Clean Energy Transition

Harnessing Battery Storage: The Key to a Sustainable Energy Future

Energy Trading · 12 May, 2024 · 10 Min Read

Why electricity markets exist ?

In July 2007, the electricity market was fully liberalized to secure an affordable energy supply for all consumers (see the European parliament’s Internal energy market description). The emergence of several suppliers raised questions about ensuring both adequate supply and network stability. To promote economic efficiency, wholesale markets were created where electricity can be traded between suppliers, producers, and major consumers. The network cannot store electricity, so production and consumption must be matched at all times to keep it stable and balanced, but maintaining this balance becomes more challenging as the number of market participants increases. Therefore, to assist the transmission system operator (TSO), reserve and balancing markets were established. These markets enable producers to offer their assets for use by the TSO when network frequency deviates from 50 Hz. Let’s explore in more detail the opportunities these markets provide. If you want to learn in more details how and why theses markets work, you can check the course by Pierre Pinson here (especially modules 1 to 4). Another excellent source (in french this time) are the videos on the YouTube channel Heu?reka.

Wholesale markets

Wholesale power markets are platforms where electricity is bought and sold in bulk, typically by utility companies and large industrial consumers. These markets operate competitively, allowing participants to trade electricity for immediate delivery (spot markets) or future delivery (forward markets). They are designed to prioritize power plants with the lowest operating costs (merit order). This system determines the order in which power plants are dispatched based on their running costs, prioritizing the use of the most cost-efficient plants first. This approach promotes economic efficiency and often supports renewable energy sources. Batteries are increasingly integrating into this system, allowing energy to be stored when renewable sources produce excess and discharged to reduce costs and emissions when renewable sources are insufficient, thus helping reducing global emissions as well as improving the economic cost of the system.

The two main markets accessible to batteries are:

The day-ahead market (DA) → This is a daily auction held at noon, setting a price for each hour of the next day and operating on a pay-as-clear payment basis. The DA market is the primary tool for participants to balance their positions (53,733.2 GWh traded on EPEX in May 2024 – for comparaison the french consumption during the same period was 123 254 GWh).
The continuous intraday market (CID) → This is a continuous market where electricity products can be traded from 3:00 pm the day before delivery up to 5 minutes before delivery. The CID market is smaller but growing faster than the DA due to the rise in renewable energy production (17,980.4 GWh traded on EPEX in May 2024, with a 30.6% year-on-year increase compared to 26.2% for the DA). It operates on a pay-as-bid basis.

These two markets present significant opportunities due to the high volume of exchanges and notable price volatility. Volatility can be leveraged by batteries because of their flexibility, allowing constant re-optimization based on market conditions. However, this requires considerable expertise in optimization methods and software development due to the large amount of data to process.

Reserve and balancing markets

Frequency response

To keep the grid stable, the transmission system operator (TSO) uses power units obtained through auctions to manage power flow as needed. Automatic Frequency Restoration Reserve (aFRR) and Frequency Containment Reserve (FCR) are two markets that present opportunities for battery operators. These markets are divided into a capacity and an energy component. The capacity component – making the asset available to the TSO for frequency restoration – ensures a small but foreseeable revenue when the bids are selected. In the FCR market, the activated energy is then compensated at the spot price, whereas on the aFRR energy market, the activated energy is compensated at the marginal price. On the latter, individual bids can be made every 15 minutes, and the marginal price is calculated every 4 seconds by the TSO, allowing for more precise optimization of battery revenues. Working with such detailed time data and multiple parameters for bidding on various revenue streams differs from a typical battery operator role, and optimization professionals can generate significantly more value in this context.

Imbalance market

In France, the imbalance market ensures that participants are responsible for maintaining supply-demand equilibrium. It sets various prices at which electricity is billed to participants whose injected and extracted volumes do not match. While the prices are designed to prevent arbitrage, the imbalance market provides opportunities to adjust the balancing strategies of battery assets by either accepting the imbalance fee or opting to trade on the CID market. For more details on this market and the price formation, you can check out this article.

Capacity mechanism

The capacity mechanism is intended to safeguard the security of electricity supply in France during peak winter periods.

The capacity mechanism in France aims to ensure the security of electricity supply during peak winter periods by incentivizing the availability of power capacity. This mechanism involves two types of actors. The first are the capacity operators, who certify their asset availability for a specific year with RTE (the French TSO). In return, RTE grants capacity guarantees. These guarantees can then be sold to obligated parties, mainly electricity providers, who must ensure they have enough to cover their clients’ consumption during high-demand periods. Trades and exchanges can be made either over the counter or during several auctions. By certifying a capacity, you commit to being available on “PP2” days, which are days of high consumption or marked by a risk situation for the system.

Revenue stacking for optimal exploitation

Revenue stacking offers opportunities to exploit battery capacities to the fullest. The different market horizons enables both revenue securing over long term periods as well as short-term optimization to capture local price volatility opportunities. The responsivity of battery assets is key. It enables the operator to quickly switch between daily optimization to constrained functioning, thus enabling the participation on the long term capacity market securing revenues while constantly re-optimizing the asset to capture short-term volatility. At StackEase we exploit markets on all the horizons to ensure maximal revenue extraction and optimal dispatching of your asset. If you want to learn more about how we can help you increase your efficiency through revenue stacking contact us here.

Glossary

TSO :

“A transmission system operator (TSO) is an entity entrusted with transporting energy in the form of natural gas or electrical power on a national or regional level, using fixed infrastructure” https://en.wikipedia.org/wiki/Transmission_system_operator#:~:text=A transmission system operator

The TSO has the monopoly of the electricity transmission over a region. It is in charge of balancing the grid.

Merit order :

The merit order is a ranking of power plants based on their operational costs, from the cheapest to the most expensive. This system prioritizes the dispatch of power plants with the lowest running costs first to ensure economic efficiency and minimize overall electricity production costs.

Pay-as-clear & Pay-as-bid :

In a pay-as-clear auction system, all successful bidders receive the same price, which is the highest accepted bid, regardless of their individual bid amounts. In power markets, this promotes transparency and encourages participants to bid their operational costs. In contrast, a pay-as-bid system requires each bidder to be paid exactly what they bid, which can lead to strategic bidding and potentially higher overall costs as participants may inflate their bids to ensure profitability.