Store, Sell, Repeat: Why Use Battery Energy Storage Systems for Energy Arbitrage
Despite a clear need for reliable energy solutions, South Africa’s uptake of grid-connected storage like Battery Energy Storage Systems (BESS) must be faster and more coordinated, despite the recent Commercial Operation of some large-scale front-of-the-meter BESS. The recent report from the International Institute for Sustainable Development sheds light on this critical gap, revealing a sluggish integration that needs to catch up to national energy plans, including demand planning.
While the draft Integrated Resource Plan presents steady additions of BESS, it fails to present an appropriate path out of loadshedding in the short term and does not account for how BESS can enable a larger adoption of Behind the Meter Distributed Generation, or the effect that access to storage capacity.
Through effective energy arbitrage, BESS can mitigate load shedding and optimise energy use during peak times. These storage solutions could be a linchpin in stabilising and future-proofing South Africa’s energy landscape.
An Introduction to Battery Energy Storage Systems
Battery Energy Storage Systems comprise several key components: the battery cells that store electrical energy, housed in a module managed by a Battery Management System (BMS); an inverter that converts the stored DC power into AC power usable by the grid; and a sophisticated Management System that optimally controls charging and discharging based on on-site energy demand, availability, and market conditions.
Scalability
Lithium-ion BESS stands out from traditional storage solutions due to its remarkable scalability, efficiency and deployability. It can be tailored to fit various sizes and power needs, from small installations serving individual buildings to large systems designed for grid-scale applications. Moreover, BESS is highly efficient in its operation, minimising energy losses during storage and dispatch.
Reliability
A critical advantage of BESS is its ability to respond almost instantaneously to fluctuations in energy demand. This rapid response capability is essential for maintaining grid stability, especially when renewable energy sources like solar and wind are integrated into the power system.
An Introduction to Energy Arbitrage
Energy arbitrage involves buying electricity when it’s cheap and selling it when it’s more expensive. This practice takes advantage of the difference in pricing of Time of Use tariffs at different times of the day. In some jurisdictions, prices vary throughout the day depending on demand.
Electricity prices drop during off-peak hours at night when demand is low. Conversely, prices rise during peak hours, such as late afternoon and early evening, when everyone uses more electricity.
BESS charge up during off-peak times when electricity is cheaper. They store the energy until it is needed. Then, during peak times when electricity prices surge, BESS discharge the stored energy back into the grid, capitalising on the higher price rates.
South Africa’s Energy Landscape
The South African energy sector is governed by the National Energy Regulator of South Africa (NERSA), which oversees electricity rates, gas tariffs, and the pipeline industry. NERSA’s decisions can significantly impact the deployment and utilisation of energy storage systems for energy arbitrage.
For instance, regulatory policies determine the licensing requirements for new technologies. They can influence investment by stipulating how energy storage is classified within the grid infrastructure and setting the criteria for how prices will change.
Recent regulatory updates have aimed to accommodate the growing interest in renewable energy sources and the integration of energy storage solutions. These changes include amendments to the Electricity Regulation Act, the introduction of specific frameworks to support small-scale embedded generation (SSEG), and a review of the National Electricity Pricing Policy. All of these indirectly support the use of BESS in arbitrage by smoothing the integration and adoption of renewable energy into the national grid and setting the appropriate tariff signals.
Electricity Pricing Models
Electricity pricing in South Africa is primarily based on mechanisms to recover administration costs, costs of building distribution and transmission assets and input costs of energy generation; one such mechanism is a time-of-use (TOU) tariff system, which is instrumental in the economics of energy arbitrage. This system currently segments the day into peak, standard, and off-peak periods with varying tariffs.
Market Dynamics
South Africa faces frequent load shedding and reliance on coal-powered energy. These factors create a volatile energy landscape where the flexibility offered by BESS can be particularly valuable for enhancing grid stability and supplying reliable power during outages. Once load shedding stabilises, stakeholders who have installed BESS and operate and maintain it sustainably can further utilise the now-existing asset to generate revenue through energy arbitrage.
The Financial Implications of BESS for Energy Arbitrage
The initial investment for BESS includes the cost of the battery, installation, integration into the existing power infrastructure, and configuring the controller or Energy Management System. While the upfront costs can be substantial, ranging from hundreds of thousands to millions of rand depending on the system’s scale, prices have declined due to raw material supply, production scale, technological advancements and increased market uptake driving competition.
Operational costs for BESS are also relatively low. They mainly involve remote monitoring, visual inspection and component replacement, which typically account for a small fraction of the initial cost annually.
Potential Savings and Return on Investment
The potential savings from employing BESS for energy arbitrage hinge on the ability to buy low and sell high. Using Ekurhuleni Tariff E as an example (One of the highest time-of-use tariffs in the country), in winter, off-peak electricity costs ZAR 1.60 per kWh and rises to ZARR9.51/kWh during peak hours. This drops to a ZAR2.89/kWh peak in the summer against a ZAR1.42/kWh. Against these tariffs, a 1.3MWh BESS, costing approximately R9m to install, could have a return of 18% when charged with solar in the middle of the day. To clarify, this is the cost of the BESS alone, without considering any back up savings and avoiding revenue loss in a high load shedding environment.
Technical Hurdles in the Application of Arbitrage
BESS for energy arbitrage brings several technical challenges, chief among them being battery degradation due to frequent charging and discharging. To mitigate this, advancements in battery technology and enhanced battery management systems are crucial. These systems can optimise the charge cycles and improve battery operational longevity, further enhanced by operating the battery modules appropriately in their optimal environment and monitoring cells’ behaviour.
Opportunities in Implementing BESS for Arbitrage
Innovation
Technological advancements are continuously improving BESS’s efficiency, capacity, and cost-effectiveness. Innovations in battery chemistry and design are expected to extend lifespans, reduce costs, and enhance performance metrics, making BESS an even more attractive option for energy management and arbitrage.
Policy Development
BESS for arbitrage provides the technical support to enact new policies to provide appropriate electricity pricing signals and cost-reflective tariffs. Further policy support could include incentives for adopting BESS, similar to the City of Cape Town’s year one incentive solar tariff feed-in tariff bonus.
Such developments would facilitate BESS’s growth and contribute to a more stable and sustainable energy grid while deferring network capacity upgrades and reducing the need to build more peaking plants, which come with expensive generation costs.
Market Growth
Market growth will likely accelerate as stakeholders become more aware of BESS’s potential financial and environmental benefits. This will be supported by the increasing demand for renewable energy solutions and the need for more flexible and responsive energy systems.
Expansion in the BESS market also opens up new business models and investment opportunities, ranging from residential and commercial systems to utility-scale projects.
Case Study: BESS for Energy Arbitrage
SustainPower collaborated with a client to help them leverage BESS for energy arbitrage. This strategy was intended to result in significant cost savings and a sustainable return on investment for the client.
- Implementation. The BESS was strategically deployed primarily as a back up solution and then later, when load shedding subsided, configured to store electricity purchased during off-peak periods and charged from solar. The stored energy is discharged during peak hours when electricity prices soar due to higher demand.
- Financial Feasibility Study. We developed a financial feasibility study to assess the economic viability of this strategy going forward. This study considered the cost of buying electricity at off-peak rates and the potential revenue from selling it during peak times. It also applied a blended tariff rate factoring in seasonal price variations to ensure a realistic financial outlook.
Against the Ekurhuleni tariffs discussed above, a 1.3MWh BESS, costing approximately R9m to install, could return 18% when charged with solar in the middle of the day. To clarify, this is on the cost of the BESS alone, without considering any savings from back up and avoiding revenue loss in a high load shedding environment.
Therefore, implementing BESS for back up and future-proofing it for arbitrage is one of the most effective ways a business can protect revenue and operating costs in the short term while creating a future revenue stream for the years ahead.
BESS points to a brighter future. One where we turn to smart solutions to support the adoption of clean energy at affordable tariffs and create a more reliable power supply.
To everyone who can make a difference – the policymakers, the businesses, the energy experts: charge your batteries and let’s get moving on BESS.
Contact SustainPower to experience the cost-saving potential of BESS.
