Financial Analysis
Financial Analysis of Energy Storage
Benefit today from tomorrow
Net present value (NPV) is the current worth of a future sum of money or stream of cash flows given a specified rate of return. It is a great tool to analyse the profitability of an investment independent of different lifetimes and account for inflation and degradation – two of the biggest impacts on profitability.
Future cash flows are discounted at the discount rate, and the higher the discount rate, the lower the present value of the
future cash flows. Determining the appropriate discount rate and term of energy storage is the key to properly valuing future cash flows.
#1 Mistake in NPV calculations
A battery of 1kWh will deliver less than 1kWh throughout its lifetime. In many cases, cycling this battery daily for 10 years will not create 1 kWh * 365 days * 10 years = 3.65MWh of kWh throughput, but in many cases delivers less than 3.0MWh.
Similarly, a battery of 1kWh with a throughput of 3MWh means that it can perform enough cycles to deliver 3MWh across its life. It does NOT mean the battery will cycle exactly 3MWh / 1kWh = 3000 cycles (8.2 year with daily cycling).
In fact, there are various technical factors in what energy is actually delivered according to charging/discharging speed, temperature, round-trip efficiency, internal resistance, and many more factors. High-quality simulation programs will include many of these non-ideal factors whereas Excel-based and back-of-the-envelope are useful for indicative calculations but should not be relied on for accurate comparisons.
specifying the npv
The storage NPV in terms of kWh has to factor in degradation, round-trip efficiency, lifetime, and all the non-ideal factors of the battery. The combination of these factors is simply the storage discount rate.
The financial NPV in financial terms has to include the storage NPV, inflation, rising energy prices, and cost of debt. The combination of these factors is simply the discount rate.
Remember in all calculations to use the overall project cost per kWh and not the cell or component cost. The project as a whole is being calculated.
Perform your own custom calculations using the Excel sheet below.
Storage NPV
Degradation is leading
Degradation is a major factor in determining the storage or financial NPV. The below graph shows the yearly kWh generated in an application where the battery cycled once per day and twice per day.
Degradation Effect - 1 Cycle per day
Degradation Effect - 2 Cycles per day
The net present formula is given as:
NPV = F / [ (1 + r)^n ] where,
- PV = Present Value,
- F = Future payment (cash flow),
- r = Discount rate (degradation rate in storage NPV calculations)
- n = the number of periods in the future is based on future cash flows.
1-Cycle per day storage NPV
The storage NPV for the red battery in terms of kWh delivered over 10 years results in a calculation of:
- 945KWh delivered from a battery designed for 100KWh per year.
- Mapping from yearly to daily -> 100kWh / 365 = 0.274kWh nominal delivering 945kWh over 10 years.
The storage NPV for the blue battery in terms of kWh delivered over 10 years results in a calculation of:
- 806KWh delivered from a battery designed for 100KWh per year.
- Mapping from yearly to daily -> 100kWh / 365 = 0.274kWh nominal delivering 806kWh over 10 years.
So from just this comparison, the blue battery delivers 17% more kWh over a 10 year timeframe.
2-Cycles per day storage NPV
The storage NPV for the red battery in terms of kWh delivered over 10 years results in a calculation of:
- 1847KWh delivered from a battery designed for 100KWh per year.
- Mapping from yearly to daily -> 100kWh / 365 = 0.274kWh nominal delivering 1847kWh over 10 years.
The storage NPV for the blue battery in terms of kWh delivered over 10 years results in a calculation of:
- 992KWh delivered from a battery designed for 100KWh per year.
- Mapping from yearly to daily -> 100kWh / 365 = 0.274kWh nominal delivering 806kWh over 10 years.
So from just this comparison, the blue battery delivers a substantial 86% more kWh over a 10-year timeframe.
Financial NPV
The previous section was the storage NPV and more directly applicable is a financial NPV which includes the cost of each kWh at the time of generation. To calculate the discount rate there are several additional factors to consider in this example calculation.
- Inflation, a positive effect, X_inf (~-2%)
- Energy rising cost (exceeding inflation), a positive effect, X_elec (~-3%)
- Degradation, a negative effect, X_deg (~+4%)
- Cost of debt, a negative effect, C_d (~+3%)
A positive discount rate means the energy storage system will have decreased cashflows in the future, a negative discount rate means the system will have increase cashflows into the future.
Therefore for the red battery, X_inf * X_elec *X_deg* C_d = (0.98)*(0.96)*(1.044)*(1.03)= 1.2%
Therefore for the blue battery, X_inf * X_elec *X_deg* C_d = (0.98)*(0.96)*(1.006)*(1.03)= -2.5%
The final step is to take the calculation over the entire lifetime of the battery to present the best comparison of value and over a 10-year provides a short-term comparison. Multiply the result by the average cost per kWh that the energy storage is replacing for an NPV per kWh.
In the worksheet Excel, a SuperTitan battery of €420/kWh is compared with a LFP battery of €300kWh using the above red/blue discount rates.
10 year comparison
For an electricity cost of €0.15/kWh and a timeframe of 10 years, the results are:
SuperTitan battery NPV: +€25.79
LFP battery: -€6.87
This is a significant result because even over a 10-year timeframe and a 30% CAPEX discount on the LFP battery, the project is not profitable at €0.15/kWh as the NPV value is negative.
20 year comparison:
The SuperTitan shines since the lifetime is substantially longer and allows the NPV to be much higher than the LFP battery.
For an electricity cost of €0.15/kWh and a timeframe of 20 years, the results are:
SuperTitan battery NPV: +€233.91
LFP battery: -€6.87
Determine the IRR
True cost of storage
IRR is calculated using the same concept as net present value (NPV), except it sets the NPV equal to zero.
By modifying the cost per kWh in order to set the NPV to zero, we have arrived at the true cost of cycling energy storage in terms of €/kWh.
Using Excel goal seek function, we arrive at the two different cost per kWh inputs that sets the NPV to zero for the SuperTitan and LFP case.
10-year timeframe
SuperTitan NPV = 0 when electricity cost is €0.128/kWh
LFP NPV = 0 when electricity cost is €0.161/kWh
20-year timeframe
SuperTitan NPV = 0 when electricity cost is €0.058/kWh
LFP NPV = 0 when electricity cost is €0.161/kWh
Payback and ROI
Return on investment
The return of investment is an important metric about how attractive an investment may be.
However this is an important note that energy storage usually does not generate electricity savings directly, but allows the transport or trading of electricity. This usually results in storage not having a high ROI like solar investments, for example.
It’s important to then also weigh the overall revenue being generated using solar and storage than just solar alone. It can be the case that a project has a high ROI but very little overall savings and earnings. A large overall savings and thus earnings will result in a lower ROI than a pure solar investment.
Bear in mind that a high ROI also does not include a risk impact but does include inflation in this energy storage calculation.
annualized ROI (years) = (Net Return on Investment/Cost of Investment ×100%)^(1/years)
PAYBACK
Payback is measuring the time before cumulative cashflows from the project match the investment amount. A shorter payback is usually desired but has to be weighed alongside the NPV and ROI of an investment, as it is possible that a shorter project payback has a lower ROI and NPV between investments. Adjust for the first 5 years average cashflow since initial degradation has not set in.
Payback = Cost of investment / average cashflow of first 5 years.
Conclusion
The business case matters
The NPV is a great financial tool to verify profitability and overall safety margin between storage as it accounts for many different factors and is lifetime independent.
The IRR provides insight to the true cost per kWh (production cost) of different energy storage systems but does not include maintenance.
The SuperTitan battery is a truly competitive technology as it outperforms LFP even on a 10-year timeline despite a 30% higher upfront cost. Extending to a 20-year timeframe, the cost of storage of LFP is 170% higher than that of SuperTitan. It is for this reason that we recommend the titanium based chemistry for longer-term projects as has far lower operational cost.