Energy Storage blog_2016_01_21-INFO1_large

Published on January 22nd, 2016 | by Rocky Mountain Institute

41

The Real Cost Of Energy Storage, According To Lazard

January 22nd, 2016 by  

Originally published on RMI Outlet.
By David Labrador

In November 2015, financial advisory firm Lazard released its first-ever Levelized Cost of Storage Analysis (LCOS). Well known for its Levelized Cost of Energy Analysis (LCOE) analysis—now out in version 9.0—Lazard publishing an analysis of storage is a major sign that it considers battery energy storage a critical technology that’s here to stay. But a closer look at Lazard’s LCOS shows something RMI’s October 2015 Economics of Battery Energy Storage report noted: a) battery economics are usually evaluated on the basis of single-use cases, b) stacking multiple uses can greatly enhance battery economics, and c) evaluating those economics gets difficult quickly. It’s the use cases and stacked value streams—in addition to per-kWh cell cost declines—that offer tremendous opportunity.

Marketing high tech backgroundRMI’s report primarily looked at the value, not cost, of a basket of multiple, stacked uses for customer-sited storage systems. Lazard focused on the costs of several physical storage technologies (including the lithium-ion studied in RMI’s report) and not “alternative” storage options such as building-as-storage, water heater-based storage, and other demand flexibility options. It evaluated those storage technologies on the basis of a variety of single-use cases such as frequency regulation and peak shaving/demand charge reduction. Lazard compared those costs to conventional, fossil-fuel alternatives.

Jesse Morris, a manager at RMI and co-author of RMI’s battery report, says, “We did not make this comparison in our Economics of Battery Storage report for a number of reasons but Lazard’s analysis is a great first step. It adds to a strong foundation from which the industry can better understand multiple-use cases.”

Morris adds, “In the end, this is the comparison that we need to be able to make if we’re going to convince regulators that a distributed energy resource-focused future is a lower-cost alternative.” Batteries are tricky to evaluate in part because they aren’t strictly a demand- or supply-side solution. They’re an arbiter of supply and demand, serving as either generation or load depending on whether they’re discharging or charging. So the favorable finances of storage can use all the clarity and all the study they can get.

Shifting from single- to multi-use cases

The LCOS examined single-use cases, which is how most batteries are deployed today. But single uses are not how RMI proposes (or how Lazard expects) they be deployed in the future. Batteries today are used for a minority of their useful lifetimes. They can do much more than sit idle the majority of the time, and increasing their utilization rate can greatly enhance the value they provide to customers and the grid.

Jonathan Mir, managing director and head of North American Power and Utilities at Lazard, says, “In point of fact, it will be possible to use batteries for more than one thing, which means their value is higher than is being captured in our study.” Lazard advanced the practice of computing costs for renewably generated electricity with their LCOE series and Mir says, “I think we’re going to have to do the same thing around the stacked use cases.”

Storage costs are dropping

Both reports find that the age of the battery is here, largely because costs have dropped so far, so fast. Mir says, “This reminds us very much of where utility-scale renewables were seven or eight years ago,” when Lazard began covering renewable costs in its LCOE series. “To us, this seems like an inflection point where you can see external factors causing demand to really take off and then you wind up with price declines as manufacturing scales up,” he says. Lazard’s analysis also predicts significant cost declines over the next five years, based on a survey of industry experts. For example, the median expected five-year price decline for lithium-ion storage is 47 percent below today’s costs.

The LCOS calculates the costs of eight different energy storage technologies for ten single-use cases, half behind the meter (including augmenting residential solar PV) and half in front (including transmission-upgrade deferral). It compares these to the costs of conventional alternatives like natural-gas peaker plants or diesel generators. The study finds that the costs of storage are within “striking distance” of conventional alternatives for many single-use cases, including lithium-ion batteries used for frequency regulation and flow batteries used to defer adding a new peaker plant.

The challenge of multi-use accounting

What the LCOS analysis doesn’t do is estimate the cost of energy storage when it is utilized for multiple, stacked services, a key to realizing the value of storage to customers and the grid.

Most of storage’s costs are fixed, capital costs. But variable costs—as well as battery lifetime, potentially capacity loss over time, and ultimately replacement—depend on the use or uses to which a battery is put over its lifetime, especially how often it is charged and discharged. This makes it difficult to state the cost of a given storage technology for a variety of multiple, stacked services. “That is our ambition,” says Lazard’s Mir. “It’s important to capture, because we think our study is likely underestimating the value and potential of storage because storage would be used in more sophisticated ways than are being illustrated,” he says,  “but the quantitative analysis and framework to illustrate that is still being developed. It is another indicium of how immature the industry is.”

Evaluating battery energy storage economics is hard, and RMI sees opportunities to build on Lazard’s commendable start. The basic problem is finding a levelized cost that can be added in as services are stacked in different combinations. Garrett Fitzgerald, a senior associate at RMI and co-author of the Economics of Battery Energy Storage report, explains that, “by combining fixed costs and variable costs—that are determined by what services and how often they are being provided—you end up with a total lifetime cost of providing just a single service. It is not possible to then determine the incremental cost of stacking other services on.” For example, “It would be incorrect to simply add the LCOS of frequency regulation and the LCOS of peaker replacement as an estimate of the LCOS of a system providing both,” says Fitzgerald.

The importance of value stacking

Establishing a framework to measure the value (and cost) of stacked use cases for storage should be possible. Mir says, “To us, that is a natural evolution of the study.” But, he notes, “We have not seen a good solution in the public domain for how to demonstrate this idea, so we will come up with a framework. We understood it as a very important qualification to the work we were doing,” says Mir, “which is why we tried to be so clear about it.”

Indeed, the third page of the LCOS is devoted to explaining exactly how the energy storage value proposition depends on the stacking of multiple uses and adding together the value streams they create. RMI’s Morris says, “Their description is very clear and an excellent way to think about the comparison between stacking values and comparing different stacks of value to a given cost.”

blog_2016_01_21-INFO1_large

The Current State of Play

Lazard considered only unsubsidized costs and disregarded the additional value created by such things as avoiding the toxic or climate-changing emissions of conventional fossil-fueled technologies. Nor does Lazard take into account state incentives, such as California’s SGIP and mandatory battery storage legislation. “Their comparison of all chemistries performing all use cases against a gas peaker plant or a reciprocating diesel engine (depending on the application) is extremely helpful,” says Morris. Should subsidies for storage be introduced at the national level, Lazard will factor them in the same way it does for LCOE.

So what did Lazard find? Of all the permutations analyzed, only one—lithium-ion batteries providing frequency regulation to the grid—was cost effective when performing a single, unstacked service today. The study also predicts that seven combinations (all of them with batteries) will be cost effective within five years. These include two use cases—peaker replacement and industrial peak shaving/demand charge avoidance—for which multiple battery chemistries will be cost-competitive with their diesel and natural-gas alternatives.

blog_2016_01_21-INFO2_large

The LCOS does contain this encouraging caveat, however: “a number of [technology and use case] combinations are within ‘striking distance’ and, when paired with certain streams of value, may currently be economic for certain system owners in some scenarios.” It is these combined value streams that come with stacked uses that need to be accurately and easily accounted for.

The road ahead

“Costs will come down naturally with scale; they always do,” says RMI’s Fitzgerald, but he cautions that, “storage won’t be mainstream until there are more channels for developers or storage owners to find revenue.” As examples of the new channels being opened up for storage, he cites, “things like aggregated wholesale market participation in California or distributed system platform providers as described in New York’s REV proceeding.”

Fitzgerald says that, “storage can do a lot for the grid, and it can do most when behind-the-meter. Regulation is changing that will allow distributed storage to collect revenue for these services.” In consequence, he says, “most of the industry is focused on opening up new revenue streams and moving toward customer-sited and customer-focused services, such as demand charge management or solar-plus-storage solutions.” Lazard’s Mir adds, “We see that demand increasing pretty rapidly.”

Top photo courtesy of Thinkstock. Graphs courtesy of Lazard. Used with permission.

Reprinted with permission.

 
 
Get CleanTechnica’s 1st (completely free) electric car report → “Electric Cars: What Early Adopters & First Followers Want.”
 
Keep up to date with all the hottest cleantech news by subscribing to our (free) cleantech newsletter, or keep an eye on sector-specific news by getting our (also free) solar energy newsletter, electric vehicle newsletter, or wind energy newsletter.

 

Tags: ,


About the Author

Since 1982, Rocky Mountain Institute has advanced market-based solutions that transform global energy use to create a clean, prosperous and secure future. An independent, nonprofit think-and-do tank, RMI engages with businesses, communities and institutions to accelerate and scale replicable solutions that drive the cost-effective shift from fossil fuels to efficiency and renewables. Please visit http://www.rmi.org for more information.



  • neroden

    So here’s the short-term result:

    Batteries will be installed by utilities (those with a clue) for frequency regulation *almost immediately*. As soon as they are installed (at substations) they will be used to avoid transformer and transmission line upgrades (otherwise needed only for peak loads), making more money for utilities.

    Meanwhile, there will be large behind-the-meter installations for *independence*, *emergency backup*, and off-grid purposes: not for pure financial reasons. In the non-off-grid cases, these will immediately be used for time-shifting solar power (Because Why Not).

    I’m not sure what happens next after that. But that’s the situation in the next 2-5 years.

  • JamesWimberley

    Very good stuff from RMI here. Important news, clearly analysed. Keep it coming.

    One issue not covered is the global and not just the US market. The USA has unusually low retail electricity prices, especially for residential use: Australia and Germany are around the 30c/kwh mark, Denmark even higher. (The differences are less for industrial consumers.) High prices make storage more valuable, and home storage is expected to take off very soon in Australia. Germany will be a little slower, as solar FITs are higher, narrowing the differential. Denmark won’t bother, as they are sitting next to a supergiant low-cost hydro battery called Norway.

    Another early adoption market is offgrid in Africa and India. The $200 8-watt kits sold by the thousand to Kenyan villagers already include proportional battery storage. The market will grow very rapidly in numbers, and probably also in mean installation size.

    • Ulenspiegel

      The retail price is not the important parameter, the difference between retail price and FIT is. With this slightly shifted yardstick the situation is not that rosy for batteries in Germany.

      Or from another POV: With an FIT of around 0.13 EUR/kWh you can afford an PV array that produces twice or thrice the amount you directly consume. Now you have to answer the question whether a larger PV array justifies economically a storage. I would say in most cases not.

      • JamesWimberley

        With German retail at 30€c/kwh. the difference is 17€c/kwh, more than most Americans pay. Australians have no new FITs at all and IIRC get wholesale if they are lucky, so their difference is around 25c/kwh. So they will go first, but it’s still very promising in Germany.

        • Ronald Brakels

          New South Wales and Queensland, which are two of the big three Australian states for population, have no set feed-in tariff. People installing new solar there only get what their electricity retailers offer them, which is typically about 6 cents (4.2 US cents). People in other states make do with small set feed-in tariffs. For example in South Australia it is 5.3 cents (3.7 US). The Northern Territory, which is not a state, may still have a high feed-in tariff.

          Unlike the rest of Australia, grid electricity prices have come down in South Australia. I only paid 39.4 cents a kilowattwatt-hour or 27.6 US cents on my last electricity bill. That is so cheap I am feeling giddy. The decrease is thanks to renewable energy pushing down wholesale prices and that being reluctantly passed on to households.

          That’s for the total cost of my grid electricity. The marginal cost, what I pay for each extra kilowatt-hour without supply charges is 29.2 cents or 20.4 US.

          In Queensland they lowered the marginal cost of electricity while raising supply charges in a delibrate move to discourage rooftop solar. (A move which also hurts grannies and other small users of electricity.) But a move that also encourages people to go entirely off-grid. This is not something that makes financial sense just yet but thanks to them it’s getting closer. It’s almost as if it’s a goal they have.

        • Ulenspiegel

          The average retail is around 26 cent and the FIT is 12,3 cent, there is no chance at the moment to make money with a storage for an owner of a small (< 10 kW) PV, sorry.

      • Freddy D

        Nevada policy is bringing this to light right now with the phase-out of full-retail-rate net-metering. The storage incentive then becomes that difference between the $0.12 one purchases power for and the $0.026 they can sell it for. Not a bad incentive.

        What neither RMI nor Lazard really fully tackle is the fact that in many battery use cases, some fraction of the battery capacity is never used at all. For example, even in a Tesla, a driver would aim to never take the battery down to zero charge. So they bought 20% of their battery capacity for that just-in-case one use. This gets very ambiguous to put a value on, but is very real. Off-grid energy storage for a home or commercial operation would be similar – some fraction of the storage would get used 2 days per year and would wear out from internal degradation. So I can see the motivation for sticking with very tangible cash-flows in the calculations.

        • Ulenspiegel

          Freddy,

          in Germany the retail is around 26 cent /kWh, you get only 13 cent /kWh with the FIT. Therefore, the cost of storage must be lower than 13 cent /kWh to make at least small money. Which battery system delivers this? No at the moment.

          Even with a lower storage price of 10 cent/kWh you would have to add another expensive component (=financial risk), this for a few Euro per year? Sorry.

          • Hans

            Luckily there are quite a few technology interested and idealistic* that buy batteries despite that they won’t make a fat profit. These early adapters will bring the technology forward.

            *Is it nowadays allowed to have ideals and act according to them? Or is that not TPC (Tea Party Correct)?

      • neroden

        Germany is dropping the FIT in favor of solar auctions, which will not *immediately* change the calculation but will probably shift it towards batteries in a few years (as solar starts producing 100% of daytime production).

        Much of the US has exceptionally low retail electricity prices by international standards (11 cents/kwh here, for example). Makes it very hard for batteries to compete. People will only get batteries if they’re simply mad at the utility company for (a) being unreliable with lots of blackouts, or (b) being jerks. Both of which will happen.

  • Bob Fearn

    When WW2 broke out countries quickly spend billions on this crisis without doing Levelized Cost Analysis’s. Now we have a climate change crisis and we have to prove that less carbon intensive energy sources are price competitive with fossil fuels but we sure as hell don’t count the pollution costs associated with fossil fuels or the future cost of climate change.
    There is something really wrong with crapitalism.

    • JamesWimberley

      In case you didn’t notice, the analyses used by the EPA to justify the Clean Power Plan regulations did use implied social costs for both health and climate damage. We don’t have a real carbon tax, but increasingly policymakers are using a virtual one.
      Second Best Tomorrow (link). Rinse and repeat.

      • Bob Fearn

        I don’t believe that the EPA, or anyone else, has calculated health and climate change costs. What was the cost associated with the 6 million who die each year due to coal use? What was the cost estimate associated with 100 ft of sea level rise or make that 200 ft!!

        • Bob_Wallace

          The health cost of burning coal has been studied. There’s a major study out of Harvard.

          The external cost of burning coal is extremely high. Simply tallying public health impacts, coal costs the United States economy $140 billion to $242 billion a year.

          http://green.blogs.nytimes.com/2011/02/17/tallying-coals-hidden-cost/

          Coal-fired power stations cost the European Union up to €42.8 billion a year in health costs associated with coal-fired power stations. ‘The Unpaid Health Bill: How coal power plants make us sick’ — found that EU-wide impacts amount to more than 18,200 premature deaths, about 8,500 new cases of chronic bronchitis, and over four million lost working days each year.

          The total costs are up to €54.7 billion annually when emissions from coal power plants in Croatia, Serbia and Turkey are included.

          http://www.evwind.es/2013/05/03/coals-hidden-health-costs-40-billion-euros-a-year/32333

        • Kevin McKinney

          Well, nobody can calculate a complete accounting; there are far too many unknowns (including our future choices). But as Bob has pointed out below, some parts of the problem have indeed been done.

          And here’s one–just the fruit of a 30-second Google–on SLR:

          http://ecowatch.com/2014/02/11/coastal-flooding-sea-level-rise-cost-annually/

        • JamesWimberley

          They did. See here (link).

    • Bob_Wallace

      When WWII broke out the US didn’t get moving. Wasn’t impacting us all that much so we just observed.

      We did not get going until we were directly impacted with the attack on Pearl.

      Same is happening with climate change. We’re turning up our efforts only as we, personally, feel threatened. It’s not the economic model, it’s human nature.

      • thinkmorebelieveless

        So what type event would have to happen to be the environmental equivalent of the attack on Pearl Harbor ?

        • Bob_Wallace

          I don’t know.

          I can’t imagine a singular event that would be that obviously caused by climate change. Climate change is a gradual process, not an abrupt change.

          Little by little the seas rise. Over time it gets hotter. Rain and snow falls become more extreme. Droughts get more frequent and longer. People don’t have clear memories of how things were a decade or two earlier.

          In the next few years we may see the Arctic Ocean free of sea ice for the first time since humans have been on Earth. That will get some attention but it probably won’t be the same as seeing the news of a massive attack on one of our military bases.

          • Bob_Wallace

            There’s the story of putting a frog in a pot of cold water and putting the pot on the stove. Then the heat is turned on and the frog sits there until it boils to death because the change is gradual.

            That’s bull. When it gets too hot the frog will jump out.

            But we’re like the frog. We’re basically sitting in the pot and it’s getting hot, just not hot enough to get us to jump. Some of are shouting that we need to jump, others are saying there’s no need or at least no need yet.

            Our big problem is – there’s no “out” for us to jump to. Or at least not a very large “out”. We’re going to have to move back from the oceans and, likely, away from the parts of the land that are the hottest and dryest. We need to be working much, much harder so that we protect as much of what we have as possible.

          • thinkmorebelieveless

            So is there any hope convincing a consumption driven population that on average uses 12,000 kWh per year and prefers SUV’s over fuel efficient vehicles ?
            It appears that most people are dumber than frogs. And when it is time to jump out of the pot there will be 7 billion jumpers.

          • Bob_Wallace

            Luckily we don’t need to convince the greater population. We innovate around them. And they’ll love it.

            Wind and solar will make their electricity cheaper. Like water in the pot the grid will become more RE intensive and FF will fade away.

            They’ll cut their electricity use simply because the things they buy to replace the things they were using will use less electricity.

            EVs will replace ICEVs. People will pay less for their cars and pay a lot less per mile to drive them. They will enjoy the performance/ride of EVs and not having to stop at gas stations.

            If people want to drive big cars then they’ll need to pay more for them and purchase more electricity to charge them. Just like they pay more for large cars and fuel now. As long as we can build those cars and generate the electricity sustainably then ‘no harm, no foul’.

            We do need to get enough people concerned so that governments get out of the way and provide some assistance. That’s happening.
            Paris.

          • thinkmorebelieveless

            I like that; Innovate around them
            The holdouts though will reap the benefits without the risk but I guess that’s just how it goes.

            Do you have any idea how I can innovate around the FERC meatgrinder permitting process for Microhydro? My only recourse is going completely off grid which, equipment wise, costs more than grid tied. Battery cost can be a lot less than permitting cost though.

          • neroden

            Honestly? I’d go completely off grid. Why mess around? You can always go back and go through the permitting process to *interconnect* after you’ve set up your own microgrid.

          • thinkmorebelieveless

            Yes, off grid is likely the way I would go. It is unfortunate that government policy forces people that are trying to do the right thing by going with renewable Micro hydro to have to go the more expensive off grid route. My site has the proven potential of over 30 kW. The average 12,000 kWh per year home would need only 2 kW of grid tied hydro. With batteries my 6000 kWh off grid site would need only 1 kW. I offered the remaining 28 or 29 kW to my town and the local watershed association for community hydro but they declined . They both are aware of the FERC permitting process. So this energy, enough to power 15 homes, goes unused.
            And I am not out of the woods yet with FERC. Even if I go off grid FERC may find me jurisdictional for two other reasons. FERC may call my water source, the headwaters of a river that I can walk across most of the year, navigable water if Native Americans canoed on it for instance. FERC may also exercise the Commerce Clause if pioneer loggers floated logs on it or modern recreational kayakers used it because recreation effects business. No kidding, this is real, FERC has done this before.

  • vensonata

    Lazard. Who are they really? Are they truly neutral and competent? I am sceptical of many of their numbers. They are not as bad say as the EIA, but I have a feeling that guys in suits without any sympathy and real interest are not the best sources for storage evaluation. I like RMI, they are much more sincere, and they really should run their own numbers completely independently.

    • bink

      the reason they cannot arrive at any conclusions is because most of the cited technologies except one cant with any reasonable credibility be given credit for certain stacked values. A lithium ion battery installation doing frequency regulation is not suited for peak shaving or t&d deferment. something they refer to in their study regarding use cases, this is a bunch of hogwash,

      they are promoting lithium because of its market dominance. it is well suited for short term power applications but dual long duration use case s out of the question from a technical perspective, just admit it and move on. .

      vrb will rule the day , no degradation and dual power and energy use case simultaneously.

      • Kevin McKinney

        “vrb” being–?

        • Zorba

          I assume he means vanadium redox (flow) batteries

        • newnodm

          vanadium redux battery – a type of flow battery. binks a flow guy, but he might be rights. The big contest has not yet begun.

        • thinkmorebelieveless

          Vanadium redox (flow) battery

        • Kevin McKinney

          Thanks, guys, appreciate it. So, probably, do quite a few readers & lurkers.

      • neroden

        Citation needed. A lithium-ion battery doing frequency regulation works just fine for peak shaving and t&d deferment — because this is all basically the same job, in technical terms (though not in financial terms). Frequency changes are caused by short-term peaks.

    • Freddy D

      Lazard’s LCOE reports over the years, now on version 9.0, have, in this engineer’s and economist’s humble opinion, have been thorough, accurate, and well written, and well presented graphically. I view RMI, Lazard, and Bloomberg New Energy Finance (BNEF – another private analyst firm whom I find to be thorough, accurate) to all be building on ideas and reaching similar conclusions, perhaps through different pathways.

      Accounting for soft benefits outside of the hard, known economics and cash-flows that directly surround the system has always been tricky and always will be. What’s interesting is that the raw economics of renewable energy and energy storage are largely standing on their own now, they continue to improve rapidly, AND the soft benefits only add to their value proposition.

      • JamesWimberley

        Seconded. It is a plus when cost analyses are published by pretty hard-boiled organisations like Lazards that are doing it for the money, not to save the world. Count the times you have used Lazards or BNEF data against wind and solar mythmakers. If the numbers are from Greenpeace, even if quite correct, you risk the reaction “they would say that, wouldn’t they?” You can’t try this with a straight face when the source is Goldman Sachs or Citibank.

        • neroden

          I like using the Deutsche Bank peak oil report for a similar reason.

      • vensonata

        The LCOE reports have a longer time frame and more people are familiar with the tech etc, Batteries are almost completely new to public consciousness, and the tech is changing both in price and efficiency at lightning speed. Consider the Gigafactory. Consider flow batteries. These need an especially engaged type of analyst. Bankers and math people can not sense a “ringer” when it enters their numbers if they are not familiar with the entire scene. And then there is the opposite, people who love the tech but can’t do the numbers. That is why I suggest great caution with these numbers that Lazard is presenting. I do not feel they are wildly off, but some of the numbers are a little off key to my ear.

        • neroden

          Yeah, the Lazard LCOE reports have sometimes been off by 10%-20% on some of the numbers, I’ve concluded after doing in-depth research. That doesn’t really change the conclusions — since the solar prices are dropping by factors of 2 — and they’re the best reports I’ve seen. I expect similar levels of accuracy in the LCOS report.

      • Graphite Gus

        Hear hear. Completely agree. James Wimberly said it better below

      • Carl Raymond S

        Any dollar figure is the output of a mathematical model based on climate theory, trends and probabilities. It’s a quantification to assist economic rationalists in making a moral decision.

        To do nothing puts the planet at risk of runaway climate change. Just one example of why this is bad: Droughts lead to desperation and desperation leads to wars and acts of terrorism. There’s no linear cost scale – there are dice rolls and tipping points. Civilisation is a construct, not a fact. We saw how quickly civility deconstructs during Hurricane Katrina.

        When I see these reports I think “good, this will help cement the case”.

        Personally, I feel one only needs to look at the Keeling Curve, and know one fact: CO2 traps heat, to reach a decision that action is necessary. This has been clear since the 1950s.

    • neroden

      Lazard’s an investment firm. They have a very strong incentive to get the financial numbers right. That said, investment firms often get the numbers wrong. But Lazard does better than anyone else.

Back to Top ↑

Shares