In January 2022 (in accordance with Section 29 Paragraph 1 EnWG in conjunction with Section 13j Paragraph 1 Sentence 2, 13a Paragraph 2 EnWG), the Federal Network Agency initiated a procedure to determine the appropriate financial compensation for redispatch measures. Kyon Energy took advantage of this opportunity to participate in public discourse as part of the consultation process. The following topics were discussed in our statement in order to contribute to a resilient and energy-transition-compatible network:
Battery storage systems play an essential role in the energy revolution. They can compensate for fluctuations and forecast errors in electricity generation from renewable energy sources in the short term and have a stabilizing effect in the short-term period of interest to the grid. They are already making an important contribution to grid stability and integration of renewable energy sources.
However, the current legal and regulatory framework still hampers their network-friendly use, and many of the technical potential of storage systems remains unused. Without adequate business models and a market model that enables energy storage systems to both operate profitably and operate in a network-friendly manner, the expansion goals set out in the network development plan will not be achieved. In essence, energy storage systems have the potential to do far more for the network infrastructure than is the case under the current market design and current remuneration mechanisms.
As a result, the Kyon-Energy proposal therefore aims at a complete redesign of the remuneration mechanisms for energy storage systems. From Kyon Energy's point of view, this is necessary because, on the one hand, the current process leaves unused the extensive potential of network-friendly use of market-based storage systems and, on the other hand, the current cost calculation of generation expenditure and opportunities does not do justice to the complexity of large battery storage systems. In order to meet the characteristics of large battery storage systems — in particular dynamic timetable adjustments and simultaneous use in several different markets — as well as the different network topologies, it is necessary to fundamentally revise the compensation mechanics of storage systems (in particular large battery storage systems) in congestion management. At the same time, there is an acute need for action simply because studies by Kyon Energy show that energy storage systems have incentives to aggravate existing bottlenecks (“strategic bidding behavior”) in the currently planned cost-based process. The risk of strategic bidding behavior is actually the central argument that is often used against market mechanisms in redispatch (“flexibility markets”). However, it also applies to a cost-based redispatch with incorrect cost calculation. This results in additional costs for redispatch, which could be significantly decimated or completely prevented by a proper incentive system for battery storage systems. From Kyon Energy's point of view, the problem is fundamental and cannot be solved in a cost-based redispatch, which is why a price-based process is proposed below for energy storage systems, which eliminates the incentives for bottleneck aggravating behavior.
The following is an example of the redispatch fee for a typical “Nord” energy storage device when there is a negative redispatch requirement. An exemplary battery storage system is examined as built by Kyon Energy and connected to the public power grid. As is generally known, when electrical energy is heavily fed in from wind turbines in northern and eastern Germany, network bottlenecks often occur when attempts are made to transport this electrical energy to high-consumption regions in the south and west of the country.
The effects of market-based battery storage are described by way of example below. Congestion management is a continuously rolling process that dynamically adapts to production and consumption forecasts. The present calculations are therefore exemplary and not to be understood as a general cost basis for redispatching energy storage systems. This example is intended to illustrate the limitations of the cost-based approach without making any claim to be general. To anticipate the result: It shows that the current approach to determining a Cost base for redispatch measures not suitable for battery storage systems is.
In the Initial situation of the example An energy storage system is considered that is in the immediate vicinity of renewable energy generation plants. In the event of a surplus of renewable energy, two typical effects can be observed in this constellation: The intraday market price is low and the local grid infrastructure in the immediate vicinity of the storage facility is just as congested as the transmission grid to major consumption centers. The storage system, which bases its charging and discharging behavior on the prices on the intraday market, is therefore planning to recharge in times of network bottleneck. In the attached graphic, the period marked in turquoise takes place.
On the basis of the signal coming from the electricity market, excess electricity, which in case of doubt would be curtailed for reasons of network congestion, would be temporarily stored. The original roadmap therefore provides for bottleneck alleviating the energy storage system.
However, this market-based network-relieving behavior can be abolished by existing congestion management regulations. In principle, all players who must participate in redispatch must report their redispatch assets to the network operator in a constantly updated manner. A memory that charges with its entire reference power, driven by low market prices, has no additional recharge capacity — it cannot be used for a negative redispatch measure (i.e. further recharge) and its negative redispatch capacity is zero.
Without the false incentive effect of the redispatch fee, the storage system would regularly recharge itself with energy purchased on the intraday market. For this, the storage operator will incur costs equal to the amount of energy purchased.
Since the memory does not have any redispatch capabilities in the initial situation, its charging behavior corresponds to its normal cycle behavior on the market. In other words, the energy storage system charges at full load when a lot of power is available in the grid (this is the case because the storage system is on the “right” side of the bottleneck here) and pays the market price in return. Charging storage during a bottleneck via the intraday market therefore alleviates bottlenecks for network operators and costs for the storage operator. The price signal on the intraday electricity market prevents bottlenecks (network-friendly timetable). In our numerical example:
Cash flow outside redispatch (alleviating bottlenecks) = approx. -550 EUR (costs incurred by the storage operator)
The decisive point: If the storage company had redispatch assets in the initial situation, instead of bearing the costs for its network-serving behavior, it would be remunerated for a redispatch measure, with this remuneration being paid “on a cost basis.” This becomes a problem as soon as the “cost base” is incorrectly determined. Because then, from a system perspective, the energy storage device has an undesired incentive to deviate from its regular charging behavior.
Instead of acting in accordance with the optimal charging time, which is determined via the intraday market signal, if the cost base of the redispatch fee is determined too generously, there is a tendency to remain inactive or even to display a hypothetical storage schedule in which the charging movement is replaced by an unloading movement. This behavior doubles the memory's redispatch capabilities, but at the same time increases the overall redispatch requirement for the network operator. This bottleneck worsening behavior is due to a false incentive effect, which can be caused by the current cost calculation of the redispatch.
A redispatch call based on current remuneration structures is often more lucrative for the storage operator than a top-up process via the intraday market. This is due to the fact that costs are actually often misrepresented. In a specific example, the storage operator weighs up the payment of purchased electricity on the intra-day market and the remuneration for the use in redispatch. For use in redispatch, however, he would be entitled to compensation for the “proportionate consumption of value” resulting from battery wear and tear. In the described case, the remuneration for use in the redisptach corresponds not only to that of the additional charging process, but also to the lack of discharge of the memory, which was only aimed at maximizing profits in the event of a bottleneck. This results in a doubling of redispatch assets and, as a result, also in the remuneration of failed loading and additional unloading (including the respective proportionate value consumption).
This strategic timetable design, in order to benefit as much as possible from the redispatch fee, can result in the memory showing some bottleneck worsening behavior. He only reports this roadmap in order to maximize his redispatch assets and thus continue to benefit from the compensation structure as provided for in the cost-based approach. Such behavior would not be sought by a memory that is not part of the redispatch.
A corresponding, strategically selected timetable adjustment is described in the graphic below.
The reason for these misincentives in interpreting the storage design is not fundamentally linked to energy storage as a technology. Rather, a cost-based approach, which is currently being used, is unsuitable for increasing the potential for economically favourable bottleneck management through storage, despite differing requirements from legislators. The reasons why such a procedure appears unsuitable for battery storage systems are explained below.
Cash flow in case of unloading and absence of load movement as part of redispatch= approx. 580 EUR (profit generated by storage)
The current remuneration approach for redispatch by the BNetzA means that false incentives are being set for the use of battery storage systems to avoid network bottlenecks. As a result, bottleneck management costs are higher overall.
In principle, the planned cost accounting is based on three partial costs — production expenditure, proportionate value consumption and opportunity costs. In their current form of calculation, however, all three appear unsuitable for even approximate the costs incurred by storage operators.
The cost calculation for redispatch measures proves to be inadequate in view of the complex reality of large battery storage systems. For example, the calculation of generation expenses is based solely on the basis of daily shadow prices from the intra-day opening auction. However, modern large battery storage systems operate simultaneously on several energy markets, such as the FCR market, the AFRR market (also in the short term in the AFRR energy market up to 30 minutes before the supply period), and not just at the intra-day opening auction. This comprehensive trade and the dynamic timetable design of battery storage systems are being neglected.
At the same time, the restriction of the number of cycles leads to difficulties in calculating the proportionate value consumption, as cycles are not completed in addition, but simply postponed. After a redispatch measure has been carried out, the memory does not return to its initial state before the measure, but adjusts the schedule in accordance with the new market conditions and the current state of charge (SOC).
Determining opportunity costs is also significantly more complex than previously assumed as part of the WEBER approach1. For example, “costs for loss of flexibility” are not shown in different markets at the same time and in view of the rolling timetable determination process (see BK8-18-0007-A, Appendix 2: Weber report dated 11.08.2015). For this reason, the determination of opportunity costs due to loss of flexibility is not fully covered.
These listed weaknesses of the cost-based approach may have some negative effects. For example, the integration of storage systems into congestion management in accordance with previous requirements cannot increase the potential for cost reductions for network operators and thus lead to a reduction in network charges paid by consumers. The growing costs of redispatch measures represent an increasing economic problem. In 2022, the costs were 4.2 billion euros. They are transferred to electricity consumers.
There is basically a problem with the current cost-based process for large battery storage systems: The conflict of locally different network topologies and a uniform price zone, together with the dynamic schedules of energy storage systems (“shifters” within the meaning of Section 3 No. 15d EnWG, such as grid-connected battery storage systems) on different markets makes it impossible to determine a uniform and highly simplified cost structure and opens up potential for strategic bidding behavior.
The integration of market-operated energy storage systems as an additional component into existing congestion management must therefore be designed in such a way that the potential for strategic behavior existing in the current, cost-based process is eliminated and at the same time incentives are created for market-driven bottleneck alleviating behavior. To this end, the cost-based redispatch process for energy storage systems must be replaced by a price-based process. Insofar as strategic, bottleneck aggravating conduct can be ruled out in a price-based procedure, in accordance with Section 14c EnWG, such a procedure is already required by law, at least in distribution networks and should also be used in transmission networks.
We therefore incorporate the following concepts for demand-based pricing in redispatch:
- Proposal 1 — static pricing: bilateral agreement on prices and quantities with a local network operator, e.g. as part of the agreement on the network connection agreement
- Proposal 2 — dynamic pricing and timetable planning taking into account the local network topology: Integration of flexibilities into the existing redispatch process while at the same time providing an incentive for bottleneck-oriented timetable design
One option with rather low contractual complexity but with increased complexity in procedural processing for storage operators and network operators is to define a storage schedule in advance for each storage location and the predictable local network congestion situation, which has a bottleneck effect. At the time of the network connection contract, a specific quota (in positive and negative redispatch directions as required) of full load hours is agreed for this. These are paid to the storage operator in accordance with a price also determined at the beginning. Within the remuneration structure, a distinction is made between settling or activating the memory.
Operational implementation of the procedure
The transfer of redispatch assets and the price of the measures takes place via the usual RAIDA technical interface, and participation in the redispatch measures takes place upon request. The price for participation in redispatch measures is set by the storage operator. The cost base is not determined by third parties.
Reducing congestion management costs for network operators
It is expected that by voluntarily postponing charging and unloading movements, bottleneck relief can be provided more cost-effectively from a network operator's point of view. Due to the severely limited number of daily cycles, it is almost impossible for the storage system to run additional cycles as part of bottleneck management. The pricing of the redispatch measure for storage operators is therefore based on opportunity costs. A correct determination of opportunity is significantly more complex than envisaged in Weber's simplified approach (see BK8-18-0007-A, Appendix 2: Weber report dated 11.08.2015). However, the storage operator is responsible for an appropriate approximation.
Create incentives for network-friendly behavior: Inclusion of local bottlenecks in original energy storage roadmaps
In order to ensure that the energy storage system provides a network-friendly, bottleneck alleviating schedule, it undertakes to pay a specific quota of hours per year of cancellations down to zero accepted by the network operator. In those times when storage is being restricted unpaid by the network operator to prevent an increase in congestion, the (subsequent) price-based provision of a bottleneck alleviating timetable must be ruled out at the same time.
A regulation (prohibition of feed-in or outflow in each network-damaging direction) creates the network status without storage (use). The storage system therefore has a high intrinsic incentive not to set a network-damaging timetable from the outset in order to participate in the price-based process and to be able to make profits there. The number of hours in which an unpaid settlement is possible is regulated during the connection procedure, and a framework can be set by the Federal Network Agency.
The use of energy storage systems via dynamic pricing in a price-based payment process has many advantages:
→ Targeted selection of a location for storage development in bottleneck areas in the immediate vicinity of renewable energy plants (in accordance with requirements from the Network Development Plan 2037)
→ Reducing demand and overall costs for congestion management through the use of battery storage systems
→ Cost-effective use of existing network infrastructure
In order to make good use of the potential of battery storage systems in congestion management, their remuneration for redispatch measures should not be based on cost calculations, but should be based on a price-based process. This requires the consideration of local network topologies in the network connection process between network and storage operators. Network operators depend on storage systems and are responsible for providing the necessary 23.7 GW of storage capacity in the energy system by 2037.
For project developers and operators of battery storage systems, the proposed regulatory adjustments open up new business models and revenue potential. At the same time, costs for congestion management can be reduced and thus relieved of the burden on electricity consumers. Granting grid connections at network-relevant locations also increases the total volume of storage that can be added to the network. This creates further economic benefits even in times without bottlenecks, by stabilizing the electricity markets and reducing costs in the control capacity and also in the wholesale market. A win-win situation! Accordingly, a price-based mechanism for the use of (large battery) storage systems in congestion management should now be introduced.
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