The battery’s role in decarbonizing the electricity grid

The increased use of renewables such as solar and wind, the electrification of demand, and the shift away from fossil fuels have led to new challenges in the electricity grid. These challenges include stability concerns driven by the need to continuously balance electricity demand and generation, reliability concerns related to maintaining overall system adequacy, and resiliency concerns regarding resuming normal operation following grid-disrupting events. These concerns highlight the need for greater flexibility to retain cost-efficient operation of the power system.

There are various sources of flexibility in the power system, such as demand response programs that encourages electricity usage modifications. Interconnectors allow for greater cross-border exchange of electricity. And cross-sectoral integration links electricity with other energy carriers, such as heat or gas. Furthermore, battery energy storage systems (BESS) are an important direct source of flexibility, as they can store and supply power to the grid almost instantly. In addition to facilitating near-real-time system balancing, BESS can also contribute to a range of services that support the grid.

Batteries can alleviate electricity grid challenges by:

BESS revenue streams can be categorized into two main groups (see figure 1). The first group is associated with implicit flexibility and targets cost avoidance (i.e., behind-the-meter BESS), known as portfolio optimization. In this case, a company uses batteries to optimize its own energy portfolio locally to minimize costs. Uses include reducing electricity bills by shifting energy consumption and reducing peak demand, smoothing out power fluctuations generated by on-site renewables, or even serving as backup generation. The way BESS operation is optimized is highly dependent on the tariff design in place.

This article focuses on the second group of revenue streams, which are associated with explicit flexibility and target revenue generation. So-called front-of-the-meter BESS can participate in multiple markets to increase revenues, which is known as revenue stacking. Within this second group there are three main revenue streams. First is energy trading in the energy markets, known as energy arbitrage. The BESS charges by purchasing electricity when the price is low and discharges by selling it when the price is high. The second stream is the ancillary market, where BESS can provide grid services to transmission system operators (TSOs), including frequency response, voltage support, and congestion management, among others. The third revenue stream is the capacity market, where batteries can provide resource adequacy by participating in capacity remuneration mechanisms (CRMs).

BESS participation in electricity markets can assist in decarbonizing the grid. For example, batteries can soak in the abundant solar generation during sunny days when electricity prices are very low. They can also be used to meet demand when prices are high. BESS profit the most in energy trading when the spread between both prices is the greatest, which is referred to as market volatility. The more volatile the market becomes, the more profitable energy trading can be, but also the riskier. Thus, energy trading is a common revenue stream included in a stacked BESS portfolio, typically complementing other revenue streams such as ancillary services.

Grid operators need a range of services that BESS can provide, as shown in figure 2 and explained below. These services aim to maintain frequency and voltage at appropriate levels, control congestion risks, and manage the balance between generation and demand, ensuring the reliability and stability of the grid and securing the continuation of service.

Frequency support

Frequency, which indicates the balance between generation and demand, is one of the main attributes that needs to be controlled to maintain the power quality and stability of the power system. Transmission system operators (TSOs) limit frequency deviations within a narrow band. Deviations from the nominal value will signal either a surplus or deficit of generated energy within the synchronous area, that is, an area covered by interconnected TSOs with a common system frequency, such as the synchronous grid of continental Europe. System frequency drops whenever there is shortage of generation and vice versa. Severe frequency disturbances can lead to load shedding, generation curtailment, or even a blackout in the worst-case scenario. These deviations can change the system’s condition to emergency or restoration, where the TSOs will use various remedial actions or system services to return the system to its normal state.

TSOs need to procure what is known as balancing reserves, provided by balancing service providers (BSPs), to carry out such remedial actions. Generators and loads can participate in the balancing reserve services and are dispatched according to the regulations in place. The volume required and speed of response for each of these services depends on the size of the synchronous system, among other factors. Hence, within a small synchronous area such as the UK, a single loss of a generator or interconnector can result in a frequency deviation that is considerably greater than what could occur in the continental Europe synchronous grid. Consequently, this requires a pool of assets that are faster in response and/or a greater volume of balancing reserves to act rapidly.

Within the balancing reserves in the EU there are typically three main services:

As BESS can respond rapidly and are able to both generate and consume electricity, they are well-suited as balancing reserves. However, they are constrained by the availability and dispatch time they can provide between their (dis)charging sessions. Depending on the regulations in place per country, it can be difficult for BESS to participate in services that require long availability or/and dispatch times. Hence, FCR is considered the most suitable service for batteries due to its technical requirements, followed by aFRR in several countries. In the UK, similar frequency response services are also procured by National Grid ESO, but categorized differently. Although several frequency response services are available, dynamic containment (DC) and firm frequency response (FFR) are considered the most suitable for batteries. These services are also stackable with energy arbitrage. The EU Agency for the Cooperation of Energy Regulation (ACER) recently published the requirements and eligibility per country to provide each of the frequency reserve services for batteries and other technologies.

Inertiaservices

Grid inertia is the amount of energy that is stored within the grid that can resist frequency change. It prevents the frequency from deviating significantly, allowing balancing reserves a chance to respond. As National Grid ESO explains, “Inertia behaves a bit like the shock absorbers in your car’s suspension, which dampen the effect of a sudden bump in the road and keep your car stable and moving forward.” Hence, it is a crucial factor in maintaining a stable electrical grid. The inertia in a system comes mainly from the conventional synchronous generation from nuclear, coal, gas turbine, and hydro sources. In an era when renewables are dominating the grid, inertia needs are growing, as renewables cannot provide it.

BESS can act as virtual synchronous machines or grid forming inverters as they are able to provide inertia services to grids where the regulation allows. They can respond swiftly to help regulate the grid frequency and act as artificial inertia.

Black start facility

A black start is the process of restoring an electric power station or a part of an electric grid to operation without relying on the external transmission network to recover from a total or partial shutdown caused by a blackout. This process comprises several steps in which the black start provider energizes the main generator (for example, a gas generator) before energizing the transmission grid. This, in turn, restores other generators and demand across the system until full restoration is achieved. Hence, the black start provider’s main duty is to bring up other generators that are not black-start capable.

Batteries can act as auxiliary generators, which are traditionally fossil-fuel based, to provide black start facilities. BESS typically have significantly lower operation and maintenance costs compared to fossil-fueled generators. The main drawback is that batteries have a fixed amount of energy available to start the generator. If the energy is insufficient and the system remains in blackout, there is no easy way to recharge the BESS. Therefore, the BESS should be sized appropriately.

Reactivepower and voltage management

Power flowing within alternating current (AC) grids can be broken down arithmetically into active (megawatt) and reactive (megavolt-ampere reactive, or Mvar) power flows. Although reactive power does not add to active power, it does play a significant role in the voltage level of the AC grid. Reactive power services are used to limit voltage levels within a given range. As reactive power is difficult to transmit, voltage has to be managed locally. TSOs do this either by utilizing their own resources, such as shunt reactors and capacitor banks, or by procuring reactive power service by contracting market parties to absorb or generate reactive power, decreasing or increasing voltage, respectively.

Batteries can both introduce reactive power into the grid as well as absorb it. They can act fast, but require clarity on the duration of supply. Market regulation for this service varies vastly per country, influencing BESS participation options. For example, in the UK, batteries are able to provide the enhanced reactive power service (ERPS), which runs beside the obligatory reactive power service (ORPS) to provide additional capabilities. Thus, ERPS provides a route to market for assets that can generate or absorb reactive power but aren’t required to provide the ORPS. The UK also facilitated BESS participation through the Power Potential Project, which created a new reactive power market for distributed energy resources (DERs). It successfully demonstrated the role of batteries connected to the distribution grid in providing such services.

Congestion management

Congestion in grids occurs when power flow is constrained by grid assets’ capabilities, creating a bottleneck that limits the normal flow of electricity. To resolve congestion, the ultimate solution is to physically reinforce the grid with more transformers and/or higher-capacity cables. However, the urgency of the ongoing energy transition demands faster and innovative solutions. Therefore, strategies aimed at reducing demand or additional generation during peak periods, when the grid’s capacity reaches its limit, are being considered to optimize grid capacity. Since congestion is location-specific, it requires flexibility providers that can influence the flows of the congested grid. There are several strategies implemented in the EU and the UK:

Another way to procure flexibility is through flexibility market platforms that offer integrated solutions for purchasing and selling flexibility. These enable grid operators to access local, aggregated flexibility from local small- and large-scale demand, storage, and generation sources which is currently not available in day-ahead, intraday, capacity, or reserve markets. Transmission and distribution grid operators can place requests for congestion relief and flexibility providers bid accordingly. Piclo Flex in UK and GOPACS in the Netherlands are the most popular.

Batteries can play a main role in congestion management when optimally located in the grid, as they can both inject or consume electricity according to the congestion in place. They are able to participate in all the different congestion management strategies, but flexibility platforms are the best fit for improving transparency and facilitating the development of BESS projects.

Grid investments deferral

BESS offer more to grids than the regular ancillary services, including the ability to defer or replace transmission grid upgrades by using storage as a transmission asset (SATA). This is also known as “virtual transmission” in Australia and is exemplified by the “Grid Booster” project in Germany. SATA initiatives are faster, more economical, and offer more benefits compared to traditional infrastructure. Batteries placed in the transmission grid can inject or absorb real and reactive power, mimicking transmission line flows. Consequently, battery systems can replace a proposed line upgrade or a new line that would otherwise be built.

Resource adequacy is the ability of the power system to ensure the reliability of electricity supply. Capacity remuneration mechanisms (CRMs), also known as capacity mechanisms or the capacity market, were introduced to address the security of supply. A CRM rewards generators for their availability to ensure demand can be supplied in the medium and long term, while overcoming the “missing money problem.” This concern has arisen in recent years, as electricity markets have undergone massive changes due to the greater penetration of renewables with variable generation and low marginal costs. Consequently, in a competitive electricity market, this should lead to lower wholesale electricity prices and shorter run times (load factors) for conventional fossil-fueled power plants, affecting their economic viability. This has resulted in underinvestment in or retirement of generation capacity, threatening the security of supply. Hence, inadequate dispatchable generation capacity to meet the demand at all times, particularly during low wind and sun periods, has become a major concern. However, the main drawbacks of CRMs are related to high costs and the possibility of distorting the electricity market. In most capacity markets, all flexible technologies, including demand-side response and BESS, can participate. Stakeholders always discuss two main parameters for CRM implementation: the derating factors used for different technologies, and the type of CRM to be implemented.

The CRM qualification process uses derating factors that account for different capacity providers’ reliability. The derating factors for each technology class are calculated using an approved methodology, considering a range of factors including historical availability statistics, installed capacity, and technical limits. Capacity providers that are less reliable from a generation adequacy perspective get lower derating factors. For example, in Belgium, the derating factor for BESS varies between 23% to 71% for 1- to 6-hour durations, respectively. Thus, a generator with an installed capacity of 100MW and a 25% derating factor is qualified to trade only 25MW in the CRM. ACER recently published the requirements and eligibility for BESS to participate in CRMs across the EU.

There are several types of CRM's in the EU (see figure 3). As of 2022, eight EU member states have active capacity mechanisms (see figure 4, see for ACER). Finland, Germany, and Sweden have strategic reserves in place, while the remaining five maintain market-wide capacity mechanisms. Spain and Portugal do not have an active capacity mechanism in place, but some long-term legacy contracts, such as targeted capacity payments, still apply. Although CRMs in the EU are highly dominated by gas and nuclear power plants, BESS have started to compete. Market-wide CRMs in Italy, France, Ireland, and the UK have boosted BESS development, as great volumes have recently been contracted.

Batteries and BESS are crucial to the energy transition and can play a major role in enhancing the reliability and stability of the power system while reducing dependence on fossil-fueled generators and allowing more renewables to connect to the grid. However, multiple factors challenge BESS implementation, blocking the power system from grasping these benefits.

We discussed these challenges with battery developers and industry leaders, including Ruud Nijs, CEO of GIGA Storage. The following views are our own, supported by insights from Nijs.

Market and regulation uncertainty prevent stable cashflows

Finding the best strategy for BESS revenue stacking is complex, particularly amid market and regulation uncertainty. It also includes making trade-offs between contracted and merchant revenues. Nijs says he would rather go fully merchant to seize market opportunities as they present themselves. Still, having some portion of revenues under contract can provide stable cashflow, making a project bankable. Nijs argues that a fully merchant strategy reduces risk because it encourages continuous profit optimization.

The availability of both long- and short-term markets will alleviate some doubts. Long-term market arrangements may mitigate long-term cashflow risks triggered by the cannibalization effect of increasing batteries’ deployment in the market, providing stability to investment decisions. Including a short-term market ensures that developers have an appropriate route to market. For example, introducing grid services flexibility platforms can provide signals and incentives for BESS investment while increasing competition and resource availability.

Connection fees and permits can be a barrier to market entry

High connection fees borne by BESS developers are a serious barrier in the Dutch market, while neighboring markets in Belgium and Germany impose no connection fee. In the UK, batteries are partially exempted from the connection fee. The permitting process in the EU and the UK, especially for grid connections, remains the main bottleneck for BESS deployment.

Supply chain concern are driven by geopolitics

Although lithium-ion battery prices witnessed an unprecedented increase in 2022, mainly due to raw material scarcity concerns, prices in 2023 fell as a result of mines opening and overcapacity across the BESS value chain. According to Nijs, the primary concern now is geopolitical rather than a raw material shortage. Geopolitical risks must be managed critically to avoid supply chain bottlenecks in the future.

Public-private partnerships are vital – can players find a way to work together?

Nijs expressed that commercial contracts between public (or regulated) and private identities can be difficult and involve many “hiccups.” These challenges could be a main reason why using storage as a transmission asset and similar initiatives may not be fully realized across markets where there is a lack of regulatory certainty for grid operators to pursue such investments.

To unlock the full value of batteries, governments would be wise to outline a clear long-term vision for the battery storage sector with a more stable route to market. To boost confidence in the industry, current regulations need to accommodate future prospects of how to optimally use BESS and provide key strategies for integrating batteries in grid planning. “At the end of the day, if we want to achieve goals we need extraordinary measures,” Nijs stresses. “There is an environmental but also an economical cost to not acting, and we need to join forces to get things done.”