AleaSoft Energy Forecasting, October 11, 2024. Battery energy storage is becoming an essential component in balancing an electricity grid increasingly reliant on renewable sources, as well as mitigating market price volatility and reducing renewable energy curtailments. However, to ensure long‑term profitability, companies must diversify their revenue generation strategies, exploring options such as price arbitrage and hybridisation with renewable energies.
In recent years, the United Kingdom has witnessed a major expansion in battery energy storage, driven by the need to balance an electricity grid increasingly reliant on renewable energy sources. Companies and developers have been betting heavily on these projects, with the expectation of earning revenue through balancing and ancillary services, such as frequency regulation. However, the landscape has started to become more complicated for many of them, and some installations are facing challenges they had not anticipated.
Expectations and reality of the ancillary markets
Ancillary services allow batteries to provide flexibility to the grid, helping to stabilise the grid in times of fluctuations in generation or demand. Initially, these markets were seen as a key source of revenue for storage projects. Batteries could respond quickly to system needs, providing a valuable service in an environment that increasingly demanded flexibility due to the intermittency of renewable energy such as wind and solar energy.
However, as more batteries have been installed and bids to participate in ancillary services have grown, prices have fallen and the revenues that companies can earn in these markets have declined. With more batteries available to participate in ancillary services markets, competition has increased considerably, putting downward pressure on prices. While storage remains an essential tool for grid stability, the abundance of options has squeezed profit margins. In addition, electricity grids in the United Kingdom and other countries have made progress in their ability to manage the intermittency of renewable energy without relying so heavily on ancillary services. This is due to technological improvements and greater predictability in renewable energy production, which has reduced the need to use ancillary services.
On the other hand, energy authorities have started to adjust market rules and incentives to adapt to the new reality of increased storage capacity in the grid. This has generated uncertainty among investors, who had expected stable revenues from these markets.
The limits of ancillary services
According to more advanced and realistic analyses and forecasts, ancillary services cannot provide high revenues on a permanent basis. As offers to participate in these services increase, and the need to use them decreases, prices in these markets tend to fall significantly. This means that relying exclusively on ancillary services as long‑term revenue source is a risky strategy.
Revenue stacking of battery energy storage
Energy storage projects must adapt to this new reality through revenue stacking, i.e. by diversifying revenue streams.
One of the strategies that will represent an important part of battery revenues is price arbitrage in the electricity market. This consists of buying electricity when prices are low and selling it when prices are high, taking advantage of market price fluctuations. In addition to generating revenue, this practice helps stabilise market prices, as it creates virtual price floors at times of lower demand and higher renewable energy production, and it reduces the possibility of price spikes at times of higher demand and lower renewable energy production when the battery injects stored energy into the grid.
Another key revenue stream for batteries, and storage systems in general, is capacity services. These guarantee remuneration for being available to cover times of high electricity demand in the system.
Hybridisation of batteries with renewable energy is another strategy that increases long‑term benefits and improves the IRR (Internal Rate of Return) of projects. With hybridisation, storage in the battery can be carried out from the associated farm, either when market prices are low or if surplus production is generated, thus avoiding curtailments while increasing revenues. In addition, this integration also contributes to price stabilisation in the market.
Challenges of battery energy storage
Battery energy storage is a strategic vector in the machinery of the energy transition, but the context in which these projects operate is changing rapidly. Forecasts that brought expectations of continued high revenues from ancillary services have not been realised in general, and companies need to be agile in diversifying their revenue streams to ensure long‑term profitability.
The energy sector, like so many others, is facing a rapid evolution, and those investing in battery storage must be prepared to adapt to the new challenges that this transition to a greener and more flexible system will bring.
AleaSoft Energy Forecasting’s analysis on energy storage
AleaSoft Energy Forecasting has the AleaStorage division, specialised in solutions for the optimisation and management of energy storage systems. This division provides revenue forecasts and reports tailored to battery projects, including several options: stand‑alone projects, hybrid systems of wind energy and batteries, hybrid systems of solar photovoltaic energy and batteries, and hybrid systems of wind energy, solar photovoltaic energy and batteries.
Source: AleaSoft Energy Forecasting.
