Battery trading strategies: optimising dispatch across wholesale and ancillary markets

Physical constraints of battery assets

While batteries are a key element of decarbonisation, they come with their own shortfalls. Thermal management can be temperamental, with overcharging or excessive cycling leading to issues. There are also associated risks with power output linked to the inverter size. Differing sizes of cells can also behave differently, with specialist management systems required to maintain consistent performance.

Limited duration and cycling constraints

Batteries are limited by their capacity, meaning they can only deliver optimal energy levels for a limited time. Frequent cycling can also degrade the battery, with specific safe cycles stated by the manufacturer. This can influence trading through practices such as degradation-informed trading, which can improve the long-term profitability of battery storage.

State of charge management

State of Charge (SoC) management exists in a few different formats:

SoC Criticality - Creating an environment of inaccurate or missed bids can result in significant financial losses in ancillary markets.

SoC for Ancillary Services: Energy top-ups may be required for SoC balance, utilising other markets such as intraday. To reduce battery stress, aim for a 40-80% charge rate.

Efficiency losses

Round-Trip Efficiency (RTE) is the ratio of charging to discharging energy, which traders must take into account. The RTE can change depending on SoC factors and can even affect efficiency as the batteries degrade.

Core revenue streams

To fully leverage BESS profitability, revenue stacking is a crucial strategy.

Intraday arbitrage opportunities

Intraday markets tend to offer higher profitability than utilising the day-ahead markets alone, with joint revenue potential of up to 96%. The continuous nature of intraday trading opens up opportunities to trade extremely close to delivery, with volatility helping, rather than hindering, trades. Its price volatility can lead to higher overall margins.

Frequency response and reserves

Fast frequency response is still one of the most crucial elements of the revenue stack and low-latency services such as batteries fulfil this high-speed response. Balancing reserves help provide rapid grid response, which bolsters decarbonisation efforts as they are preferable to slower fossil alternatives.

Capacity market revenues

Capacity auctions offer contracts with long-term options of 1-15 years, which can mitigate risk. Contract prices can rise, however, due to volatility connected to renewable energy.

Dispatch optimisation logic

Value stacking optimises battery storage by monitoring ancillary and wholesale markets. Advanced dispatch optimisation monitors and takes action when the best time to buy and sell energy is determined by algorithmic models that balance battery degradation, market forecasts and technical limits.  

Charging during low-price periods

For batteries to be profitable, they must charge during low-demand, low-price periods. Periods of oversupply of renewable energy are also a cost-effective time for charging to take place. Intraday Arbitrage refers to periods of high solar generation when solar overproduces, leading to negative pricing. These occurrences are ideal, profitable conditions for charging batteries. 

Discharging into peaks or imbalance events

The best time for battery-led traders to sell, or dispatch, is during price spikes. This tends to be during the morning or evening.  

When renewable energy falls short, for example when wind drops, this can cause a surge in real-time pricing, allowing profitable rapid discharging. Battery services can provide highly profitable Fast Frequency Response (FFR) to ancillary markets during low-frequency events.

Using forecasts to time cycles

Demand forecasting, renewable output and price forecasting are at the heart of good trading in the battery-led sector. Leveraging technology such as AI and machine learning can help identify price hikes or drops before they happen. It can be useful to automate updates when batteries charge or discharge energy, depending on factors such as cloud cover. Forecasting can also help to manage the trading risk of volatility.

Revenue cannibalisation risks

One of the key changes that has occurred as a result of increased battery penetration is reduced trading spreads. High battery deployment can cannibalise revenues by decreasing price volatility, which is the profit mechanism for BESS.

This is in part due to declining spreads. When the market is flooded with batteries, they all charge during low-pricing events and discharge during high-pricing events, reducing arbitrage profitability by narrowing the spread. Increased solar and wind, coupled with battery storage, are leading to higher negative price frequency, which, while beneficial for charging, indicates oversupply and lower overall revenue potential.

Competition in ancillary markets

Frequency response and ancillary service market participation can be highly competitive, leading to revenue declines when the market is saturated. Certain regions, such as the UK, have seen more than a 70% drop in prices due to oversupply. Ancillary services, in turn,, offer lower returns, which could prompt a mass shift to the main, energy-led markets, as well as shorter procurement timelines for ancillary services.

Strategy evolution as markets mature

Older trading models favoured simple strategies, whereas stacked strategies are becoming increasingly popular. This is because single-market strategies cannot guarantee profitability thanks to areas of market saturation. Value stacking involves combining multiple services, such as balance mechanism participation, combined with wholesale energy arbitrage.

This marks a general shift in the market towards wholesale and away from ancillary. Longer-duration systems are also trending to try to mitigate the risk of shorter spreads.