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Why Financing Innovation in Distributed Energy Storage Should Focus on Total Cost of Ownership

Mar 15, 2017

In Part 1 and Part 2 of my recent two-part blog series on financing innovation, I focused on two new types of standardized contracts that have emerged to enable the financing of distributed battery energy storage systems (BESSs). But standardized contracts are only one part of the financing innovation story. Another key component is the proper evaluation of the total cost of ownership (TCO) of BESSs from both a power and energy performance standpoint.

Overview of BESS TCO

Purchasers of BESSs—such as utilities, project developers, and end users—are faced with an array of energy storage technologies from which to choose. By simply comparing these technology options on the upfront cost and nameplate performance parameters, many of the complexities that affect actual cost and performance over the life of a system will be ignored. Further, many of the stakeholders in this sector are under a constant barrage of media coverage about lower battery cell and or pack storage technology costs. The storage technology represents only a portion of the all-in installed capital cost associated with the hardware, software, and services required to develop, finance, and install a BESS.

Energy Storage Value Chain

(Source: Guidehouse Insights)

Key Factors That Fuel a TCO Analysis

A proper turnkey financial TCO analysis should look at the total cost of operation for power, known as normalized TCO (expressed in $/kW), and energy, known as the levelized cost of storage (or LCOS, expressed in $/kWh). Such an analysis evaluates the factors that affect several different battery selection and deployment scenarios. This approach reveals how extended lifetime and other performance factors can reduce the ultimate costs that BESS owners would pay over the life of the system.

The required inputs incorporate several parameters that affect the construction and operating costs and revenue aspects of energy storage systems (ESSs). Some examples are summarized below.

(Source: Guidehouse Insights)

Standardizing the Approach to Quantifying TCO

Guidehouse, Inc. has developed a TCO model that combines detailed asset financing with technology-specific and application-specific performance considerations to evaluate normalized TCO and LCOS. The model leverages insights into ESS capital costs routinely gathered by the energy storage team here at Guidehouse Insights.

I anticipate the continued growth and refinement of these analysis techniques as distributed energy storage markets mature. Such growth will enable developers to employ new business models to better quantify the flexible benefits of storage. This type of approach eliminates the “cheapest first cost is best” hurdle. And as that hurdle is overcome, the sector will see new business models with improved revenue prediction capabilities. As I’ve highlighted, these de-risked, predictable revenue streams will feed the growth financing innovation that will drive the deployment of stationary energy storage technology.