Lunar Energy which already have pre-existing distribution channels and brand recognition. And if Base’s incentives are popular with customers, it wouldn’t take a lot for Tesla or Sunrun to replicate their success. These companies, especially Tesla, already have access to in house battery manufacturing and will win any price war with Base.
But Base Power should be given credit for bringing Silicon Valley’s tried and tested playbook of fast, aggressive growth at any cost to energy infrastructure. And if Base succeeds at what it does, they will mainstream batteries in a way that could permanently alter people’s perception of clean energy infrastructure. We wish them the very best!