Financial feasibility study of BESS vs Diesel

With the collaboration of Geraldo Silveira

As this is a recent topic in the solar sector and increasingly common in investment circles, it is important to be aware of all the nuances involved in this type of project.

Therefore, before we delve into the financial comparison between the use of BESS and diesel generators, it is extremely important to pay attention to the topics that are correlated to this topic as they will serve as a basis for understanding the premises for financial return.

Therefore, in the first part of this article, to level knowledge, topics will be covered on charging for captive market consumers, the use of diesel systems, energy storage systems, and financial return metrics.

Captive Market Customer Pricing System

The Brazilian market's customer pricing system is divided into two types of consumers, which are called free contracting environment consumers and regulated contracting consumers.

The focus of this article is on Group A's captive market customers. Therefore, to keep the article from becoming too long, we will only consider considerations related to this type of consumer.

The Brazilian market's tariff modalities for captive customers are defined by the Normative Resolution ANEEL No. 1000/2021 and in Module 7 of the Tariff Regulation Procedures – Proret.

Group A Consumers: with the exception of underground distribution network customers, who are referred to as AS-type customers, Group A customers are those served with voltages above 2.3 kV. These are subdivided according to their voltage level:

• Subgroup A1: voltage greater than or equal to 230 kV;
• Subgroup A2: voltage greater than or equal to 88 kV and less than or equal to 138 kV;
• Subgroup A3: voltage equal to 69 kV;
• Subgroup A3a: voltage greater than or equal to 30 kV and less than or equal to 44 kV;
• Subgroup A4: voltage greater than or equal to 2,3 kV and less than or equal to 25 kV.

These customers are charged amounts related to power demand and energy consumption. This article will understand that the term "energy" in the context of pricing includes the charges for the use of the distribution/transmission system (TUSD/TUST) and the charges for the use of electricity (TE).

Energy billing for these consumers is defined according to the tariff subgroup and tariff station.

Regarding the tariff station, these customers are charged for consumption at the peak tariff station – a daily period of 3 consecutive hours, with the exception of Saturdays, Sundays and national holidays – and the off-peak tariff station – a daily period consisting of consecutive hours and complementary to peak hours.

Due to the high energy demand in the power distribution system during peak hours, energy consumption at this rate is more expensive compared to energy consumption at the off-peak rate. Regarding the types of tariff subgroups, two subgroups are defined:

Blue Hourly Pricing: Available to all tariff subgroups in Group A, with differentiated energy consumption and power demand rates depending on the tariff level. It's important to remember that this customer must request two demand values.

Green Hourly Pricing: available only to A3a, A4 and AS consumers, with differentiated energy consumption rates according to tariff station and a single power demand rate.

Use of a diesel generator to reduce consumption during peak hours
Many companies choose to operate part or all of their loads using diesel generators during peak hours.

The most common structure of a diesel generator energy reduction system includes the generator set itself sized to meet the required load and consumption, a manual or automatic transfer switch to isolate the installation from the grid and direct the supply to the diesel generator generation, in addition to control and protection systems and, eventually, integration with automation systems for scheduled activation.

Sizing must take into account the active and reactive power of the loads that will remain in operation, the simultaneity factor, the usage regime (typically a few hours per day) and the starting time to avoid unwanted peaks in demand before the generator is activated.

From an economic standpoint, the benefits are clear. The cost of generating power with diesel, even considering high fuel prices, for some power utilities is lower than the cost of electricity during peak hours.

On the other hand, operational and environmental aspects must be considered. Using generators involves fuel costs, preventive maintenance, and monitoring operating hours. Depending on the power and length of use, environmental licensing may be required. It's also important to consider impacts related to noise and vibration, especially in urban areas.

From a regulatory point of view, the installation must follow the technical standards of the local distributor, as well as other determinations of the ANEEL. In grid-parallel systems, formal approval from the utility company is required. In the case of systems with open transfer switches, where there is no simultaneous operation with the grid, the process is usually simpler.

In recent years, the use of generators for peak abatement has been complemented by more modern solutions, such as battery energy storage systems, which allow demand reduction without polluting gas emissions.

Diesel generator Capex and Opex

The CAPEX and OPEX of diesel generators vary according to the installed power, the operating regime and the level of automation of the system.

The largest portion of CAPEX is in the generator set itself, whose cost per kVA decreases as power increases. OPEX encompasses operating costs (fuel consumption and storage) and maintenance costs over the equipment's lifespan, which typically ranges from 15 to 20 years.

It should be noted that diesel consumption depends on the power of the load being supplied by the diesel generator. Table 1 shows an example of a diesel consumption curve as a function of the power being supplied by the diesel generator set.

Table 1 – diesel generator fuel consumption as a function of load percentage

OPEX costs involving corrective and preventive maintenance typically range from 1% to 2% of the equipment's CAPEX.

BESS benefits for A4 Group customers

The use of battery energy storage systems (BESS) can bring significant financial and operational benefits to consumers in group A4. The main applications include:

• Reduced costs with contracted demand through peak shaving, using batteries to supply power peaks and avoid high charges;
• Reducing consumption costs during peak hours by charging batteries during periods of cheaper energy and discharging them during times of higher tariffs (time of use).

Total BESS storage capacity

The focus of this article is not to comment in detail on considerations regarding the technical sizing of the BESS, such as considerations on efficiency, maximum battery charging and discharging current, modeling of degradation as a function of temperature and charge and discharge cycles, minimum and maximum inverter voltage limits, among other items.

where, 

DoD (deep of discharge): Maximum depth of discharge of the battery. For lithium, this is 90%;
RTE (round trip efficiency): Overall efficiency of the BESS, which can be set at 90% (losses due to power supply to the lighting, control and cooling systems, DC/AC conversion, etc.), as a very conservative value.

SoH (state of health): Battery degradation condition in relation to its initial condition, in general, a value of 20%-30% can be adopted.

Indicators for economic and financial analysis

There are several indicators that can be used to demonstrate project viability. This article will use discounted payback, net present value (NPV), and internal rate of return (IRR).

Discounted payback

The term "payback" represents the time it will take for the project's revenues to equal the initial investment. Discounted payback (PD) brings cash flows to the same time interval (at present value), incorporating the concept of the time value of money.

Net present value

The net present value (NPV) measure is obtained by the difference between the present value of the project's income and the present value of the investments.

Where,
i = the year of cash flow analysis;
n = total project evaluation time.

The evaluation of an investment using the NPV indicator is summarized in the table below:

Table 2 – Decision criteria using NPV

Internal Rate of Return

The internal rate of return (IRR) represents the discount rate that equates project returns with investments.

Where,

i = the year of cash flow analysis;

n = total project evaluation time.

For this work, the minimum value of 12% will be considered for the IRR.

Case study

This study aims to compare the financial viability of replacing a diesel system with a BESS system to serve peak hours at the Equatorial PA dealership.

The study was carried out based on the energy consumption data of the consumer unit, on an hourly average, starting on January 1, 2023 to December 31, 2023, taking into account the energy costs and demand at each hourly station, considering the analysis period of 15 years.

Figure 1 – consumption curve of the case study. Source – Author

During the discharge of the storage system batteries, despite the parallelism with the utility grid, there can be no energy injection into the distribution system.

This article will provide details on the technical considerations for sizing the storage system – maximum charge/discharge rate, inverter sizing, temperature effect, among others.

All simulations were performed using Homer Grid software from UL Solutions, which is widely used to optimize electrical systems with multiple energy sources (hybrid systems) and energy storage.

The consumer unit, the basis of the study, has the following characteristics:

Table 2 – Consumer Unit Characteristics

Characteristics of energy concessionaires

Equatorial PA's tariffs, the basis of the study, have the following values:

Table 3 – Energy tariff characteristics

Main features of the storage system

BESS has the following characteristics:

Table 4 – Storage System Characteristics

Notes:

1. All equipment, engineering and installation costs included.2.
2. Annual adjustment based on the IPCA

Main features of the diesel generator

The energy concessionaires' tariffs, which are the basis of the study, have the following characteristics:

Table 5 – Diesel Generator Characteristics

Notes:

1. Annual adjustment based on the IPCA

Analysis of financial viability

As previously mentioned, the financial analysis was based on a comparison of the use of a diesel system and a BESS for peak-hour service at the Equatorial PA concessionaire. Table 6 shows the financial results of the case study.

Table 6 – Financial Summary

Conclusion

The results obtained in this study show that the use of a battery energy storage system (BESS) to meet demand during peak hours presents economic advantages compared to the use of diesel generator sets.

The financial analysis, considering the tariff conditions of Equatorial PA, demonstrated that the BESS obtained a higher NPV, a higher IRR and a shorter discounted payback period than the diesel generator.

In addition to the financial benefits, the use of BESS systems brings relevant operational and environmental advantages, such as noise reduction, elimination of local emissions and reduced maintenance requirements when compared to diesel generators.

Thus, it is concluded that, for the scenario analyzed, the alternative with BESS is more attractive from an economic point of view, in addition to being less polluting during operation.

Reference

[1] ASSAF NETO, A.; LIMA, FG Financial Administration Course. 3rd Edition. São Paulo, Atlas, 2014.

The opinions and information expressed are the sole responsibility of the author and do not necessarily represent the official position of the author. Canal Solar.