Deciphering the
Energy Storage
Value Proposition
Introduction and Summary Findings
While energy storage has grown rapidly
over the past couple of years and
several hundred MWs of projects are
under development, the value to
investors of energy storage remains
somewhat nebulous. This paper
identifies leading energy storage
technologies, defines key applications,
reviews current leading battery projects,
and estimates investor returns for
differing applications and markets.
Further, the paper discusses the key
factors driving storage economics and
investor returns.
Today, in the right application and
market, battery storage can provide
attractive returns. Clearly, there are
other applications where the economics
today do not meet a minimum
threshold. The storage economic
proposition will improve in all
applications as capital costs fall, which
they are expected to do. By its very
nature, storage offers multiple value
streams. A rational investor would take
advantage of all possible value streams,
so long as each value stream in practice
can be realized and there is no “double
counting” of benefits.
usa.siemens.com/digitalgrid
Deciphering the Energy Storage Value Propositon | White Paper
Storage Technology Discussion
Grid reliability and power quality are generally met through
the integrated contributions of generation, transmission,
distribution, and customer assets as depicted in Exhibit 1.
Exhibit 1: Energy Storage Response by Application
Source: Southern California Edison
In real-time operations, the electric system (which could be
a small utility system managed as a balancing authority or a
large ISO footprint, also managed as a balancing authority)
has to be in perfect balance between load and generation
at every instant. To achieve this, system operators (small
utility or large ISO) have to rely on a hierarchy of reserves
and capabilities which can be called upon in different time
frames (Exhibit 1). Some reserves are available through the
generation system based on their physical characteristics
(e.g., ramping, spinning reserve), while other capabilities
such as system inertia can be made available through
transmission system operation. Yet other capabilities like
power quality can be maintained by taking advantage of
equipment such as capacitors located close to the
customer.
Two key events are spurring energy storage technology
development – (1) increasing generation from uncontrolled
renewable generating assets with variable output (i.e. wind
and solar), (2) increased desire to manage variable
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generation from these renewable resources with cleaner
technologies. To meet these and other grid needs,
numerous storage technologies have been developed or are
currently under development. As depicted below, typical
short duration technology options include flywheels, lead
acid batteries, and lithium ion batteries. Common long
duration storage solutions include pumped hydro, to a
lesser extent compressed air energy storage, and lithium
ion batteries as well. Also of note are the new technologies
currently under development, many focused on various
flow battery chemistries which could serve either short or
longer term needs. There are also many new and novel
energy storage technologies under development. One such
technology, not shown in Exhibit 2, is a gravity rail system
recently deployed in Nevada in which train loads of rock are
raised to mountain tops using low cost electricity which is
then recovered during periods of higher prices by lowering
the rail cars. This device operates using the same potential
energy concept as pumped storage hydro.
White Paper | Deciphering the Energy Storage Value Propositon
Exhibit 2: Energy Storage Technology Maturity
Source: Electric Power Research Institute (EPRI)
Mature storage technologies include lead-acid batteries,
compressed air energy storage (CAES), pumped storage
hydro (PSH), flywheels and lithium ion batteries. With
better performing technologies, traditional lead acid
battery sales for the stationary market have waned and
flywheels have suffered vendor attrition. While CAES and
PSH have been employed at scale, they are only applicable
where the geography or geology is appropriate. Lithium ion
battery costs have experienced, and are predicted to
continue rapid price declines driven by economies of scale
primarily from their use in vehicular applications, and
learning curve effects resulting in strong competition both
with other storage technologies and between lithium ion
battery vendors. Driven by these changing economics,
EPRI opines that lithium ion batteries will be the dominant
battery technology for at least another decade and perhaps
beyond 2030. Based on this view and the emerging ubiquity
of lithium ion battery technology, the battery investment
analysis presented later in this paper is focused on lithium
ion battery technology.
Several battery technologies are beginning to show
promise, though maturity remains some years away.
Perhaps most notable is the class of flow batteries, led by
vanadium redox batteries, an example of which was
recently installed for Avista in Washington State. Flow
batteries offer better cycling, greater longevity, essentially
no cell degradation, and are more customizable than Li-Ion
batteries; however, their size limits them to stationary
applications, which limits application and may ultimately
extend the time needed to meet the scale required to
sufficiently lower costs. Both Sodium Ion and Metal-air
(zinc-air, lithium-air) batteries are also making progress,
though the technology is nascent.
Storage End Uses and Value Streams
As mentioned briefly, storage applications can range from
very short duration requirements like frequency response
and regulation, operating and planning reserves, to longer
term needs of energy management (e.g., to store energy
from renewable resources generated in off peak periods an
consume it during on-peak periods). Exhibit 3 indicates the
rated power and discharge time for each key storage
technology available to meet the system frequency
response and regulation, operating and ramping, and
energy management needs. As shown, Li-Ion batteries are
quite versatile in terms of the range of applications they
capture. For example, such batteries can respond quickly
(seconds) to cover frequency response and regulation
needs with small storage sizes and at the same time cover
longer duration storage needs where speed of response is
less critical. Flywheels, on the other hand, can provide an
even quicker speed of response and hence are ideal for
frequency response applications but the storage duration
or capability is much smaller.
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Deciphering the Energy Storage Value Propositon | White Paper
Exhibit 3: Battery Energy Storage Capability
Source: EPRI, Pace Global
As discussed above, energy storage may serve three generic
system needs - frequency response and regulation,
operating and ramping, and energy management. By
applying storage in either the transmission, distribution, or
customer portion of the electric delivery system, the energy
storage owner/ operator may solve one or many system
issues and in doing so, earn revenues from supplying
multiple service to the grid. For example, in some
jurisdictions batteries are paired with renewables to supply
quick power bursts to network segments thereby assisting
in frequency response when, for instance, clouds pass
overhead. After that burst, additional slower acting higher
power resources step in to maintain system frequency.
Energy storage applications in the transmission and
distribution systems are sometimes termed “utility scale” or
“in front of the meter” solutions, while those sited with
consumer facilities are often termed “behind the meter”
solutions. Storage applied in transmission infrastructure
4
support the bulk delivery of electricity, ancillary services,
and infrastructure weaknesses. When added in the
distribution systems, storage may also support a challenged
infrastructure, as well as enhance customer energy
management. When applied “behind the meter”, storage
may improve energy quality, support local infrastructure, or
help to reduce customer energy costs.
Exhibit 4 represents the range of potential storage
applications (end uses) across the electric delivery system.
A storage system could earn revenues from several sources,
depending upon where it is placed in the system
(geography), what services the system is designed to serve
(design), the market in which the system operates (market),
type of owner (owner), and incentives. As the color coding
in Exhibit 4 indicates, there are several common storage
value themes including: upgrade deferral, voltage/ VAR
support, power quality, reliability, load time shifting, and
renewable firming.
White Paper | Deciphering the Energy Storage Value Propositon
Exhibit 4: Battery Energy Storage End Uses
Each storage theme is discussed below in Exhibit 5.
Exhibit 5: Battery Energy Storage Application
Service
Definition
Concept
Commercial Sample
Upgrade Deferral
(non-wires alternative)
Apply storage in lieu of a
delivery system upgrade or
replacement
Rather than replacing an aging
transformer on a ‘like-for-like’ basis,
install a battery on the low side of
the transformer to augment peak
supply thereby reducing the peak
loading and the cost of the replaced
transformer.
Con Ed’s Brooklyn-Queens
Demand Management
project 1
Value Proposition
Very high cost of traditional
upgrade; speed of
installation
Voltage and VAR
Management
Reduce electric line losses
and increase grid efficiency
Fast acting storage placed in the
distribution system combined with
global and local dynamic VAR
controls to control voltage
variations.
Part of NSP Belle Plaine
Solar/ Battery project 2
Provides multipurpose flexibility
unlike capacitor-only
additions
Power Quality
Frequency regulation
Apply storage rather than other fast
acting technologies to maintain
system frequency
NEC Energy Solutions PJM
regulation system 3
Provides multipurpose flexibility
unlike capacitor-only
additions
Reliability
Augment system capacity
to increase reliability
Installed in the transmission,
distribution, or customer location to
support one or many customers
AES San Diego and SCE
peaking system ( in
response to Aliso Canyon
gas leak) 4
Reliability; Speed of
Installation
Load Shifting
Energy arbitrage
Charge battery during off-peak and
discharged during on-peak/ superpeak. Requires spread between on
and off peak energy. Also relevant in
systems with high renewable
curtailment.
PG&E Yerba Buena Battery
Energy Storage System
(BESS) pilot 5
‘buy low sell high’
Renewable Firming
Use storage to reduce
variability of renewable
generation
Combine storage with renewable
generation to ‘firm’ otherwise
variable renewable generation
creating a dispatchable carbon-free
energy source
AES Hawaii solar/ storage
system 6
Create dispatchable
resource
http://www.utilitydive.com/news/coned-awards-22-mw-of-demand-response-contracts-in-brooklyn-queens-project/424034/
http://www.minnelectrans.com/documents/Grid-Modernization-Report-NSP.pdf
3 http://www.utilitydive.com/news/nec-energy-solutions-plans-60mw-of-storage-for-pjm-market/398142/
4 http://aesenergystorage.com/category/pressreleases/
5 http://www.utilitydive.com/news/pge-completes-battery-system-performance-pilot-project-in-caiso/430336/
6 https://www.greentechmedia.com/articles/read/aes-puts-energy-heavy-battery-behind-new-kauai-solar-peaker
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Deciphering the Energy Storage Value Propositon | White Paper
Fundamental Economics of Storage
As discussed in the previous section, storage applications are
numerous. However, based on current capital costs, energy
storage economics are typically only attractive when multiple
value streams are realized. This ‘revenue stacking’ is often
necessary to meet or exceed investment hurdle rates in
battery energy storage applications. The section below
discusses the various factors that affect energy storage value.
Capital Costs: Battery capital costs have fallen by 33 percent
over the past 5 years. Costs are expected to fall by another
40-50% over the next 5 years 7. Most cost declines occurred
in the cell costs, but the costs of the DC to AC power
conversion and battery management systems have declined
as well. Capital costs materially impact battery investment
returns as demonstrated in the case studies below.
Availability of Federal Tax Credits and Accelerated
Depreciation: Energy storage qualifies for accelerated
depreciation as a 7 year property. In terms of federal tax
credits, energy storage does not qualify for investment tax
credits (ITC) on a standalone basis, or if added to a solar
system after the solar installation was completed. However,
if the battery is installed simultaneously with a solar
installation, the energy storage portion and the solar portion
then qualify for ITC. The qualification is based on IRS private
letter rulings. Exhibit 6 depicts the ITC eligibility based on
ownership and grid supply criteria.
Exhibit 6: Battery Energy Storage Tax and Depreciation Eligibility
Source: NREL
Recently, legislation was introduced to enable energy
storage to capture ITC benefits on a standalone basis, similar
to the solar ITC schedule. All forms of energy storage will be
eligible as long as they are at least 5 kW in capacity. If
smaller than 5 kW, they may qualify for credit by aggregating
with other storage resources.
Incentive Payments: Several states such as California and
New York provide Self Generation Incentive Payments (SGIP) 8.
For example, Southern California Edison (SCE) provides a
base SGIP payment of $1.30/W for systems between zero and
1 MW. The incentives reduce to 50% of base for systems
between 2 and 3 MW, and 25% of base for systems larger
than 3 MW. The eligibility is based on either a standalone
energy storage system or one paired with solar. ConEd in
association with NYSERDA has developed a demand
management program that provides incentives capped
at 50% of the installed battery energy storage costs. 9
6
Regional Differences and Participation in Wholesale
Markets: Availability of incentives and access to revenue
streams is market dependent. For example, in New York and
California, reduction of residential and commercial demand
charges may serve as a significant revenue stream. These
benefit streams may not be available in other regions.
Reg. D 10 requirements in PJM and other ISOs created a
demand for energy storage during the early years of BESS.
However, regulation prices are market dependent and may
vary from year to year based on market demand and
competition amongst resources.
Wholesale capacity market regimes and clearing prices will
likely influence battery economics once energy storage
becomes eligible to participate in the wholesale energy and
capacity markets. FERC recently issued a Notice of Proposed
Rule-making (NOPR) directing ISO’s to propose guidelines
under which storage can participate in wholesale energy
and capacity markets. 11
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Price Certainty: Uncertainty in pricing of the several
market driven revenue streams such as capacity prices and
frequency regulation may make financing BESS projects
more challenging. More predictable revenue streams such as
long term contractual capacity payments tied to a peaking
application will likely improve the financial viability of
energy storage projects. For example, front of the meter
BESS projects that recently came online in the SCE and
SDG&E in response to reliability issues have a contractual
capacity payment. Altagas, that was selected by SCE to build,
own, and operate a 20 MW x4 hour storage system 12 will be
paid fixed monthly resource adequacy (RA) payments for a
period of 10 years 13. The project will also retain the right to
earn energy payments if called upon by the CAISO. However,
RA payments in California can vary from year to year similar
to capacity prices in centrally administered capacity markets
but can be higher in more constrained zones.
Ownership and Control: The ownership of BESS systems
can impact both the value and flexibility of BESS. Different
ownership models include utility ownership, private
ownership, or customer ownership. Some argue that utility
ownership can optimize operation of distributed storage
resources and provide an incentive for utilities to rate base
storage investments. However, operation of BESS should be
agnostic to ownership. In NY, utilities are being asked to play
the role of a distribution platform provider. Most of the 100
MW utility scale storage installations in 2016 were owned by
non-utilities and a vast majority of installations occurred in
ISO regions. This is also true for projects under development.
This is partly because utilities have little experience with
owning and operating BESS. As BESS becomes more
mainstream, we are likely to see increased utility ownership.
A number of utility pilots currently are focused on
distribution or transmission deferment.
Storage Valuation Case Studies
To evaluate battery storage economics, a cash flow model
was developed to determine the levered internal rate of
return (IRR). Three applications were considered; two behind
the meter installations, one in PJM and the other in NYISO;
while the third was an in front of meter application in NYISO.
All batteries were long duration (4 hour storage). The
analysis assumes that multiple revenue streams are
simultaneously available with the market rules being
supportive of the battery earning these revenue streams.
The analysis further considers the practical aspects of
battery operation by assuming that hours reserved for
capacity applications are not available for other non-capacity
end uses or applications.
The dominant revenue stream in PJM (Case 1) was demand
charge reduction (DC), while frequency response was a
secondary stream (FR). In NY, for the first application (Case 2),
the primary revenue stream was demand charge (DC)
reduction with day-ahead demand response (DADR) being the
secondary application. For the second NY application (case 3),
installed capacity was the primary revenue stream, with
energy arbitrage and substation deferral being the secondary.
New York also provides incentives payments for behind the
meter applications. These were recognized and evaluated,
but not considered in the summary graphic below.
The analysis considered a number of performance and cost
elements such as extended warranty expenses, fixed costs,
cell replacement costs, charging costs, and other factors.
The economic analysis assumed a system life of 15 years.
However, due to cell degradation prevalent in Li-Ion
batteries, cell life is generally limited, and for this analysis a
cell life of 8 years was assumed and cell replacement costs
were considered. The battery investment is considered viable
if the achieved return exceeded the target of 14%, a typical
hurdle for merchant investors. The target return was based
on expected after tax cost of equity returns assuming that
battery storage cash flows are exposed to merchant risk.
The target returns may be smaller if the battery application
involves a long term PPA with a credit-worthy counterparty.
Exhibit 7 illustrates the project levered after tax returns for
various end-use applications. For each use case, sensitivity
analyses displayed the impact of capital costs on project IRR.
As expected, project IRRs increase with declining capital
costs with current capital costs assumed to be approximately
$500/kWh for a 4 hour duration battery 14. The NY use case
focused on ConEd (Case 2), target returns are achieved at
higher capital costs relative to the PJM case because the
higher demand charges in the ConEd region ($240/kW-yr.)
relative to PJM ($130/kW-yr.) provide greater revenue. In PJM
and in the other NY use case (Case 3), the target returns
are achieved when capital cost fall below about 40-50%
of current costs. In Case 3 with the primary use being an
installed capacity resource, target returns are achieved at
approximately 45% lower costs despite accessing three
revenue streams. This is partly because of lower wholesale
installed capacity payments during the winter months
(average annual payments being $90/kW-yr.) and energy
arbitrage revenues being materially smaller relative to the
installed capacity revenues.
Beyond application and market, several other factors may
impact battery economics. Sub-station deferral revenues can
be high in certain cases resulting in attractive returns, but
these are extremely location specific 15. Access to incentives
also plays a key role in achieving target returns, but as
capital costs decline, the need for incentives also declines.
Battery cell degradation, often overlooked in battery
economic calculations, can materially impact expected
returns. If cell augmentation costs are considered, project
IRRs were lower, but the impact of cell degradation is
minimized as capital costs decline.
A key takeaway from the analysis is that battery storage
broadly can be financeable on a merchant basis when capital
costs decline by about 50% relative to current levels. Given
the large price declines seen over the past few years and
continued expected declines; this is potentially achievable
over the next 5 years.
Source: Pace Global proprietary learning curve model. 
SGIP ( Self Generation Incentive Payment) Note that Pacific Gas and Electric and San Diego Gas & Electric also administer the SGIP.
 9 Battery energy storage systems is one of the eligible technologies along with others.
10 PJM’s Reg D is designed for fast ramp units such as storage and can provide mileage at a much faster rate than conventional generation.
11 In response to the NOPR, NYISO recently issued a blueprint for the participation of DER (including storage) in the wholesale markets.
12 The battery capital costs are in the range of $2000/kW or $500/kWh.
13 https://www.sce.com/NR/sc3/tm2/pdf/3455-E.pdf
14 A capital cost of $600/kWh was assumed for the Coned service territory.
15 The BQDM project in the Coned service territory had substation replacement costs of $1.2 Billion for a 60 MVA capacity. This translates to
$20,000/KVA. The auction cleared at $985/kW-year with 22 MW of DER offers accepted. However, for this analysis, substation replacement
costs of $2000/kVA were assumed which is more typical outside of densely populated areas.
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Deciphering the Energy Storage Value Propositon | White Paper
Exhibit 7: Summary of Case Study Results
Source: Pace Global analysis
In conclusion, while the industry has known for some time
that from a technical perspective, energy storage will likely
disrupt the energy industry in many ways, it is only just
now that battery economics are beginning to reach levels
sufficient to attract substantial capital. As capital costs
decline over the next five years and resultant investor
returns grow, battery projects across a multitude of
applications and markets will be viewed as economically
appealing. The electricity storage industry has potential to
disrupt the energy industry given the large cost declines
and changing regulations and customer needs. Costs
continue to come down and while battery energy storage
value proposition is currently tied to niche market
applications, multiple value streams, and incentives,
continued cost declines over the next few years and
lowering of regulatory and market barriers will enable
the battery energy storage market to take off.
Pace Global, A Siemens Business
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Subject to change without prior notice.
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©2017 Siemens Industry, Inc.
Subject to changes and errors. The information given
in this document only contains general descriptions
and/or performance features which may not always
specifically reflect those described, or which may
undergo modification in the course of further
development of the products. The requested
performance features are binding only when they are
expressly agreed upon in the concluded contract.