Energy Storage for Utilities: Is It Better to Own or Contract a Battery Storage System?
“The energy storage industry will begin significant multiyear growth in 2021, continuing until 2030, as the technology begins to form a core component of power grids in developed markets.” Source: George Hilton, IHS Markit
“Energy storage costs declined 72% between 2015 and 2019.” Source: EIA
As recently as five years ago, utility-scale energy storage, also known as a battery energy storage system (BESS), was out of reach for many utilities, particularly electric cooperatives and municipal utilities due to a lack of familiarity with the technology and the high cost of the systems. But as is often the case with leading-edge technologies, familiarity increases and prices decrease over time (i.e. solar). Today, battery storage offers utilities a proven way to reduce wholesale demand and energy costs, increase capacity, improve reliability, support renewables integration and defer transmission upgrades.
If you are considering adding energy storage to your portfolio, you are in good company. Energy storage is gaining momentum across the utility sector as a way to reduce costs and increase reliability for community members. While the merits of energy storage for utilities are well documented, the benefits typically fall into the following five buckets:
1. Cost Savings: Batteries allow power to be deployed at the most strategic times, insulating utilities against rising wholesale demand and energy costs. Batteries can store electricity when it is cheapest and dispatch it when it is most expensive, reducing costs for customers.
2. Reliability: Batteries improve the reliability of electricity by “firming” renewable resources on the grid, particularly solar. Batteries can store surplus power produced by solar energy and inject it back onto the grid when there is a deficit or when it is economical to do so.
3. Capacity: Battery storage increases the capacity by providing stored electricity to the grid at the times of highest demand.
4. Deferral of Transmission Upgrades: Energy storage can be used as a Non-Wires Alternative (NWA) by using the storage to increase capacity and defer the need for costly capital transmission and infrastructure upgrades.
5. Sustainability/Future-Proofing: In some cases, battery storage can replace the need for peaker plants by injecting power onto the grid when it is most needed, in sub-seconds. In addition, batteries can be paired directly with solar energy, (“solar-plus-storage”) and charged by solar PV or enable more solar to be deployed on the grid.
But you likely know all this already. As you consider procuring a battery storage system, you face a big decision: Is it better to own a battery-storage system, procured from a manufacturer, or enter into a contract and partner with a developer that owns and maintains the system?
Both approaches have distinct advantages with their own risks and rewards.
Owning vs. Contracting
Battery energy storage systems are complex and require 24/7 monitoring and alerting. All systems require annual maintenance, and many require quarterly or monthly maintenance. To help you evaluate whether owning or contracting is right for your utility, below is a checklist that compares the roles and responsibilities under both options:
As you’ll see, the key benefit of buying and owning your battery storage system outright is that you can reap the full economic benefit of the resource if the system is optimally operated. This requires trained personnel—not only operate the system—but also to maintain it.
Unlike solar or wind, a battery needs to be actively managed and monitored to deliver optimal performance (and value). If successful, however, this can amount to additional savings to the tune of seven figures to your utility and customers. The downside is that the added value is not guaranteed and comes at a literal—and figurative—price in the form of added risk, responsibility, and capital.
If your utility chooses to buy the battery storage system, you will
need the upfront capital to make the investment. For some utilities, this is a nonstarter. For others, it is appealing. If your utility has earmarked funding for other projects, investing millions of dollars today in a battery storage system may not be feasible. Buying the system also involves waiting for a longer-term payout (i.e. 10-20 years), whereas if you contract you can realize savings from day one.
The takeaway on buying and owning the system: While there is potential for greater reward—that reward is not guaranteed and there is certainly greater risk.
For a majority of electric cooperatives or municipal utilities, with less available capital or personnel than IOUs, contracting out the management and maintenance of a battery storage system may make more sense. Economically, contracting provides an immediate upside (delivering savings from day one) but, over time, may not deliver the same savings if owned outright (note: whether you own or contract the system you’ll realize savings). Here’s why:
When you engage a partner to contract for the battery, the developer finances the system and assumes the financial risk. The utility pays nothing upfront for the storage system; the provider absorbs those costs and insulates the utility from risk (construction, performance, maintenance, etc.)
The following chart highlights typical financial returns over time of both the “owned” and “contract” models.
In some cases, such as for a utility in Massachusetts planning to use the battery to peak shave capacity and transmission peaks in ISO-NE, modeling showed greater total savings from contracting with Convergent than procuring the system directly. When degradation of the system was taken into consideration, this utility could realize greater total savings under a contract versus ownership model.
For utilities in a strong financial position to invest in owning a battery system, buying batteries outright may seem like a no-brainer after viewing this chart, but there’s more to the story. This is because a battery that is not properly maintained and operated is just a giant paperweight!
Many utilities choose to dispatch the systems in-house or coordinate with an expert advisor, such as their joint action agency or energy management firm. When thinking about this option, utilities should also seek out a partner that can also consult on battery storage operations and provide guidance on optimal times to dispatch.
Whether a utility chooses to dispatch directly or depend on a partner to dispatch, it is important to consider expertise beyond when to charge and discharge a battery. An experienced energy storage provider should be operating hundreds of megawatts of energy storage, which can lead to better pricing with preferred vendors along with greater expertise on system design, operations, and maintenance. A good partner will also offer industry best practices and provide best-in-class ideas to your project that you might not have considered.
The Choice Is Yours (But the Time is Now)
Whether you are an electric cooperative, municipal utility, or IOU, energy storage is likely part of your strategic plan, or soon will be. In our experience as a leader in the energy storage space, the decision to buy a battery storage system versus partnering with a provider and contracting for its services is one of the biggest you will face, but it is ultimately an individual decision that each utility will need to evaluate.
Do you have a large capital budget, available staff ready to learn new skills, an appetite to take on cost overruns associated with constructing and maintaining the battery storage system, and existing battery storage and/or solar-plus-storage expertise? If so, buying the system and assuming all the risk to maximize your long-term returns may make the most sense.
If this is not the right time for you to make a large capital investment in energy storage and/or you lack the internal resources to manage and maintain the asset optimally, it may be in your interest to rely on the expertise of a partner who can guarantee your returns and ensure your system is always delivering peak performance.
Either way, the time is now for energy storage to bring your customers costs savings, added capacity and resilience, and a greener way of powering the people in your community.
Waiting is the only wrong decision.
To learn more and explore the benefits of energy storage for your utility, please get in touch.