The rapid growth of renewables across Europe is increasingly leading to periods of low or negative wholesale power prices, particularly during summer days when both wind and solar are generating. Spain and Germany are leading these market trends, but we expect the majority of European markets to follow.
The increase in low prices periods is not linear with the growth in renewables. Initially renewables are integrated into the system with very limited impact on price, then a tipping point is reached when renewable generation starts to get close to total market demand and prices are forced down to very low levels to force the market to balance . This is clearly illustrated by the Spanish market, see chart below. Rapid increases in renewables from 2015 to 2022 had very little impact, however the market reached a tipping point in 2023 and the prevalence of low priced periods has exploded.
In local constrained markets we see similar dynamics. For example in the UK, there is too much wind connected to the relatively small Scottish market, and insufficient grid transportation capacity to move power to the demand in the English market. As a consequence NESO is frequently turning off wind farms and paying high balancing fees in compensation either for wind farms to turn off or for storage in Scotland to charge and reduce the market oversupply.
These low market prices and attractive balancing fees during high renewables periods, is opening up a range of businesses opportunities across the power value chain, for example:
- Industrial customers: behind the meter BESS; electrical heating in parallel with gas heating.
- Suppliers to residential customers: agile tariffs, particularly for those with EV chargers
- Generation: utility scale BESS; long duration storage such as pumped storage, thermal storage, and in the longer-term green hydrogen electrolyzers
A key challenge to any business model targeting low price periods, is the cost of the upfront capital. As at the inherently lower utilization levels required, the upfront capital cost becomes a critical economic driver. The two other key driver are (i) the grid tariff during low price periods, and (ii) the value in product produced from the cheap electricity, for electricity storage that is the value you generate when you discharge the electricity into higher priced periods. For electric heating for industrial customers it is the value of the gas and carbon saved. The table below contrasts these key factors for the differing technologies.
Industrial electric heating is a new opportunity we are developing for clients with large industrial heating loads. Its key advantage is the relatively low unit capex cost and its inherent flexibility. These benefits are sufficient to offset the value created from the savings on the gas and carbon. For customers with limited grid capacity or who do not pay for carbon emissions this technology becomes less attractive. In addition to investing in electrical heating, industrials can couple this with heat storage allowing them to further displace gas consumption.
The business model for BESS has to date relied predominantly on the high value of the electricity discharged and of high responsiveness, typically from grid services such as frequency response and balancing . Going forward, the opportunity to charge at low prices will become an increasingly important element in the revenue stack. This increase the attractiveness of behind-the-meter BESS, which may combine low prices charges with higher product value. For medium duration storage, around 2 hours, economics are currently attractive in many markets. However the incremental cost of extending duration on BESS is relatively high, whereas the marginal revenue from extending the battery life declines with each incremental hour of duration (tends to get used less frequently). So BESS are less able to take advantage of longer low price periods such as the 7+ hours we frequently see in Spain.
The economics for higher capital cost solutions such as long duration pumped storage and hydrogen electolyzers remain more challenged, given the uncertainty around the future market evolution and the potential for BESS growth to cannibalise some of the low priced market periods. They require high utilization levels to justify the investment. To stabilize these business cases, markets such as the UK that are looking to encourage long-duration storage are offering cap and floor schemes to manage the risk.
The flexibility to shift EV charging into these emerging lower priced periods is also a new opportunity. An increasing number of agile home charging tariffs are encouraging homeowners to adjust their charging habits in order to benefit from lower rates. A number of CPO’s are also starting to experiment with offering lower prices during periods of low-cost electricity.
Different European markets are going to reach their tipping point at different times and the shape and frequency of low priced periods will be market dependent, e.g. wind dominated markets will have a very different profile to solar. Thus the optimal solution and timing will differ by market.
E-CUBE has developed strong expertise on new business opportunities in low power prices context through its recent projects and the experience of its consultants. We would be delighted to discuss these market perspectives and opportunities with you. Please feel free to contact the experts below to schedule a conversation on the topic.
