Energy storage arbitrage involves storing electricity when prices are low and dispatching it when prices are high to profit from price differences. However, this activity carries several potential risks:
Market and Financial Risks
- Price Uncertainty and Negative Returns: Storage operators face the risk that if they charge energy at high prices but cannot sell it later at profitable prices, they may incur negative returns.
- Margin Volatility and Active Management: Arbitrage requires active asset management responding to fluctuating prices, which leads to revenue margin volatility and reduced predictability of when and how much the asset will be charged or discharged.
- Higher Risk Compared to Other Revenue Streams: Arbitrage is considered riskier compared to stable revenue sources like capacity provision, ancillary services, or long-term contracts.
Technical and Asset Degradation Risks
- Accelerated Battery Degradation: Frequent cycling and variable depth of discharge driven by arbitrage can cause faster degradation of battery storage systems, particularly lithium-ion batteries. This rapid degradation reduces the asset’s usable capacity over time and shortens its life expectancy.
- Degradation Impact on Profitability: As degradation progresses, revenue potential declines significantly—studies show revenue reductions in the range of 12-46% due to capacity losses and efficiency drops.
- Safety Risks from Degradation: Severe degradation can lead to battery overheating and thermal runaway, which poses fire, explosion, and system failure risks, potentially causing costly damage and safety hazards.
Operational Risks
- Complexity and Need for Accurate Forecasting: Successful arbitrage depends on accurate price forecasting and fast response to real-time price signals. Inaccurate forecasts or delays can reduce profitability or cause losses.
- Reliability and Grid Stability Considerations: While arbitrage can support grid balancing, prioritizing it without proper risk management may affect grid reliability if storage dispatches are not well coordinated.
In summary, while energy storage arbitrage can be lucrative, it carries risks including market price volatility, accelerated battery degradation impacting asset life and safety, and operational complexities requiring sophisticated forecasting and control systems. These factors must be carefully managed to ensure profitability and system reliability.
Original article by NenPower, If reposted, please credit the source: https://nenpower.com/blog/what-are-the-potential-risks-associated-with-energy-storage-arbitrage/
