What follows is an introduction to the concept of benefits associated with energy storage. The emphasis is on the following:
- Individual benefits that could be associated with storage use, including reduced or avoided costs and increased profit and
- Combinations of those individual benefit “building blocks” (value propositions) that underpin specific applications.
Readers should note the important distinction between three related terms: applications, benefits, and value propositions. In general terms, an application is a use, a benefit connotes value, especially quantifiable financial value and a value proposition involves a combination of two or more benefits.
To some extent, the terms application and benefit are used interchangeably. However, it is helpful to maintain a crisp distinction between the two. That is because benefits – when compared to costs – indicate the financial attractiveness or viability of an alternative and applications indicate the way that the storage is used.
Storage Benefit Bases
A benefit from energy storage (storage) may have one of two fundamental forms:
- Avoided cost, or
- Additional revenue received by the storage owner/operator.
Gross benefit reflects the total amount saved/received irrespective of cost. Net benefit – or value – reflects benefit minus cost.
There are three key forms of avoided cost. First, if storage is the only viable alternative, then avoided cost involves the negative outcomes associated with the doing nothing alternative. Next, the avoided cost for storage used in lieu of a conventional/standard solution is the cost that would have been incurred for the conventional/standard solution including purchase, installation, operation, removal and disposal, etc. Finally, if there are several viable alternatives, then the avoided cost is the cost for the alternative with the lowest total cost.
Consider some examples of avoided cost associated with storage use. Benefits from additional revenue include payments received for energy sales, electric supply capacity and ancillary services provide. If storage is used in lieu of generation transmission and distribution (GT&D) equipment then the avoided cost is related to the utility’s deferred or reduced need for GT&D capacity additions. For an electricity end-user using storage to reduce an electricity bill the benefit is reduced cost for energy and/or demand charges and if the end-user uses an uninterruptible power supply (UPS) the benefit is the cost that would have been incurred during electric service outages without the UPS such as lost employee productivity and lost sales.
Introduction to Value Propositions
A value proposition is one or more storage uses whose financial benefits are combined – known in some realms as “benefits stacking.” A viable or attractive value proposition is one for which the combined value of benefits exceeds the cost including the required return on investment.
In some cases, a single benefit is significant enough for a viable/attractive value proposition. However, in most cases two or more benefits must be combined for total benefits exceed total cost. So the concept of combining or stacking of benefits – into a viable/attractive storage value proposition – is important.
An important concept is benefits compatibility: benefits must be both technically and operationally compatible if they are to be stacked. A combination of benefits is technically compatible if the storage system has all technical characteristics necessary to perform as needed when used for all of the targeted benefits. Benefits are operationally compatible if there are no operational conflicts that arise when used for the respective benefits (i.e., no conflicts occur because the storage’s output is needed for more than one benefit.)
The quantitative value of many storage benefits can be assessed. For example, if storage is used in lieu of generation equipment then the primary benefit is the avoided cost for the generation. However, there are several storage benefits that are:
- Not easily quantified,
- Are “diffuse” (i.e.,spread out among many stakeholders), or
- Cannot be quantified at all (i.e., qualitative benefits).
Some benefits cannot be quantified because there is no experience with them and for others current conditions in electricity markets do not provide adequate “price signals” that reflect the full value that storage could provide. Diffuse benefits are challenging because they are so modest for the many stakeholders that no one or few stakeholders has enough financial incentive to pursue them.
Consider some examples. Storage use may reduce the total amount of air emissions from electricity generation. However, there are no strong price signals in the electricity marketplace reflecting the cost for pollution. Storage use may also reduce the total amount of fuel used for generation but for any specific end-user the benefit is too trivial to matter.
Nonetheless, it is important to include these qualitative and less quantifiable benefits – at least informally – when characterizing value propositions because those less quantifiable benefits may still convey importance to stakeholders such as utility regulators and policymakers. And, as the electricity marketplace evolves it is likely that price signals will improve.
Benefits and Value Propositions are Circumstance-specific
It is quite important to note that the values of individual benefits that comprise a specific value proposition are somewhat-to-very circumstance-specific. The value of any specific benefit may vary based on several notable criteria such as:
- The utility electric supply generation equipment and fuel mix,
- The characteristics of the utility T&D systems and
- The types and numbers of end-users and end-use equipment being served.
Conclusions & Observations
The importance and attractiveness of energy storage as an integral part of the electrical supply, transmission and distribution systems is receiving increasing attention by a wide range of stakeholders including utilities, end-users, grid system operators and regulators. To evaluate and quantify that “importance” and “attractiveness” requires an assessment and quantification of specific benefits and a characterization of specific value propositions.