The nascent smart home sector is now exposed to potentially fatal disruption.

By Andy Mack, Head of Strategy, Ovo Energy

Tesla announced their latest product and surprisingly it’s not another Ferrari-beating electric car. While automakers are breathing a collective sigh of relief, a whole new industry is now exposed to potentially fatal disruption: the nascent smart home sector.Why?

Tesla has taken their knowledge of batteries and moved into the energy storage market. Starting in late summer 2015 they will offer a range of storage options, from small domestic units (7 kWh) to data-centre scale (4,800 kWh) and beyond. Customers will benefit from a) buying energy when electricity prices are lower, b) using more of any electricity they generate on-site, and c) having back-up power available in the event of grid outages.

The financial benefits could be substantial.

Taking the difference between OVO Energy’s standard electricity unit rate and its night time rate, simply switching to night time-only consumption would save an average UK household £125 per year. For homes with solar PV, increasing the amount of generation used on-site from 50% to 100% could save £100 to £170 per year.

However, there are also benefits that extend beyond the customer and into the electricity network. Tesla will control all of their batteries remotely, and will thus be able to change the demand profile of all its customers. This can open up valuable additional revenue streams: in the UK the National Grid pays out in excess of £100m each year for these ‘reserve services’. Tesla is already talking about having 10 GW of effective generation capacity connected to the grid in the US. To put that into context, the UK’s biggest energy storage facility, Dinorwig, has a maximum output of 1.8 GW. Payments from grid operators will enable Tesla to lower the cost of batteries to customers, increasing adoption and driving further economies of scale. The low wholesale price of Tesla’s systems – which start at $3,000 for a 7 kWh unit – suggests that it is already factoring in some of these savings.

But for every winner there is invariably a loser.

For years, manufacturers have been investing in the development of smart appliances: fridges, washing machines, heating systems and other devices that can be controlled remotely in order to change the way people use electricity. While the economic case for these devices has not yet been sufficient to drive mass adoption, many companies assumed that because the future was going to be smarter than the past they would make more money from selling smarter products (and associated services).

Domestic scale energy storage threatens a fundamental tenet of the smart home business model. With a battery sitting between the home and the grid, the demand response capability of a home full of smart appliances can be replicated and exceeded. Where previously every smart home would be trying to simultaneously control multiple appliances from multiple manufacturers (while managing consumer needs and expectations) batteries will be operated as one single, invisible, network-scale unit.

Suddenly there’s no need for consumers – or businesses – to spend money on smart appliances, and no need for anyone to change their usage patterns. Want to use your kettle at half time on match day? Want to charge your electric car as soon as you get home from work? Want the freedom to ramp up your data centre at a moment’s notice? Go ahead. The battery will provide the extra energy, and recharge itself later when power is cheaper.

Like many disruptive innovations, home energy storage will be slow to scale up in the short and medium term, but in the long term it will have a much broader impact than most organisations are expecting. And it won’t just be the likes of energy suppliers and appliance manufacturers who are wrong-footed; regulators and governments will also have to deal with fundamental changes in the way that people consume and produce energy.

Moving into energy storage appears to have been good for Tesla: after a big decline in the last two quarters the share price rose by 20% in April. The question is, has this all been at the expense of the smart home sector?