In 2024, 72% of wholesale revenues for grid-scale battery energy storage in CAISO came from buying and selling electricity in the day-ahead power market. But these arbitrage revenues weren’t the same everywhere.
Arbitrage opportunities vary depending on where in the power system a battery is connected. This is because energy prices in CAISO are locational - meaning they vary across the power system as transmission congestion occurs.
In this article, we’ll examine the history of energy prices across California to identify which locations provided the best potential for energy arbitrage and the drivers behind price spreads across the state.
Why is Day-Ahead arbitrage significant in CAISO?
Batteries in CAISO are earning an increasing share of their wholesale revenue buying and selling electricity in the Day-Ahead Market.
Here, ‘wholesale revenue’ or ‘merchant revenue’ refers to revenue earned in CAISO’s Day-Ahead and Real-Time Markets. It excludes revenue from bilateral long-term arrangements - such as Resource Adequacy contracts or Power Purchase Agreements.
In 2024, Day-Ahead energy arbitrage accounted for 72% of merchant battery revenues in CAISO - up from 64% in 2023.
Generally, these batteries charged in the afternoon when prices were low. Then, they discharged during the peak in prices later in the day.
CAISO operates as a nodal electricity market. This means the system operator divides the network into thousands of nodes and determines prices locationally. The price at each node is known as the Locational Marginal Price (LMP), and it reflects the marginal cost of producing energy and transporting it to that location.
The spread between the highest and lowest hourly average LMPs observed at a location on a given day measures the potential to generate revenue through arbitrage.
The south of California is generally better for energy arbitrage
CAISO’s nodes are bundled into three virtual trading hubs - or congestion zones - to represent the price dynamics across the network. The price spreads at a resource’s node represent the actual settlement price a resource is exposed to. However, the zonal average of the nodes within a given zone provides a useful signal for general long-term locational opportunities.
Arbitrage opportunities have been strongest in the SP15 congestion zone for each of the past five years. In fact, in 2024, arbitrage potential in SP15 was 40% greater than in the NP15 zone.
This is indicative of the fact that price formation differs across the different regions in CAISO. Generally, price spreads tend to be higher in Southern California, or SP15.
But why is this the case?
What drives price spreads in California?
In CAISO, the largest spreads generally happen on days when net load (or demand minus wind and solar generation) rises to relatively high levels. On these days, prices tend to be at their highest in the evenings as solar generation declines.
Solar sites make up a significant portion of generation in California, and their outputs rise and fall with the sun’s movements. When solar generation is at its peak, it often is the marginal technology type, lowering prices across CAISO towards zero.
Then, as solar generation ramps down in the evening, other technologies increase their output to meet demand. This switches the marginal technology delivering energy to the grid and raises prices across the system.
On days with high demand, more costly ‘peaking’ natural gas generators are often required to meet peak load.
These gas ‘peaker’ plants often price the top end of their capacity near CAISO’s energy bid cap of $2,000/MWh, higher than other technologies. This results in large spikes in energy costs at many nodes.
An example of this was September 5th, 2024, when system demand reached a record high for the year, peaking at 47,750 MW at 6:00 p.m. This, in turn, resulted in the system’s highest day-ahead average daily price spread for the year, at $543/MWh.
The abundance of solar in southern California makes these price swings from gas-driven generation even more significant.
Just last summer, SP15 produced 3.7 million TWh of solar energy, dwarfing the technology’s contribution in both other zones five times over. Additionally, the difference in solar production between zones is likely only growing larger.
This is because solar generating capacity has nearly doubled in the past four years in SP15 while staying relatively flat in the other two zones.
High solar output doesn’t always mean high price spreads. However, it leaves the system vulnerable to more volatility, especially when coupled with high demand and under-generation relative to forecasts in the evening.
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Nodal prices provide a range of opportunities across the network
CAISO’s trading hubs comprise around 1,870 individual pricing nodes.
By charting the average annualized Day-Ahead arbitrage potential over the past two years across all these locations, it’s apparent how much revenue opportunities vary across the network.