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With increasing renewable penetration, energy storage is the need of the hour across the power value chain to improve predictability and increase grid resilience. But it is important to understand the true cost of including storage into any electrical network.

It is crucial to remember that energy storage systems (ESS) are fundamentally buffers of energy and not generators of energy. The cost of getting 1 unit of energy out of an ESS, therefore, is the sum of (A) the cost of putting a unit of energy into the ESS and (B) the cost of storing and returning the unit of energy from the ESS.

The cost of charging is dependent on the source of charging energy and typically the lowest cost source of energy is used for charging the ESS.

The cost of storage is somewhat more nuanced. The time-adjusted, real cost of storing a unit of energy in the ESS is also known as the “Levelized Cost of Storage (LCOS)”. This is an often used and often misrepresented term in the energy storage industry. LCOS is calculated as –

[the net present value of all costs associated with the ESS during its lifetime] divided by [the net present value of the total discharge energy from the ESS during its lifetime]

**The costs associated with an ESS include –**

- The Upfront Capital Expenditure
- Any Augmentation Expenditure
- OnM Cost
- End of Life Salvage Value / Disposal Cost

**The total discharge energy depends on –**

- The Number of Cycles Being Used in the Particular Application
- The Depth of Discharge of the Battery
- The DC-AC Conversion Efficiency of the Discharge from the ESS

People often tend to underestimate the LCOS by ignoring a lot of these factors. We often hear that “since battery cost is USD 250 / kWh and the battery gives 4000 cycles, the LCOS should be USD 250 / 4000 or 6.25 cents (INR 4.7)”

**However, this misses a host of factors –**

- When the battery cost is USD 250 / kWh, the landed cost of the ESS is USD 350 / kWh
- Add USD 70 / kWh (NPV) for installation and OnM costs, and the cost is USD 420 / kWh
- If the depth of discharge allowed by the battery technology is 90% and the discharge conversion efficiency is 97% – the cost per usable kWh is actually USD 480 / kWh
- Most ESS applications utilize ~300 cycles of the battery every year, and plan the project for 10 years. That results in ~3000 cycles during the lifetime of the project and not the 4000 cycles promised by the battery manufacturer.

All put together, the LCOS ends up being USD 480 / 3000 or USD 1.6 (INR 12) – more than double the casual estimate.

The good news is that not only are ESS already commercially viable at this LCOS for several applications, but the LCOS is also rapidly reducing.