The Financial Case for Hybrid Solutions
To evaluate the financial case for a hybrid Combined Heat and Power (“CHP”) and Battery Energy Storage System (“BESS”) solution, the incremental revenue or savings from the battery must be compared to its incremental costs. Returning to the example highlighted in a previous blog post about the technical case for hybrid solutions, it is imperative to determine the following:
- What is the cost/kWh of charging the BESS using the CHP?
- What is the cost/kWh of charging the BESS directly from the grid during off-peak hours?
- What is the savings/kWh achieved by the BESS as it discharges to shave leftover demand?
This is informed by both the natural gas pricing as well as the incumbent electric rates. In places where gas pricing is cheap, it may often be significantly cheaper to charge the BESS through the CHP during hours of low demand and discharge the battery during more expensive peak hours. The advantage of CHP is that gas utilities often have cheaper gas rates for end-uses that involve on-site electric generation. This is particularly the case in New York (Con Edison) and Northern California (Pacific Gas and Electric).
However, the risk of fluctuating commodity pricing must also be evaluated. Historic trends in changes in electric rates as well as natural gas pricing inform the stability of savings that a hybrid solution can provide over the life of the project. The difference between the price of natural gas and the price of electricity derived from the natural gas is defined as the “Spark Spread”. In regions where the spread is high, CHP is typically a suitable solution. It follows that adding on a BESS to installations where the issues with standalone CHP arise are also likely to be technically viable. The spark spread has traditionally been high and stable in markets like New York and California. Figures 3 and 4 below illustrate the spark spread as observed at actual commercial office locations[1]. A steady and high spark spread lends itself well to CHP and hybrid solutions. However, if the spread were to drop over time, CHP and hybrid solutions may become uneconomical. In such cases, stand-alone BESS installations may begin to look attractive.
There may be efficiencies gained by structuring the integrated solution as one construction project rather than two distinct ones. However, the incremental capex added by the BESS is often prohibitive compared to the savings it generates. To that end, incentive funding is also key to such projects. California’s Self-Generation Incentive Program (“SGIP”) and New York State’s Retail Storage Bridge Incentive Program are available for hybrid solutions.
The California SGIP program is targeted at short-duration behind-the-meter (“BTM”) BESS installations that compensates project developers based on their asset’s performance. The program incentives up to 0 – 6-hour duration batteries with a max capacity of 6,000 kWh. The incentive follows a declining block-structure with smaller, lower duration BESS’s being compensated the most.
New York’s Retail Storage Bridge Incentive Program compensates batteries up to 5,000 kW power delivery for BTM or standalone front-of-the-meter (“FTM”) BESS projects. Projects are capped at 15,000 kWh BESS capacities. The program is designed in declining tranches with each tranche having a specified budget and per kWh compensation for projects.
Does a hybrid solution make economic sense for your business?
The success of a hybrid solution is dependent on the impact to overall project economics from adding a BESS. BESS projects continue to rely on the availability of incentives in order to buy down the high upfront capital expenditure. Most of the uncertainty in project costs are associated with development, permitting and construction. The uncertainty in these costs are primarily driven by the fact that the rules for operating BESS in complex urban environments are only just being written. As a result, restrictions on construction protocols, safety measures etc. introduce uncertainty in the eventual installed cost of a project. As rules around safety and construction guidelines continue to evolve, particularly in markets such as New York, BESSs still have a way to go before reaching competitive all-in pricing.
However, by suitably accounting for incentives and taking advantage of value engineering and efficiencies in constructing a hybrid solution, hybrid solutions at sites where the technical case has already been proven can begin to make financial sense as well.
GI Energy’s CHP development, construction and service team has over 100 years of collective experience in deploying CHP solutions for a variety of customers across the United States. We are also a leading expert in BESS development, feasibility analysis and technoeconomic modeling. We offer our customers assistance across the lifecycle of project development, starting from feasibility analysis and modeling through actual project development and operations under a variety of ownership structures.
For questions about the comments discussed in this article or to explore whether CHP coupled with a BESS solution is right for your business, reach out to us at info@gienergyus.com.
