Forget energy storage as the technology of the future, for many utility customers the time for storage is already here. Commercial and industrial customers in parts of California, New York, and Hawaii are already using energy storage to save on utility bills by cutting demand charge expenses. According to new analysis by the energy systems integration and management software company Geli, those energy storage savings could expand to include customers in another 43 states if battery prices continue their downward spiral.
For those not familiar with demand charges, it’s a separate fee applied to a customer’s bill based on the maximum kilowatt energy demand that occurs during a billing period. This demand charge is in addition to the more familiar kilowatt-hour electricity consumption fee. For more on how energy storage can reduce demand charges, see Clean Energy Group’s recent webinar on demand charge management.
Demand charges are typically applied only to commercial and industrial customers, though a few utilities offer residential demand rate structures and many more are beginning to explore the option. There appears to be growing interest among utilities to consider demand charge rate structures as an alternative to imposing fixed residential charges to offset eroding profits as more customers install solar and implement energy efficiency measures.
In their analysis, Geli considers a representative facility and uses an ambitious five-year payback period as the standard for judging storage as a good investment. The representative facility is based on the load profile of a California facility with a peak monthly demand of 500 kilowatts and monthly consumption of 18,000 kilowatt-hours. The facility is located in the Pacific Gas & Electric utility territory and benefits from participation in California’s Self-Generation Incentive Program (SGIP). For a 120 kilowatt/240 kilowatt-hour battery system, the facility sees a 23 percent demand charge savings and a system payback of 4.2 years – without the SGIP the payback period increases to 7.4 years.
Geli expands on this to create a more representative case for the facility with no incentives. They assume an all-in battery cost of $1,162 per kilowatt-hour. This price includes all associated hardware, software, permitting, interconnection, and other costs involved in installing a storage system. To achieve a five-year payback, the facility would need to face a steep demand charge of $38 per kilowatt. Few rates hit that price point. However, if the facility could take advantage of the 30 percent federal Investment Tax Credit (ITC) by adding solar to the system, the demand charge for a five-year payoff drops to $24 per kilowatt – a fee found in many more utility rate structures.
The all-in storage system cost assumes a battery cost of $500 per kilowatt-hour, twice that of Tesla’s reported cost for its new Powerpack – priced at $250 per kilowatt-hour. With costs scaled to the Powerpack price point, for a total all-in cost of $766 per kilowatt-hour, customers with a demand charge of $26 per kilowatt would see a positive return after five years, even without the ITC.
What if the all-in cost were $350 per kilowatt-hour? This seems like a big drop, but some experts believe it’s a reasonable estimate for the cost of 2020 battery systems considering the current price trajectory. So, at an all-in cost of $350 per kilowatt-hour, customers could see a five-year payback at demand charges of $13 per kilowatt-hour – a rate currently found in 38 states across 246 utilities. Take off another 30 percent with the ITC for solar+storage systems, and you’re looking at a five-year payback across 46 states and 455 utilities.
These findings are similar to those put out by the global financial research company UBS earlier this year. UBS found that for an energy storage system with installed costs of $400 per kilowatt-hour, customer would begin to see a positive return at demand charges of about $10 per kilowatt.
With battery prices dropping and demand charges on the rise, the economics are going to start looking favorable in a lot more places very soon. Add in additional savings from time-of-use energy shifting, revenue through utility demand response programs and participation in wholesale electricity markets, and the additional benefit of power resiliency when the grid goes down, and things look even better for investing in energy storage.