Calculating Behind-the-Meter Energy Storage Incentives on an Avoided Cost Basis

Behind-the-meter (BTM) energy storage offers the potential for shared investment by utilities and their customers, in which both parties share in the costs and benefits of battery investment. Several utilities and a handful of states have begun providing incentives to help customers purchase BTM energy storage, and in exchange, operate that battery on behalf of the customer to realize grid benefits such as meeting peak capacity needs. But there is wide variation in the value and structure of these incentives, suggesting a lack of clarity on the value of BTM storage to the grid and to non-participating customers who fund the incentives for participating customers. This paper provides an objective framework for establishing BTM energy storage incentives based on the avoided cost of generation from a marginal, gas-fired peaking plant. It also conducts several sensitivity analyses to see how those avoided costs vary with emissions pricing, gas prices, plant heat rates, and utility capital structures. This work may be of use to utilities, regulators, and energy system stakeholders in providing a value-based framework for BTM incentive programs that can be used in the absence of policy guidance.