Electric batteries are buying cheap energy and selling it at a much higher price

The rise of renewables, particularly solar power, has created a new opportunity for the battery business. What we have seen in recent months, especially during the summer, is that electricity prices can drop to zero, or even turn negative. This makes it potentially highly profitable for some companies to buy electricity during these cheap hours, store it, and release it again when demand rises and production is not as high.

However, not everything is as it seems, and this very trend could have a counterproductive effect that would jeopardize the viability of some power plants in the future.

It all begins in the electricity market. In the daily energy market, buying and selling is negotiated for each hour of the following day. Offers are accepted based on several factors, such as economic merit or available interconnection capacity, as explained by Omie. To verify the viability of these offers, the auction results are reviewed by the system operator, which validates them from a technical standpoint.

But forecasts can change. That is why intraday markets exist, allowing participants to adjust their positions before electricity delivery, based on how demand, renewable generation, and other system conditions evolve.

The intraday spread. This is where a key indicator comes into play: the intraday spread. It refers to the price difference between the cheapest hours of the day (typically midday, when solar photovoltaic output is very high) and the most expensive hours (when night begins to fall, but electricity demand remains high). This difference represents the potential profit margin for an hour of energy purchased at lower prices and sold or discharged through storage systems during peak-price hours.

A high intraday spread can incentivize greater corporate participation in the electricity market, driven by the increasing value of storage systems.

What has happened this summer? El Periódico de la Energía reports that the monthly average of the one-hour intraday spread in our country during September was 215.37 euros/MWh. This figure even exceeds that of August, which was 195.29 euros/MWh, a month that is generally characterized by good solar resource (although also by high electricity demand).

All of this shows that Spain appears to be a favorable setting for the development of the battery market, a horizon that Europe is betting on very strongly in its energy transition strategies. The problem is that the conditions that make these projects attractive today could change radically in the coming years.

An effect that can be counterproductive. However, the fact that there is currently a significant difference in electricity prices does not mean that batteries will maintain those revenues throughout their entire useful life. As explained by the energy consulting firm AleaSoft Energy Forecasting, the profitability of storage systems can also be affected by other issues, such as the ability to shift the energy intended for storage, the degradation and lifespan characteristics of the battery, and other operational constraints.

These factors are compounded by something fundamental: the fact that the expansion of storage itself can alter prices to the point where the intraday spread is no longer economically attractive. This is known as cannibalization.

Cannibalization vs. financing. This factor can occur because, when battery systems are deployed that charge during low-price periods, electricity demand will increase. Conversely, when high prices arrive and the batteries discharge, the available supply will increase. In other words, the price difference between charging and discharging will decrease. This introduces a problem for the financing of new projects. If revenue projections are based on current price differentials, they may end up overestimating long-term profitability. And that complicates financial institutions’ assessment of certain investments as viable.

Opportunities will remain. Cannibalization does not mean that batteries will cease to be profitable or that their installation should be halted. Rather, it means that the business cannot rely exclusively on the price differences we observe today. For projects to be financeable, as noted by Tellkes based on AleaSoft’s statements, consistent assumptions regarding installed capacity and operation must be established.

This will require hourly forecasts that account for different trajectories of the power system, including the least favorable conditions. Only then can projects present long-term-based proposals that are attractive for securing financing and for the renewable energy market to continue gaining momentum, compared to other alternatives.