In view of the extreme shocks in the European electricity market as a result of the war in Ukraine, the price of electricity has only been heading in one direction for months — upwards. This “fever curve” can be measured, for example, in terms of the price that is called on the market for the supply of a constant amount of electricity for the following year (“baseload”, i.e. assuming consistent performance over the entire calendar year). On August 29, 2022, a peak of over 1,000 euros was paid for the delivery of one megawatt hour of electricity in 2023. This corresponds to one euro per kilowatt hour, mind you only for electricity generation, i.e. excluding taxes, levies and grid charges. Just one year earlier, at the end of August 2021, the stock exchange would have paid just 70 euros (equivalent to 7 cents per kilowatt hour) for the same megawatt hour delivered in 2023 — an increase of a factor of 15 within a year!
The potential effects on the national economy and on every individual end user are unforeseeable and the current efforts to lower prices are absolutely justified. It is often said here that there is a “supply shock” and that the best way to lower prices is to bring additional power generation to market quickly. Against this background, there is also discussion about the extended running time of German nuclear power plants and about the temporary return to the market of coal reactors that have already been retired. So far, so challenging — so far, so clear.
What influence do battery storage systems have on electricity price levels?
What is not obvious at first glance: Energy storage systems such as battery storage systems contribute to reducing electricity prices. In the case of battery storage systems, in view of the current energy crisis, new capacities can also be realized relatively quickly — even at present — despite all problems with global supply chains. For example, the battery storage systems developed by Kyon Energy in 2021 will be connected to the grid by the end of this year, with a rapid implementation period between the initial project idea and commissioning. Storage systems that are currently being planned can therefore make a significant contribution to stabilizing the energy markets as early as the next winter of crisis 2023 — 2024.
But let's take a step back at this point: How do energy storage systems actually contribute to reducing prices? After all, production is simply postponed but not increased. Can storage systems therefore even relieve the burden on the electricity markets in such a situation?
The answer, which is not immediately obvious, is: Yes! By charging a storage tank during periods of low prices, for example during the day with large amounts of solar power or when there is strong wind, and by discharging during periods of high prices, for example after sunset or during a wind downturn, the price of electricity is actually reduced overall. The explanation requires a look at the mechanisms of pricing on electricity markets.
How are the prices on the electricity market formed?
The price is based on consumers' willingness to pay for electricity on the one hand and the price expectation for electricity generation on the other. The willingness of electricity consumers to pay is typically high and can only be slightly influenced by price changes. Household customers, for example, generally pay the same amount for their electricity all year round, regardless of whether the electricity on the stock exchange is currently cheap or expensive. They therefore have no incentive to postpone their consumption. In industry or among new types of consumers such as electric cars, the impact of price signals is higher, but remains rather low overall. Economists speak of low price elasticity.
When generating, the price expectation is derived from the costs of generating an additional kilowatt hour of electricity. In general, it can be said that when it comes to wind and solar energy, these additional costs are almost zero, because once the wind turbines or photovoltaic systems have been built, the operation hardly costs any money. Wind and sun are available free of charge. The situation is different with conventional power plants. In addition to the costs charged in Europe for the emission of CO2, fuel costs in particular play a decisive role here. This is also currently the fundamental reason for the often extremely high electricity prices, because whenever gas-fired power plants are needed to meet demand, operators of gas-fired power plants must cover at least their (high) fuel costs in order to still have an incentive to produce electricity.
The result is a so-called “merit order” curve of electricity supply, which is initially very flat, driven by renewables, and then rises steeply in the area of conventional power plants. The stock market price is formed from the intersection between the electricity supply curve and the electricity demand curve.
Let us now look at the situation on the electricity market in times of low prices. If — as is currently increasingly the case — electricity demand is largely met by renewables (and possibly partly by other rather cheap energy sources such as brown coal), the electricity price is very low and in part close to zero even despite the generally high price level. If additional demand is created by loading a storage tank during these times, the prices on the market react only slightly, as the supply curve is still “flat” here.
Let us therefore imagine a situation — which will occur more and more frequently in the future — in which all energy demand is met by renewables. The price is almost zero and the storage system can then absorb the surplus renewable electricity on the market very cheaply without driving the price up sharply.
In dark and windless times, when the price of electricity rises sharply, the supply of electricity is significantly more exhausted and expensive power plants are required to produce electricity. In this area, the supply curve is typically “steep.” The removal of the most expensive producer on the market — this could specifically be, for example, the most inefficient gas-fired power plant needed to meet demand — has a strong price-dampening effect. It is precisely this effect that unloading the storage system has, which creates additional supply in times of scarcity and thus displaces expensive (conventional) production.
conclusion
The reality on the electricity market is, of course, more complex than described here for the sake of simplicity. Nevertheless, the effects described are clearly observable and the result can be stated: The bottom line is that the operation of storage systems not only leads to a smoothing of prices on the markets, but also to a reduction in the price level overall. The reason for this is that prices tend to rise only slightly when loaded, but tend to fall much more when unloaded than if the storage system were not active on the market. By the way, renewables are stored at a time when they would otherwise either have been “given away” abroad or completely shut down due to network bottlenecks (see our article Power system of the future).
Is there also a catch somewhere? Not really. As long as the price signals promise profits for storage operators, investments in storage will be increased. This is also currently being observed, so the price signals are working. If we experience further price spikes on the markets in the coming months, we can at least be sure that things would have been even worse without the use of storage technologies and that the heavy expansion of battery storage systems, as Kyon Energy is driving forward, will help to dampen electricity prices in the future.
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