Energy Arbitrage

Energy Arbitrage is the business of buying power at a low price and reselling it at a higher price.  The great disadvantage of renewable energy is that it is not schedulable and dispatchable, the energy is effectively sold at the price available at the moment of production. 

While providing ancillary services is a value-add way of 'buying low and selling high' when it comes to energy, here we discuss the more pure-play strategies.  A renewable energy supplier may use a utility scale battery to store energy produced during low pricing periods, and then sell the energy during high pricing periods.  A battery may also be used as a generation/load resource on the grid without reference to the renewable generation, buying and selling energy on the open market.  Anytime the price spread between buy and sell of energy exceeds the inefficiencies of storing energy in a battery, a potential profit may be gained.

Most energy is bought and sold on long term bilateral contracts.  However, to balance the load there exists a marginal market which represents perhaps 5% of all energy consumed.  Energy generators can schedule to sell energy in 10-15 minute chunks at a bid price, scheduled 75-90 minutes ahead.  Energy consumers who require power purchase it at the lowest bid price available.  The highest value paid for energy in that period is called the MCP, or Market Clearing Price, and published. 

The MCP is historically much lower than prices gained in long term Power Purchase Agreements (PPAs), as the marginal market is often comprised of generation that will be 'lost' if not sold.  However, during peak usage periods, the premiums available for energy on this market can be huge.

There are general daily trends of one or two high pricing periods during a day and one or two low pricing periods.  In addition, there are relatively random spot changes that can be enormous, with pricing changing from -$50/MWh to +$500/MWh in a few hours.  The chart below shows the Market Clearing Price for ERCOT West for May of 2008, representing 2976 15 minutes periods.  While the price curve on the month is dominated by the $2000/MWh spikes, the second chart shows a single 4 day period where energy arbitrage on the hourly or even 15 minute basis would have been very lucrative.



Batteries can take advantage of this market on the long term, short term, or a combination of both.  In many wind farms, the wind blows primarily at night, during the lowest pricing period, while the load and price is greatest during the day.  By shifting energy daily to higher value periods, while maintaining the opportunity to take advantage of pricing spikes, significant value can be achieved. 

Renewable Development in Limited Transmission Areas
Areas with limited transmission assets are often the same areas where wind and solar energy is most abundant.  Due to transmission constraints, utilities may find renewable energy to be of little value, as the energy provided will displace only the lowest cost energy available.  They may even curtail the provider, as happens often with wind energy suppliers in ERCOT.  With batteries, wind and solar plants may make new developments practical by garnering higher PPA pricing due to the flexible dispatchability of the energy.  Simply, if the utility can take advantage of the energy arbitrage opportunities as outlined above, they can justify a higher PPA price.  The renewable developer may also opt to enter partially or wholly into the open energy market, rather than sell all power via a long term PPA.

A good description of the wholesale energy market can be found here: http://neuralenergy.blogspot.com/2009/06/electricity-markets.html, and here http://www.epsa.org/industry/primer/.

Batteries can gain significant revenue streams via energy arbitrage, and their use would eventually lower energy prices for all.  However, rules and protocols allowing energy storage devices clear access to these markets is needed in the various ISO/RTO operating areas.