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LCOS Methodology

The LCOS methodology calculates the levelized cost of storage ($/kWh) necessary for a storage system to break even over its economic life, factoring in capital expenditures, operational costs, and electricity charging costs. Key components include the present value of capital expenditures, fixed charge rate, capital recovery factor, and construction finance factor. The methodology provides a comprehensive framework for evaluating the financial viability of energy storage systems.

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46 views3 pages

LCOS Methodology

The LCOS methodology calculates the levelized cost of storage ($/kWh) necessary for a storage system to break even over its economic life, factoring in capital expenditures, operational costs, and electricity charging costs. Key components include the present value of capital expenditures, fixed charge rate, capital recovery factor, and construction finance factor. The methodology provides a comprehensive framework for evaluating the financial viability of energy storage systems.

Uploaded by

sodik.ilupeju
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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LCOS Methodology

The LCOS determined from this analysis provides a $/kWh value that can be interpreted as the average
$/kWh price that energy output from the storage system would need to be sold at over the economic
life of the asset to break even on total costs.

Equation 1 below shows the LCOS calculation.


((𝐹𝐹𝐹𝐹𝐹𝐹 × 𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑃𝑃𝑃𝑃 )+ 𝑂𝑂&𝑀𝑀𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 )
𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 = + 𝐸𝐸𝐸𝐸𝐸𝐸 (1)
𝐴𝐴𝐴𝐴

Where:

𝐿𝐿𝐿𝐿𝐿𝐿𝐿𝐿 = Levelized cost of storage ($/kWh)


𝐹𝐹𝐹𝐹𝐹𝐹 = Fixed Charge Rate (%)
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑃𝑃𝑃𝑃 = Present value of capital expenditures ($/kW)
𝑂𝑂&𝑀𝑀𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹𝐹 = Annual fixed O&M ($/kW-year)
𝐴𝐴𝐴𝐴 = Annual hours discharged
𝐸𝐸𝐸𝐸𝐸𝐸 = Electricity charging cost ($/kWh-discharge) inclusive of costs due to losses [ECC =
charging cost for purchased energy ($/kWh) divided by system RTE (%)].

LCOS Equation Sub-components


CAPEX
The present value of capital expenditures (𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑃𝑃𝑃𝑃 ) is used to determine the total investment in the
storage system in present year dollars. While the bulk of the CAPEX cost is assumed to be incurred in
year 0 for this report, various capital investments for augmentations and replacements will be incurred
in future years. Equation (2) shows the present value equation for capital expenditures over the project
life of the system. The year in which augmentation, major overhauls, and replacements for battery
systems take place will be dependent on the cycle life, calendar life, DOD, and other factors for each
system, as specified in the LCOS section of the report.
𝐶𝐶𝐶𝐶𝑛𝑛 𝐶𝐶𝐶𝐶1 𝐶𝐶𝐶𝐶2 𝐶𝐶𝐶𝐶𝑁𝑁
𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑃𝑃𝑃𝑃 = ∑𝑁𝑁
𝑛𝑛=0 = 𝐶𝐶𝐶𝐶0 + + + ⋯+ (2)
(1+𝑑𝑑)𝑛𝑛 (1+𝑑𝑑)1 (1+𝑑𝑑)2 (1+𝑑𝑑)𝑁𝑁

Where:

𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝐶𝑃𝑃𝑃𝑃 = Present value of capital expenditures


CFn = Cash flow in year n
N = Project Life
d = 𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅
Information on the major overhauls and replacement frequency and cost (CFN) as well as the project life
(N) for each storage technology can be found in Section 6. The 𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 is calculated below.

Weighted Average Cost of Capital


The real WACCreal is presented in Equation 3. This value represents the rate paid to financial assets as a
weighted average after adjustment for inflation.
(1+𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁 )
𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 = −1 (3)
(1+𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖)

𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁𝑁 = 𝐷𝐷𝐷𝐷 × 𝑖𝑖𝑛𝑛𝑛𝑛𝑛𝑛 × (1 − 𝜏𝜏) + (1 − 𝐷𝐷𝐷𝐷) × 𝐶𝐶𝐶𝐶𝐶𝐶𝑛𝑛𝑛𝑛𝑛𝑛 (3.1)

Where:
Table A4.1. WACC Equation Variable List and Definition

Variable Name Definition


𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖𝑖 Inflation rate (%) Assumed rate of inflation. Assumed to be 2.8% in this report.
𝐷𝐷𝐷𝐷 Debt Fraction (%) Percent of total capital expenditures financed with debt.
𝑖𝑖𝑛𝑛𝑛𝑛𝑛𝑛 Nominal interest rate (%) Interest rate assumed on expenditures financed with debt.
𝜏𝜏 Tax rate (federal and state) Federal and state combined tax rate (%).
𝐶𝐶𝐶𝐶𝐶𝐶𝑛𝑛𝑛𝑛𝑛𝑛 Nominal cost of equity (%) Rate of return paid on assets financed with equity.

Fixed Charge Rate


The fixed charge rate gives the percent of capital expenditures that must be recovered on an annual
basis to cover annual revenue requirements. It is a function of the capital recovery factor (CRF) and the
construction finance factor (CFF), defined below (Equation 4). The tax depreciation method is the
modified accelerated cost recovery system (MACRS), half-year convention.
(1−𝜏𝜏 × 𝑃𝑃𝑃𝑃𝑃𝑃𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀𝑀 )
𝐹𝐹𝐹𝐹𝐹𝐹 = 𝐶𝐶𝐶𝐶𝐶𝐶 × (1−𝜏𝜏)
× 𝐶𝐶𝐶𝐶𝐶𝐶 (4)

Where:
𝐶𝐶𝐶𝐶𝐶𝐶 = Capital recovery factor (%)
𝜏𝜏 = Tax rate (federal and state)
PVDMACRS = Present Value of Depreciation (MACRS)
𝐶𝐶𝐶𝐶𝐶𝐶 = Construction finance factor (%)

Capital Recovery Factor


The CRF represents the constant annual payment necessary to amortize a loan over a specific lifetime. It
is a function of the assumed economic life (t) and 𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 (d). This equation (Equation 5) returns the
CRF as a fraction of the original principle that must be paid annually.
𝑑𝑑
𝐶𝐶𝐶𝐶𝐶𝐶 = (5)
1−(1+𝑑𝑑)−𝑡𝑡

Where:
CRF = Capital Recovery Factor (%)
t = Economic life (years)
d = 𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑊𝑅𝑅𝑅𝑅𝑅𝑅𝑅𝑅 , see Equation (3)
The economic life (t) is the assumed number of years to pay off asset costs. This value is assumed to be
20 years for all technologies in this report for the base case.

Construction Finance Factor


The CFF represents the financing costs that are incurred during the construction period of the project
and is shown in Equation 6.
𝐶𝐶𝐶𝐶𝐶𝐶 = ∑𝐶𝐶𝑐𝑐=0(𝐴𝐴𝐴𝐴𝑐𝑐 × 𝐶𝐶𝐶𝐶𝑐𝑐 × 𝐿𝐿𝐿𝐿) + ∑𝐶𝐶𝑐𝑐=0(𝐴𝐴𝐴𝐴𝑐𝑐 × 𝐶𝐶𝐶𝐶𝑐𝑐 × 𝐸𝐸𝐸𝐸) (6)

Where:
𝐶𝐶𝐶𝐶𝐶𝐶 = Construction Finance Factor (%)
c = Year of construction period
C = Total construction period (years)
𝐴𝐴𝐴𝐴𝑐𝑐 = Accumulated interest during construction in year c
𝐶𝐶𝐶𝐶𝑐𝑐 = Capital fraction (%) in year c
𝐿𝐿𝐿𝐿 = Percent of leverage
EC = Percent of equity
𝐴𝐴𝐴𝐴𝑐𝑐 = Accumulated equity during construction
Where:
𝐴𝐴𝐴𝐴𝑐𝑐 = 1 + ((1 + 𝑖𝑖𝑛𝑛𝑛𝑛𝑛𝑛 )𝑐𝑐+0.5 − 1) (6.1)

𝐴𝐴𝐴𝐴𝑐𝑐 = 1 + ((1 + 𝐶𝐶𝐶𝐶𝐶𝐶𝑛𝑛𝑛𝑛𝑛𝑛 )𝑐𝑐+0.5 − 1) (6.2)

𝑖𝑖𝑛𝑛𝑛𝑛𝑛𝑛 = nominal interest rate

𝐶𝐶𝐶𝐶𝐶𝐶𝑛𝑛𝑛𝑛𝑛𝑛 = nominal cost of equity

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