Batteries: earning money based on price fluctuation

An increasing number of companies have one and even more are considering getting one: a battery. With more and more wind turbines and solar panels putting electricity on the grid, it is becoming progressively more challenging to balance supply and demand at every moment of the day. Batteries can provide a solution, but the business case can be complex and problematic, say Jeroen de Veth, Jim Quik and Mark Rijntalder of Pondera Consult.

 

Making money by balancing supply and demand? It is possible and the principle is simple. A battery is charged when wind turbines and solar panels provide more power than is required at that moment. At that moment the electricity is cheap because of the excess supply. This same electricity is then resold at a higher price when the demand is high and supply low. ‘A battery is most economically used if you can take advantage of availability allowances and price differences in five submarkets’, states De Veth. But exactly how significant are these price differences, and how often can you buy at a low cost and sell at a higher price? Which submarkets are the most interesting and what are the risks? ‘We have developed a calculation model precisely for that purpose. It calculates exactly what the earning power of a battery is and how to optimise it’, says Rijntalder. It sounds simple, but there is a whole world behind it.

De Veth, Quik and Rijntalder explain.

The idea

Suppose you operate a wind farm and the grid connection is slightly larger than the capacity of the farm. Using wind models, we can assess your remaining grid capacity, and what share is available at what time. Our calculation model then allows us to determine how a battery can capitalise on changing market conditions and what income would be generated. We call this the ‘Revenue Assessment’.

Which parties are involved?

The electricity grid has to be kept in balance throughout every moment of the day; an equal amount of power must always be offered to the grid as consumed. TenneT, the high-voltage grid operator, monitors the balance of supply and demand. The state-owned company does so in two ways. Firstly, all energy companies share their forecast for next-day generation and consumption with TenneT. Energy companies like Eneco and Essent are called ‘Balance Responsible Parties’ (BRPs). BRPs therefore ensure the best possible balance between supply and demand in their planning. But on the day itself, supply and demand can of course differ from the planning. TenneT needs to adjust in real time and buys balancing services from a Balancing Service Provider (BSP).

As a battery owner, you cannot directly participate in the energy market, for that you need to be a BRP or BSP. Before negotiating with a BRP or BSP, it is useful to know the earning potential of your battery and where the vulnerabilities lie. As an external party, Pondera can use its Revenue Assessment to make an accurate estimate of the revenues and risks, and thus of the market value of the battery. This is particularly important because the revenues of batteries are difficult to guarantee, unlike wind and solar farms.

Who do you do business with as a battery owner?

There are various ways of balancing the power grid, and therefore different ways of generating revenue. BRPs and BSPs aim to match their supply to demand as best they can. But they always need ‘regulating power capacity’, including power from external providers. A number of submarkets are relevant to that regulating power capacity. For instance, you have the ‘Frequency Containment Reserve’, a rapid response capability capable of absorbing disruptions on the network. FCR is contracted by TenneT through BSPs in blocks of four hours. If you offer your battery for FCR, the power offered must also be permanently available to charge or discharge for four hours. If you cannot deliver, you risk a fine. Another submarket is the ‘Automatic Frequency Restoration Reserve’ (otherwise known as aFRR) and is somewhat similar to the FCR. The difference is that the time period is longer and you get paid not only for offering the battery’s power, but also for every megawatt-hour delivered by the battery.

Offering flexible power is profitable, because if BRPs fail to maintain balance, TenneT itself has to intervene at a considerable cost. For this reason, more and more BRPs are turning to contracting storage to be active in the Intraday and Day-Ahead market for portfolio optimisation and imbalance prevention. This earning potential is also reflected in the Revenue Assessment.

How does the business model work?

As a battery owner, it’s beneficial to make use of a charge/discharge cycle as often as possible with as big a price difference as possible. The price difference should at least be significant enough to make up for the battery’s efficiency loss (usually between 10% and 20%). Pondera’s calculation model determines which options (e.g. FCR or aFRR/unbalance) are most profitable for a specific battery, allowing its owner to be well-informed before approaching and negotiating with BSPs. The engineers at Pondera understand how big the different submarkets are. For example, for the FCR market 116 megawatts of capacity is contracted. So if you have 500 megawatts of capacity on offer, you will have to use several submarkets. There are batteries from 1 megawatt up to tens of megawatts. In the future, we expect there will be batteries of hundreds of megawatts.

Which companies could benefit?

The majority of clients Pondera works for are professional parties. In some cases, they have already spoken to an energy company and are wondering if they have received a favourable offer. In that case, the ‘Revenue Assessment for Batteries’ offers a second opinion. Landowners near a high-voltage substation often have a surplus of space. They could lease that land to a third party, who then puts a battery on it. Such landowners want to know the revenue potential for that plot of land. Pondera focuses on the flow of revenue, not on costs; the customer is usually well aware of what the purchase and maintenance of a battery costs. With the revenue forecast that Pondera provides, the client can then make a sound business case for themselves.

How large is this market?

Pondera handles a lot of permit applications for battery systems which gives us insights into the current developments. We are also receiving signals from many market players who want to invest in batteries. Our estimation is that several Gigawatts of storage capacity will be added in the coming years.