Negative price season is here, are batteries ready?

This month, I’m celebrating 20 years in the energy industry. In my first week, I took an in-depth course on the electricity market. You can imagine that, coming in with no prior knowledge, there was a lot of information to absorb. Two key things stuck with me:  

1. Production follows demand 

2. Electricity cannot be stored 

Look where we are today – we now need to follow intermittent production and batteries are the hot topic. It’s not just at events, conferences and trade fairs – even people at the golf club are asking for my opinion on whether they should install a Battery Energy Storage System (BESS) at home. 

The fact that developers are currently focusing heavily on batteries makes sense. The BESS business case looks promising, while the outlook for renewables – particularly solar – is worsening due to increasing negative prices in the system. Beyond the financial aspect, there is a clear fundamental need for flexibility in the energy system. BESS can help balance the grid, shift load and alleviate grid congestion issues. 

BESS business case

At its core, the concept is simple: charge when market prices are low and discharge when prices are high. 

Given the surge in negative prices last summer and the structure of day-ahead prices, I firmly believe that anyone investing in BESS is essentially taking a position on renewable production on one hand and gas and CO2 prices on the other. Why? Because the oversupply of renewable production, particularly solar, is driving prices down – often into negative territory. However, in the morning and evening hours, we still rely on fossil fuel generation to meet demand. This pattern is visible in the graph below: when there’s no solar (yellow), fossil fuel generation must step in. 

In Germany, the marginal generation source is gas. Gas prices – inflated by the black swan event of the Ukraine war – have pushed marginal electricity prices to high levels. This, combined with low prices during solar hours, has resulted in high daily price spreads. The graph below illustrates this, showing Germany’s day-ahead prices (DAP). 

While BESS can deliver various services, the day-ahead market is typically not the most attractive. However, it has a strong correlation with the opportunity cost of other products, such as ancillary services. When the spread between high and low prices is large, other markets also tend to experience higher volatility and price fluctuations. 

BESS opportunity index

To explore this, I created a leaderboard ranking BESS spreads per region. The spread is simply the difference between the highest and lowest prices in the day-ahead market. I also included the share of each fuel type in total electricity production. 

The results are clear: the top-ranking countries – Hungary, Greece and the Netherlands – all have significant shares of both solar and gas in their energy mix. 

At the other end of the leaderboard, the lowest-ranking countries tend to have a high proportion of hydropower in their generation mix. Hydropower inherently acts as a storage system, smoothing out price fluctuations. This means my theory doesn’t hold for countries with a large share of hydropower in their energy balance. 

High solar and gas generation provides revenue for BESS assets

Spain ranks low on the leaderboard. Despite having a high share of solar, its limited ability to export excess generation north, combined with hydropower’s price-dampening effect, results in low volatility. While this mix is great for stability, it limits opportunities for BESS. 

Britain also ranks low, despite having both gas and solar. However, its solar share isn’t high enough to push gas out of the merit order during the day. As a result, gas remains the marginal fuel throughout the day, preventing the occurrence of very low prices. That said, if more renewables enters the system, spreads in Britain will increase.

British domestic production per type in relation to maximum day-ahead price spread in 2024. Image: Montel Analytics 

For the top-ranking countries on the leaderboard – and thus the most attractive markets for BESS – the spread is clearly driven by a combination of renewables and fossil fuels. 

According to the meteorological calendar, spring started on 1 March. It was a sunny month and negative prices immediately appeared in the system: the season of volatility has begun. What can we expect this year? Will last year’s records be beaten? I have no doubt. It will become even clearer in the leaderboards that the combination of gas and solar will continue to drive the business case for BESS. 

Have a great negative price season.

This article originally appeared as a column on montelnews.com