Energy arbitrage: A green way of making money
THOUGHT LEADERSHIP |Norman Jackson, Vice-Chairman, South African Energy Storage Association
Every businessman’s dream is to be able to buy low and sell high, without any risk, and on a contract that goes on for dozens of years. – Well that opportunity exists today in energy arbitrage, where you can …
Well, now that I have your attention. Let me tell you that only works in the high-demand “Winter” three months, the remaining nine months, it is a cost of R0.51 and a selling rate of R1.16 – which makes any calculation complicated, so let’s just proportionally blend the tariffs and get a tariff of R1.7660 (Peak), R0.8717 (Standard) and R0.5283 (0ff-peak).
To try and equalise the supply and demand curve for energy in South Africa state utility, Eskom, has a Time of Use (TOU) tariff structure for large users of electricity.
This opportunity has been around for a long time. The issue has been the cost of storing energy for two hours, which was prohibitively expensive. Well, thanks to electric vehicles and green initiatives, science and engineering have brought down the cost and it is not only theoretically, but also commercially, viable.
In simple terms, we are talking about a large uninterruptible power supply (UPS) that comes in one or more shipping containers. In technical terms, it is a battery storage system (BSS) with a discharge rate of two hours (C=2), a rated capacity calculated after the normal depth of discharge, a degradation of less than 20% over 10 years, based upon 6 000 cycles on the full discharge of rated capacity. The round-trip efficiency of the batteries should be 95% and power electrics 97%, having an overall loss of less than 7%.
Typically, a UPS is expensive, but when you compare it to what happens when you have a sudden interruption in power, the cost is negligible.
– But I digress, having a UPS is a by-product, not the intent of the BSS.
Energy storage is an expansive field, all the way from a human body to a pumped storage hydro scheme. The options are endless, and the technologies are constantly improving. For this example, I am going to choose one of the most common battery storage systems, that is readily available – Lithium Iron Phosphate (LFP). A BSS of the above specification is less than US$400 /kWh (R6 400/kWh). This example is more appropriate for consumers of more than 500kW.
“Sweating the asset” – having an expensive asset at our gate and only using it five times a week for the morning peaks is not optimum. We could also use it for the evening peak by charging it during the day (Standard). We can also use it twice on a Saturday charging at Off-peak and discharging at the Standard rate. In summary, 12 times a week, 50 weeks (considering public holidays), 10 years, which is 6 000 cycles.
Ok, we are now ready to do some calculations:
If we take a figure of 3% of CAPEX for maintenance and battery supplement to keep to our 100% rated capacity, we are looking at ROI of about 13% in year one, but with a modest Eskom increase of 8% a year, the ROI is above 25% in year ten.
Increasing the ROI
From the above, I hope that you agree energy arbitrage pays for itself and is an investment, I am not going to talk technical and put a value to having a huge UPS on your doorstep or try to estimate the savings in network demand charges, which for many customers, are significant.
If we add solar PV to our system, we have our very own power station, and we can charge our BSS System during the day as well. For those not familiar with PV, it is a generator that produces electricity from solar irradiance, but usually requires a reference grid (on-grid). With a BSS, the system would be able to work off-grid as well, which is sometimes referred to as island mode.
In Johannesburg, a solar PV system has a CAPEX cost of less than R9 000/kW, and producers yearly an average of about 2 000Wh a year. Which is about 5.5hrs/day of 100% output. (The actual output is more of a bell curve with lots of slices taken out of it due, to clouds and technical issues. – Another discussion.)
The calculation for the saving/income a solar PV system would give looks generally like this:
That is a healthy 17% in Year One (based on an O&M cost of 2%) and with an 8% escalation in energy prices annually, we are looking at over 35% in Year 10 of its 25-year life output warranty.
Going “green” is no longer an emotional or “right thing to do” decision, it is now the right business decision.
Source: Eskom, Tariffs & Charges Booklet 2020/2021 (www.eskom.co.za/tariffs)View more