SolarCity, the country’s biggest solar PV installer, and Tesla Motors, the country’s biggest electric vehicle maker (and soon to be the country’s biggest advanced battery manufacturer), could be the utility industry’s worst nightmare.

Consider the threat represented by two fast-growing companies, combining forces to bring energy independence to utility customers via mass-market battery-backed solar systems. It’s a transformation that strikes at the heart of the “we make it, you buy it” electric utility business model that has kept the grid humming and modern industrial society running for the past century.

But looked at another way, the SolarCity/Tesla solar-energy storage push could be seen as a solution to a host of utility and grid challenges. That’s because SolarCity’s small but growing number of energy storage installations aren’t just a lot of relatively tiny batteries, backing up lots of relatively tiny solar PV systems, in isolation from the grid.

Instead, they’re more like a “fleet” of energy assets, complete with the on-site digital controls and real-time communications systems required to enlist them into a host of grid needs -- if, that is, the regulatory and business models to make it worthwhile for customers and utilities alike can be put into place.

That’s how Eric Carlson, SolarCity’s senior director of grid integration, described the company’s approach to solar-storage integration in a recent interview. Right now, the company’s residential battery installations are meant for emergency backup, while its commercial installations are for demand peak shaving -- functions that aren’t directly tied to grid or utility imperatives.

“What we’ve built, though, is really a general purpose energy storage system,” he said, consisting of a set of lithium-ion batteries provided by Tesla, with both high power and deep-cycling capabilities. That could be a valuable resource for a whole host of grid functions, if it’s connected to the IT infrastructure to make use of it -- and SolarCity just happens to have that infrastructure in place.

The network effect for distributed solar-battery systems

“Every single solar system we’ve installed -- and now, every single battery system we’ve installed -- has one of these gateways,” he said, referring to a configuration that includes a fairly powerful computer, networked to SolarCity’s central cloud-based server infrastructure. These gateways have the ability to collect data and interact with the inverters that turn PV and battery DC power into grid-ready AC power, he noted.

Right now, SolarCity uses those gateways to collect interval data from its PV systems, as well as customer energy consumption and power quality data, he said. “We typically collect it in fifteen-minute intervals, but in many cases, we also collect it in much faster intervals, and we have real-time links with these systems,” via a combination of broadband and cellular connections, he said.

That’s not necessarily how most solar installers operate, he added. While most PV systems come with some kind of metering and communications attached, they tend to be single-purpose devices, meant to collect energy data for net metering or off-site troubleshooting of system performance.

Indeed, SolarCity’s decision to install more powerful computing platforms at each customer site could be seen as overkill, in terms of what that computing power is worth today. SolarCity has been tapping its fleet of smart solar home data collection devices to assist in various research projects, such as the 2010 California Solar Initiative project that got it started installing Tesla batteries in SolarCity-equipped homes.

But once it’s in place, the technology opens up a whole range of grid-facing applications that require near-real-time communications and on-site digital controls to handle. “It’s really [about] knowing the right algorithms to put on that general-purpose computer, and designing a system that’s flexible and future-upgradeable. That’s something we’ve spent a lot of time on as a company,” he said.

And that means that “what we’re deploying today is, I’d say, not significantly limited in future applications. We see solar plus storage as being able to replace much of the need for other pieces of grid infrastructure.”

A long list of grid needs to be met

For example, “Why build a fossil-fuel-fired peaker plant, when you can build solar plus storage instead?” he asked. That could allow utilities and grid operators to enlist these systems to help solve problems that the growth of distributed PV is creating, such as the infamous “duck curve” that predicts big drops in midday electricity demand when solar is generating the most, and an unprecedented ramp-up in evening demand when solar drops away and people return home from work.

Linking demand-side resources like smart thermostats and load controls at each home could increase the value of those distributed assets, he added. That’s the idea behind SolarCity’s proposal for Southern California Edison’s “Living Pilot” project, which is seeking ways to bring local resources to bear in making up for a host of grid needs in the wake of the closure of gas-fired power plants and the loss of the San Onofre nuclear power plant.

California regulators are struggling to come up with ways to enlist distributed solar PV systems in helping to solve these new challenges. “There’s a lot that needs to be discussed, both at the CPUC and at the ISO, about how customer assets can participate in wholesale market services,” Carlson said. “But from a technical perspective, I’d say that as long as we have a real-time link to each system and computing intelligence,” it should be doable.

On the highly localized scale, SolarCity is looking at how a combination of energy storage and distributed controls could help mitigate the impacts of high-penetration solar on distribution grids through its SolarStrong program with the U.S. Army, he said.

AB 327, the California law passed last year that sets up a process for the state to reconfigure the net metering regime that pays solar-equipped customers and companies like SolarCity for the electricity they generate, will also require utilities to incorporate distributed generation into their distribution grid planning. “We’re looking forward to that public discussion” to see how SolarCity’s capabilities can be put into play on that front, said Carlson.

Another important innovation on the technology side will be “turning solar inverters into what we call 'smart' inverters,” he added. California is once again taking a lead in pushing grid-interactive functions into the inverters that connect solar PV systems to the grid. “We want to get those features out into the field in every inverter possible, as soon as possible,” Carlson said.

An uncertain future for grid-ready distributed energy

These concepts aren’t unique to SolarCity -- in fact, they’re a part of the plans of a host of solar-storage startups, utility pilots, regulatory proceedings and cutting-edge research projects, all looking at how to solve the challenge of integrating distributed generation into the grid.

But SolarCity is one of the few entities with enough solar systems deployed that are capable of being networked to start testing propositions like these on a wide scale. If Tesla’s plans for a battery Giga factory play out, it will soon have a source of mass-market batteries to deploy as well.

This confluence of factors could give SolarCity the heft to take on California’s investor-owned utilities in an ongoing dispute over how battery-backed solar systems should be allowed to connect to the grid. Since last year, the state’s big utilities have been blocking net metering applications for customer-owned systems like these, claiming they could store grid electricity and feed it back under the guise of green, solar-generated power -- a situation that Elon Musk, Tesla’s CEO, called “crazy” in a recent California Public Utilities Commission appearance.

At the same time, SolarCity and the rest of the solar industry are facing their own challenges in how they’re going to transition from the incentive-driven market that’s allowed them to grow as much as they have so far. Federal investment tax credits for solar systems expire at the end of 2016, and net metering programs in states from Arizona to North Carolina are under attack from conservative activists and utilities that want to reduce payments or add new fees to solar-system owners’ bills.

On the storage incentive front, it’s worth noting that SolarCity’s big foray into customer-sited batteries has been largely bankrolled by California’s Self-Generation Incentive Program, which pays for roughly one-third of the cost of installed systems. California’s massive new grid storage mandate could boost the market for customer-sited storage, but the rules for how that’s going to happen are still being worked out.

Just how future grid services could help replace incentives like this is a huge open question for SolarCity, as well as the utilities and regulators the company is working with. What’s clear is that each side needs the other -- and that the terms for how energy-enabled consumers and traditional utility ways of doing business will have to change.

“If it benefits people, we can help them manage generation, help them manage energy storage, and help them manage loads if they’re dispatchable and controllable,” Carlson said. “But it really does come down to setting the value to the utility.”