Battery storage and electricity pricing: cost savings through the expansion of flexibility?

Battery storage and electricity pricing: cost savings through the expansion of flexibility?

Battery storage systems are described as a key technology in the German energy transition. Thanks to their ability to react quickly to imbalances in the power supply, they can be used in a variety of ways.  

If the storage system is active on energy markets, price signals on electricity exchanges and balancing power markets control the charging and discharging behavior of the storage system. In addition, the storage system is able to provide non-frequency-based services such as improving voltage stability and grid inertia. If there are bottlenecks in the electricity grid, the storage system can counteract this in a targeted manner by being used in redispatch. The use of battery storage for grid stabilization and infrastructure can avoid lengthy grid expansion.
A battery storage system with a suitable strategy is able to combine grid-friendly behavior with market-oriented action. This interaction makes it possible to address and reduce some of the biggest problems in the energy system. For example, storage can contribute to a more effective integration of renewables into the electricity system, the reduction of electricity costs for end consumers, but also the improvement of voltage stability. Not all positive influences can be quantified equally. For this reason, this article focuses on the market activity of storage facilities on the day-ahead electricity market. We analyze how the reaction of the battery storage system to market signals can generate added value.  

Use of Kyon energy storage systems on the day-ahead market

The behavior of battery storage systems on the electricity markets results in long-term ecological and economic benefits. For example, the charging and discharging strategy of a battery storage system can lead to more electrical energy from renewable sources being used. In addition to these ecological aspects, the use of battery storage systems can already save German (and European) citizens money today. This effect that the expansion of storage capacity in Germany has on electricity pricing will be explained and quantified below.  

Assuming the targets set by the grid development plan of 23.7 GW of additional storage capacity by 2030, the expansion of storage projects must be significantly accelerated. This is because Germany currently (November 2023) has just 1.2 GW of storage capacity from large-scale battery storage systems. Kyon Energy would like to play its part in driving forward the expansion so that the storage projects can develop their added value in a timely manner. For this reason, the following calculations consider the projects that Kyon will realize in the short term. This consideration results in an additional installed output and capacity of 3 GW/6 GWh. For the calculations made, it is assumed that these large-scale battery storage systems are already active on the day-ahead market today. The charging and discharging behavior of the storage facilities is controlled by the price signals on the day-ahead market. In addition, the filling level of the storage facility (state of charge) and the maximum restriction on the daily number of cycles (1.5 cycles per day) must be taken into account.  

Especially on days with extreme price fluctuations on the electricity exchanges, the cost savings for electricity customers can be particularly high thanks to storage. The price fluctuations result in a high demand for market stabilization. For this reason, a summer day in 2023 (11.06.2023) is used as an example below.
Assuming that the price elasticity of demand for the loaded and unloaded energy is negligible, the additional storage capacity would be used as shown in Figure 2. The times of loading and unloading were determined by a linear optimization model, which determines the activity of the storage facilities according to the above-mentioned boundary conditions.  

For June 11, 2023, direct correlations between the load profile, the feed-in of renewable energy and the prices on the day-ahead market can be derived from the figures as an example. Such energy, which exceeds the domestic demand for electricity, leads to an oversupply, which can be partially offset by exports. It also causes electricity prices on the day-ahead market to fall into negative territory in some periods. Negative prices are therefore a market signal for an oversupply of electricity compared to domestic demand. The storage facility can counteract this through targeted charging processes, as this increases the demand for electrical energy.  

Sharply rising electricity prices on the day-ahead market are in turn a sign that there is a high demand for electrical energy. By discharging the storage facility, triggered by the price signal, the supply of electricity can be increased, thus partially meeting the high demand. As shown in Figure 2, such high market prices occur mainly at times when only little energy from solar and wind is fed into the grid. Unloading when demand is high means that peak-load power plants with high marginal costs for electricity production are less active.
The feed-in capacity of renewable energies is therefore not a determining factor for storage activity, but it is a relevant factor due to its influence on electricity pricing. The charging and discharging behavior is determined by the price signals on the day-ahead market. Price peaks and troughs on the electricity markets are absorbed, thereby strengthening market resilience. This behavior, together with the existing mechanisms for electricity pricing, leads to a reduction in the cost of electrical energy.

Reducing electricity prices through energy storage

Regardless of the weather conditions on any given day, the battery storage system acts in such a way that it charges when demand is low - and therefore prices are low - and discharges when demand is high and electricity prices are expensive. The two effects described have an opposing influence on the costs that citizens have to pay for electricity.

The amount of payments that end consumers have to make for electrical energy depends on the marginal costs of the power plants used. These generation capacities of all power plants are sorted in ascending order in the merit order list. Pricing is based on the pay-as-cleared principle: All power plants used receive payments in the amount of the marginal costs of the most expensive activated power plant unit. The pricing of the total electricity demand is therefore influenced by the charging and discharging activity of the storage facility. Thanks to the approximate convex property (see Figure 3) of the merit order list, the price reduction when discharging outweighs the price increase when charging the storage facility.  

The consumer surplus resulting from the price differences (reduction in procurement costs for electrical energy due to lower demand) at the time of discharging is greater than the producer surplus (increase in procurement costs due to increased demand) at the time of charging. This means that all consumers incur lower costs overall due to the consumption of electrical energy.  

Through modeling, this consideration can be transferred to the activity of the Kyon Energy Pipeline on the intraday market. To this end, the linear optimization model described above was first used as a 'schedule' for the storage facility. In a second step, it is determined whether and to what extent the additional entry and exit capacity has an influence on electricity production from fossil fuels. By comparing the required generation capacities and a merit order list published by the "EWI Merit Order Tool 2022" research project of the Energy Research Institute and the University of Cologne, the marginal costs of the corresponding fossil generation capacities required can be determined. If this is done for the required generation capacities before and after the use of battery storage, the difference in the marginal costs for electricity production can be determined. For the sake of simplicity, it is assumed that the difference in marginal costs from the merit order list can be transferred to the pricing of the day-ahead market. Accordingly, the savings or additional costs resulting from each individual loading movement of the storage facility can be measured.  

If the modeling is applied to the exemplary summer day, it becomes clear that the savings outweigh the additional costs, as shown in Figure 4.  

The example shows that at the time of charging, depending on the available generation capacities, additional activation of power plants with low electricity production costs may be necessary. Charging can therefore lead to a slight increase in the price of electricity (marked here as a reduction in savings) if there is no surplus of renewable energy.  

However, the cost savings when discharging the electricity storage system are much more significant. At the time of discharging, the demand for electricity exceeds the production of renewable energies. The feed-in of the temporarily stored electricity reduces the demand for electrical energy at the time of discharge. By reducing the need for electricity production, the power plants with the highest marginal costs are no longer needed to meet demand. This reduces the price of electricity.
The total expenditure for the procurement of electrical energy is significantly reduced on the day in question through the use of storage. The behavior of electricity storage systems on the electricity market results in savings for electricity customers.  

The calculation carried out above as an example can be extended to any period of time in order to determine what savings the Kyon Pipeline would have generated in the first three quarters of this year. The loading and unloading movement of the 3GW/6GWh Kyon Pipeline was therefore simulated for all days in the first ten months of 2023. These charging and discharging movements can be used to draw conclusions about differences in demand and the maximum marginal costs of fossil power generation. By transferring the cost difference to the day-ahead markets, a saving of EUR 298.42 million is already achieved in the first 10 months of the year. This corresponds to a cost reduction of EUR 0.7886 per MWh of electricity generated. This cost saving would increase significantly by the end of the year due to the upcoming winter months, as the use of peak-load power plants can be avoided particularly often during these months.
With a 28% share of final energy consumption in Germany, households (total consumption of 339.413 million MWh) could have already saved over EUR 83 million this year to date by using storage.

Especially in times of strong fluctuations on the electricity exchanges, the integration of electricity storage systems brings great added value. Therefore, the use of the Kyon Pipeline in 2022, a year characterized by instability, would have resulted in savings of EUR 657.813 million (or EUR 1.363/MWh). The year 2022 was characterized by high prices and, in some cases, supply bottlenecks for fossil fuels. At the same time, less (cheaper) electricity could be imported from neighboring countries. These two aspects, together with the even lower expansion of renewable energy plants, meant that expensive peak-load power plants were often used to meet high demand volumes. Together with high spreads on the electricity exchanges, there was great potential for battery storage systems to have a price-smoothing effect.
Such times, characterized by instability and the frequent use of peak-load power plants, increase the costs for German energy supply. Battery storage systems are able to counteract such instability and thus improve the resilience of the electricity markets. Political action and the increasing expansion of renewable energies should reduce external dependencies for domestic electricity generation in the future. It is therefore to be expected that 2022 will remain the exception.  

Nevertheless, the example shows the relevance of a crisis-proof energy supply, to which battery storage systems can make a contribution.  

Conclusion

Modeling the behavior of large-scale battery storage systems on the day-ahead market indicates the influence they can have on electricity prices on the market. The further expansion of storage capacities can therefore lead to direct cost savings for electricity customers in both the industrial and private sectors.

As described at the beginning of this article, the added value that battery storage systems can provide from an economic perspective is not limited to a reduction in electricity prices. In order to fully describe and quantify the effects, further analysis is required. Together with other players from the storage industry, Kyon is committed to making the benefits of battery storage visible. Based on the added value of storage described above, we advocate the removal of regulatory hurdles in the development of storage projects by creating a transparent framework. This is particularly important to ensure the introduction of your feed-in regulation for storage technologies (SpeicherNAV) and the exemption from payments for construction cost subsidies for grid connection

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