Method for Analyzing the Value of Distributed Energy Storage at the Facility Level – Step 6: Life Cycle Costing (LCC)

Figure 1 shows the current step in the evaluation methodology…

Figure 1 Showing the current step (step 6: Life Cycle Costing, LCC) in the methodology for evaluating a facility level energy storage deployment.

Life Cycle Costing (LCC) is a methodology that is well suited for evaluating the financial aspects of an energy-saving project when compared to other energy-saving projects. LCC also allows for comparison between the energy saving project and the base case of maintaining the status quo by investing in other projects or saving/investing the money that would have gone into the energy saving project. LCC is the total cost of owning, operating and eventually disposing of the equipment for a project over a given study period. All costs are adjusted using a discount rate that determines the present value of future cash flows. The predicted future change in price of consumed resources during the study period is calculated in an LCC using a regionally relevant escalation rate. The complete evaluation of an energy storage deployment at the facility housing the software company included the comparison (using LCC) of the financial aspects of implementing solar PV, wind energy or one of the three energy storage technologies relative to maintaining the status quo (the base scenario). LCC was also used to evaluate the cost benefit of combining solar PV or wind with one of the three energy storage devices.

For this analysis Building Life-Cycle Cost software, BLCC 5.3-12, was used. This version of BLCC was released in April 2012 by the Applied Economics Office of the US National Institute of Standards and Technology. The software is free to download and a more recent version of the software is available. It can be downloaded here: http://www1.eere.energy.gov/femp/information/download_blcc.html

The following assumptions and common inputs are applicable in a first pass analysis:

• FEMP Analysis – life-cycle costing rules of the Federal Energy Management Program according to 10 CFR 436A can be used in the LCC calculation (DOE, 2012). For a first pass analysis for a facility in the US this should be fine but the applicable LCC rules may be different for each application. A more refined analysis will likely require a review of the appropriate LCC rules.
• Base Date – The base date reflects the beginning of the study period. It is the date when the project(s) would be fully implemented.  
• Study Period – Though each technology has an expected life of at least 20 years, most facility owners/managers have a preference for projects with a payback period less than 2 years. It is this preference for shorter study periods that puts pricing pressure on energy storage devices. The energy storage device manufacturer that can deliver storage devices at a price that allows for meaningful benefit with a payback period within 2 years or less will have a significant advantage over other manufacturers attempting to deliver distributed facility level energy storage.
• Discount/Escalation Rate – The discount rate is set to 3%. As prescribed by 10 CFR 436A, this discount rate is based on long-term U.S. Treasury bond rates averaged over 12 months prior to the annual update of BLCC5. Note that the software determines the escalation rate for energy projects in the given state following guidelines prescribed by 10 CFR 436A (DOE, 2012). It is important to consider that 3% may not be appropriate for a given facility. The discount rate can be estimated by asking those responsible for a facility or organization’s finances. It can loosely be tied to the percentage growth that is commonly realized by investing a company’s cash reserves. Larger organizations may have very conservative rules dictating the investment of cash reserves, however, 3% may still be low for a discount rate.
• Residual Value Factor –The residual value factor represents the salvage or resale value of the project after the study period. For this first pass analysis a residual value factor of zero will provide a conservative estimate.
• Beyond the annual cost of electricity it can be assumed that the operations and maintenance costs of each scenario (including the base case) are the same. For this reason costs related to maintenance and operations may be excluded from consideration in this first pass analysis. This of course, may not be accurate and should be revisited after this first pass analysis.

After entering the required inputs, the LCC software outputs many financial metrics to help evaluate the different scenarios. From the results, the three metrics, generated in the LCC analysis, that are most important to evaluating the financial aspects of a project are:

• Total Present Value (PV) Life Cycle Costs – Considering the time value of money, the Total PV Life Cycle Costs is the cost of the entire project in today’s dollars. Project costs include energy costs and the initial capital investment in the project. Note that the time value of money is driven by inflation and opportunity costs (the benefit the cash could have achieved had it been spent differently or invested) (Fuller & Petersen, 1996).
• Savings-to-Investment Ratio (SIR) - The SIR compares the economic performance for a project alternative by establishing a ratio between the project’s savings and the increased investment costs. The SIR is expressed in present value terms. Only if the SIR is greater than 1 will the project be considered cost effective relative to the base case within the study period. Note that the SIR is also an effective means of comparing one alternative project with other independent alternative projects (Fuller & Petersen, 1996). Though it could be argued that the VRB-ESS® and the LightSail RAES V1 are mutually exclusive projects, they are sufficiently different to be considered independent along with a solar PV project, a wind energy project and the Ice Bear installation.
• Discounted Payback (DPB) – DPB measures the time required to recover initial investment costs with respect to the base case. In DPB, cash flows occurring each year are “discounted to present value before accumulating them as savings and costs (Fuller & Petersen, 1996).” If the DPB is less than the study period, the project is considered cost effective relative to the base case because less present value money is spent during the study period to achieve similar or better results compared to the base case.

Along with changes to energy and power consumption, the most important LCC metrics of an energy storage device are the installation costs (expressed in terms of $/kW or $/kWh), the maintenance costs and any recurring costs related to the storage media. These costs are rarely advertised on a device manufacturer’s website and often require a confidentiality agreement with the device manufacturer. Of all the factors currently limiting the widespread deployment of energy storage, the cost is perhaps the most significant.

Works Cited

DOE. (2012, December 12). Federal Energy Management Program. Retrieved February 23, 2013, from US Department of Energy: http://www1.eere.energy.gov/femp/information/download_blcc.html

Fuller, S. K., & Petersen, S. R. (1996). LIFE-CYCLE COSTING MANUAL for the Federal Energy Management Program. Washington, DC: US Department of Commerce.