A Beginner's Guide to Energy Storage Arbitrage
As the energy transition continues with more renewable energy resources participating in energy markets, the concept of storing this renewable energy is front and center for market participants. With battery energy storage systems gaining more market share, energy storage arbitrage opportunities continue to present themselves in certain markets. But what does energy storage arbitrage mean and what is its impact on power markets? Let’s take a brief walk into the electricity markets to understand how and why energy is stored.
What is Energy Storage Arbitrage?
The term arbitrage in financial markets is when market participants take advantage of the differences in prices of an asset between when it’s bought and sold. In other words, an asset (securities, commodities, currencies, etc.) is purchased at one price with the intent to make a profit when the asset is sold.
Energy storage arbitrage works in a similar way - electricity is stored when the price of electricity is cheap and dispatched when electricity is expensive. Energy storage projects earn revenue from the delta between the price at which power is stored and then sold into the market when the electricity is dispatched.
Battery Storage Arbitrage
Battery energy storage systems, like lithium-ion, are typically the types of storage products participating in electricity markets today. However, energy storage technologies like pumped storage hydro also participate in the market.
The concept of battery storage arbitrage is simple. Let’s use our cell phone as an analogy. We charge our cell phones overnight to then use our phones the next day. Similarly, battery energy storage systems store electricity from the market to use later when the electricity is most needed.
Renewable Energy Arbitrage
Intermittency is a fact of life when it comes to the production profile of solar and wind assets. Solar and wind are ideal when the sun is shining or the wind is blowing. However, cloudy days and low wind speeds for long periods of time eat away at solar and wind project revenues.
One strategy to combat this erosion of value is to to pair a battery energy storage system with a solar or wind project, or develop a stand-alone battery energy system. The battery stores excess electricity from the solar or wind project and then dispatches the stored electricity during periods of peak demand on the electricity grid or low electricity output from the project. In other words, these projects can take advantage of renewable energy arbitrage.
Energy Arbitrage Strategies
While not an exhaustive list, here are a few energy arbitrage strategies:
Demand-Charge Reduction: Demand charges can be a high cost for commercial and industrial customers (C&I) operating during periods of peak demand on the electricity grid. Some businesses pay higher electricity rates during these periods of high demand. C&I customers with access to energy storage can draw against stored electricity to reduce their peak demand and hopefully reduce electricity costs.
Resiliency and Backup Power: Electricity consumers in natural disaster areas (wildfires, hurricanes, etc.) know the pain and safety issues of being without power for long periods. Energy stored in batteries can be a short-term solution for customers experiencing power outages.
Avoided Renewable Energy Curtailment: Power Purchase Agreements and interconnection agreements typically have provisions for curtailment risk - electricity from your project is reduced or restricted from participating in the market reducing your revenues. If a project has the ability to store its electricity during periods when supply exceeds demand, and then dispatch its stored electricity later, energy does not have to be wasted.
Transmission and Distribution Upgrade Deferral: Congestion, like curtailment, is something to keep in mind when contracting power from a solar or wind project. Energy storage can potentially ease congestion on power lines translating to a decreased need for infrastructure upgrades to alleviate congestion.
Frequency Regulation: The electricity grid is a unique beast in that supply must meet demand at all times instantaneously. The ability to stabilize the frequency of the grid, frequency regulation, is where batteries can quickly respond to the grid’s need for stabilization.
Why Energy Storage Arbitrage Matters
Demand charge costs can make up a significant portion of a C&I bill every month. By using stored electricity when prices are high, there’s an opportunity to realize cost savings by not purchasing electricity at peak demand on the electricity grid.
Residential customers typically don’t have demand charges. However, residential energy storage plays a crucial role if your goal is to reduce your reliance on the electricity grid. Solar panels on your roof displace the electricity you’d otherwise purchase during the day while batteries can fill a short-term gap when solar production is low and your home’s electricity usage ramps in the early evening (i.e. AC is turned on, washing dishes, etc.).
The Future of Energy
There’s no shortage of talented, experienced, and competent energy storage developers in the market taking on energy storage arbitrage opportunities. As power markets continue to absorb more renewable energy supply, energy storage will continue to play an outsized role. Filling the supply gap when the sun isn’t shining or the wind isn’t blowing is one fantastic way for batteries to participate in the market.
