Why battery storage systems lower electricity prices

Why battery storage systems lower electricity prices

In view of the extreme shocks to the European electricity market caused by the war in Ukraine, the price of electricity has known only one direction for months - upward. This curve can be measured, for example, by the price called on the market for the delivery of a constant quantity of electricity for the following year ("baseload", i.e. assuming constant output throughout the entire calendar year). On August 29, 2022, the peak price paid for the delivery of a megawatt-hour of electricity in 2023 was over 1,000 euros. This corresponds to one euro per kilowatt hour, mind you only for electricity generation, without taxes, surcharges, levies and network fees. Just one year earlier, at the end of August 2021, one would have paid only 70 euros (equivalent to 7 cents per kilowatt hour) on the stock exchange for the same megawatt hour with delivery in 2023 - an increase by a factor of 15 within one year!

The potential impact on the national economy and on each individual end user is incalculable, and the current efforts to lower prices are absolutely justified. It is often said at this point that there is a "supply shock" and that the best means of lowering prices is to bring additional power generation into the market quickly. It is against this backdrop that the discussion about extending the operating lives of German nuclear power plants and about a temporary return to the market of coal-fired reactors that have already been decommissioned is also underway. So far, so challenging - so far, so clear.

What influence does battery storage have on the electricity price level?

What is not obvious at first glance: Energy storage systems such as battery storage contribute to lowering electricity prices. In the case of battery storage, there is also the fact - in view of the current energy crisis - that new capacities can be realized relatively quickly despite all the problems with global supply chains, even at present. For example, the battery storage systems being developed by Kyon Energy in 2021 will go online by the end of this year, with a speedy realization period between the initial project idea and commissioning. Storage facilities that are currently being planned can therefore make a substantial contribution to stabilizing the energy markets, in some cases as early as the winter after the next crisis in 2023 - 2024.

But let's take a step back at this point: How do energy storage facilities contribute to lowering prices in the first place? After all, generation is merely shifted, not increased. Can storage facilities thus provide any relief at all for the electricity markets in such a situation?

The not immediately obvious answer is: Yes! Charging a storage facility during periods of low prices, for example during the day with large amounts of solar power or when the wind is strong, and discharging it during periods of high prices, for example after sunset or during a wind lull, actually lowers the overall price of electricity.
For the explanation, a look into the mechanisms of price formation on electricity markets is necessary.  

How are prices formed on the electricity market?

The price is formed from the consumers' willingness to pay for electricity on the one hand, and the price expectation for electricity generation on the other. Electricity consumers' willingness to pay is typically high and is only slightly affected by price changes. For example, residential customers typically pay the same amount for their electricity year-round, regardless of whether electricity is currently cheap or expensive on the exchange. So they have no incentive to shift their consumption. In industry or with new types of consumers such as electric cars, the influence of price signals is higher, but it remains rather low overall. Economists speak of low price elasticity.

In the case of generation, the price expectation is derived from the costs incurred for an additional kilowatt hour of electricity generation. In general, it can be said that for wind and solar energy, these additional costs are almost zero, because once the wind turbines or photovoltaic systems are built, they hardly cost any money to operate. Wind and sun are available free of charge. The situation is different with conventional power plants. Here, fuel costs in particular play a decisive role, in addition to the costs charged in Europe for the emission of CO2. This is also currently the fundamental reason for the often extremely high electricity prices, because whenever gas-fired power plants are needed to meet demand, operators of gas-fired power plants must at least cover their (high) fuel costs in order to still have an incentive to produce electricity.

As a result, a so-called "merit order" curve of the electricity supply is formed, which is initially very flat, driven by renewables, and then rises steeply in the area of conventional power plants. The intersection of the electricity supply curve and the electricity demand curve forms the exchange price.  

Let us first look at the situation on the electricity market in times of low prices. If - as is currently increasingly the case - electricity demand is largely met by renewables (and possibly partly by other rather cheap energy sources such as lignite), the electricity price is very low and sometimes even close to zero despite the generally high price level. If additional demand is created in these times by loading a storage facility, the prices on the market react only slightly, since the supply curve is still "flat" here.  

So let's imagine here a situation - increasingly common in the future - in which all energy demand is met from renewables. The price is almost zero and the storage facility can then absorb the surplus renewable electricity on the market very cheaply without driving the price up sharply.

In contrast, during dark and windless periods, when the price of electricity rises sharply, the supply of electricity is much more fully utilized and expensive power plants are needed to produce electricity. In this range, the supply curve is typically "steep." Removing the most expensive generator in the market - specifically, this could be, for example, the most inefficient gas-fired power plant needed to meet demand - has a strong price-dampening effect. This is precisely the effect of unloading storage, which creates additional supply in times of shortage and thus displaces expensive (conventional) generation.

Conclusion

The reality of the electricity market is, of course, more complex than has been described here for the sake of simplicity. Nevertheless, the effects described are clearly observable and the result can be stated: The bottom line is that the operation of storage facilities not only smooths prices in the markets, but also lowers the price level overall. The reason for this is that prices tend to rise only slightly when loaded, but tend to fall much more sharply when unloaded than if the storage facility were not active in the market. Incidentally, renewables are stored at times when they would otherwise either have been "given away" abroad or completely shut down due to grid bottlenecks (see our article Electricity System of the Future).

Is there a catch somewhere, too? Not really. As long as the price signals for storage operators promise profits, there will be increased investment in storage. This can also be observed at present, so the price signals are working. If we see further price spikes on the markets in the coming months, we can at least be sure that things would have been even worse without the use of storage technologies and that the strong expansion of battery storage, as Kyon Energy is driving, will help to dampen electricity prices in the future.

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