Energy storage systems (ESS) present an opportunity for lowering energy costs, particularly for large energy consumers like industrial plants, hospitals, and large multifamily complexes. This is especially relevant in Massachusetts and New York, where incentives make the financial benefits compelling.
What is the value of storing energy?
ESS provide value in several ways. For one, these systems can be configured to help utilities reduce the energy transmitted during peak weather events, such as exceedingly hot or cold days. The batteries are loaded in anticipation of the peak event, and subsequently disbursed of energy during the peak event. By disbursing the energy in this way, the ESS acts like a small scale power plant. This lowers power transmission spikes and the very high costs often associated with them.
Grid stability and resiliency are additional benefits. If part of the grid goes down, for example, during a weather event like Superstorm Sandy, the energy in the batteries can be used to provide power in a local area, if they’re integrated within a microgrid.
A fourth point of value is in the context of renewable energy, particularly solar and wind energy. Both energy sources are growing quickly, particularly in Massachusetts and New York State. Solar and wind capture energy, but not always when it’s needed most. So the ESS stores excess (or cheaper) energy when it’s produced, and then disburses it when its value is optimized.
ESS Optimization
As noted, customer-sited energy storage systems provide benefits to power producers and power distributors. These benefits are monetizable for the owner of the ESS. In a typical scenario, the utility pays the owner of the ESS for power drawn from the ESS to the grid.
In a second common scenario, the energy is used on-site to flatten out demand and reduce utility demand charges. Our partner, Enel X provides value in both scenarios. The company’s software optimizes the revenue for the owner of the ESS, buying power when it is cheaper, storing it in the ESS, and either using it when utility demand charges kick in, or selling it back to the grid.
Development and Ownership of the ESS
Obtaining an ESS is not akin to buying an appliance or new motor… there’s much more scale and complexity with the storage system. As you might expect, the capital requirements are significant. Fortunately, they do not have to be born by the property owner.
For most ESS installations, the engineering, planning, installation, ownership, maintenance and operation of the ESS can all be farmed out, typically to one single entity. That entity is proficient in doing (or managing) all of those things. For most organizations considering an ESS, this is the type of arrangement that’s most suitable. Exceptions might be large Fortune 500 type companies that have the scale to develop and maintain the specialized knowledge and expertise that’s needed to optimize the ESS.
The ESS developer/maintainer/owner attempts to maximize revenue from the equipment. The owner of the property on which the ESS sits gets paid a percentage of the revenue derived from the ESS. Because the payment is a percentage, it keeps the interests of all the parties, ESS owner and property owner, aligned.
For the property owner upon which the ESS sits, there’s no capital required. The ESS generates revenue with no downsides.
Resources
A good extra resource on this subject, with content that goes beyond battery storage can be see on this page published by the Federal government’s Energy Information Administration.
Reducing energy use in buildings often requires an investment of capital, making an obligation of some sort, or both. As with any investment, there needs to be an acceptable financial return.
Returns are usually quantified in dollars saved. When looked at strictly from a dollars point of view, the investment can be looked at like other investments. The investment might even be compared to alternatives such as repaving a parking lot, expanding a workout area, or hiring more staff. Except it should be easier to quantify the return on the investment in energy reduction. Energy consumption can be easily measured. Things like parking lot improvements and staff may be desirable, but the returns are largely guesswork.
Payback Period
One of the easiest ways to quantify energy reduction return expectations is by estimating a simple payback period. Divide the expected annual savings by the initial cost. If an expected simple payback period is really long, like 15 or 20 years, that investment can be quickly eliminated from contention without spending any more time on it. There are probably alternatives out there that will get a much faster payback.
Limitations to payback period as an investment metric include not quantifying changes in maintenance costs, which are not part of the initial investment. Also not accounted, but very significant are the returns that accrue after the payback period ends. The time value of money is not accounted for.
Discounted Cash Flow Analysis (DCF)
Discounted cash flow accounts for the time value of money, and is therefore a metric that can be used if the quick-and-easy payback period metric passes muster. DCF provides a closer look at the attractiveness of the investment opportunity.
DCF requires using a discount rate. Different discount rates make large impacts on the results of the analysis. Therefore, it’s important to use one that is realistic, and even more important, to be consistent in using the same discount rate for all DCF analyses.
Net Present Value (NPV)
Net Present Value also accounts for the time value of money, as DCF is used to determine NPV. Calculating the NPV results in either a positive number or a negative number. A positive result usually indicates that an investment is worth doing.
Where NPV is less clear is when two different investment alternatives end up with positive NPVs. The larger NPV is usually the best. However, if more initial capital is required to reach that higher NPV, and that capital requirement comes at the expense of other things, such as necessary maintenance, then the answer is not so clear cut.
Internal Rate of Return (IRR)
The internal rate of return is another useful metric. It shows the discount rate where the NPV of cash flows = zero (assuming NPV is positive). The IRR is useful for determining if an investment is worthwhile. If the IRR is higher than the cost of capital, and there is confidence in the assumptions made to determine the IRR, then the investment is probably worthwhile.
Valuation Effects
Another consideration for energy cost reduction is how the reduction in costs effects valuation. A change to energy assets that creates a lasting and meaningful energy cost reduction most definitely will increase the value of the property or business. Of course, to be true, the scale of energy use reduction must have a material affect on the cost structure.
More details about the subject of how energy costs cuts affect valuation is available in this blog post.
Other Financial Considerations
In the world of energy efficiency, there are often additional factors to consider. Some of these factors include:
- No money down loans
- Low interest loans
- Energy services agreements (ESAs)
- Tax credits
- Tax deductions
- Accelerated depreciation
- Grants
- Discounted fuel
- Discounted power
- Tradeable credits, and more.
CIMI Energy Can Help
CIMI Energy can perform these financial analyses and write up reports that help you to prioritize where to focus.
Beyond the financial aspects of these investments, there are environmental and sustainability considerations. CIMI Energy can help with this also. If so desired, these considerations can be considered within the reports.
Energy is used in many ways, from heating to cooling to power and motion. Opportunities to lower energy use are available in all of these areas. The challenge is to identify the best areas for reducing energy consumption by balancing opportunities with their costs. It’s possible to find a positive net present value (NPV) for many different upgrades.
Energy Audits
For many building owners and managers, an energy audit is a worthwhile first step. Often there are some glaring opportunities that easily apparent. Old technologies that use lots of energy are an example. Energy audits can provide a list of items where deficiencies exist, which can be prioritized and addressed by order of value.
Technical Fixes
The low-hanging fruit for energy reduction efforts is through the application of technical fixes. In new-builds as well as in retrofit situations, older technologies are being supplanted by new. Many leading industrial companies such as 3M, GM, and Volvo Group have made great efforts to reduce their use of energy in their processes. For example, Volvo Group announced in May 2018 that they have successfully reduced their energy consumption by 25% at their US facilities! As a company in an energy-intensive business, Volvo Group’s savings is impressive, and impactful. Reducing costs, lowering environmental impacts, and increasing competitiveness and investor returns are all resulting benefits.
Technical fixes are also available for other large energy users such as multifamily buildings, hospitals, and hotels. Larger organizations may have in-house expertise, or work with management companies that dedicate staff to energy reduction efforts. Smaller and medium size organizations in these business areas also stand to benefit from significant cost savings, and a corresponding increase in profitability.
Operational Fixes
As noted in the article at the Volvo link (above), that company is going beyond technical fixes: “As we shift from technical changes — which tend to have a large one-time impact — to operational and behavioral changes that are more people-driven” the company’s objectives are to continue to reduce energy consumption.
Companies like Volvo Group are showing great leadership in their commitment to, and success in reducing energy consumption. The behavioral and operational changes are a frontier that is ahead for everyone, though for the time being, for most, it is the technical changes which will bear the quickest payback.
It’s now possible to track natural gas consumption in real time, and here’s why you should. Knowing your consumption in real time makes it possible to associate consumption data with specific internal and external factors. These associations enable insights and actions into making improvements in key performance indicators (KPIs) like energy efficiency, conservation, and sustainability. 