The efficient trading of battery storage systems (BESS) on the short-term markets offers the opportunity not only to increase revenues through flexibility and intelligent trading strategies but also to make a significant contribution to the energy transition. In this blog article you will learn how to successfully position your BESS on the power markets and which factors are crucial for success.
Battery Storage as a Key to the Energy Transition
Battery storage is becoming increasingly important, especially with the rising integration of renewable energy and the associated volatility in the grid. In Germany, over 23,000 commercial storage units and approximately 200 large-scale storage systems with a total capacity of over 2.3 GWh have already been installed (as of 2023), and this number continues to grow. These storage systems are essential for balancing grid fluctuations by storing excess electricity and feeding it back into the grid when needed to ensure grid stability. They also make a significant contribution to increasing the flexibility of the energy system and reducing grid expansion to a necessary minimum.
Ancillary Services and Spot Markets: The Fundamentals of Flexibility Trading
In Germany, there are two main markets for trading flexibility of BESS: the ancillary services and the spot markets, each offering different opportunities.
Ancillary Services (Capacity Auctions)
Battery storage plays a crucial role in stabilising the power grid in the control reserve markets (often referred to the general term Ancillary Services). The transmission system operators (TSOs) purchase FCR (Frequency Containment Reserve), aFRR (automatic Frequency Restoration Reserve), and mFRR (manual Frequency Restoration Reserve) to balance frequency fluctuations.
The FCR has been the leading market for battery storage for years, as it requires fast and reliable reactions to grid fluctuations. Pricing takes place via auctions in which suppliers offer their capacity prices for the provision of power capacity for the following day. Successful bids are remunerated with the awarded capacity price, regardless of how much power capacity is actually activated. A separate energy price is not paid in this market.
The importance of aFRR has increased significantly in recent years – partly due to advances in storage technology, partly due to regulatory changes and the increasing need for flexible grid solutions as a result of the strong expansion of fluctuating renewable generation. With the phase-out of nuclear energy and the gradual shutdown of coal-fired power plants, previously available power plant capacities have been withdrawn from the aFRR market. Compared to FCR, aFRR requires a higher energy capacity as it is used to balance longer-term grid fluctuations. Pricing is based on the pay-as-bid principle, whereby each provider receives the price it has set in its bid. In contrast to FCR, with aFRR and mFRR there are also energy prices for the energy actually activated in addition to the capacity prices for the provision of the power capacity.
Ancillary Services (Energy Auctions)
In addition to the capacity market, there is a separates energy market which operates independently. This market includes auctions for aFRR and mFRR and allows for the short-term balancing of grid imbalances in 15-minute intervals up to 25 minutes before delivery. Pricing here is determined by the pay-as-cleared principle, where providers receive the price, they bid for each activated unit of energy (€/MWh). This flexibility is particularly attractive for BESS, as it allows them to react to price fluctuations and maximise revenue. The granularity of this market – with short time intervals – makes it an important value driver for storage projects.
Participation Requirements for Ancillary Services Markets
Participation in the ancillary services markets requires technical prequalification to ensure that BESS meet the high standards set by the TSOs. Entelios, which has successfully traded various types of systems across all four German control zones since 2015, manages the entire prequalification process—from concept development to applying with the TSO. This ensures that BESS can be quickly and seamlessly integrated into the ancillary services market.
Spot Markets and Arbitrage Trading
In addition to the ancillary services markets, BESS can also generate profits on the spot markets, such as the day-ahead and intraday markets, by storing electricity when prices are low and selling it when prices are high through arbitrage trading. This provides a flexible way to take advantage of short-term price fluctuations and generate additional revenues.
For Entelios, arbitrage trading involves not only the classic buying and selling of electricity but also trading a specific delivery quarter-hour within the same market. This approach, also known as “financial trading”, allows even more precise reactions to market movements, helping to fully exploit the potential of BESS.
The Two Spot Markets: Day-Ahead and Intraday
In Germany, this trading takes place on two main markets: the day-ahead market and the intraday market.
The day-ahead market is the largest in terms of volume for electricity trading. Offers for the following day can be submitted until 12 a.m. It is a closed auction, where bids are collected for each hour of the next day and are then “cleared.” All market participants receive the same price for electricity, the so-called clearing price, which is determined for each hour through the clearing process.
The intraday market allows for short-term trading in 15-minute intervals (96 intervals) up to one-hour intervals (24 intervals). This market is particularly important for battery storage, as it offers the flexibility to respond quickly to price fluctuations and thus maximise revenue. After the day-ahead market closes, participants can submit bids up to a few minutes before actual delivery to respond to unforeseen changes, such as weather conditions or technical failures. Pricing is based on the pay-as-bid principle, where each trade is completed at the price accepted by the buyer or seller.
While the day-ahead market is mainly relevant for larger storage systems, the intraday market, due to its flexibility, is the most important market for BESS.
Maximum Revenues and Resilience Through Cross-Market Optimisation
Entelios’ Cross-Market Optimisation (CMO) is an integrated trading concept that incorporates all relevant flexibility markets and responds algorithmically to price signals, thereby maximising the value of flexibility. Instead of relying on individual markets, the power capacities are used comprehensively in various segments, including the ancillary service markets of transmission system operators (TSOs) and short-term trading on the European power exchange EPEX SPOT. This holistic approach enables significantly higher revenues than isolated trading.
By making comprehensive use of the flexibility markets, a cross-market optimisation increases the potential for monetisation that would otherwise remain untapped with an single-market strategy. At the same time, this approach offers robust protection against market changes. If price levels or regulations fluctuate in one market segment, trading activities can be flexibly shifted to other segments. With significantly higher revenues compared to single-market optimisation, this approach ensures high profitability and resilience in dynamic energy markets.
Co-Location and Stand-Alone Storage: Strategies for Market Entry
There are two main approaches to trade battery storage: stand-alone storage and co-location with renewable energy plants.
In co-location projects, BESS are installed close to a renewable energy source, such as a solar or wind farm. This offers synergies, as existing infrastructure like grid connections can be shared, resulting in cost savings. The approval process is often simpler, as only a single system is considered.
In contrast, stand-alone BESS is installed independently of a generating plant on a separate site. The storage system is not directly connected to a solar or wind plant but draws and stores electricity from the public grid. There are also cases where multiple storage systems share a grid connection, which is sufficiently dimensioned, with the systems being separated by a distinct metering concept.
Stand-alone storage offers more flexibility in trading, as it is not dependent on the local production of renewable energy. This allows for targeted use in providing ancillary services. Another key advantage of stand-alone storage systems is their exemption from grid fees, which significantly boosts their profitability. Both concepts have their pros and cons, but stand-alone storage typically covers a wider range of flexibility trading opportunities.
Challenges in Project Realisation
The realisation of battery storage projects is complex and comes with several challenges. Here are some key considerations:
Storage Dimensioning: The optimal dimensioning of the storage system is crucial for profitability. Entelios recommends an energy capacity of at least two hours to fully exploit the potential across all flexibility markets. A storage system of this size is also more resilient to market changes and offers stable long-term revenue opportunities.
Early Involvement of the flexibility trader: A key success factor is the early involvement of the potential marketer in the project development process. This is especially true when selecting the EPC (Engineering, Procurement, Construction), implementing relevant interfaces, and considering market-related aspects. This ensures a smooth process from the start.
System certification: Certification is a central component of project development. It ensures that the battery storage system fulfils the regulatory requirements and can be easily integrated into the market.
Energy management system (EMS): Successful commercialisation requires an existing EMS, which is usually provided by the system operator to ensure optimum monitoring of the system parameters.
24/7 monitoring by the optimizer: Continuous monitoring of the system performance by a 24/7 control centre is essential to ensure the efficiency and reliability of the storage facility. The trading service provider is not only responsible for monitoring, but also for safeguarding the traded flexibility so that the storage facility meets the requirements of the ancillary services at all times.
Financing and Market Knowledge
In our experience, it is crucial to familiarise banks with the relevant markets in detail at an early stage, as they are often still unfamiliar with them. Many banks have little experience with financing BESS and therefore require comprehensive information to make informed decisions. This is where Entelios comes in, providing expertise by transparently explaining how the markets work and the potential of BESS. We also recommend involving experts like AFRY, enervis, Aurora or similar specialists to provide banks with a complete picture of the investment opportunities.
Case Study: Allgäuer Überlandwerke GmbH
A practical example of flexibility trading a BESS owned by Allgäuer Überlandwerke GmbH. Around a year ago, Entelios became the first German provider to market this storage system not only in the intraday market and FCR but also in aFRR. This demonstrates how versatile BESS can be and the additional revenue potential that can be unlocked through a comprehensive trading strategy. Due to changing market conditions and new revenue opportunities, Entelios responded quickly and dynamically, becoming the first to open the BESS market – including successfully completing the necessary prequalification (PQ). This example highlights the flexibility of BESS across different markets and the pioneering role Entelios has played in unlocking these revenue streams.
Conclusion
The flexibility trading of BESS on the short-term markets offers numerous opportunities, from providing ancillary services to arbitrage trading on spot markets. With the right strategy, clear market knowledge, suitable technical requirements and an experienced partner like Entelios, operators and investors can benefit from attractive returns while making a significant contribution to the energy transition. Entelios understands the market processes and requirements thoroughly, ensuring a smooth project start and successful market entry.
