Buy Low, Use High: Energy Arbitrage Explained

According to the U.S. Energy Information Administration (EIA), the number of cooling degree days—how hot the temperature was on a given day or time frame—increased by 38.6% from May 2021 to May 2022. Electricity from renewable sources including hydro, wind, and solar accounted for 20% of all generation in 2020 and 2021 but is expected to increase to 22% this year and then to 24% in 2023. EIA notes that as more renewable capacity comes online, other generation sources such as coal and nuclear are being retired. Fortunately, through energy arbitrage utilities can better prepare for the unexpected challenges of an uncertain grid.

At the same time, rolling blackouts could become the norm for an industry that relies on customer behavior and decision-making—good and bad—to help relieve pressure on an already congested electric grid. And real-world energy supply chain disruptions continue to pose a serious challenge to grid reliability, rate structures, and continuity of service.

More energy is being consumed, generation sources are changing and can be intermittent, and the world is burning. What’s a utility to do? Buy low, use high, using a technique called energy arbitrage.

What Is Energy Arbitrage?

Put simply, energy arbitrage is when utilities buy power during off-peak hours when grid prices are the cheapest. It is then stored and used during peak hours when grid electricity prices are highest.

Thanks in part to the massive growth of utility-scale battery storage, which more than tripled from 1.4 GW at the end of 2020 to 4.6 GW last year, energy arbitrage has become an increasingly critical way for utilities to boost the use of renewables while maximizing income.

According to EIA’s Annual Electric Generator Report, nearly 60% of installed utility-scale storage capacity last year was involved in energy arbitrage, up from 17% in 2019. In California, which has the most energy storage of any state—and is frequently on the leading edge of sustainability—more than 80% of battery storage capacity added to CAISO’s grid in 2021 was used for price or energy arbitrage.

Combining energy storage with renewable energy sources like solar and wind helps utilities overcome intermittency with grid-tied battery systems. The two main applications of grid-tied battery systems are energy arbitrage and grid services:

• Energy arbitrage consists of storing surplus electricity (from sources including renewables) when there’s ample supply and lower prices and then providing that energy to the grid when demand is greater and prices are therefore higher. The practice leverages variances in prices in two or more markets, creating profit through a combination of matching deals to capitalize on the difference between the market prices at which the units are traded.
• Grid services are various functions that can be performed by batteries to keep the grid stable. Batteries can balance generation and consumption and control voltage and frequency.

Economic Dispatch and Economic Merit

To better understand how energy arbitrage works, it’s useful to look at real-world examples.

ISO New England, which serves 7.2 million retail electricity customers and a population of 15.1 million people, is almost constantly (about every five minutes) engaging in economic dispatch—selecting which energy resources to operate so it can produce just the right amount of electricity to meet the region’s demand at the most affordable price. As electricity demand fluctuates during the day, ISO New England dispatches resources in economic merit order. This means that resources submitting the lowest-price offers are dispatched first. As demand for electricity increases, higher-priced generators are then dispatched. Thus, as demand increases, higher-priced resources reduce output in reverse merit order.

But, it’s important to note that “resources” can refer to any asset, including distributed energy resources (DERs) that are renewable-energy-produced electricity from utilities’ residential battery storage networks.

Regardless of the resource, energy arbitrage becomes more lucrative as the price difference between off-peak and peak electricity increases. As the differential shrinks, the potential savings through energy storage (and arbitrage) are reduced. That’s why it’s important to use sophisticated forecasting models to anticipate fluctuations, with battery storage helping to time-shift wind and solar outputs that can help mitigate weather forecasting inaccuracies while efficiently delivering energy when the electricity prices are higher.

The concepts of economic dispatch and economic merit also can be applied at a much larger scale in the wholesale electricity market. Traditionally, generation companies have sold their electricity at higher spot prices because their wind turbines and solar farms depend on the vagaries of the weather. Now, with utility-scale energy storage, these generation companies can hold on to their renewable energy resources for hours until wholesale electricity prices rise, maximizing profits that then can be reinvested in the battery storage network.

Energy Arbitrage “Partners”

The time-varying mismatch between electricity supply and demand that is inherent in energy arbitrage is a growing challenge for the grid as renewable energy resources proliferate. Due to their weather-related volatility, this difference will be exacerbated by the fast-growing renewable energy market. Energy storage systems offer a solution for this imbalance while generating economic benefits through energy arbitrage, which will continue to be a critical tool for utilities to manage grid resources for the foreseeable future.

Forecasting

The best way for utilities to ensure that their customers have a reliable power supply at the lowest prices is to use demand forecasting software that leverages machine learning approaches to increase resiliency and flexibility while reducing costs. Essentially, demand forecasting turbocharges the electricity-purchasing process by providing utilities with a view into the near-term future so they can use energy arbitrage to “buy low, use high” with confidence.

Load forecasting can turn information into action by synthesizing into one platform the most relevant data sources, from predictive weather forecasts to real-time usage data to DER programs to granular battery telematics. It also makes it possible for utilities to efficiently manage portfolios by rapidly responding to changes in demand response programs without waiting for a data analysis team to pore over complex data sets.

Demand Response

As the saying goes, the cheapest—and greenest—energy is the energy that you don’t use. Curtailing energy usage frees up revenue that otherwise would go to supplying the grid with higher-priced (and often less sustainable) power during high load-demand times. Demand response programs increase system efficiency by shifting electricity consumption away from peak load times to periods when demand (and cost) is lower, reducing overall energy consumption.

Using real-time data, often down to the individual device level, utilities can aggregate devices into groups to optimize demand response programs. Over the longer term, scalable and sustained demand response lowers aggregate system capacity requirements, allowing utilities to purchase or build less new capacity and reduce their environmental impact.

Distributed Energy Resources (DERs)

According to Fortune Business Insights, the global distributed energy resource management system market is projected to grow from $0.42 billion in 2021 to $1.33 billion in 2028. Some of the most exciting DER technologies include vehicle-to-grid (V2G) charging, managed charging initiatives, and virtual power plants.

When utilities pilot, scale, and sustain DER programs, there are three major benefits:

• Reducing energy demand creates financial incentives to offset energy costs.
• Decreasing demand improves the reliability of the electric grid.
• Implementing DER programs leads to a greater ability to efficiently manage the electricity market.

Conclusion: Energy Arbitrage (& Other) Opportunities Abound

The world is getting hotter, with more people competing for finite energy resources. The increasing development and deployment of electricity from renewable sources—made possible in part through the booming storage sector—provides a notable bright spot. The future of the electric grid is increasingly managed through energy arbitrage, which has benefits for utilities, customers, and the environment.

In 2021, retail sales of electricity in the United States generated revenues of $424.3 billion, a year-over-year increase of nearly eight percent. That growth—combined with the expanding energy arbitrage market plus strategies including load forecasting, demand response, and DERS—creates an opportunity for utilities to build a better electric grid and a more sustainable planet.