On the sleepy Hawaiian island of Kauai sits a first of its kind solar and battery project.
The rain pauses, the clouds part, and the sun finally shines down on a sprawling 65-acre solar panel farm, surrounded by bright green grass and tropical foliage, on the plush Hawaiian island of Kauai.
The close to 55,000 solar panels, which are still being installed on the site, aren’t yet converting the sun’s light into electricity, but something else quite remarkable is happening at the project on this Wednesday morning in mid-November. Bay Area-based solar company SolarCity, which is in the process of being acquired by energy company Tesla, is installing the first of a series of batteries provided by Tesla in a section of the solar site.
When the project is finished early next year, the batteries will store the sun’s energy during the day to be used at night, when the local utility, Kauai Island Utility Cooperative, usually starts turning on fossil fuel-consuming generators. When the farm is switched on it will be one of the first ones where a utility is using big blocks of Tesla batteries, and it will also be one of the first utility systems to use solar and batteries to displace power-hungry generators.
While the island’s population is relatively small (the utility has just 33,000 members) the solar and battery project is a glimpse into a future in which energy companies combine clean power with energy storage in order to lower greenhouse gas emissions, and in some cases reduce energy costs. In addition, the project shows how Tesla TSLA , an electric car and battery tech maker, could work closely with SolarCity SCTY to construct the solar and battery vision laid out by billionaire Elon Musk, the CEO of Tesla and Chairman of both companies.
The companies will hold a shareholder vote on Thursday afternoon, which will determine if the two firms will merge into one. A day before the crucial meeting, SolarCity and utility Kauai Island Utility Cooperative (KIUC) showed Fortune around the project, a first by a media entity.
Energy Tech In Paradise
On Wednesday morning, a handful of the 60 plus workers on the site drill into paved rectangles where the first of Tesla’s so-called battery “Powerpacks” will soon be installed. The boxy white battery containers—which are covered by “Tesla Energy”-branded tarps and were shipped to the island via boat—contain rows of lithium-ion batteries that were assembled at Tesla’s massive battery factory, itself under construction outside of Reno, Nev.
Last year, Tesla officially announced that it would sell batteries for the power grid, buildings, and homes after building a business on battery-powered electric cars. However, for many years before that Tesla and SolarCity worked together testing how solar panels and batteries could be used for customers with intensive or unique energy needs.
Since SolarCity’s deal with the Kauai utility last year, workers have been installing steel posts into the ground and mounting silicon-based solar panels that face the sun. The crew then string wiring along the rows of panels, connecting the rectangular electricity generators to inverters that convert the solar energy into usable electricity. The site is about 50% finished, says SolarCity’s senior commercial project manager, Danny Valdez.
For KIUC, the project isn’t just about solar; the utility already has that in spades. The issue is, KIUC can’t add any more solar panels to the island without adding more energy storage, says KIUC engineering manager John Cox. It has so much solar that on some sunny, cloudless days, it’s getting a peak energy load of 90% from renewables—and sometimes 70% from solar alone.
To take the next step, KIUC needed technology that could store the energy for when fast-moving clouds cover the solar panels or when night falls. The island sees peak energy demand start around 8 p.m., as residents return home and turn on lights and appliances.
In other words, the utility needed the batteries if it was to continue along its path to more clean energy. KIUC has a goal to reach 50% clean energy by 2023, and the state of Hawaii wants to hit 100% by 2045. Hawaii has notoriously high energy costs because much of the fuel used to create electricity is imported, so the state has unique incentives to go green (an issue faced by many islands).
There’s another key element driving the pioneering project: low battery and solar costs. KIUC is paying 13.9 cents per kilowatt hour for the energy and storage capability from the solar and battery project. That’s one of the lowest costs around for a deal that includes both solar panels and batteries (solar on its own can be a lot cheaper). Importantly, the energy from the project is cheaper than energy from some of KIUC’s older fossil fuel generators, says KIUC’s Cox.
With solar panels are at their cheapest moment in history, battery costs have recently started to drop as well. Originally spurred by massive factory investments by battery giants like Samsung, Sony, LG, and Panasonic, lithium-ion batteries are starting to break out of the market for cell phones and gadgets and become firmly planted in the power grid, basements of buildings, and electric cars.
Working with Panasonic, Tesla plans to lower the cost to make its batteries by a third with its Gigafactory in Nevada. Tesla confirmed that the Kauai batteries were manufactured at Gigafactory.
For an inside look at Tesla’s Gigafactory watch our video.
Low cost batteries could be a game changer for clean energy sources like solar or wind. One reason solar and wind fall short of natural gas and coal on reliability is that these renewable sources only produce electricity when the sun shines or the wind blows. In contrast, gas and coal can produce power at any time, without fluctuation. But if the cost of batteries falls low enough, clean energy can be much more competitive.
For KIUC, the Tesla batteries will also provide a needed way to maintain the power grid. When a cloud suddenly covers one of its big solar farms—like it did for much of the morning of Fortune’s visit—the energy output quickly drops, and that can throw the grid out of whack. Because batteries can react within seconds, KIUC can flip on the batteries, discharge the stored energy, and keep the grid in balance.
For a “sleepy island,” as KIUC’s Cox refers to it, Kauai actually has a unique and sophisticated history with batteries and clean energy. KIUC was one of the first American utilities to install batteries back in 2012, adding advanced lead acid batteries built by a now-bankrupt company called Xtreme Power. Those batteries had issues and lasted far fewer years than expected.
Following that move, KIUC opted for lithium-ion batteries at another of its sites. Provided by French giant Saft, those batteries have performed well, says Cox, but are largely used to maintain the grid with short energy bursts of 15 minutes or so. In contrast, the Tesla batteries can last closer to four hours at a time, and are KIUC’s first ones that are meant to displace generators.
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KIUC appears to be one of the first utilities to get a large amount of batteries from Tesla, a Silicon Valley-born tech company. The Kauai site will have 52 megawatt hours of energy storage on demand, or 13 megawatts of capacity. California utility Southern California Edison is buying 20 megawatts of Tesla batteries; that project could come online after KIUC’s.
KIUC will be able to use the solar and battery combination in various ways to meet its unusual energy needs. A team of three will monitor the system at all times and be able to send the solar energy directly onto the grid, or send it into the batteries for use later.
SolarCity and Tesla Deal
The Hawaiian project is a symbol of what Tesla and SolarCity strive to do under one roof.
Earlier this summer, Elon Musk shocked the tech world by announcing that Tesla would seek to acquire SolarCity. The solar firm is run by Musk’s cousins, CEO Lyndon Rive and CTO Peter Rive, and Musk is the largest shareholder of both companies. A few months later, the companies agreed on a $2.6 billion price tag for the deal.
The merger hasn’t been without controversy. Partly that’s because of the close ties between the companies, but it’s also because of worries over both firm’s aggressive spending plans. Some analysts have called the Tesla purchase a bail out for SolarCity, which has struggled to turn a profit. Tesla itself only recently generated a quarterly profit for the first time in three years.
Musk has been pushing hard to convince shareholders and the public that the deal is meant to be. He’s said that the companies should have been one originally, and he’s estimated that the combined companies could save $150 million in costs the first year.
Musk has also noted difficulties working closely with SolarCity in the past because the companies haven’t been joined. In particular, Musk recently said that the Kauai project itself was an example of a deal that would have been far easier to do as one company.
Musk said on a recent call about the acquisition: “We went through this earlier this year with the Hawaii utility deal, where it’s a combined solar battery system. We had to go through the independent directors of both boards, and go through this lengthy process of approval, verifying it’s an arms-length transaction. It slowed down the whole thing. There’s no way we can scale that.”
Tesla plans to do “hundreds of utility-level battery installations,” said Musk, and the companies need to be one to do that efficiently. SolarCity and Tesla also recently co-designed a new type of roof-integrated solar cells and showed them off at an event at Universal Studios in Los Angeles.
Most expect the Tesla, SolarCity deal to be approved on Thursday. In the off chance that it isn’t, that would spell bad news for SolarCity and Musk.
Updated on Thursday afternoon: The SolarCity, Tesla deal was approved by shareholders.
It could also be bad news for power companies that hope to follow in the footsteps of KIUC and combine large scale solar panels with batteries at low cost. One company, with streamlined operations, would likely be able to deliver the cheapest energy generation and storage option possible.
Updated to correct that the batteries are Tesla’s Powerpacks not Powerwalls, and were manufactured at the Tesla Gigafactory.