Battery storage systems for peak load shaving

applications
Part 2: Economic feasibility and sensitivity analysis

Enrico Telaretti, Luigi Dusonchet

DEIM
Università di Palermo
Palermo, Italy
telaretti@dieet.unipa.it; dusonchet@dieet.unipa.it

Abstract—This paper is the second of a two-part series,
aiming to evaluate the economic feasibility of electrochemical
storage systems in peak load shaving applications. The battery
energy storage system (BESS) is considered to be added to a
private facility, with the aim of reducing the customer electricity
bill. The BESS is charged during the night, when the electricity
prices are the lowest and discharged during the daily hours,
when the prices are the highest, contemporary achieving a
leveling of the daily usage pattern. The economical evaluations
are carried out considering four different electrochemical
technologies: lithium-ion (li-ion), advanced lead-acid, sodium-
sulphur (NaS) and flow batteries. First, the total costs and
savings are estimated, calculating the net present value (NPV)
and the internal rate of return (IRR) for each BESS technology.
The economic indexes are calculated referring both to 2015 and
to the estimated 2020 BESS prices. Second, a parametric analysis
is carried out to investigate the effect of several parameters on
the economic feasibility of installing a BESS. The considered
parameters are: i) the gap between high and low electricity
prices; ii) the peak demand charges; iii) the BESS investment
costs. The economic analysis reveals that none of the BESS
technologies are cost effective at the current BESS prices, without
incentives, but the situation could already change in 2020 thanks
to the sharp cost decline expected in the coming years.
Keywords—battery energy storage; peak load shaving; demand
charges; technical-economical evaluation; parametric analysis
I. INTRODUCTION
In the last decades, renewable energy sources (RESs) have
been supported by many policy and regulatory initiatives.
Driven by generous incentives implemented by Governments
in different countries, wind and photovoltaic (PV) power plants
have been installed at unprecedented rates [1-5]. However,
higher penetration of RES energy may cause challenges to the
stability and reliability of the power system, because of the
fluctuating nature of renewable energies [6]. The risk of
reliable supply of electricity can be reduced using stationary
energy storage systems (ESSs), providing flexibility to the
power system. Battery energy storage systems (BESSs), among
ESSs, offer additional benefits to the power grid due to their
peculiar characteristics such as versatility, modularity,
scalability, fast response time, etc.. BESSs can also provide the
ancillary services necessary to the proper operation of the
power system. Furthermore, the decreasing cost of such
technologies is spurring the development of BESSs in the
electricity sector, although several problems remain to be
solved, such as safety issues, regulatory barriers and utility
acceptance [7].
Although their significant advantages, BESSs are not yet
competitive, and their deployment within each country is
mainly driven by support policies and Government incentives
[8,9]. In the last years, several projects are being deployed
worldwide, for different applications [10]. They are typically
composed by the battery bank and the electronic devices,
necessary to ensure a proper interconnection and a reliable
control system, according to national technical specifications
[11-15]. Other than providing ancillary services, BESSs can
also be used by residential, commercial and industrial users to
shift portions of the load from on-peak to off-peak hours, also
contributing to relieve peak demand charges, thus ensuring a
saving for the customer. This can be obtained if the electricity
user is billed through demand reflective energy pricing
schemes, such as the time-of-use (TOU) tariff, typically
involving two or three billing periods (on-peak, mid-peak and
off-peak periods), reflecting the different costs associated to the
electricity production throughout the day. This application, also
known as energy arbitrage, consists in buying inexpensive
energy at off-peak hours, through battery charging, and
reselling it back to the grid a few hours later, at a higher price,
through battery discharging. If the gap between on-peak and
off-peak prices, added to the saving from the reduction of peak
demand charges is enough to compensate for the BESS losses
and for the cost of the storage system, the use of the battery
will be profitable for the BESS owner [16].
This paper is the second of a two-part series, aiming to
evaluate the economic feasibility of electrochemical storage
systems in peak load shaving applications. The BESS is
considered to be added to a private facility, with the aim of
reducing the customer electricity bill. The BESS is charged
during the night, when the electricity prices are lower, and
discharged during the daily hours, when the prices are higher,
contemporary achieving a leveling of the daily usage pattern.
The economical evaluations are carried out considering four
different electrochemical technologies: lithium-ion (li-ion),
advanced lead-acid, sodium-sulphur (NaS) and flow batteries.

978-1-5090-2320-2/16/$31.00 ©2016 IEEE

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 Initially, the total costs and savings are estimated, calculating
the net present value (NPV) and the internal rate of return
(IRR), for each BESS technology. The economic indexes are
calculated referring both to 2015 and to the estimated 2020
BESS prices. Later, a parametric analysis is carried out, to
investigate the effect of several parameters on the economic
feasibility of installing a BESS. The considered parameters are:
i) the gap between high and low electricity prices; ii) the peak
demand charges; iii) the BESS investment costs.
The BESS has been sized in order to maximize the
customer load shifting benefit, simultaneously achieving the
flattest daily usage pattern, as already explained in the part 1 of
the two-part series. The case study focuses on a tertiary facility,
an office located in climatic zone E [17].
The remainder of the paper is organized as follows. Section
II reviews the current literature on the economic feasibility of
storage systems. Section III describes the mathematical
formulation, showing all the costs and all the profits to be
considered in the economic evaluation. Section IV shows the
simulation results. Finally, Section V summarizes the
conclusion of the work.
II. CURRENT LITERATURE
The evaluation of the economic feasibility of ESSs has
been addressed by many authors in the literature. Some authors
found that load shifting benefits are not sufficient to offset the
upfront investment cost of the storage systems, while other
authors found more promising results. As confirmed by [18], a
growing interest in electric load management is being observed
in the last years, with a fast obsolescence of older results. In
[19] the authors investigate the economics of NaS batteries for
arbitrage and flywheel for frequency control in the New York
state's electricity market. They find that both technologies have
a high probability of positive NPV for both energy arbitrage
and regulation. They also conclude that storage efficiency is a
primary factor for developing ESSs in a competitive electricity
market. In [20] Ekman and Jensen consider a number of large
scale electricity storage technologies in the Danish power
system, concluding that arbitrage revenues are significantly
lower than the estimated costs of purchasing ESSs. In [21]
Mulder et al. carry out a complete investment analysis, based
on real system prices and best future expectations, considering
the German tariff system. The analysis reveals that batteries
supporting household PV systems can already be cost-effective
today without subsidies, but without a return on investment, if
the electricity price does not increase more than the inflation.
However, if the electricity price increases by 4%, batteries
become quickly attractive and do not need subsidies. In [22]
Gabash and Li propose a combined problem formulation for
active-reactive optimal power flow in distribution networks
with embedded wind generation and battery storage. The
proposed solution ensures the feasibility and enhances the
profit significantly. In [23] the same authors extend the optimal
power flow method by developing a flexible battery
management system, where the daily charging/discharging
periods are optimized, leading to a complex mixed-integer
nonlinear program (MINLP). In [24] Santos et al. assess the
relevance of having distributed electricity storage capacity at
the residential level with the aim of optimizing self-
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consumption and mitigating the peak power flows. They find
that the use of ESSs can improve the residential energy
management, and the effects are strongly influenced by the
sizing and the operating strategy of the BESS. Bradbury et al.
[25] analyze the arbitrage revenue of seven real-time U.S.
electricity markets and 14 different storage technologies. They
find that the optimal profit depends largely on the technological
characteristics (BESS efficiency and self-discharge), rather
than the magnitude of market price volatility, which instead
affects the IRR. In [26] Purvins et al. analyze in technical terms
the application of BESSs for household-demand smoothening
in electricity-distribution grids. They find that BESSs with low
rated power and low battery capacity can smooth the demand
sufficiently with the aid of a simple management process.
However, higher battery-system capacity and power are
required to further smoothening the power diagram. In [27]
Park et al. evaluate the economic benefit of ESSs for peak load
shaving in the substation of urban railway, using the NPV
method. After developing a method to determine the capacity
of ESS and PCS (Power Conditioning System), they find that
economic benefits of ESS for peak load shaving mainly depend
on the BESS cost. In [28] Shcherbakova et al. evaluate the
economic potential for energy arbitrage using the Hotelling
rule, and determine a strategy for maximizing the value of the
BESS. They conclude that the current BESS costs are too high
to generate a sufficient amount of arbitrage revenue. In [29]
Zheng et al. evaluate the economics of providing peak shaving
demand response under realistic electricity tariffs in the U.S.,
using a range of storage technologies. They find that several
storage technologies provide profitable demand response and
that the annual profit can range from 1% to 39% of the
household’s non-demand response electricity bill. In [30]
Graditi et al. present an estimate of the economic benefit from
using BESSs for TOU energy cost management at a consumer
level, exploiting a simple operating strategy. The economic
benefit is estimated performing a parametric analysis, by
varying the capital cost of the batteries and the difference
between maximum and minimum electricity prices. In [31, 32]
the authors describe the application to a medium-scale public
facility of a simple BESS operating strategy which aims to
maximize the arbitrage customer savings in presence of real-
time electricity prices. The experimental evaluations highlight
how the power profile of the public facility changes as a result
of the proposed charging strategy. The battery operating
strategy has been further expanded and generalized in [33]. In
recent works [34], Qiangqiang et al. examine the electricity
pricing mechanisms of NaS batteries supporting peak shaving
in Shangai. They conclude that NaS batteries can be profitable
for peak shaving in Shanghai's electricity grid when the
construction cost decreases to 1000ௗyuan/kWh. They also assert
that the twofold electric power price mechanism is fitter than
the onefold energy price mechanism, when NaS batteries are
used.
III. ECONOMIC ANALYSIS
Initially, the cash flow generated in the generic year t, ‫ܥ‬௧‫ כ‬, is
calculated by algebraically summing all the costs, ‫ܥ‬௧ , and all
the profits, ܲ௧ :
‫ܥ‬௧‫ כ‬ൌ ܲ௧ െ σ௜ ‫ܥ‬௜ǡ௧ (1)
 The yearly profit, ܲ௧ , can be expressed as the sum of all the In addition, the self-discharge and the battery degradation
customer daily savings, ܲௗ : are neglected.
Table I shows the main operational parameters and the
ܲ௧ ൌ σଷ଺ହ
ௗୀଵ ܲௗ (2)
range of component costs for each BESS technology
(min/max). The BESS costs are updated to 2015 and derived
The customer electricity bill is normally composed by two
from [35].
main components, an energy charge component (€/kWh),
proportional to the consumed energy, and a capacity charge The estimated capital cost decreases are shown in Table II
component (€/kW), proportional to the maximum power draw. [35, 7].
Peak demand charges are typically calculated based on the
maximum demand during a given month. Thus, the daily The sizing and the BESS operating strategy have already
savings, ܲௗ , can be expressed as: been defined in the part 1 of the two-part series. The same
applies for the specification of the TOU tariffs and the demand
௖ೖೢ ήο௉ charges.
ܲௗ ൌ σଶସ ᇱ
௛ୀଵ ܿ௛ǡௗ ή ൫‫ܧ‬௛ǡௗ െ ‫ܧ‬௛ǡௗ ൯ ൅ (3)
ே೘೚೙೟೓
IV. SIMULATION RESULTS
where ܿ௛ǡௗ is the electricity cost in the hour h of the day d Table III shows a comparison of NPV and IRR values for
(€/kWh-day), ܿ௞௪ is the demand charge (€/kW-month), each BESS technology, calculated for each extreme value
ܰ௠௢௡௧௛ is the number of days in a month, οܲ is the reduction (min/max) of the investment and replacement cost range (last
ᇱ
in the maximum power draw during a given month, ‫ܧ‬௛ǡௗ ǡ ‫ܧ‬௛ǡௗ four rows of Table I). The economic indexes are referred both
are the hourly user's consumptions with and without storage, to 2015 and to 2020 BESS prices. As can be seen in Table III,
respectively. none of electrochemical technologies are profitable for peak
The total BESS cost, ்ܿை் , can be expressed as: load shaving applications at the current BESS costs. The only
BESS technologies approaching the break-even point are li-ion
௨ ௨ ௨ ሻ and flow batteries. In 2020 the situation could change, and the
்ܿை் ൌ ሺ‫ܥ‬௉஼ௌ ൅ ‫ܥ‬ௌ்ைோ ൅ ‫ܥ‬஻ை௉ ή ‫ܥ‬஻ாௌௌ (4)
li-ion electrochemistry will likely be the most convenient
௨
where ‫ܥ‬௉஼ௌ ௨
is the PCS cost, ‫ܥ‬ௌ்ைோ ௨
the storage cost, ‫ܥ‬஻ை௉ technology, thanks to the sharp cost decrease expected in the
the balance of plant (BOP) cost, expressed in p.u., and ‫ܥ‬஻ாௌௌ is next 5 years. Among the remaining BESS technologies, only
the capacity of the battery (kWh). flow batteries will be profitable, but at a lesser extent than li-
Once calculated all the costs and all the profits, the ion. NaS and advanced lead-acid batteries appear to be less
discounted cash flow, ‫ܥ‬௧ , can be expressed as: competitive, essentially because of their high cost.

‫ܥ‬௧ ൌ ‫ܥ‬௧‫ כ‬Τሺͳ ൅ ݆ሻ௧ (5) TABLE I. OPERATIONAL PARAMETERS AND COST COMPONENTS FOR
EACH BESS TECHNOLOGY

where j is the weighted average cost of capital (WACC). Li-ion Lead-acid Flow based NaS
More details about the economic analysis can be found in min max min max min max min max
[9].
Capacity (kWh) 3700
In the simulations, the following hypotheses are made: Power rating (kW) 800
• the estimated life of the BESSs is 10 years and the N. cycles per year 300
simulations are carried out assuming a 10 years
DOD per cycle (%) 80
reference period (replacement costs are neglected);
Project life (years) 10
• the annual electricity price escalation rate is neglected;
Roundtrip eff. (%) 91 93 86 86 72 77 75 76
• the WACC is assumed equal to 3%;
CuSTOR (€/kWh) 290 971 508 1750 223 910 380 1230
• the use of the storage device does not influence the
price of electricity in the energy market; CuPCS (€/kWh) 54 54 54 54 54 54 54 54

CuBOP (€/kWh) 51 153 85 270 42 145 65 193

• the battery performs a full charge/discharge cycle per
day, with a depth-of-discharge (DOD) equal to 80%; O&M cost (€/kWh) 4.5 12.5 13.4 51.8 3.6 27.7 9.82 29.5

• at the end of each charge/discharge cycle the battery

returns to the initial state-of-charge (SOC). Doing so the TABLE II. BESS CAPITAL COST DECREASE (2015-2020)
battery energy constraint is automatically satisfied, i.e.
Li-ion Lead-acid Flow based NaS
the storage level cannot exceed the rated energy
capacity of the device, at any time; 5-year capital cost
47% 24% 38% 6.5%
decrease
• the BESS operates at unity power factor.

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 TABLE III. NPV AND IRR FOR EACH BESS TECHNOLOGY 2 show, once again, that li-ion and flow batteries are the most
profitable technologies for peak load shaving applications, at
NPV (k€) IRR (%)
the current BESS costs. The other BESS electrochemistries are
2015 2020 2015 2020 less convenient, essentially because of their high cost. Indeed,
the breakeven point is not approached by lead acid and NaS
min max min max min max min max batteries, even when the electricity price ratio and the peak
Li-ion -3307 -170 -1234 526 - 0.67 -9.53 14.5 demand charge ratio take the highest values. Furthermore, the
IRR value appears to be more sensitive to the electricity price
Lead-
acid
-6832 -1241 -4944 -653 - -8.9 -21.8 -4.7 ratio rather than the peak demand charge ratio. This is
Flow essentially because the energy component has a greater impact
-3441 -130 -1841 325 - 0.81 - 10.8 on the electricity bill than the power component.
based
NaS -4733 -847 -4226 -546 - -7.3 - -6.2 C. Battery costs
As a further step, a parametric analysis is carried out to To take into account the variability of IRR with the BESS
investigate the effect of several parameters on the economic cost, the battery p.u. cost is made variable within the range
feasibility of installing a BESS. The considered parameters are: 0.2-1, as shown in Fig. 3, for each BESS technology. Fig. 3
i) the gap between high and low electricity prices; ii) the peak shows that a capital subsidy not less than 60% should be
demand charges; iii) the BESS investment costs. granted for li-ion technology, in order to have IRR values
greater than the WACC.
A. Gap between high and low electricity prices
k=2 k=3 k=4
To evaluate the variability of NPV and IRR from the gap 20%
between on-peak and off-peak electricity prices, the electricity
price ratio,݇, is defined: 10%
IRR (%)
஼ಷభ
݇ൌ (6) 0%
஼ಷమ

where ܿிଵ and ܿிଶ are the on-peak and off-peak electricity -10%
prices, respectively. Flow battery Li-ion
-20% NaS battery Advanced lead-acid
Fig. 1 shows the IRR for different values of the electricity
price ratio,݇. ܿிଵ and ܿிଶ have been selected, for each value of Fig. 1. IRR values versus electricity price ratio.
the electricity price ratio, keeping constant the average value
between ܿிଵ and ܿிଶ : h=1 h=2 h=3 h=4
15%

‫݁݃ܽݎ݁ݒܣ‬ሺܿிଵ ǡ ܿிଶ ሻ ൌ ͲǤʹʹͷ (7) 10%

The IRR values have been calculated referring to the 5%

IRR (%)

maximum BESS cost values (updated to 2015).

0%
B. Peak demand charges
To take into account the variability of economics indexes -5% Flow battery
with the peak demand charges, a further parameter is Li-ion
-10% NaS battery
introduced, referred as peak demand charge ratio, ݄: Advanced lead-acid

೓ Fig. 2. IRR values versus peak demand charge ratio.

஼ೖೈ
݄ൌ (8)
஼ೖೈ
BESS cost (p.u.)
௛
where ܿ௞ௐ is the parametric value and ܿ௞ௐ the reference 0.2 0.3 0.4 0.5 0.6 0.7 0.8 0.9 1
value of the peak demand charges. The variability of the peak 30%
demand charge ratio has been obtained keeping constant the
20%
reference value of the peak demand charges:
10%
ܿ௞ௐ ൌ ͷͲ€Ȁܹ݇ ή ‫ݎܽ݁ݕ‬ (9)
IRR (%)

0%

Fig 2 shows the IRR for different values of the peak -10%
demand charge ratio, ݄. Peak demand charge reductions have -20%
been calculated assuming a power profile perfectly flattened in Flow battery Li-ion
shoulder seasons, as defined in the part 1 of the two-part series, -30%
NaS battery Advanced lead-acid
and the IRR values have been calculated referring to the
maximum BESS costs values (updated to 2015). Fig. 1 and Fig. Fig. 3. IRR values versus BESS cost (p.u.).

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 V. CONCLUSION
This paper is the second of a two-part series, aiming to
evaluate the economic feasibility of electrochemical storage
systems in peak load shaving applications. The BESS is added
to a private facility, billed through a TOU tariff, with the aim
of reducing the customer electricity bill. The BESS is charged
during the night, when the electricity prices are lower and
discharged during the daily hours, when the prices are higher,
contemporary achieving a leveling of the daily usage pattern.
The economical evaluations are carried out considering four
different BESS technologies: li-ion, advanced lead-acid, NaS
and flow batteries. Initially, the total costs and savings are
estimated, calculating the NPV and the IRR for each BESS
technology. The economic indexes are calculated referring both
to 2015 and to the estimated 2020 BESS prices. Later, a
parametric analysis is carried out, to investigate the effect of
several parameters on the economic feasibility of installing a
BESS. The considered parameters are: i) the gap between high
and low electricity prices; ii) the peak demand charges; iii) the
BESS investment costs. The analysis reveals that none of the
BESS technologies are cost effective at the current BESS
prices, with li-ion and NaS batteries approaching the break-
even point. The situation could already change in 2020 thanks
to the sharp cost decline expected in the coming years,
especially for the li-ion technology. Simulation results also
show that, at the current BESS costs, a capital subsidy not less
than 60% should be granted for li-ion technology, in order to
have IRR values greater than the WACC.
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