In a large-scale energy storage project, input into the choice of technology comes from multiple stakeholders, each of whom is impacted differently. Today, project stakeholders have an increasingly wide choice of storage technologies to choose from, each with its own relative performance capabilities, revenue potential, and costs.
Around the world, energy storage is proving its value as a bankable investment behind and in front of the meter. Depending on your role in a project, the questions you ask and financial models you use to find the answers will be different. For most stakeholders, Levelized Cost Of Storage (LCOS) and Levelized Cost Of Energy (LCOE) offer the greatest flexibility in comparing between technologies and use cases, are the most comprehensive methods, and are closest to realized value.
As the leading supplier of vanadium flow batteries, we’re often asked what LCOS means. How is it different from LCOE and other financial analysis tools used to evaluate energy project options, and why are these calculations important to understanding project value?
Answers to these questions depend on your role in the energy project. This article describes how the cost of energy storage impacts each stakeholder and the financial models each stakeholder uses to compare technology alternatives.
What’s at Stake for Stakeholders
Which parties have an active stake in an energy storage project varies throughout the lifetime of the project – some stakeholders are exposed to lifetime project costs, while others have shorter-term interest in the project. Here’s a run down of the typical stakeholders and their roles:
/ Developers initiate projects, defining the project in its early phases, determining how the energy storage system will be used— usually to store and return excess energy from co-located generation and/or low-cost surplus energy to and from the grid. Developers also establish the offtake agreements that help secure financing and often sell projects to owner-operators once they reach a certain level of maturity.
/ Engineering, Procurement and Construction (EPC) firms are typically contracted by the developer and have primary responsibility to ensure the technical, safety, reliability and lifetime specifications are met, but do not typically stay involved in the project once operating.
/ Owners, Operators and Generators include utilities, merchant grid services providers, independent power producers, and businesses who own their own batteries behind the utility meter. These parties take on responsibility for generation and continuous economical and reliable delivery of power to end-users throughout the life of the project.
/ Investors provide the financing for the project, and comprise developers, owner-operators, governments, public or private generators, and/or private investors.
Entities often play multiple roles within projects. Table 1 below summarizes why energy storage costs matter for each stakeholder, and the key financial questions they should be asking.
Table 1. Impact of Energy Storage Costs on Project Stakeholders
|Stakeholder||Impact of Storage Costs||Key Financial Questions|
|Developer||Impacts asset value and market facing activity||Which system architecture maximizes projects value? What is the minimum offtake agreement price I can offer to achieve investment hurdle rates?|
|EPC firms||Impacts initial capital cost||Which system architecture will win the EPC order? How can I match tender specifications at lowest capital cost?|
|Battery Owner||Liable for extended project costs||What costs am I exposed to in order to achieve expected market activity? How can I allocate costs most effectively to minimize net present cost?|
|Battery Operator||Impacts dispatch optimization||Which operational trade-off maximizes my contracted share of the project value?|
|Generator||Impacts asset value||What capture price do I need to hit my hurdle rate?|
|Investor||Impacts project returns||Which project/technology offers the highest long-term value? What are the risks involved in the business case and asset operating strategy?|
Even as responsibilities, ownership, and decision points evolve over time, the lifetime costs of storage remain relevant throughout. Why? Because offtake agreements, availability payments, tender evaluation and evaluation of market performance should be based on an accurate understanding of all project lifetime costs.
This is where LCOE and LCOS are preferred methods to CAPEX calculations or an NPV calculation that only looks forward a few years and ignores upsides in revenue, or future costs.
What do LCOE and LCOS Measure?
The Levelized Costs of Energy (LCOE) is a measure of the average present cost of electricity generation for a generating plant over its lifetime. It can be interpreted as the average present-value capture price required for a generator to achieve an Internal Rate of Return (IRR) equal to the discount rate. Similarly, this metric can be calculated for energy storage assets, giving a measure of the average present cost of electricity discharged , accounting for all costs incurred to install, charge and discharge the energy storage system, throughout its lifetime. When applied to energy storage assets, however, this metric is often referred to as the Levelized Cost Of Storage (LCOS).
A more insightful definition of LCOS, which relates more specifically to the storage of electricity rather than to the generation per se, excludes the cost of charging the storage that is not related to cycle efficiency and other losses. With different organizations using these terms differently, it is important to be aware of these distinctions and their implications when making comparisons. Both LCOE and LCOS are expressed as units of currency per unit of stored energy discharged (e.g. $/MWh or £/MWh) and are useful for analyzing and comparing generation project options.
For any particular project, levelized cost of energy and storage (LCOE/LCOS) arguably has the highest impact on these stakeholders:
/ The developer, because understanding energy costs over time helps to determine potential value and offset agreement price points, both needed to secure financing;
/ The owner (which may also be the generator), who is accountable for costs throughout the life of the project; and
/ The investor, who is often dependent on full project lifetime operation to yield returns.
When it comes to contracting for storage EPC services, however, the translation of operational and cost requirements into tender specification can artificially limit the range of eligible assets through reliance on more-easily-specified metrics such as CAPEX, potentially excluding options with lower lifetime cost and higher lifetime value.
How Can Energy Storage Costs Factor Into Your Financing Strategy?
LCOE and LCOS, which take into consideration the full lifecycle of the project and the often-ignored discount rate, are helpful analyses to determine capture price and to develop an operating scenario using energy storage to optimize profitability. Moreover, understanding the full lifecycle of the various battery types will also help each stakeholder forecast DEVEX, CAPEX and OPEX/REPEX, and may present opportunities to shift costs between the budget categories.
Table 2. Common Energy Storage Project Component Costs
For example, if the developer is taking advantage of government funding support for capital expenditures, the higher initial capital cost of a flow battery compared to lithium-ion battery may be advantageous. This could mean a developer chooses to capitalize operational costs by negotiating an up-front warranty package.
Similarly, knowing that a lithium-ion battery may need to be augmented due to degradation, the developer may decide to oversize the installed battery to take advantage of CAPEX funding opportunities, adding up to 20% to the CAPEX budget instead of budgeting for replacement in 8-10 years in a REPEX budget.
Table 3. Impacts of Shifting Storage Costs Between CAPEX and OPEX
|DECISION POINT||CAPEX-LED STRATEGY||OPEX-LED STRATEGY|
|Performance Degradation||Oversize system to compensate for degradation||Augment system when needed to offset degradation|
|Maintenance & Warranties||Pay for warranty upfront||Pay for maintenance as needed|
|Lease vs Buy||Purchase all asset componets, recover value at EOL||Lease durable asset components eg. vanadium electrolyte|
|Impact||Shifts price risk to suppliers or contractors||Increases exposure to future component price|
|Beneficial under CAPEX support schemes||Can enable access to lower-cost capital|
Likewise, leasing options for durable asset components, such as the electrolyte in a vanadium flow battery, can lower CAPEX by shifting electrolyte lease costs to OPEX. Knowing the contribution of different project cost components to total lifetime costs can help focus on maximizing project value.
Whatever your role in an energy storage project, the type of battery you select has an impact on the costs that are relevant to you. Particularly for financing decisions, it is important to accurately value project lifetime costs in order to inform your strategy. LCOE/LCOS is a flexible metric that allows comparison between technologies and between use cases, when treated appropriately.
Are you a utility, developer, EPC or commercial business looking to better understand financial modelling for energy storage projects? Our own modelling experts would be happy to connect with you to share further insight. Contact us today to speak with our team.