When evaluating whether and what type of storage system they should install, many customers only look at the initial cost of the system — the first cost or cost per kilowatt-hour (kWh). Such thinking fails to account for other factors that impact overall system cost, known as the levelized cost of energy (LCOE), which factors in the system’s useful life, operating and maintenance costs, round-trip efficiency, and residual value.

Looking only at the initial cost of the system also fails to account for other factors, such as the revenue side of the equation, where a versatile battery that can be used for multiple applications can generate multiple revenue streams. When considering an energy storage purchase, it is essential that customers consider all these factors if they hope to secure an understanding of the true costs — and value — of the energy storage system they plan to purchase.

A simple calculation of LCOE takes the total life cycle cost of a system and divides it by the system’s total lifetime energy production for a cost per kWh. It factors in the system’s useful life, operating and maintenance costs, round-trip efficiency, and residual value. Integrating these factors into the cost equation can have a significant impact on the real cost of the battery.

For example, storing energy in a battery is no free lunch. Some of the energy you store in the battery is lost to due heat or other inefficiencies. Round-trip efficiency looks at how much of this energy is lost in a “round trip” between the time the energy storage system is charged and then discharged. You can almost think of it as a toll for getting on the highway. The question is how big the toll is. Most energy storage systems that use flow-batteries have round trip efficiencies of 75 percent or more, meaning that if you charge the battery with 100 kWh, you would be able to discharge 75 kWh of electricity from the battery. By integrating round-trip efficiency into the LCOE calculation these efficiency losses are accounted for, and you can have a better apples to apples comparison between two energy storage systems with different round-trip efficiencies.

Lithium advocates sometimes claim that their technology has a higher round trip efficiency, but the answer is not that simple. Lithium battery systems can have an 85 percent round trip efficiency for shallow cycles, but efficiency is relative to the charge and discharge rates of the battery, the depth of discharge, and even temperatures. In the case of certain flow batteries, round trip efficiency doesn’t vary much at all, irrespective of depth of discharge, and charge or discharge rates. In other words, depending on the use cases and various charge rates and depths of discharge or duty cycles, the lithium battery efficiency benefit disappears.

A system’s useful life is also factored into the LCOE calculation. This is calculated in years, but it is not as simple as that because batteries do not age based on time only — they also age based on use. Specifically, many batteries can only support a certain number of charge/discharge cycles before their performance either begins to degrade or they fail. Therefore the expected use pattern for a battery can have a significant impact on its useful life. One of the advantage of flow batteries is their useful life is not determined by charge/discharge cycles, as they can be charged and recharged nearly an unlimited number of times without degradation. For long-term, high-use applications, this capability lowers a flow-battery’s LCOE versus other battery technologies, as the flow battery does not have to be replaced due to frequent cycling.

Another factor to consider is operating and maintenance costs. The cost of an energy storage system is not final when you purchase it—there are also the costs involved in keeping it up and running. These can be high, especially for certain batteries which require frequent maintenance. By integrating these costs into the LCOE calculation, you obtain a truer understanding of a battery’s actual cost over its entire life.

And while powerful, LCOE is also not perfect. LCOE does not measure the reliability of a battery, or the impact of the sourcing of its components on the environment. And while it looks at the cost side of the equation, it fails to look at the other side — revenue. Batteries do not have to be used solely for a single application, like peak-shaving, renewable firming or frequency regulation. Versatile battery systems have the performance capabilities necessary to perform a diverse set of applications, allowing them to secure revenue from each of these applications. Thus a battery with a higher initial cost that is versatile enough to perform multiple applications could generate additional revenue that makes up for the initial cost.

Because it measures the cost of a battery over its overall life, LCOE is a powerful metric, and should be on any energy storage developer’s checklist when evaluating various battery storage technologies. In addition, energy storage developers need to look beyond this single number to a battery’s other characteristics — reliability, sustainability and versatility — if they hope to understand not just the raw cost, but the true value delivered by the battery.

*Lead image: Calculator via Shutterstock*