On which Energy Markets do Battery Energy Storage Systems (BESS) participate?

Definition

In Germany, the energy market encompasses all markets for electricity and gas transported via the respective grid. This includes exchanges and other trading centres where both are traded as an energy source, as well as markets for ancillary services. An example of such a service is the provision of reactive power, which is used to maintain the voltage in the electricity grid rather than power electrical appliances.

Wholesale Energy Markets

A large-scale Battery Energy Storage System (BESS) can engage in wholesale energy trading in several ways. The fundamental principle behind these methods is purchasing electricity at low prices and then selling it at higher prices. This takes advantage of the differences in electricity prices at different times of day or on different days of the week. The battery storage units "physically" store the electricity during the period between purchase and sale.

Arbitrage Trading with a BESS

Arbitrage trading with a BESS takes advantage of price fluctuations in the power market. A typical marketplace for such arbitrage transactions is the spot market of an electricity exchange. To realise such transactions, electricity storage systems have to react very quickly - especially for trading on intraday markets.

Arbitrage profits with BESS are possible in particular because of the volatile power generation of wind and solar energy. When they become productive, spot market prices tend to fall because, unlike coal and gas, solar and electricity do not cost producers anything. Hence, the marginal costs for wind and solar power are zero, and when they cover the entire demand, the intraday or day-ahead prices fall to this value: zero. If they feed in more than is consumed, prices can even become negative, resulting in payments for purchasing electricity.

Conversely, when renewable generation drops, prices rise again, leading operators of conventional power plants to use coal or gas to meet demand. Due to the German electricity market design with merit order, this price also applies to all other electricity sources, including BESS, and electricity stored cheaply can be sold at a higher price.

Renewables and Short Term Price Volatility

The relationship between renewable energy and the short-term volatility of electricity prices on wholesale markets is complex. Several factors influence the interaction, including the market share of renewable energy, the availability of storage facilities and the flexibility of the energy system. In general, as the share of renewable energy rises, short-term power price volatility increases. This is because energy sources like solar and wind do not feed in constantly, causing supply and demand imbalances to appear more frequently and more quickly than with controllable power plants, leading to higher price volatility.

Integrating energy storage systems such as BESS, can help minimize the impact of fluctuating renewable energies on short-term electricity price volatility. By storing surplus energy and feeding it back into the grid when needed, batteries can balance supply and demand.

The quicker all entities involved respond to changes in supply and demand, the less impact renewable energies will have on the short-term volatility of electricity prices. In addition to battery storage, this includes a diversified energy mix, flexible conventional power plants, and demand-side management options.

It is important to note that the interactions between renewable energies and short-term electricity price volatility can differ based on market conditions, the electricity market design and the characteristics of the electricity system.

Defining Short Term Price Volatility in Electricity Wholesale Markets

Electricity price volatility refers to how much and how often prices change in the wholesale electricity markets. It is influenced by factors such as shifts in supply and demand, weather conditions, unexpected outages, and more. Short-term electricity price volatility specifically relates to fluctuations in electricity prices within minutes, hours, or a few days.

For instance, if the electricity price in a specific market is €50/MWh in the morning, €100/MWh in the afternoon, and €70/MWh in the evening, this would be considered high short-term price volatility. Conversely, if the price remains between €70 and €80/MWh for an entire day, the volatility would be classified as low.

How does electricity price volatility affect the electricity market? 

Price volatility can significantly impact the entire electricity market by affecting the income and costs of electricity producers, the margins of suppliers, and consumer prices. High volatility can also lead to uncertainty among market participants, complicating and delaying investment decisions.

Price volatility depends on market design, regulation, and the characteristics of the electricity system. These characteristics include the share of renewables in electricity generation, the availability of storage and transmission options, and the overall flexibility of the system.

Ancillary Services Market

BESS can also participate in markets for ancillary services such as frequency regulation, peak shaving and black start..

The market for balancing energy

A battery storage system can participate in the energy market by providing balancing services to the grid operator, usually the transmission system operator (TSO). The goal is to stabilize the grid frequency by balancing the electricity supply and demand with minimal lead time. Because they can react quickly to charging and discharging commands, battery storage systems are well-suited for providing services such as primary control reserve (PCR), also known as frequency containment reserve (FCR), in Europe.

Capacity Market

BESS can also participate in a capacity market by providing reliable reserve capacity for the grid. During periods of high demand, the grid operator can access the electricity storage system to counteract a voltage drop and prevent brownouts (localised power outages) or even large-scale blackouts.

Value Stacking

BESS are suitable for value stacking, meaning they can participate in multiple markets to generate various income streams and maximize overall investment value. For instance, a BESS can engage in arbitrage transactions during periods of high power price volatility, while also providing primary or secondary control energy when those market opportunities look more favorable.

Another example is a BESS that provides capacity for a capacity market can market its black start capability when required. This means that in the event of a power outage, it provides stored energy to supply power plants with enough electricity to resume generation and rebuild the power grid.

Value stacking can increase the revenue potential of a BESS and at the same time increase the benefits for the grid and for society. However, this requires a good understanding of the various markets and regulations as well as an efficient battery management system and a flexible battery technology.

Route to Market for Battery Energy Storage Systems

The market access for a BESS is typically done through an energy trader or a "virtual power plant," which connects a group of distributed energy resources to provide various ancillary services.

It's important to understand that different markets have distinct rules and regulations. As a result, the opportunities for market participation depend, among other things, on the location of the electricity storage system.