Tesla CEO Elon Musk formally announced last week that his electric car company will spin off a new battery business. Tesla Energy—now distinct from Tesla Motors—will manufacture lithium ion batteries for households and businesses that can be used to augment solar or wind-powered systems, or just to provide an extra layer of redundancy for customers connected to the traditional grid.

But over the next several years, Tesla's consumer-grade batteries may not make much financial sense for households in many places around the US . Unless traditional power is very expensive in your state (as it is in Hawaii), it's likely cheaper to stay on the grid when the sun goes down every day, especially if utilities buy back excess solar from rooftop systems (as they do in California). And though consumers might want batteries to use as backup electricity, for a multi-day emergency scenario a generator can still deliver more power for less money. So what's Tesla Energy's business model?

Consumer batteries have garnered most of the media's attention, but Musk admitted in an earnings call this week that Tesla Energy's near-term target demographic is actually business and utilities. “We expect most of our stationary storage sales to be at the utility or industrial scale,” is how he phrased it.

That's where the money will be too. Musk has been clear that Tesla will manage the installation and maintenance of batteries for large businesses and utilities, but installation and maintenance on the consumer-focused Powerwall units will be handled by third-party installers. This could mean that Tesla Energy will make less on the smaller batteries.

The focus on utilities is also important if Tesla Energy wants to "fundamentally change the way the world uses energy at the terawatt scale," as Musk claimed last week when he announced the new batteries. To do that, Tesla must tackle a larger issue than consumer energy storage—it must change our traditional, aging power grid at a utility level.

Tesla’s new batteries will come with integrated management software and Internet connectivity "so we can create smart micro-grids," Musk said when explaining how this fundamental change will occur. Currently, no major US cities have utilities that operate such micro-grids outside of pilot programs, so Elon Musk's enthusiasm made us wonder: what does the micro-grid of the future look like and how might Tesla's new utility-grade batteries play a role?

The ideal grid is smaller islands

The Pacific Northwest National Laboratory’s (PNNL) senior staff scientist Rob Pratt says that an ideal micro-grid has a smaller collection of customers sharing multiple, local power sources—think a college campus or industrial park. This allows the micro-grid to be isolated from the larger electric grid or from neighboring micro-grids in an emergency or by design.

To Pratt, the ideal micro-grid would start using a mixture of diesel or natural gas generators and enough renewable energy sources to make the grid cleaner—or at least as clean as what we have today.

“My ideal next step is recycling waste heat from the diesel generators," Pratt said. "If you utilize the waste heat, then you’re squeezing 70 to 80 percent of the energy out of the fuel, when it’s 40 percent currently.”

With a micro-grid in place, batteries can then be introduced. If the micro-grid is powered in part by renewable energy like solar, utility-scale batteries can store some of that harvested energy to use during unfavorable conditions, just as individual households can. That would give a micro-grid operator some additional leeway, and it might help reduce the need for additional generators.

"The other thing that batteries can do is provide a buffer,” Pratt said. “Diesel generators don’t like to be running at part load; they really like to be at 70 percent output. They’re more efficient and least-polluting when they’re in that sweet spot.” During transition periods in mornings and evenings, “when it’s time to turn on another generator, but you really wish you didn’t have to,” a battery could kick in instead.

“By bringing the battery in for a while I can really keep my generators moving as efficiently as possible,” Pratt said.

In addition, a battery could help with handling very short term "frequency transients" in older rotating generators—where the generator's output will stagger for a few seconds before it can catch up to deliver the appropriate energy load. If an event like this happens, “the battery can respond so quickly, it can kick right in there and help absorb those transient events,” Pratt explained.

To make various micro-grids talk with each other, a utility will need software. That's where companies like RTI (Real Time Innovations) come in. David Barnett, Vice President of Products and Markets for the company, said RTI is currently developing and selling analytics software to help utilities predict demand for power in real time, something that would allow a micro-grid operator to decide how much of and what kind of power to produce.

That's not a simple problem to solve. "If somebody plugs in their Tesla, that’s going to create a big drain on the grid," Barnett said, and a micro-grid would only "have tens of milliseconds to respond to that event." RTI's software mixes real-time data and predictive analytics to make sure a utility's substation doesn't get caught trying to respond to massive spikes in demand in too short of a time.

Batteries can help a micro-grid respond more quickly to such needs. "These days, most of the decisions [about power switching distribution] are made in one location," Barnett said. But with a micro-grid, "batteries [are] at the substation, so they’d be distributed around town. All the intelligence exists at the substation, and goes between the consumer and the substation," he added.

All this adds up to a new kind of electric grid that’s more efficient than the aging structure we currently have—and it could be just as environmentally-friendly, if not more so.

"Batteries can respond to counteract virtually all the transitory effects at various time scales from seasonal, to daily, to minutes and seconds, that make the grid difficult (and expensive) to manage," Pratt wrote in a follow-up e-mail to Ars.

However, batteries aren't the only new tool that can help.