Residential electric utility customers rarely have opportunities to use energy arbitrage – buy low and sell high. But with the right TOU rate, a residential customer can make arbitrage work as energy costs increase, and energy storage prices decrease.
When people think of energy storage, they often think of using it to purchase and store energy at a time when the cost of electricity is low and subsequently selling or using that stored energy during a time when the cost is high. This strategy is called energy arbitrage and is the most direct method for profiting from energy storage. However, energy arbitrage is rarely used in practice due to its cost effectiveness. In this article, we will look at why this strategy is rarely used today and what it would take to make it more cost effective.
As the cost of energy increases and the cost of energy storage system decreases, more and more ratepayers will be able to take advantage of Behind The Meter (BTM) energy storage. Many BTM energy storage systems are already being used for backup power and demand charge management. However, relatively few are used for arbitrage. To better understand this, we need to understand the complete cost of BTM energy storage and the dynamic cost of energy.
The cost of energy storage is decreasing
In a residential storage market, Tesla Powerwall is the benchmark to compare prices. In 2020 Tesla’s website suggests $6,500 for a 13.5 kWh system. Lazard’s Levelized Cost of Storage is an industry report often cited for all forms of storage, including residential PV plus storage. Bloomberg’s NewEnergyFinance (“BloombergNEF”), an accessible report with investors, also shows Lithium-Ion battery pack prices dropped from 2010 value of $1,160 in 2018 dollars to $176 in 2018 . The Annual Technology Baseline from National Renewable Energy Laboratory (NREL) shows PV plus storage costs with $10,000 value for a 5 kW/20 kWh Lithium-ion battery in 2016 dollars. This cost is $ 10,754 in today’s dollars.
Few Lithium Iron Phosphate (LFP) batteries have been in the field for 30 years, so it is prudent to claim they are expected to last for more than 25 years or 2.5 times as long as Nickel Manganese Cobalt (NMC).
Crunching the numbers
For energy storage to be cost effective as energy arbitrage, the cost of the proposed system must be less than the value gained using it over time. Let us look at two examples, one system that works and one that doesn’t pencil out. We purposefully chose bookends to cover the spectrum of projects that fall in between projects that work and those that don’t.
At the outset, we are assuming a typical Energy Storage System (ESS) hardware cost for a 5kW/13kWh system is $8000. The typical labor cost of installing a residential system is about $5000. Batteries are consumable goods.
The average residential customer wants to get a Return On Investment (ROI) while the batteries are still usable. Most energy storage systems have a warranty period of at least ten years, so we would like to pay the system back in approximately ten years or less. The system will have a usable life after this. Experienced battery storage experts know first hand which systems last longer than others. However, to make our numbers work for comparison purposes, we have assumed ten years for warranty.
Assuming that we have only one charge/discharge cycle per day to move 13 kWh of energy from the off-peak time to the on-peak time. Each period, we save only the difference between the price of on-peak to off-peak or the price delta.
An example where numbers work- A system with the highest delta of TOU rate and off-peak rate: Hawaiian Electric Company (HECO).
1. At HECO, the TOU on the Big Island from 5 to 10 pm is 49.2 cents per kWh. And the off-peak rate from 9 am to 5 pm is 9.7 cents.
2. So, we have a delta of 39.5 cents per kWh or $5.135 per discharge (39.5 cents times 13 kWh).
3. Multiply that $5.135 times the number of working days per year (261 working days because TOU usually does not include weekends or holidays) and we get $1340 per year or $13,400 ($1340 times 10) before the warranty period runs out.
4. This $13,400 benefit is more than the installed cost ($8000 plus $5000) of the system.
5. Hence, the numbers work.
An example where numbers don’t work- A system with the lowest delta of Time of day rate and off-peak rate: Xcel North Dakota.
1. At Xcel-ND, the Time of day service from June through September is 15.34 cents per kWh. And the off-peak rate for all months is 2.559 cents.
2. So, we have a delta of 12.781 cents per kWh or $1.66 per discharge.
3. Multiply that $1.66 times the number of working days per year (261 working days because TOU usually does not include weekends or holidays) and we get $433 per year or $4330 before the warranty period runs out.
4. This $4,330 benefit is less than the installed cost ($8000 plus $5000) of the system.
5. Hence, the numbers don’t work.
These calculations do not include incentives like Federal Investment Tax Credit (ITC) or some state incentives such as California’s Small Generator Incentive Program (SGIP). Perhaps the residential customer should include the ROI for the HI and ND examples with these incentives here. There are other reasons to install a residential ESS such as backup power that provides non-monetary value. Since the prices of energy storage continue to come down, the numbers should be run whenever the underlying parameters change.