Battery energy storage systems (BESS) are playing an increasingly pivotal role in global energy systems, helping improve grid reliability and flexibility by managing the intermittency of renewable energy. But uncertainty over the profitability of such systems in Europe risks holding back their roll-out, according to Rystad Energy research. As well as providing trading (arbitrage) opportunities for operators, the development of large-scale BESS projects is essential for the energy transition, helping balance fluctuations in renewable energy and improving grid reliability. As such, any slowdown in battery storage growth could spell bad news for the energy transition.
BESS energy arbitrage, the process of charging batteries when electricity prices are low and discharging them during higher-priced peak demand periods, is a promising avenue for operators to maximize margins and generate revenue. According to our latest research, which analyzes day-ahead power prices in Europe for 2023, Bulgaria (BG), Italy (NORD) and Hungary (HU) offer the highest profit potential for BESS energy arbitrage. In contrast, Nordic power markets, specifically Sweden (SE1), Norway (NO1) and Finland (FI), exhibited the lowest profit potential due to their relatively low peak prices.
Bulgaria’s power market offers the most opportunity for high revenues, with a battery storage system with two hours of discharge capacity using energy arbitrage capable of generating €110 per megawatt-hour (MWh) in terms of average spot market revenue in 2023. Related: The World’s Safest and Deadliest Sources of Energy
“BESS capacity could be the key to a reliable, green energy future, but questions over its profitability could severely slow uptake. Currently, profitability is limited to markets operating under very specific conditions, so policies and incentives are required to mitigate risk and encourage build-out. While spot market profits exceed system costs in a few European countries, even a 30% tax credit on BESS projects may not be enough to make energy arbitrage a standalone viable business case in 2023,” says Sepehr Soltani, energy storage analyst at Rystad Energy.
Soaring prices in Europe's spot power market and a growing emphasis on emission reduction have propelled power purchase agreements (PPA) into the spotlight as an enticing option for buying parties seeking to secure clean energy sources at stable and competitive prices. Just as PPAs increase the appeal of solar and wind farms, attracting investors and propelling industry maturity in recent years, this mechanism holds promise as a potential solution for BESS as well.
Categorized as either physical PPAs or virtual PPAs, the latter are gaining increasing traction due to their inherent benefits. A virtual PPA (VPPA) is a contract structure in which a power buyer agrees to purchase a project's power at a pre-agreed price. Under this arrangement, the utility project receives the market price when the energy is sold. If the market price is higher than the fixed VPPA price, the buyer pockets the difference. In essence, VPPAs provide BESS projects with a guaranteed price for output, which is highly advantageous for developers seeking to finance new projects.
Due to the ongoing European energy crisis and significant shifts in the market, the growing reliance on renewable energy within Europe's power mix will introduce heightened unpredictability in the coming years. This uncertainty will be exacerbated by the limited availability of flexibility options (FO) in grid – such as cross-border trade and BESS – amplifying the potential negative impact of a low-priced PPA on a BESS revenue stream and creating large degrees of variance for BESS owner.
Based on current prices in 2023, any PPA in Europe priced below €75 per MWh would result in a financial loss for the BESS owner. Some markets have minimum prices far above €100 per MWh, relatively far from where PPA prices for renewable energy are currently.
To ensure BESS projects function as profitable tool, a relatively high PPA price is necessary to compete with energy arbitrage revenues in 2023. This is based on the assumption of a one-charge discharge cycle per day, which aligns with current market standards.
Engaging the expertise of a trading specialist allows for the maximizing of profits by strategically operating BESS across various markets, including capacity markets, while consistently delivering the agreed-upon power in the PPA. This entails reserving a portion of BESS capacity for services such as energy curtailment and frequency control ancillary services (FCAS) throughout the day. Such a proactive strategy not only amplifies potential revenue streams but also enables a reduction in the minimum PPA that the BESS owner must offer. Consequently, this adjustment increases the attractiveness of the PPA price for the buyer (offtaker), while adding more complexity to the BESS operation.
While the prevalence of traditional PPAs for BESS may be declining in Europe compared to solar and wind agreements due to the inherent differences in their operational nature, its flexibility remains its hallmark.
This flexibility allows BESS operators to take advantage of volatile power markets and provide grid services such as frequency regulation and peak shaving. The attractiveness of energy arbitrage opportunities for BESS varies across markets and depends on the specific time and power system situation.
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The current volatility in European power markets presents substantial energy arbitrage opportunities and offers BESS operators considerable flexibility, providing an additional source of flexible supply and addressing the evolving needs of Europe's power market.
By Rystad Energy
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