In part 1 of this blog, we wrote about Con Edison’s Brooklyn Queens Demand Management (BQDM) DR program, which is intended to help Con Edison find “non-wire alternatives” (NWAs) to reduce electricity load by 69 MW in Brooklyn and Queens. The auction took place on July 27th and 28th, 2016, and the DR price was set at $985/kW-year. We also covered the implications for the New York Reforming the Energy Vision (REV) process.
Beyond providing a mechanism for greater temporal and geographic granularity of the value of peak shaving (which we explain here), the BQDM auction also provides an opportunity for the economic installation of emerging technologies in New York City. This blog post, Part 2, focuses on the implications of the BQDM DR program for energy storage project economics.
Energy storage assets, such as lithium-ion batteries, have the capability to provide value in multiple ways. When these batteries are installed behind the customer’s meter (BTM), they are typically used for peak shaving, as well as potentially for participation in demand response (DR) programs.
So how does participation in the Con Edison DR program compare to the revenue that could be derived from a batteries’ typical peak shaving use case? To estimate this, we will assume the installation of a 4 MWh battery. This battery would be able to reduce customer load by 1 MW for four hours in order to satisfy the 4-hour discharge requirement for the BQDM DR program. Actual project economics would depend on individual buildings – the numbers below are intended to be an educatedestimate to evaluate the impact of the BQDM DR program on the viability of installing BTM energy storage. We have also assumed that the BQDM building experiences its peak load between 8pm and 12am, while the conventional BTM building experiences its peak load in the middle of the day. This is consistent with the typical load profiles in the BQDM territory, versus the loads on the overall Con Edison network.
First, we can look at the conventional value streams for a BTM battery of this size. Demand charges in Con Edison’s territory are seasonal, and are roughly $38.60/kW-month from June – September and $16.12/kW-month in the other months. The amount of demand reduction that can be expected from a 4 MWh battery is dependent on the shape of the specific customer’s load profile. Theoretically, a battery could contribute 8 MW in peak load reduction (because the load reduction is calculated on a thirty-minute basis), but most buildings would only receive 0.5-2.0 MW of load reduction. Assuming 2.0 MW of load reduction, from a relatively “peaky” building, the battery would offset roughly $567k of electricity bills each year, or $5.67mm in total over a ten year lifespan. Conventional demand reduction programs would have the potential to contribute additional revenue to the battery project, but it is difficult to stack the two revenue streams, because responding to a demand response call would often leave the battery unavailable for peak shaving.
Table 1: Demand & estimated costs/kW
So how does this compare to the Con Edison BQDM DR payments? During the first two years, the 4 MWh battery would be able to receive $985k/year in DR payments. The battery would also be able to peak shave as normal during the winter months, generating an additional $258k/year in bill reductions. Finally, the host site may receive some peak reduction benefits in the summer months, but they would not get the full benefit. This is because the battery would be required to discharge all of its energy during the four hour BQDM DR window (8pm – 12am), which is not the optimal dispatch strategy for peak shaving, and does not overlap with all of Con Edison’s demand response windows. Summer demand charge reductions are therefore highly building-dependent. Assuming a 0.5 MW demand charge savings (rather than 2 MW) for an evening-peaking building would result in an additional $61,780/year for the first two years. In total, we can predict $1.30mm/year in value generated by the battery over the first two years.
So far so good. The BQDM DR program generates approximately $1.30mm/year in value for the first two years, compared to only $567k for a typical peak-shaving battery. But what happens after the first two years, when the program is finished? The battery will not be able to receive the full $567k bill reduction/year that the conventional BTM receives. This is because the demand charges are lower for evening-peaking buildings. Instead, the battery will be able to receive the full 2 MW of demand reduction, but it will be worth slightly less. Taking this into account, the total bill reductions in years 3-10 will be $505k/year.
Table 2: Estimated value of 4MWh battery enrolled in Con Edison’s BQDM DR program, versus same battery installed in a day-time peaking building outside the program.
Participation in the BQDM DR program generates roughly $1mm extra revenue over the ten-year lifespan of the battery system. Furthermore, because the revenues are front-loaded, the payback period and return on investment get a significant boost from utilizing the BQDM DR program.
Table 3: Payback in years, and internal rate of return, assuming that the 4 MWh battery costs $4mm to install.
Con Edison’s BQDM DR represents a significant opportunity for energy storage developers to deploy some of the first batteries in Con Edison territory. The front-loading of the revenue significantly helps to increase the rates of return on these assets, although ongoing revenues may be slightly less than for a typical BTM project, since evening peaks are targeted, which are less valuable under the current Con Edison tariff. GI Energy looks forward to seeing how the BQDM DR program evolves, and hopes that similar programs are implemented throughout Con Edison’s territory, as well as replicated in other utility territories around the country.