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Power Storage Contracts: Clearing Away The Smoke

July 18, 2016

Summer 2016

On-site power storage is becoming a realistic possibility. However, as with most opportunities to cut energy costs, the devil may be in the contractual details. If contract terms are not specified clearly, it could be a bunch of hocus pocus.

The cost of battery power (measured in dollars per storable kilowatt-hour, $/kWh) has been rapidly falling. The cost of solar panels has also dropped, making its renewable power competitive, after the inclusion of incentives and subsidies. But solar panels only generate power when the sun shines. If some of that power could be stored, it may help trim a building’s peak load and provide off-peak power.

To make that happen, some states or utilities have been offering large financial incentives for batteries. The Demand Management Program (DMP) in New York City (which closed June 1, 2016) gave $2,100 per kW for units providing four hours of continuous power. Similar incentives were offered in California. Amortized across that duration, those rebates essentially covered the base cost of a battery, which is often the biggest ticket item in a power storage system. In both states, expanding use of on-site solar generation and changing power use patterns are creating localized problems that could be addressed by large batteries. Where such programs are available, facility managers are looking at contracts for power storage systems.

Unlike solar power purchasing agreements (PPA) that sell solar kWh over a long-term commitment, a power storage agreement (PSA) is essentially an equipment lease. Essentially, you pay a flat fee for use of the device, to perform whatever tasks are desired, and the developer installs and maintains it.

Dollar savings may come from storing either solar or off-peak grid power to use later for:

  • Peak demand and capacity charge reduction
  • Load shifting
  • Demand response programs
  • Emergency backup power

This is an exciting innovation, but as with all contracts, it pays to sweat the details. One developer agreed to install its system and charge a flat monthly fee. For a 375 kW module, the lease payment was $1,000 a month with a 10-year term. Each module stores 1,500 kWh (i.e., four hours of continuous output) per discharge cycle, yielding about $80 per storable kWh. To make that possible, all utility, state, and tax incentives go directly to the developer.

Assuming that the battery is used each weekday to cut peak demand, a total of 375,000 kWh would be stored and released each year. That averages out to $.032 to merely store and recover a kWh. The lease does not guarantee any savings, though (for an extra cost) a developer may offer software and services to optimize battery operation, which also does not guarantee any savings.

To ensure savings exceed leasing costs, a facility manager needs to consider several issues:

Quality of output – All claims must be in AC kilowatts, measured at the output of the battery’s inverter, which converts battery DC output to AC. Consistency of power waveform and voltage, power factor, harmonics, etc. should reference the Institute of Electrical and Electronics Engineers (IEEE) specs for power quality. A proviso is needed to address failures to remain within them.

Costs not covered in the lease – As with a backup generator, a battery needs to be integrated with existing electric services: automatic transfer switch, power monitoring, automatic dispatch, security, fire detection, and safety (the New York City Fire Department will only allow lithium-ion batteries to be located outdoors), utility interconnection, permitting, inspections, etc. Unless otherwise stated in a contract, all must be paid by the customer.

Monitoring and continuity of output – All batteries degrade over time. Tesla’s Powerwall system, for example, produces full output for only 500 charging cycles. In a commercial building, that would be only ~2 years of useful service. Through what method and at what point is the developer required to replace degraded batteries? How will payment for failed demand reduction, etc. resulting from degradation be quantified and paid to the customer?

Charge/discharge efficiency – Even before degrading, all batteries, and inverters involve losses. A large system may return ~90% of the power it absorbs, but smaller systems may give back only 80%. Where in the contract is the loss rate quantified, or is it built into the kWh output specs? How will such losses be monitored, and if exceeded, will their extra cost be repaid?

Battery disposal – If the developer goes bankrupt, who pays for the removal and disposal of the system? Lithium-ion batteries must be disposed of through regulated channels. A module could weigh 10 tons (or more). A disposal bond may be needed.

Required footprint for maintenance and removal – Power storage systems need to be accessed for service and replacement. Floor plans and pathways showing all such requirements should be part of the proposal and contract.

Liability – Lessor contractual liability may be quite limited. The lessee (i.e., the customer) may need additional insurance to cover battery leakage, vandalism, theft, etc. If a battery failure results in loss of customer product (e.g., food spoiled during an outage if a battery fails to provide backup power), what is the reimbursement limit?

Luthin Associates

Written by Luthin Associates

Founded in 1994, Luthin Associates provides energy advisory services to all industry sectors in the New York Tri-state region and beyond. In 2019, Luthin Associates joined forces with 5, an innovative energy advisory firm comprised of energy innovators, commodity traders, analysts, engineers, and former energy supplier executives. As part of the 5 family of companies, Luthin Associates provides strategic advice on energy-related matters including procurement, demand-side management, rate optimization, regulatory intervention, benchmarking, bill auditing, RFP management, sustainability planning services, renewable power, and distributed generation.