Chapter 3. Financial Feasibility of New and Renewable Energy
B. Feasibility Analysis
4. Energy Storage Systems (ESS)
Under the current electricity tariff system, which does not provide government subsidies and which charges the same basic fees and tariff rates irrespective of seasons and hours, households have little incentive to install ESS, which is the most beneficial when different electricity tariffs are applied by season or hour. However, households can still benefit from
the installation of ESS if they use it to store energy at night and use the stored (and cheaper) nighttime electricity during high-demand daytime hours, thereby saving significantly on their electricity bill. Although ESS is not currently eligible for nighttime electricity benefits, many speculate that Korean policymakers will soon extend policy benefits and subsidies to ESS for air-conditioning and heating systems. Therefore, in our study, we will analyze the financial feasibility of household ESS, taking into consideration differences between nighttime electricity and residential electricity. Our analysis considers only the demand-shifting type of ESS, which is assumed to employ relatively simple mechanisms to store electricity at night and discharge it during hours when residential tariff rates apply.
A. Main Assumptions
1) Specifications of Household ESS
The household ESS currently available in the Korean market comes in two capacities: 3.3 kWh and 6.5 kWh. The technical specifications for these capacities, provided by manufacturer “L,” which produces household ESS, are summarized in Table 3-17. The 3.3-kWh ESS is the subject of our analysis.
Table 3-17. ESS Specifications
ESS Official capacity
(kWh)
Actual capacity (kWh)
Ampere hour (Ah)
3.3 kWh 3.3 2.9 63
6.5 kWh 6.5 5.9 126
Source: Manufacturer “L”, technical specifications (p.
11)(http://m.lgchem.com/upload/file/product /ESS_LGChem_ENG.pdf, accessed on October 29, 2017).
2) Main Assumptions and Preconditions
The main assumptions and preconditions of our analysis are summarized in Table 3-18.
Table 3-18. Main Assumptions and Preconditions of Analysis: ESS
Variable Unit Assumpti
on Remarks
Hours per year Hr/yr 8,760 24 hours x 365 days
Hours per month Hr/m
o. 730 Hours per year/12
ESS capacity kWh 3.3
Installation cost 원/k
Wh 805,000 USD 700/kWh (average price abroad) x KRW 1,150 (current exchange rate)
Lifespan Years 10 Warrant period for manufacturer “L”
3.3kWh ESS loss rate % 12.1 Difference between actual capacity and official capacity
Nighttime tariff KRW
/kWh 49 Nighttime (B)I: KRW 62.3 in winter (4 months), KRW 45.2 in summer (8 months), weighted average
Discount rate % 5.0 Applied to NPV estimation
VAT % 10.0 10% of basic fee + tariff
Electricity Industry Base Fund Contributions
% 3.7 3.7% of basic fee + tariff
B. Feasibility Analysis
1) Electricity Consumption After ESS Installation
The representative household used in our analysis consumes an average of 450 kWh of electricity a month; this household electricity consumption level is the most likely to benefit from ESS installation. Table 3-19 lists the electricity amounts to which residential tariff rates apply, under the conditions of a household operating a 3.3-kWh ESS for 10 years. In the feasibility analysis, the electricity stored at night on the ESS is subtracted from the amount of electricity consumed, while the cost of storing energy is included as part of the household’s expenses.
Table 3-19. Monthly Electricity Consumption by Year Following ESS Installation: Subject to the Residential Tariff Rate (Unit: kWh/month)
Year Monthly
consumption (A)
Stored on ESS (B)
Actual consumption
(A-B)
1 450 87 363
2 450 87 363
3 450 87 363
4 450 87 363
5 450 87 363
6 450 87 363
7 450 87 363
8 450 87 363
9 450 87 363
10 450 0 363
2) Electricity Bills After ESS Installation
Table 3-20 lists the electricity bills the representative household would pay throughout the 10-year lifespan of its ESS system. These amounts reflect the basic fees, tariff, cost of storing electricity on the ESS, VAT, and Electricity Industry Base Fund Contributions.
Table 3-20. Monthly Electricity Billing Amounts After ESS Installation
Year Net-metered consumption
Basic fee
(E)
Tariff (F)
ESS- charging
cost (G)
Subtotal
(E+F+G) VAT Base Fund
Contribution Total
1 363 3,850 55,128 4,851 63,829 9,370 3,460 76,659
2 363 3,850 55,128 4,851 63,829 9,370 3,460 76,659
3 363 3,850 55,128 4,851 63,829 9,370 3,460 76,659
4 363 3,850 55,128 4,851 63,829 9,370 3,460 76,659
5 363 3,850 55,128 4,851 63,829 9,370 3,460 76,659
6 363 3,850 55,128 4,851 63,829 9,370 3,460 76,659
7 363 3,850 55,128 4,851 63,829 9,370 3,460 76,659
8 363 3,850 55,128 4,851 63,829 9,370 3,460 76,659
9 363 3,850 55,128 4,851 63,829 9,370 3,460 76,659
10 363 3,850 55,128 4,851 63,829 9,370 3,460 76,659
As seen in Table 3-7, under pre-reform conditions, a household consuming 450 kWh of electricity a month would spend KRW 1,278,240 on electricity each year (KRW 106,520 x 12 months). Installing ESS would reduce this amount to KRW 919,906 a year. Table 3-21 shows the net cash flow of a household with an ESS installation over the course of the system’s 10-year lifespan, taking into account the installation cost of KRW 2,656,500.
Table 3-21. Net Cash Flow for an ESS-installed Household by Year Year Pre-installation
billing amount (A)
Post-installation billing amount (B)
Difference (A-B)
0 0 2,656,500 -2,656,500
1 1,278,240 919,906 358,334
2 1,278,240 919,906 358,334
3 1,278,240 919,906 358,334
4 1,278,240 919,906 358,334
5 1,278,240 919,906 358,334
6 1,278,240 919,906 358,334
7 1,278,240 919,906 358,334
8 1,278,240 919,906 358,334
9 1,278,240 919,906 358,334
10 1,278,240 919,906 358,334
4) NPV Analysis
The NPV of a 3.3-kWh ESS, with an installation cost of KRW 2,656,500, a presumed lifespan of 10 years, and an applied discount rate of five percent, totals KRW 105,203. From a financial perspective, the NPV for ESS would be greater than zero if pre-reform tariff rates were to apply. A household consuming 450 kWh of electricity a month on average therefore has a financial incentive to install ESS in the absence of government subsidies.
5) Sensitivity Analysis
Table 3-22 lists the results of our NPV sensitivity analysis for a household with a 3.3-kWh ESS consuming 450 kWh of electricity a month. As with the other renewable energy systems analyzed previously, the NPV for ESS also increases as the discount rate and the installation cost are lowered. The NPV for ESS turns negative when the installation cost and the discount rate are raised above KRW 2,656,500 and five percent, respectively. A household consuming 450 kWh of electricity must therefore be very careful when deciding whether or not to invest in ESS.
If the ESS installation cost is fixed at 2,500,000 and the discount rate is lowered from five percent to four percent, the NPV improves by 54 percent from KRW 254,251 to KRW 390,782. If the discount rate, on the other hand, is fixed at five percent and the installation cost is lowered from KRW 2,500,000 to KRW 2,000,000, the NPV increases by an astonishing 187 percent from KRW 254,251 to KRW 730,441. In other words, lowering the discount rate and the installation cost by 20 percent improves the NPV by 54 percent and 187 percent, respectively, indicating that the feasibility of ESS is much more sensitive to changes in the installation cost than the discount rate.
Table 3-22. NPV Sensitivity Analysis: ESS
(Unit: KRW 1,000) Category
Installation cost
1,000 2,000 2,500 2,657 3,000 5,000 6,000
Discount rate
1% 2,370 1,380 885 730 390 -
1,590 - 2,580
2% 2,175 1,195 705 551 214 -
1,746 - 2,727
3% 1,997 1,026 540 389 55 -
1,887 - 2,858
4% 1,833 872 391 240 -90 -
2,013 - 2,975
5% 1,683 730 254 105 -222 -
2,127 - 3,079
6% 1,545 601 130 -18 -342 -
2,229 - 3,172
7% 1,418 483 16 -131 -452 -
2,321 - 3,255
8% 1,300 374 -88 -233 -551 -
2,403 - 3,329
9% 1,192 275 -184 -327 -643 -
2,477 - 3,395
10% 1,093 183 -271 -413 -726 -
2,544 - 3,453
Figure 3-4. NPV Sensitivity Graph: ESS