In this post we examine the economics of solar + storage.  We examine the value of solar and storage for two commercial buildings in each of three markets: California, New York, and Hawaii.  We find solar and storage are strongly synergistic in all three markets.

The NPVs of solar + storage investments are greater than the sum of the NPVs of solar investments and storage investments alone because, among other reasons:

• The combination allows for much larger demand charge reductions than either technology can achieve on its own
• Pairing storage with solar allows the owner of the storage system to claim the federal Investment Tax Credit on the storage system, subject to certain constraints on how it is charged

(We looked at the returns to storage alone in an earlier post.)

We are grateful to Geli, a provider of intelligent energy storage software solutions, which provided the building load profiles, solar production estimates, and storage system operating profiles for the analysis. Thanks to this cooperation we were also able to validate the economic calculations in our model versus those in an independently developed model.

Building Load Profiles

Figure 1 shows the daily average load profile and 15-minute load heat map for each of the two buildings we analyzed. The first building is an office building and the second is a factory. In both the load profiles and heat maps, time of day is on the horizontal axis, so we see the normal workday roughly in the middle. “Hotter” colors on the heat maps indicate higher load.

For analytical consistency we assume that each of these two buildings exists in each of the three locations we examined. The office building requires a much higher load during normal working hours than at other times, while the factory’s load is spread more over the entire 24-hour day, but has higher variability.

Figure 1: Average daily load profiles and 15-minute Load Heat Maps

Office Building	Factory

Assumptions

We made several assumptions for this analysis. Figure 2 shows those that are not building- or location-specific:

Figure 2: Solar + Storage Global Model Assumptions

Solar*
System size Installed cost Annual O&M cost	250 kW $1.80 / W $12 / kW
Storage**
System capacity Installed cost O&M cost	120 kWh $1,200 / kWh $11.40 / kWh
Global Assumptions
Model term Federal income tax rate State income tax rate Insurance O&M escalator Utility rate escalator Discount rate	30 years*** 35% 8.84% (CA), 7.1% (NY), 6.4% (HI) 0.35% of CapEx 2% 3.5% 7%
*Assumes inverter replacement in the 10th year **No assumption made on system load rating, as it is variable with the optimal operation in each state ***Assumes energy storage system replacement in the 15th year

Source: Woodlawn Associates

Energy Storage and ITC Eligibility

With certain caveats, energy storage paired with solar is eligible for the federal Investment Tax Credit (ITC), according to IRS Private Letter Ruling 121432-12. First, the systems have to be installed at the same time. Second, at least 75% of the electricity used to charge must come from the solar system. Finally, the ITC is reduced in proportion to the amount of energy used to charge it that does not come from the solar system.

For example, the owner of a $100,000 storage system that gets 20% of the energy used to charge it from the grid would be able to claim an ITC of $24,000 ($100,000 * 30% ITC * 80% of energy from solar).

California

With excellent sun, high electricity prices (for both demand and energy), and incentives under the Self-Generation Incentive Program (“SGIP”), California should be among the best locations for both solar and storage.

SGIP provides incentives of $1.46 per watt for storage systems, up to 60% of the project cost. If the system supplier is California-based, the system receives a 20% bonus incentive. (We assume in our analysis the that the supplier is California-based.)

We assume our buildings use PG&E tariff E-19 (Medium General Demand Time-of-Use Service) and are located in San Jose.

Solar Only

Figure 3A shows the electrical production of the solar system (generated using data from PVWatts). Figures 3B and 3C show the post-solar load heat maps for each building, in which we can clearly see that the net load is significantly lower during the day (note the lack of red in the heat maps during the day). The grid savings for the office building and factory, respectively, are 22% and 21% relative to the status quo in the first year of operation.

The savings come exclusively from reductions in energy charges (not demand charges). Note that both buildings still have demand over 250kW at certain times (orange or red in the heat maps).

Figure 3: Solar PV production and net building load with solar

3A: Solar Production in San Jose, California
3B: Office Building with Solar	3C: Factory with Solar

Storage Only

Figure 4 shows how storage would operate without solar. It would discharge throughout the peak hours and charge overnight. The grid expenses savings would be 6% and 10% in the first year for the office and factory, respectively.

Figure 4: Schematic Operation of Storage

Solar + Storage

Figure 5 shows the impact of installing paired storage and storage on these buildings. Neither building’s load ever goes above 250 kW (note the lack of red or orange in the heat maps), which neither solar nor storage achieve on their own. The grid savings are 38% for the office building and 37% for the factory in the first year—more than simply the addition of the savings from the two solutions separately.

Figure 5: net building load with Solar + storage

Office Building	Factory

Solar + Storage: More than the Sum of Parts

In both our office building and factory cases, paired solar and storage more effectively reduce demand than either solar or storage alone. How is this possible? Figure 6 explains the intuition.

Figure 6: Demand reductions due to solar, storage, and storage + solar

6A: Solar Only, Sunny Day	6B: Solar Only, Cloudy Day
Solar alone does not reduce demand because the building load falls off later than solar production:	Even if building demand falls off earlier, cloudy days limit demand charge reductions:
6c: Storage Only	6B: Solar + Storage, Cloudy Day
Without solar, storage would definitely reduce demand charges:	But pairing solar and storage allows much bigger reductions with the same storage device:

Source: Woodlawn Associates

NPV and IRR

So far we have only looked at the savings on an electric bill, but both the solar system and the storage system have costs and other benefits. Both obviously cost money to install and maintain. Both also benefit from accelerated depreciation that reduces taxable income. The solar system is eligible for the ITC and for both buildings, the energy storage system is eligible for at least some of the ITC.

Figure 7 shows the NPV and IRR for solar only, storage only, and solar + storage for each of the buildings.

Figure 7 NPV ($000’s) and IRR in California

Office Building	Factory

California Solar + Storage Conclusions

In both buildings we examined, solar and storage are strongly synergistic, with combined NPVs that are significantly higher than the sum of the individual NPVs for solar and storage alone.

New York

New York is an established “solar state” thanks to its high cost of electricity and state rebates. Our solar system will receive a NYSERDA incentive of $0.80/W for the first 50 kW and $0.50/W on the next 150 kW.

New York City—otherwise known as ConEd Zone J—is also a hotbed of energy storage activity due to NYSERDA and ConEd’s Demand Management Program (DMP) and associated incentives: $2.10 per average Watt discharged from 2 p.m. to 6 p.m., June through September.

Analysis

When paired with solar, storage could receive the DMP incentives if it discharged during the required time periods. However, this may not be the economically optimal choice. Consider the decision tree in Figure 8. In all cases, the objective is to maximize NPV. In analyzing the optimal choice, we must determine whether it is better to—for example—operate the storage system in a way that is DMP compliant but forgoes potential demand charge reductions, or to forgo the DMP incentive and maximize demand charge reductions. The decision tree also highlights choices to be made about ITC compliance and tariffs.

Figure 8: NY Solar + Storage NPV Optimization Decision Tree

Surprisingly, we found the optimal choice for the office building was to forgo the DMP incentives, take the ITC incentives on both solar and storage, and operate on ConEd Rate I. For the factory, we found the optimal choice was to forgo both the DMP and ITC incentives.

Another major difference between New York and California is the quality of sun. Put simply, it is cloudy more often in New York. Figure 9 shows the solar production profile for New York City.

Figure 9: Solar PV Production in New York CITY

Figure 10 shows the NPV and IRR associated with solar only, storage only, and solar + storage for each building.

Figure 10: NPV ($000’s) and IRR in New York

Office Building	Factory

New York Solar + Storage Conclusions

Just like in California, there is a strong synergistic relationship between storage and solar. However, due to more variable solar production and different tariff structures, this phenomenon is even stronger in New York.

Hawaii

The Hawaiian Public Utilities Commission recently made a ruling that effectively ended net metering in Hawaii. For this analysis, we will look at solar without net metering, energy storage, and solar + storage assuming the buildings are in Honolulu and Schedule P is the rate used for both.

Figure 11 shows the production of our solar system in Hawaii.

Figure 11: Solar PV Production in Honolulu

Figure 12 shows the Hawaii NPV and IRRs:

Figure 12: NPV ($000’s) and IRR in Hawaii

Office Building	Factory

HECO Solar + Storage Conclusions

The solar system we modeled provides very attractive returns, even without net metering, because the solar system we chose is small relative to the load. Even without net metering, we reduce our energy purchases from HECO by almost 100% of the generation of the solar system, allowing us to capture the full retail value of that energy.

The returns to energy storage alone are limited. Hawaii has no storage incentives and HECO has lower demand charges than PG&E or ConEd.

Like in California and New York, solar + storage provides the best returns. It allows larger demand charge reductions than storage alone and allows us to benefit from the ITC.

Overall Conclusions

Having started this analysis without any particular point of view about the economics of solar + storage, we found two things particularly interesting from the analysis above:

1. Solar and storage are strongly synergistic. The value of paired system is greater than the value of either one of the parts on its own.
2. In some cases, it may make sense forgo storage incentives and/or the ITC, if the operational requirements of those incentives are such that it is not possible to optimize the demand charge management from the customer’s perspective.

Throughout this analysis, we have assumed that the host of these systems is also their owner. We know that many developer-financiers will want to offer these systems under service agreements as well. Their task will be to get project investors comfortable they can reliably predict and monetize demand charge reductions.

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Woodlawn would be happy to assist you with any questions about energy storage. Please contact Micah Sussman or Josh Lutton.

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