The rep from the commercial battery company has just handed you the proposal, complete with a price and a payback figure. But you don’t want to take any major capex investment to your colleagues on the board without being absolutely certain that the numbers stack up.
In this article, we’ll show you how to pull those figures apart so you can see whether the proposed return still holds up when you test the assumptions behind it.
How was the payback figure calculated?
First, ask to see the main figures it used to calculate the payback period in the proposal, specifically:
- Electricity use: At least 12 months of half-hourly data showing when your site uses electricity and how much.
- Electricity prices: What you currently pay for electricity at different times, including the relevant charges on your tariff.
- Solar and export: How much electricity your solar panels generate and what you receive for any electricity you export.
- Battery performance: Its usable capacity, power, efficiency and how much usable capacity it is expected to lose as it gets older.
- Project costs: The installed price of the battery and any ongoing software, maintenance, monitoring or trading costs.
- Trading income: If it is included in the payback figure, how much the battery is expected to earn and what that estimate is based on.
Some of those figures come from things you already know, like your electricity use and current tariff. Others, however, like future electricity prices, battery degradation and trading income, are educated guesses about what might happen in the coming months and years.
For every figure that is a forecast, ask how they arrived at those numbers so you can judge how much confidence to put in them.
Can you see exactly how the payback figure was worked out?
Ask to see the spreadsheet or software the battery company used to calculate the payback period, so you can see precisely how they got to the final figure.
The basic idea is simple. Compare the same site twice, once without the battery and once with it. The difference between the two shows how much your business could save or earn by adding the battery.
Start with the no-battery version. Work out what your business would have paid for electricity over the same period.
Some battery proposals use a blended electricity price to keep the calculation simple. What that means is that the installer takes your total electricity cost and divides it by the amount of electricity you used to get one average price per kWh.
That is fine for a rough first estimate, but be wary of relying on it for the final payback figure. That’s because a battery saves you money partly by changing when you buy electricity. You might charge it when electricity is relatively cheap and use that stored electricity later when buying from the grid would cost much more.
If one average price is used throughout the proposal, then the model can’t properly show how much the battery saves you by changing when you buy electricity.
For a proper calculation, start with a half-hourly data analysis using at least 12 months of electricity data and the actual prices and charges on your tariff.
What if your site already has solar?
If you’re looking at commercial solar battery storage, the calculation also needs to include what your panels generate.
Start with how much electricity the panels generate. Your business will use some of it straight away. If the panels produce more than the site needs at that time, the surplus can go back to the grid and you may be paid for it. Include that export income in the calculation.
At this point, the no-battery calculation should be able to recreate what actually happened at your site. Check the electricity cost it produces against your real bills for the same 12 months, and check the export income against what you were actually paid.
If those figures are nowhere close, something in the starting calculation is wrong.
Once the no-battery version looks right, add the proposed battery to the calculation. Use its usable capacity, power and efficiency, along with the real limits on how much electricity your site can take from or send back to the grid.
Then run the same 12 months again with the battery in place. If the battery stores solar electricity that would otherwise have gone back to the grid, remember that your business is giving up the export payment it would have received. That needs to come off the saving attributed to the battery.
Where does the return actually come from?
You now have one calculation without the battery and one with it. The next job is to see exactly what is cutting your electricity costs or bringing in extra income.
Do not accept one line saying “annual benefit: £40,000”. Ask to see each part separately.
| Part of the return | What is happening |
|---|---|
| Lower electricity costs | The battery reduces the amount of electricity you buy from the grid when prices are high, or lets you use stored solar electricity later. |
| Better control | Software changes when the battery charges and supplies the site as prices, solar generation and electricity use change. |
| Trading income | Your business may be able to earn extra income from spare battery capacity where the site and contract are suitable. |
How much could the battery cut your electricity bill?
Start by comparing what your business would pay without the battery with what it would pay after the battery is added.
Make sure the saving is a real one. If the battery charges from the grid, your business has paid for that electricity. Some of it is also lost when the battery charges and later supplies the site. And if the battery stores solar electricity that you would otherwise have exported, you have given up that export payment.
Count each saving once. If your business stores solar electricity and uses it later instead of buying from the grid, that is one saving. Do not count the same electricity again as a separate “solar saving”.
How much could better control add?
Next, check how much more your business could save through energy optimisation with the same battery.
Keep the battery, tariff, site use, grid limits and any backup reserve the same. The only thing you change is when the battery charges, supplies the site or holds electricity back for later.
Suppose your business would spend £100,000 a year without a battery. With basic battery control, that falls to £88,000. Better control brings it down again to £84,000.
The battery has therefore cut the bill by £12,000, while better control has added another £4,000 of saving. Do not call the full £16,000 an “optimisation saving” and then add the £12,000 battery saving again.
What could trading add?
Battery energy trading is the third way the battery could add to the return.
For suitable sites in Great Britain, a trading provider may be able to use battery capacity your site does not need at that time to earn extra income. Count only the trading income your business expects to keep after charging costs, electricity losses, fees and any share paid to the trading provider.
The same part of the battery cannot do two jobs at once. If some of its capacity is being kept back for an evening peak or for backup, do not assume that same capacity is also available for trading.
And if the trading income is not guaranteed, keep it separate from the savings you are relying on.
You can now see how much of the return comes from lower electricity costs, better battery control and trading. The next step is to put those figures against everything the project will cost over its life.
What does the investment look like over its life?
Once you know how much your business could save or earn from the battery each year, put that against everything the project will cost over the years you expect to use it.
What will the battery cost you?
Start with the price you have actually been quoted. Include the battery, installation, electrical and grid work, controls, testing and any other one-off cost needed to get the system working at your site.
Then add the costs that continue after installation, including software, monitoring, maintenance, insurance and trading fees.
What happens as the battery gets older?
Don’t assume the savings in year one will stay the same for the whole life of the battery.
Batteries gradually lose some of the electricity they can store as they get older. This is called degradation. Use the warranty and performance information for the battery you are actually buying rather than assuming it will perform the same way every year.
If the financial model shows the battery providing roughly the same usable storage much later in its life, ask how that level of storage will be maintained. If cells, equipment or extra battery capacity will need to be added or replaced to keep it performing at that level, put that cost into the year you expect to pay it.
Do the contracts match the financial model?
The figures in the model should also match what the contracts actually say:
- Term and exit rules: How long are you tied in and what will it cost to leave?
- Fees: What will you pay for software, monitoring, maintenance and trading?
- Revenue share: How much trading income does the provider keep?
- Battery control: Who can control the battery and what limits apply?
- Warranty: Does the way you plan to use the battery stay within the warranty limits?
- Downtime: What happens if the battery, meter, internet connection or software is unavailable?
- Guarantees: Which savings or payments, if any, are actually guaranteed?
Before you sign the contract, also agree how the savings will be checked after installation. What report will you get, how often will you get it and what happens if the actual savings are lower than forecast?
How should you judge the return?
Build VAT, tax, inflation and funding into the calculation in the same way you would for any other capital project.
Simple payback shows how long it takes the business to recover the money it spent upfront. Return on investment (ROI) compares the return you expect to make with the amount you have invested. Net present value (NPV) shows what the future cash flows are worth today. Internal rate of return (IRR) turns the forecast return into a percentage.
Use the same measures and return requirements you use when deciding between other projects competing for the same money.
You now have a sensible base case. But it is still a forecast, so the next job is to see what happens when some of those assumptions turn out to be wrong.
What happens if the assumptions are wrong?
Some of the figures behind the payback depend on things nobody can know for certain today. Go back to the spreadsheet or software and see what happens when those assumptions turn out differently.
| Change this | Ask this |
|---|---|
| Electricity prices | What happens if the gap between cheaper and more expensive periods gets smaller? |
| Site electricity use | What if the site uses less electricity or uses it at different times? |
| Solar and export | What if solar generation is lower than forecast or exported electricity is worth more than the model assumes? |
| Better control | What if the extra saving is smaller than forecast? |
| Trading | What happens if trading earns very little or nothing? |
| Battery ageing and costs | What if usable capacity falls faster than forecast, fees are higher than assumed or equipment needs replacing sooner than the model allows for? |
Change one important assumption at a time first. You’ll quickly see which ones have the biggest effect on the return.
Then change several at once. Reduce the electricity savings and trading income below the forecast, increase the fees and assume the battery loses usable capacity faster than the model allows for.
You are not trying to invent the worst possible outcome. You are asking whether the investment still makes sense if several of the figures turn out worse than the base case at the same time.
If it does, you have some room for things not going to plan. If the investment only works when nearly everything goes as forecast, the board needs to know that before approving it.
What should you take to the board?
By this point, you should be able to show the board:
- Upfront spend: What the business will actually pay to get the battery working.
- Annual savings: The savings you are comfortable relying on.
- Trading income: Shown separately if it is not guaranteed.
- Payback, NPV and IRR: Worked out in the same way as your other capital projects.
- Downside case: What happens when several figures turn out worse than the base case.
- Contract commitments: The main fees, terms, responsibilities and guarantees.
- Key assumptions: The figures that have the biggest effect on the return.
How can GridVolt help you check the numbers?
If you are considering commercial battery storage, ask your installer to put the site through GridVolt’s free simulator. They can use your half-hourly electricity data, tariff, solar and export data where relevant, and the details of the battery being proposed.
Ask to see the important figures separately: what your business would pay without the battery, how much the battery could save on its own, how much better control could add and, where relevant, how much trading income could add.
GridVolt does not sell batteries. Energy Manager works with compatible third-party batteries and controls when they charge, supply the site or keep electricity stored for later as prices, solar generation and your electricity use change.
At one live site, Energy Manager increased the savings from an existing battery by 41% during its first 70 days. That was the result at one site, so you should not treat it as a typical or guaranteed saving.
For suitable sites in Great Britain, GridTrade can also use spare battery capacity for electricity trading. GridTrade is not currently available in Ireland.
Before you put the proposal in front of the board, make sure you can see where the return comes from and what happens when the assumptions change.
A payback figure gives you a headline answer. A payback figure you can pull apart and test tells you much more.