The Economics of Energy Storage Explained

4th March, 2021



Ophilino DaCosta, General Manager Global C&I Business Unit

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Commercial and industrial facilities (C&I) are expected to see a rapid rate of adoption of energy storage solutions built on lithium-ion technology as a way of optimizing energy consumption, reducing energy costs, and reducing their carbon footprint. This trend is driven by pricing structures of utilities, incentive programs of policymakers, and the reduction in the cost of energy storage – that together make the investment case increasingly attractive.

To understand the economics behind this, we need to take a closer look at how utilities charge C&I customers for their energy. The best-known way are volumetric charges, i.e., how much energy is consumed over a period of time, calculated in terms of kilowatt hours (kWh). However, because of the expense of managing peak demand, many utilities also send out economic signals to encourage consumers to flatten their load, i.e., avoiding dramatic energy surges that will trigger the need to call upon more expensive generating assets.

The most common way that utilities send these signals is through demand charges. Typically, a utility looks at the consumer’s peak load each month for a short duration of time, usually a fifteen-minute window. The demand charge is calculated by taking the peak usage for each month and multiplying it by a certain rate. Unlike energy consumption charges, demand charges look only at a snapshot in time, and thus are based on kilowatts (kW) as opposed to the volumetric charges which are based on kilowatt hours (kWh).

For example, a small manufacturing company may have a big order due at the end of the month and utilize all its machinery in a short period of time, causing a spike in its energy consumption. Let us assume their typical load is 750KW, but during the end of month surge it ramps up to 1,200KW. The rate for demand charges can vary from zero to as high as $50+/KW. In this case, let us assume that the rate is $40/KW. This would translate to a monthly charge of $48,000, just for that one spike in energy consumption. Typically, demand charges are anywhere from 30%-70% of a customer’s bill.

Price Signals Justify Commercial-scale Energy Storage Projects Today

To mitigate the high demand charges, facility and energy managers are looking for ways to even-out their load profiles. These price signals, together with the rapid price decline of energy storage systems, are making energy storage an attractive option. And policymakers are establishing incentive programs for energy storage, accelerating the positive trend in the energy storage market.

In fact, according to a study by the Clean Energy Group and the National Renewable Energy Laboratory (NREL), installing an energy storage system makes economic sense for customers who are paying more than $15/kW in demand charges. Based on this threshold, NREL determined that energy storage systems would make economic sense (two-five years’ payback time) for five million commercial customers in the US.

In another study, NREL looked at two specific case studies for commercial facilities to determine the potential value of an energy storage system built on lithium-ion battery technology. The first project was in Los Angeles, CA and looked at a storage system paired with photovoltaic (PV) solar energy, and a second project in Knoxville, TN that only had a battery system. Both projects had a positive Net Present Value, justifying the investment case.

Incentives for Energy Storage

Like Europe and other global markets, the rate of penetration for energy storage is dependent not only on underlying market conditions but also government policies to jump start the market. In Europe, Italy, Germany, and UK each created rapid growth as they rolled out storage-friendly policies.

In the US, early-stage markets are driven by state policies with the leader being California where a rebate program called the Self Generation Incentive Program (SGIP) drove 45MW of new installed storage capacity for the C&I market in 2017. More recently, New York, New Jersey, and Massachusetts have all launched new storage incentive programs. Of course, federal policies are also important and customers who co-locate storage with solar, will be able to take advantage of the 30% Investment Tax credit and accelerated depreciation.

Lithium-ion The Technology of Choice for Energy Storage

According to World Economic Forum and the Global Battery Alliance, global demand for energy storage based on lithium-ion technology is set to grow by a factor of 22 by 2030. It is currently the technology of choice in the C&I market, due to its well-understood and predictable performance, characteristics, and longevity. Continuous innovations in manufacturing are also driving down costs. These energy storage systems are easily installed at a commercial facility and require little maintenance. They are suitable for storing energy from the grid or for matching with a solar energy system to deploy energy for shorter periods to mitigate demand charges by peak shaving.

However, a battery needs an operating system to tell it what to do. Energy storage systems needs to be sophisticated enough to understand when facility load is at its peak and when to deploy its energy. Most commercial battery systems come with their own integration software or can be combined with other energy management software. Over time, these systems will become increasingly sophisticated and allow for demand monitoring. By factoring in a variety of variables such as market pricing signals, time-of-use rates or even predictive models using weather, load and other data, C&I customers can be given an in-depth insight into their energy load and be able to control it.

The Benefits of Pairing Solar and Storage

When combined with a solar energy system, commercial facilities can use energy storage to lower costs through demand mitigation(reducing demand charges by reducing load spikes), arbitrage (for facilities with time of use rates), and backup power to  keep facilities fully-operational  for a limited amount of time or a subset of critical systems for a longer period. Furthermore, it is likely that more opportunities for facilities to monetize their systems will arise as policy makers continue to leverage the benefits of distributed energy generation.

In fact, when pairing solar and energy storage, it is technically possible for a facility to be self-sufficient in that it can generate its own power, store it, and use it as needed. However, the sizing requirements for a storage system large enough to be completely independent of the grid does not yet make economic sense in most market conditions.

Exploring the Advantages of Energy Storage

Across the globe, policymakers are recognizing the benefits of energy storage and this is reflected in aggressive market forecasts. With large, complicated energy loads commercial, institutional, and industrial facilities are ripe for storage deployment. In turn, the benefits to these entities go beyond cost savings, giving them more control and optionality with their energy strategies, increasing their resiliency and helping them to achieve their sustainability goals.

However, for facility managers who are interested in pursuing these benefits, the initial steps can be quite daunting. The best choice will be dependent on specific incentives, tariff structures and load profiles. If you think storage, or a combined solar and storage system, might be a good fit for your facility, a reputable energy company should provide a basic assessment free of charge. That assessment should indicate the potential for savings. In-depth analysis is often done for a fee or a shared savings model. By understanding your options, you are taking the first step in lowering your energy costs and your carbon footprint, while also building resiliency and gaining control of your energy future.


Ophilino DaCosta is General Manager Global C&I Business Unit at Polarium, dedicated to finding new and innovative ways in which energy storage can make the world smarter and more sustainable. Prior to joining Polarium, Ophilino was Managing Director of the energy storage solutions unit at Panasonic.  

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