How can energy storage systems be economically justified?

1 ESS value proposition

The value proposition of ESS depends on the type, size, location, and operation of the system, as well as the services it can provide and the markets it can participate in. ESS can generate value by providing multiple services, such as energy arbitrage, frequency regulation, peak shaving, voltage support, backup power, or renewable integration. However, not all services are compatible or complementary, and some may require trade-offs or constraints on the ESS performance and lifespan. Therefore, ESS owners and operators need to optimize their service selection and dispatch strategy to maximize their value and minimize their costs.

2 ESS cost structure

The cost structure of ESS consists of capital costs, operating costs, and maintenance costs. Capital costs include the initial investment in the ESS hardware, software, installation, and interconnection. Operating costs include the variable costs of charging and discharging the ESS, such as electricity prices, efficiency losses, and degradation. Maintenance costs include the fixed costs of keeping the ESS in good condition, such as inspections, repairs, replacements, and upgrades. The cost structure of ESS varies by technology, size, and application, and influences the payback period and return on investment of the system.

3 ESS revenue sources

The revenue sources of ESS depend on the services they can provide and the markets they can access. ESS can earn revenues by selling electricity or ancillary services in wholesale markets, by reducing electricity bills or demand charges in retail markets, by receiving incentives or subsidies from policies or programs, or by providing other benefits to customers or stakeholders, such as resilience, reliability, or environmental benefits. However, not all revenue sources are available or attractive for every ESS, and some may be subject to uncertainty, volatility, or competition.

4 ESS economic analysis

The economic analysis of ESS involves comparing the value proposition, cost structure, and revenue sources of the system to determine its feasibility and profitability. The economic analysis of ESS can be conducted using various methods and metrics, such as net present value (NPV), internal rate of return (IRR), levelized cost of storage (LCOS), or benefit-cost ratio (BCR). The economic analysis of ESS can also consider different scenarios and sensitivities, such as changes in electricity prices, market rules, policy incentives, or technology costs.

5 ESS economic challenges

The economic justification of ESS faces several challenges that may limit its potential and attractiveness. Some of these challenges are technical, such as the limited availability, performance, and durability of some ESS technologies, or the need for integration and coordination with other power system components. Some of these challenges are regulatory, such as the lack of clear definitions, rules, and standards for ESS, or the barriers to entry and participation in some markets and services. Some of these challenges are financial, such as the high upfront costs, long payback periods, and low returns of some ESS projects, or the difficulty of accessing funding and financing sources.

6 ESS economic opportunities

The economic justification of ESS also offers several opportunities that may enhance its value and viability. Some of these opportunities are technological, such as the innovation, improvement, and diversification of ESS technologies, or the development of smart and flexible ESS management systems. Some of these opportunities are regulatory, such as the recognition, facilitation, and compensation of ESS in various markets and services, or the harmonization and simplification of ESS rules and standards. Some of these opportunities are financial, such as the reduction, optimization, and sharing of ESS costs, or the creation and expansion of ESS revenue streams and business models.

7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?