Energy storage systems can help building operators reduce costs despite continued increases in average electricity prices

According to data from the U.S. Energy Information Administration (EIA), from April 2019 to April 2024, electricity costs for commercial buildings in the U.S. rose by about 20.5%, with significant regional variations. However, for commercial buildings and other large electricity users, focusing only on average electricity prices may cause them to miss potential savings opportunities.

Electricity bills are mainly composed of two parts: generation costs (i.e., the price of generating electricity) and capacity costs (i.e., the price of the infrastructure required for generation, transmission, and distribution). Both costs vary over time. For example, renewable energy has zero marginal generation costs, but its supply is not consistently stable; infrastructure costs fluctuate with demand—they can be minimal during off-peak hours but can spike sharply during peak hours.

These factors lead to significant differences in electricity prices at different times of the day. In California, for example, high solar generation during the day, sometimes exceeding demand in certain seasons, results in lower electricity prices; but after sunset, solar supply disappears and prices rise rapidly. Around sunset is peak demand, when commercial and residential usage overlap, and capacity costs also surge. These factors create significant intraday price differences, sometimes several-fold. Therefore, today's electricity bills depend more on when electricity is used than on total consumption.

Standard rate plans from utility companies typically average out daily fluctuating costs and divide them into tiers such as peak, off-peak, and sometimes super off-peak. Although average electricity price forecasts show slow increases, this masks key trends: peak prices are expected to rise significantly, while off-peak prices are expected to decline. The peak-to-off-peak spread is widening much faster than average prices are rising. For example, according to the Avoided Cost Calculator released by the California Public Utilities Commission (CPUC) in 2022, prices during some peak periods in California are expected to rise by nearly 50% between 2024 and 2044; meanwhile, prices during some off-peak periods are expected to fall by more than 50% over the same period. This means the intraday price spread will nearly triple over the next 20 years. Therefore, in energy usage decisions, buildings that shift consumption to lower-price periods as much as possible can save money.

This price spread is driving demand for on-site energy storage systems. Energy storage helps mitigate the impact of time-of-use high electricity prices, saving money for buildings and reducing their carbon footprint.

The Role of On-Site Energy Storage

Shifting electricity usage to avoid peak prices is easier said than done. Buildings cannot simply shut off power during high-price periods because critical systems like air conditioning must run continuously. On-site energy storage systems help building operators exploit these price differences. Storage systems charge normally from the grid during periods when the price per kilowatt-hour is lowest, and release stored energy to power building systems when grid prices are higher. This way, buildings meet all their electricity needs while drawing from the grid only when prices are lowest.

Thermal energy storage (TES) systems are specifically designed to power air conditioning systems using stored thermal energy. Air conditioning is the largest electricity consumer in buildings, accounting for half or more of a building's peak electricity demand. TES systems avoid some of the biggest challenges faced by lithium-ion battery storage systems, including fire risks and regulatory hurdles. The Inflation Reduction Act (IRA) has provided additional substantial subsidies to encourage storage installation, which can cover up to 50% of upfront costs. Recent energy market reforms have also created pathways for storage system owners to earn compensation by discharging to help reduce grid peak loads, thereby improving return on investment.

Today's thermal energy storage solutions are more compact and modular than earlier designs, and can be retrofitted into older buildings and infrastructure. Since IRA-related government incentives took effect in 2022, the return on investment (ROI) period for on-site thermal energy storage systems has shortened from 3-7 years to about 3-5 years, depending on the region. Additionally, technological advances and higher electricity prices (meaning greater savings when using these solutions) also help shorten payback periods. ROI can be further improved when buildings participate in market programs like demand response and leverage locally available incentives.

The combination of advanced software and government incentives has given rise to an emerging model of "storage-as-a-service." In this model, buildings avoid upfront costs and instead subscribe to a service where the provider supplies all necessary equipment, installation, and on-site storage management. The building then shares electricity savings with the service provider, who uses those funds to finance the storage system. Over time, the building retains a higher share of the savings.

On-site energy storage systems can immediately reduce electricity bills from the moment they first release stored energy for internal use, such as air conditioning.

By proactively adopting energy storage solutions, buildings can take control of rising energy costs. If charged with zero-emission electricity, on-site storage can also help buildings achieve sustainability goals and contribute to urban decarbonization. As buildings reduce their reliance on the grid during peak hours, their annual electricity bills will decline year over year, and grid power will become more abundant, meaning fewer outages for everyone.