The Latest Regulations Fueling Europe's Battery Storage Expansion

The landscape for battery energy storage systems (BESS) in Europe has dramatically improved following changes to the EUs electricity pricing structure, implemented in October. This shift has significantly boosted the profitability potential of BESS operations, with some countries experiencing up to a 15% increase in earnings, as per an analysis by Rystad Energy. The new pricing system sets electricity prices in 15-minute intervals instead of hourly, providing more chances for BESS operators to purchase electricity when it is inexpensive and sell it when prices are higher. Since the transition, the arbitrage potential across European markets has grown by an average of 14%, with nations like Austria and Slovakia seeing gains exceeding 20%, while others, such as Portugal, Norway, and Sweden, have experienced more modest improvements.

For example, if a battery's annual income increases by 20% due to these price fluctuations, its return on investment could rise by approximately 3% over the course of 20 years.

Previously, electricity prices in the EU were set every hour, but with the new system that operates in 15-minute increments, there are new avenues for profit. The move from hourly to 15-minute trading intervals (known as 15-minute Market Time Units or MTUs) allows for more profitable quarter-hour energy trading. For instance, in Lithuania, trading energy in 15-minute intervals earned about $263 per megawatt-hour (MWh), which is 14% more than the hourly trading rates. In Germany, the profit from quarter-hour arbitrage was 16% higher compared to hourly trading.

In regions with less flexibility in power generation and consumption, the dominance of intermittent renewable energy sources like wind and solar can cause significant price fluctuations. Rapid changes in generation from these sources can lead to noticeable price swings even within the span of one hour. The shorter 15-minute intervals are better at capturing these price movements, creating more opportunities for flexible storage solutions. However, in areas with a more stable power supplysuch as Norway, which relies on hydropower, or Portugal, which uses a mix of hydropower and gasprices tend to remain more constant over an hour, reducing the benefits of switching to 15-minute intervals.

Rystad Energys analysis examined the potential for profits in European markets under two different scenarios: one where energy is traded in 15-minute intervals and one with the traditional 60-minute intervals. The results indicate that adopting shorter intervals could lead to higher earnings for battery storage operators, with a more frequent trading cycle of charging and discharging steps.

However, its important to note that the current high arbitrage margins, averaging around $150 per MWh, are unlikely to remain in the long term. A more sustainable average over the next 10-20 years is expected to be around $60 per MWh, which would correspond to an internal rate of return (IRR) of approximately 6% from energy arbitrage alone. The increased market granularity could push the average revenue to about $70 per MWh, boosting IRR by around three percentage points.

One of the major hurdles in earning through arbitrage is the unpredictability of price volatility. While Europe only recently switched to 15-minute markets in October, other regions have seen the benefits of shorter trading intervals for years. In Australia, for instance, the transition from 30-minute to 5-minute markets in 2021 resulted in a 20% increase in arbitrage revenues in New South Wales, while Victoria saw a 15% increase over the past four years.

In the real world, arbitrage revenue will likely be lower than theoretical maximums due to factors such as system efficiency losses, availability, market liquidity, and the strategies employed to mitigate risks from extreme price spikes. While arbitrage opportunities offer a useful benchmark for the potential profitability of BESS projects, actual earnings will depend on these and other market conditions.

Sources:

• The New Power Rules Driving Europe's Battery Storage Boom