BESS Tracker – Arbitrage income index
(Jan 2014-Sept 2024)

​​

In electricity industry there is a lot of talk about grid-connected battery solutions but how profitable are they?  This gave rise to the idea of a BESS Tracker, an effort start understanding the business case for batteries by focusing on arbitrage opportunities; namely charging the battery when wholesale power market prices are low and discharging it when prices are high.  There are other potential sources of value from BESS but let's keep things simple. 

 

From an economic point of view, what is a battery?

 

There is plenty of technical jargon surrounding BESS but at its heart a battery can be defined by two key characteristics: connection capacity and energy storage capability.  So a one-hour battery with connection capacity of 1MW (power) will have storage capability of 1MWh (energy), an equivalent two-hour battery will be able to store 2MWh, etc.  Batteries are not perfect so will be losses when you charge and discharge.  A full charge and discharge is referred to as a “cycle” and cycling degrades the battery. By reducing the useful lifetime of your battery, cycling implies a cost.  And this is separate from cycling losses.  For example, if you charge with 1MWh but can only discharge say 0.85MWh later this means you have a 15% cycling loss.  (Hydroelectric pumped storage power plants may not suffer much from degradation but have about 20-30% cycling loss.)

 

Defining the problem

 

With this in mind, we define four 1MW batteries with 1, 2, 4 and 12-hours of storage, namely 1MWh, 2MWh, 4MWh, and 12MWh respectively.  Let’s assume a cycling loss of 15% and apply a variable cost to reflect degradation of 1€/MWh whenever you charge or discharge the battery.  No limit is applied to the number of cycles. Each month begins with zero charge. Then we set up an optimisation model that defines hourly charge and discharge cycles that maximises net income over time using only the hourly day-ahead prices in the Spanish electricity wholesale market operated by OMIE (Operador del Mercado Ibérico de Energía - Polo Español) starting from 1 January 2014.

 

Creating an index

 

A BESS system with more storage capability will earn more but, interestingly, if one normalises results, by defining say 2019 = 100, the resulting indices for each BESS configuration are remarkably similar as shown in the figure below.  This is what makes this a good candidate for a BESS Tracker. [Warning: The chart may be hard to see well on a mobile device. You really need large screen appreciate the detail.]

 

At the beginning of each month, the index will be updated with the previous month's prices.  

 

And you can read Kim's related articles here from Nov 2023 and here from June 2024.