LCOS Methodology for Energy Storage Systems Incorporating Discharge Capacity Maintenance Constraints under Capacity-Based Contracts

Large-scale Energy Storage Systems (ESS) are increasingly recognized as a cornerstone for grid flexibility and the expansion of renewable energy. Consequently, the Levelized Cost of Storage (LCOS) has been widely adopted as a key economic indicator across various electricity markets. While conventional LCOS methodologies effectively serve energy-oriented markets, they exhibit significant limitations in capacity-based contractual environments, where specific operational constraints and rigid capacity maintenance requirements are enforced. This study proposes an advanced LCOS estimation framework that explicitly incorporates two critical constraints: the mandatory maintenance of discharge capacity throughout the contract period and the prohibition of mid-term capacity expansion. To meet these requirements, the model integrates a 'preemptive oversizing strategy' at the initial installation phase to compensate for expected degradation. Furthermore, the framework endogenously reflects the dynamic feedback loop between capacity fading and degradation rates; specifically, it accounts for the gradual increase in the effective Depth of Discharge (DoD) required to maintain constant discharge energy as the system ages, which in turn accelerates cycle-life depletion. Comparative analysis using a simplified grid-scale ESS case demonstrates that traditional LCOS approaches systematically overestimate the economic feasibility of ESS under capacity-based contracts by neglecting the coupled effects of oversizing costs and DoD-induced lifespan reduction. This research clarifies that cost metrics must be tailored to the specific market structure and provides a robust methodological expansion to support consistent design, operation, and investment decision-making for ESS in evolving electricity markets.