Pricing
21 Dec 2023
Brandt Vermillion

ERCOT Quick Take: Battery energy storage arbitrage revenues by location

As more intermittent renewables come online in ERCOT, high-voltage transmission infrastructure is struggling to keep up. Building transmission is a difficult task for utilities. This is because:

  • It requires large capital expenditure.
  • It’s more difficult to acquire the land and permits needed for transmission infrastructure than for generation resources.

As such, congestion costs in ERCOT have been on the rise in recent years. And, as congestion costs increase, so does the variation in nodal prices across the system. This creates increased basis spreads - and battery energy storage systems can take advantage of these arbitrage opportunities.

Neil explains the differences in Energy arbitrage revenues by location.

What have energy arbitrage revenues looked like on a locational basis for battery energy storage systems in 2023?

Through the end of September 2023, the proportion of battery energy storage revenues from energy arbitrage has roughly doubled - from 6% in 2022, to 12% this year. So, where are the batteries driving this growth located?

In 2023, batteries in West Texas have earned, on average, roughly double the revenues from energy arbitrage than batteries in other parts of the state.

One major reason for this is that West Texas currently has the vast majority of the two-hour systems that are operating in ERCOT. Two-hour systems are better suited than one-hour systems to take advantage of energy price spreads - with their increased ability to provide more energy over the course of a single cycle. Therefore, they have been more likely to focus on arbitrage as a core part of their strategy while Ancillary Services remain unsaturated.

In fact, across the state, two-hour systems earned 3.5x what one-hour systems earned in arbitrage from January to September.

Some systems earned $100,000/MW, annualized, from arbitrage alone during that period. These resources are a great example of how successful a battery energy storage system can be when it prioritizes an arbitrage strategy - and when that system executes that strategy, both in terms of location and taking advantage of inherent locational price volatility.

What does the future hold for energy arbitrage revenues across the system?

It’s been well-established that the saturation of Ancillary Services is coming in 2024. When this happens, batteries in ERCOT will pursue energy arbitrage as a more frequent strategy - and arbitrage will begin to form a larger part of the revenue stack for batteries.

Also, the planned battery buildout for 2024 includes both larger systems (carrying nameplate capabilities as large as 600 MW) and a higher proportion of two-hour systems. And these resources will be located across the state - not just in West Texas.

As such, we expect the importance of energy arbitrage revenues to grow. And, if 2023’s system and price volatility carry over into 2024, we’d expect actual arbitrage revenues to increase, too.