Revenue stacking in the French markets

Revenue Stacking in the French Markets

Energy Trading · May 12, 2024 · 10-minute read

Why do electricity markets exist?

In July 2007, the electricity market was fully liberalized to ensure an affordable energy supply for all consumers (see the European Parliament’s description of the internal energy market). The emergence of multiple suppliers raised concerns about ensuring both adequate supply and grid stability. To promote economic efficiency, wholesale markets were created where electricity can be traded between suppliers, producers, and large consumers. The grid cannot store electricity, so production and consumption must be balanced at all times to keep it stable and in equilibrium; however, 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 grid frequency deviates from 50 Hz. Let’s explore in more detail the opportunities these markets provide. If you want to learn more about how and why these markets work, you can check out Pierre Pinson’s course here (especially modules 1 through 4). Another excellent resource (in French this time) is 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 operating 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 being integrated into this system, allowing energy to be stored when renewable sources produce excess power and discharged to reduce costs and emissions when renewable sources are insufficient, thereby helping to reduce global emissions as well as improving the economic efficiency of the system.

The two main markets for batteries are:

The day-ahead market (DA) → This is a daily auction held at noon that sets a price for each hour of the following day and operates on a pay-as-you-go 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 comparison, 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 p.m. on 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 offer significant opportunities due to the high volume of trading and notable price volatility. Batteries can capitalize on this volatility thanks to their flexibility, which allows for continuous re-optimization based on market conditions. However, this requires considerable expertise in optimization methods and software development due to the large amount of data that must be processed.

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 predictable revenue when the bids are selected. In the FCR market, the activated energy is then compensated at the spot price, whereas in the aFRR energy market, the activated energy is compensated at the marginal price. In the latter, individual bids can be submitted 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’s role, and optimization professionals can generate significantly more value in this context.

Market imbalance

In France, the imbalance market ensures that participants are responsible for maintaining the supply-demand balance. It sets various prices at which electricity is billed to participants whose injected and withdrawn volumes do not match. While these 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 choosing to trade on the CID market. For more details on this market and how prices are determined, you can read this article.

Capacity mechanism

The capacity mechanism is designed to ensure the security of the 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 participants. The first are the capacity operators, who certify the availability of their assets for a specific year with RTE (the French TSO). In return, RTE issues capacity guarantees. These guarantees can then be sold to obligated parties—primarily electricity suppliers—who must ensure they have sufficient capacity to cover their customers’ consumption during periods of high demand. Trades and exchanges can take place either over the counter or through various auctions. By certifying capacity, you commit to being available on “PP2” days, which are days of high consumption or days marked by a risk situation for the system.

Revenue stacking for optimal utilization

Revenue stacking offers opportunities to fully leverage battery capacity. The different market time horizons allow for both securing revenue over long-term periods and short-term optimization to capitalize on local price volatility opportunities. The responsiveness of battery assets is key. It allows the operator to quickly switch between daily optimization and constrained operation, thereby enabling participation in the long-term capacity market to secure revenue while continuously re-optimizing the asset to capture short-term volatility. At StackEase, we leverage markets across all time horizons to ensure maximum revenue extraction and optimal dispatch of your asset. If you’d like 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 responsible for transporting energy in the form of natural gas or electricity at the national or regional level, using fixed infrastructure” https://en.wikipedia.org/wiki/Transmission_system_operator#:~:text=A transmission system operator

The TSO has a monopoly on electricity transmission in a given region. It is responsible for balancing the grid.

Merit order:

The merit order is a ranking of power plants based on their operating costs, from the lowest to the highest. This system prioritizes the dispatch of power plants with the lowest operating costs first to ensure economic efficiency and minimize overall electricity generation costs.

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

In a pay-as-clear auction system, all successful bidders receive the same price—the highest accepted bid—regardless of their individual bid amounts. In power markets, this promotes transparency and encourages participants to bid based on 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.