What is BESS and how does it work?

Understanding how battery energy storage systems work is essential for those who want to know the knots and bolts of the industry. Battery Energy Storage Systems (BESS) are in simple terms big batteries that store energy for later use, ensuring a reliable supply of energy when the primary energy source is unavailable. These systems are crucial for utilities, businesses, and homes, providing a buffer against energy supply fluctuations caused by weather, blackouts, or geopolitical issues.

Battery energy storage systems have quickly gone from being overlooked to becoming a fundamental component of modern energy strategies, particularly those leveraging renewable energy sources like solar power and wind.

Solar and wind energy, while abundant, isn’t producing energy all the time. By integrating battery energy storage systems with photovoltaic (PV) solutions or wind turbines, solar and wind energy is stored for later use. This integration ensures a continuous and steady power supply, mitigating the intermittent nature of solar energy and enhancing overall energy reliability.

How battery energy storage systems work​​​

The operating principle of a battery energy storage system (BESS) is simple. Batteries get electricity from the power grid, directly from a power station, or from renewable energy sources like solar panels or wind turbines. They store this electricity as current, which is released when DSOs need the extra power. 

That’s the very simple version, but there’s more to BESS.

When combined with advanced software, a BESS transforms into a sophisticated platform that merges the storage capacity of batteries with intelligent energy management. By harnessing AI, machine learning, and data-driven solutions, these systems can optimize energy consumption, adapting to fluctuations in demand and supply. This intelligent management makes BESS a powerful asset in combating climate change by enabling more efficient and flexible energy use.

Battery energy storage systems support the increased deployment of renewable energy sources, helping to reduce carbon emissions and lower energy costs for businesses and households.

Main applications​

Battery storage can be used in various ways that go beyond simple emergency backups during energy shortages or blackouts. Applications differ depending on whether the storage is utilized by businesses or homes. 

Let’s check them out.

For commercial and industrial use, BESS applications include:

• Peak shaving: This involves managing energy demand to avoid sudden short-term spikes in consumption.
• Load shifting: Businesses can shift their energy consumption from one time period to another by using the battery when energy costs are higher.
• Flexibility: Customers can reduce their grid demand at critical times without changing their overall electricity consumption. This makes it easier to participate in Demand Response programs and save on energy costs.
• Microgrids: Batteries are crucial for microgrids as they provide the necessary energy storage to enable disconnection from the main electricity grid when needed.
• Integration with renewable energy sources: Batteries ensure a smooth and continuous electricity flow when renewable energy sources are not available.

For residential users, BESS offers several benefits:

• Self-consumption: Homeowners can produce solar energy during daylight hours and use stored energy to run their appliances at night.
• Emergency backup: Batteries provide a reliable backup power source during blackouts.
• Going off the grid: BESS enables complete detachment from electrical or energy utilities, providing energy independence.

Advantages of battery energy storage systems

The advantages of using battery storage technologies are numerous. They enhance the reliability and viability of renewable energy sources. Solar and wind power supplies can fluctuate, so battery storage systems are essential for “smoothing out” this flow to provide a continuous power supply, regardless of whether the wind is blowing or the sun is shining. Additionally, they protect users from grid fluctuations that could compromise energy supply. Here are some key advantages of battery storage:

• Environmental gains: Installing a battery storage system in homes or businesses powered by renewable energy reduces pollution, contributing to the energy transition and combating global warming.
• Lower energy costs: Storing low-cost energy and consuming it during peak periods when electricity rates are higher allows users to shift consumption and avoid higher charges, saving money. These savings are magnified when combined with solar power, which is free.
• Reduced grid dependency: Battery storage systems guarantee a continuous energy supply, even when the energy grid is unstable due to peaks in demand or extreme weather.
• “Always on” supply: Since the sun is not always “on,” a battery storage system works around the clock, compensating for any fluctuations in solar energy supply by storing excess power.
• Resilience: A battery storage system provides emergency backup during power outages, ensuring business continuity and household comfort.

What are the main types of battery energy storage systems?

Battery energy storage systems come in two primary varieties: “Behind-the-Meter” (BTM) systems, also known as “small-scale battery storage,” and “Front-of-the-Meter” (FTM) systems, which belongs on the utility side of energy distribution.

Behind-the-meter systems (BTM):
These systems are installed on the user’s premises and are typically smaller than Front-of-the-Meter systems. BTM systems, such as residential PV plants and battery storage units, reduces stress on the public grid when solar power isn’t produced, for instance, when the sun isn’t shining. The main function of a BTM is to improve the stability of the owner’s energy supply and reduce costs. If local regulations permit, these batteries can also feed energy back into the grid, providing an additional revenue stream.

Front-of-the-meter systems (FTM):
FTM systems are larger and directly connected to the power grid, typically belonging to utilities. These systems include large-scale energy production and storage facilities like power plants, solar parks, and substantial energy storage units. FTM systems help solve network congestion issues and can serve as alternatives to building new power lines.

How long does a battery energy storage system last and how to give it a second life?​

Most battery energy storage systems last between 5 to 15 years. As integral components of the energy transition, these systems not only enable sustainability but also must be sustainable themselves. Reusing batteries and recycling their materials at the end of their life aligns with broader sustainability goals and applies circular economy principles effectively.

Recovering materials from batteries and giving them a second life offers significant environmental benefits, both in the extraction and disposal stages. Additionally, battery reuse provides economic advantages, reducing the need for new materials and lowering overall costs.

BESS revenue streams

As BESS is not generating energy on its own and is acting as a flexible asset in our energy system it can gain revenue through many different ways depending on the market. The most common ways of gaining revenues in European markets are either ancillary services or energy arbitrage. 

Ancillary services are services that the grid provider buys from the asset owner, the most common one here is ‘Frequency services’. which can be divided into what’s known as ‘Frequency containment reserve’ (FCR) and ‘Automatic Frequency restoration reserve’ (aFRR).

Energy arbitrage is basically using the market fluctuation of the electricity price to gain revenue – charging when the price is low and discharging when the price is high.

How to find the right investor for battery energy storage projects​

Whether you’re a new or seasoned developer, you’ve probably already witnessed first-hand that there are many investors out there, many of whom are willing to invest in renewable energy projects.

Although finding investors for energy storage projects is easy in theory, finding just the right one typically proves itself to be a whole different game, oftentimes taking multiple months, especially if you want to be sure that you also get the optimum price for your project.    

Having been in this business for nearly a decade, we know the struggle, but we also know the solution to it.

Read more about how we help developers find the right investor for energy storage projects.

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Unlike fossil fuels—coal, oil, and gas—which demand hundreds of millions of years to form and contribute to harmful greenhouse gas emissions when burned, renewable energy sources offer a cleaner, greener alternative. 

But what exactly is renewable energy, and how does it promise to help our global energy landscape?

Renewable energy. Defined.​

From the perpetual glow of sunlight to the ever-shifting currents of wind and waves, these natural resources are abundant and omnipresent and present a way out of the climate crisis if tamed and utilized.

The official definition of renewable energy by the United Nations says that renewable energy is “energy derived from natural sources that are replenished at a higher rate than they are consumed”.

But, transitioning from fossil fuels to renewables is not merely an environmental necessity but also a strategic necessity for many countries to diversify and secure the supply of energy.

The shift to more renewable energy holds the promise of significantly reducing greenhouse gas emissions and consumer prices, with renewables already proving to be a more cost-effective and job-generating solution than their fossil counterparts.

Solar energy

Harnessing sunlight through photovoltaic panels (PV for short) offers one of the most sustainable and cost-effective solutions that can help deliver everything from heat to cooling to electricity for residential homes to industrial complexes.

How solar energy works​

Solar energy is in theory quite simple: When the sun is shining and reaches a solar panel, energy from the sunlight is absorbed by the PV cells in the panel. This energy creates electrical charges that move in response to an internal electrical field in the cell, causing electricity to flow.

More energy in store​

The good news about solar is that there is plenty of if. 

And despite solar energy being in high demand, we are still far from fully being able to harness the power of the sun. According to the Intergovernmental Panel on Climate Change, the rate at which solar energy is intercepted by planet Earth is about 10.000 times larger than the rate at which we as humans can consume it.

The plummeting cost of solar panel manufacturing has not only made solar power affordable but often the most economical electricity option in many countries.

At the time of writing, the price of solar panels are at an all-time low thanks to China having flooded the European market with cheap yet effective solar panels. In fact, 96% of EU solar panel import comes from China.

Wind energy

From towering onshore turbines to sprawling offshore wind farms, wind energy holds vast potential to meet global electricity demands. Despite variations in wind speed, the technical capacity for wind energy far exceeds current electricity production, offering a compelling case for further investment and innovation in this renewable realm.

How does wind energy work​

Wind energy has undergone a remarkable evolution since the Danish scientist Poul la Cour in 1890 discovered that fewer rotor blades, not more, was the most effective way to harness the power of the wind.   

Today, the wind is captured by turning the top part of the turbine, also known as the nacelle, against the wind and adjusting its three blades at an angle that lets the flow of air cause rotation. Once moving, a drive shaft inside the nacelle turns magnets inside a coil of wire. This generates an alternating current of electricity.

The future belongs to wind energy​

As with solar, there is plenty of wind for everyone. Wind turbines have the potential to be deployed in almost every country on Earth where winds are strong and consistent enough. The potential for wind is still one of the largest when it comes to renewable energy and around 2.000 new turbines would be needed to be installed every year for the next decade to meet global targets.  

The best locations for wind turbines is often at sea due to the strong winds, which simultaneously removes the issue of local communities being against having these large steel structures in their backyard – a phenomenon also known as NIMBY (not in my backyard).

Geothermal energy​

Tapping into the Earth’s internal heat reservoirs, geothermal energy presents a reliable and mature technology for electricity generation. Whether harnessing naturally occurring hydrothermal reservoirs or employing enhanced geothermal systems, this renewable source offers a sustainable alternative with minimal environmental impact.

How does geothermal energy work? ​

With over a century of operational experience, geothermal energy stands as a testament to the enduring power of Earth’s natural resources.

The way it works is simple yet very powerful.
Small underground pathways bring underground fluids through hot rocks.
In geothermal electricity generation, this fluid can be drawn as energy in the form of heat through wells to the earth’s surface. Once it has reached the surface, this fluid is used to drive turbines that produce electricity.

The USA leads the race in terms of utilizing geothermal energy. Almost 4 GW, enough to power around 3 million homes, is being generated in the US every year.

Hydropower

Leveraging the gravitational force of water, hydropower remains not only a cornerstone of renewable energy infrastructure in many countries but also the largest source of renewable energy at the time of writing. From reservoir-based plants to run-of-river installations, hydropower offers and very versatile solution capable of meeting diverse energy needs. While concerns over ecosystem impact persist, innovations in small-scale hydro technologies hold the promise of minimizing environmental disruption while empowering local communities.

How does hydropower work?​

Hydropower has two modes:
1. Run-of-the-river systems: Here the flow and force of the water apply pressure on a turbine that in turn produces electricity.
2. Storage systems: Here water is stored in reservoirs and released when energy is needed. The volume of the water flow and the change in elevation – or fall determine the amount of available energy in moving water, so the greater the water flow and elevation, the more electricity a hydro plant is able to produce.

Ocean power

Harnessing the untapped potential of our oceans, ocean energy represents a frontier yet to be fully explored in full. Ocean energy offers a vast reservoir of untapped energy waiting to be harnessed. In fact, more than the world’s entire energy consumption. As research and development efforts accelerate, ocean energy holds the promise of becoming a significant contributor to our renewable energy portfolio if the technology manages to harness the potential of our oceans.

How does ocean energy work?​

There are currently three types of wave energy technologies being tried and tested to reach a level of large-scale commercialization, each designed to harness wave energy in different environments.

1. A point absorber is a floating buoy that absorbs energy through the movement of the waves at the water’s surface.
2. An oscillating wave surge converter is mounted on the seabed in shallower water, and harnesses wave energy with an oscillating flap.

An oscillating water column is a partially submerged, hollow structure that is open to the seawater below the surface and connects to an air turbine above through a chamber. As the waves rise and fall, the air in the chamber is pushed back and forth through the air turbine, generating power.

Bioenergy​

Derived from organic materials such as biomass and agricultural crops, bioenergy offers a multifaceted solution to energy production. From traditional biomass use in rural areas to modern biofuel technologies, bioenergy presents a viable option for both energy access and environmental sustainability. However, careful consideration must be given to potential environmental impacts, with a focus on sustainable practices to mitigate adverse effects.

How does bioenergy work?​

Biopower technologies harness the energy from renewable biomass sources to generate heat and electricity, employing methods like those utilized with fossil fuels. The energy stored in biomass can be extracted through burning, bacterial decomposition, or conversion into gaseous or liquid fuels.

By utilizing biopower, the dependency on carbon-based fuels in power plants can be reduced, thereby decreasing the carbon footprint of electricity production. Unlike certain intermittent renewable energy sources, biopower offers increased flexibility in electricity generation and contributes to the reliability of the electric grid.

However, the energy created by burning biomass does create greenhouse gas emissions, but at lower levels than burning fossil fuels like coal, oil, or gas. Despite this, it is still considered a sustainable energy.

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Why financial returns can deceive ​

What many fail to realize is that the calculation of returns in renewable energy investments is far from straightforward. Two parties evaluating the same project may arrive at vastly different figures for returns. Why? The devil lies in the details of the assumptions underlying these calculations and the diverse interpretations of the term “return.”

A case study on renewable energy project returns ​

Consider a hypothetical scenario involving a wind turbine project. Here, we examine two common metrics for assessing returns:

Return on Investment (ROI): Calculated as EBITDA divided by total investment.

Internal Rate of Return (IRR): Utilized to assess the present value estimate of future cash flows.
Let’s crunch the numbers based on a wind turbine project with the following attributes:

• EBITDA: €2 M
• Total Investment: €25 M
• Equity: €25 M (100%)

Understanding the discrepancies ​

In our analysis, the ROI is computed as 8%, while the IRR, accounting for the project’s NPV, yields a return of 5.8%. However, if we introduce debt financing, with equity reduced to €5 M, the IRR spikes to 11%.

Embracing the nuances of return assessment​

It’s clear that the choice of return metric significantly impacts the perceived profitability of the project. Yet, all these figures represent pre-tax numbers, potentially offering tax advantages to buyers. Thus, for the same project, returns can fluctuate from 5.8% to 8% to 11%, depending on the chosen definition of “return.”

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VRE impacts the way power systems operate

Renewables, such as solar and wind, are uncertain and inverter-based. These downsides of the technologies introduce challenges in managing the dynamics of the grid while replacing synchronous conventional generators. 

In addition, introducing more distributed generation produces the need for digitalization and electrification of the consumers, which opens many opportunities, but also introduces costs at a system level to ensure that the system stays stable while increasing the flexibility and resilience needed as renewables production increases. 

With the system operations evolving and more independent power producers (IPPs), the monitoring and control system of the grid needs more coordination and readiness, with more advanced codes governing the system operator activities. 

Grid connection codes in a transforming power system

Two important aspects addressed by grid codes are voltage and frequency regulations. Most of the work that is done to upgrade the grid codes aims to address the lack of inertia introduced by inverter-based generators and ensure operations during faults and contingencies.

Solar and wind plant interfaces are based on power electronics and no synchronous generator is there with rotational inertia, causing an increase in the rate of change of frequency after the event, causing the need for more security measures to avoid bit variations from the standard 50 Hz. Therefore, to achieve a grid with high penetration of VRE new operational mechanisms and participation of these technologies in black start operations (restoring service after blackout).

Are declining subsidies incentivizing co-location?​

The role of ancillary services, as balancing markets (also managed by grid codes), which ensure the balance between demand and supply, will increase its importance in order to keep the system going.

Even though VREs provide a certain degree of fast frequency response (FFR) and reactive power regulation, these services can be enabled only with adequate control in place. 

With the energy system facing increasing change along with the necessity of implementing real-time internet-based data to keep up with operations and control of the grid, cybersecurity gains much more importance than before.  

The dynamics of the energy sector are changing, and more power electronics and control systems dramatically increase the vulnerability to cyberattacks.

Grid codes, through AI or machine learning implementation, will play a crucial role in the development of low-carbon grids and their secure and stable operations.

Frequently asked questions​

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Major market reform​

This included more trading windows with Day Ahead, intra-day and short-term energy balancing trading periods. Auctions for capacity contracts were also introduced with the overall market allocation for capacity revenues decreasing from €530m to €330m.  Coupled with this was the launch of the €235m System Services market under EirGrid’s Delivering a Secure Sustainable Electricity System (DS3) program. This market is designed to facilitate more renewable generation by incentivizing services that help keep the grid stable at critical times.

Utilities operating or looking to enter the Irish market need to continually refine methods of sourcing of revenue across the ISEM and DS3 System Services frameworks. This means ensuring that the trading capability supports systems and processes that function in the new market over a sustainable period and that the utility is agile enough to handle the changing landscape of the market as it transitions to a decarbonized future. The following are key aspects of the wholesale electricity market under the ISEM rules.

Capacity winners and losers​

The Capacity Auctions result in some generators receiving contracts for reliability whilst others will not receive these payments. This will have a significant impact on the revenue streams and market strategies of generators. Already, older generating units have exited the market and even those generators that have been successful in the auctions have faced downward pressure on payments for capacity. With government policy focusing on decarbonization, it is expected that the capacity market will result in older carbon-intensive plants exiting whilst opportunities will exist for lower carbon technologies.

Increased trading activity​

With the new day ahead and intra-day market windows, there has been an increased emphasis on trading activities for generators and suppliers. Price volatility has been observed at certain times and strategies will need to be developed to effectively adopt positions in these new market windows as more renewables connect to the Irish grid.

Balancing responsibilities​

The ISEM arrangements require all market participants to be responsible for delivering or consuming the amounts of energy that they have submitted to the market. Generators, wind farms, and suppliers must all manage the exposure to volatile prices for imbalances in their energy in the market. Forecasting of energy supply or demand is key for generators and suppliers to capture the most value from these new markets and avoid exposure to volatile prices.

Opportunity for new value-added services ​

There are 14 value-added system services that participants can tender for through the DS3 System Services framework. These services include traditional reserve products, such as Primary and Secondary Operating Reserves, and new fast-acting services to help support grid stability. Most market participants will have the capability to provide a subset of the 14 services and can assess them based on the capabilities of their generation asset. As the market develops, more opportunities to provide services will emerge and new service offerings may be defined to support the stable operation of the grid.

Openings for new technologies ​

New technologies will play a significant role in the transition to a power system with high penetrations of renewable generation. Arrangements have been developed for the treatment of storage devices and demand response in future capacity auctions. The opening up of capacity and DS3 System Services provides significant opportunities for utilities to make investments in new technologies. There are also now attractive signals for large energy users to harness the flexibility within their own consumption to provide services and generate revenues to offset energy costs.

All of this means that utilities face changes to traditional operating models. The need for these businesses to plan for and respond to the current and future requirements of I-SEM presents significant resource demands. As in any market, some participants will face challenges, yet there clearly are opportunities to be successful.

Clear market strategy​

Creating trading strategies that optimize returns across the different markets will be essential. One such area that participants will need to consider is making trade-offs in trading in the Ex-Ante or balancing markets versus being available to provide services. Effectively assessing the opportunity cost in these situations will form part of the overall trading strategy.

Optimizing performance and reliability​

In a market with an increasing focus on price and asset performance, having appropriate control over costs is critical. A key element of the DS3 System Services framework is to incentivize best-in-class delivery and reliability in performance. To ensure maximum revenues, generators will need to ensure that their asset can deliver the highest level of service possible, on a consistent basis. Monitoring performance, minimizing outage times, and ensuring reliable delivery will be critical to success.  

New opportunities​

New technologies could threaten revenues from traditional assets. An effective strategy to seize the new opportunity whilst also managing threats to existing operating models will be key. The auctions for new technologies will attract interest in the short term but it will be important to consider all revenue streams from DS3, Capacity, and the energy markets when making investment decisions and market entry strategies over the medium to longer term.

Customer data and agility​

In the future green-focused world, the customer will become a much more active participant in the transition. The lessons from other energy markets indicate that analytics to identify customer value will be increasingly important. Successful suppliers will be able to extract value from consumption data to reduce risks in short-term markets. Collaborating with larger customers to understand short-term electricity demand variations can reduce costs and offer value. This requires agility and new ways of working across operations, customer service, and billing.

Risk and reward for large consumers​

The new arrangements under ISEM and DS3 create opportunities for large energy users on the island. For industrial customers, capacity charges will decrease as new auctions lead to reduced prices. DS3 also offers a route for customers to harness flexible consumption to provide services and generate revenues to offset energy costs. Engaging with your supplier and with a demand aggregator can provide a route for large energy users to best use their assets and reduce overall costs.

ISEM and the DS3 System Services framework have led to a transformation in the wholesale energy markets on the island of Ireland. As the transition to a decarbonized future continues, utilities must redefine their approach to engaging in the market. Those who fit the pieces together to form a coherent strategy will stand to benefit the most. Utilities will need to be open to adopting new and flexible approaches and place this at the center of their trading strategies to continue to navigate the transformation of the sector.

About the author

David Cashman is a Senior Manager in EY’s Power & Utilities service with over 10 years of work experience in the utilities sector. David has worked across major transformational programs in power system operation, retail and generation trading, and distribution network operations. He has extensive experience in the Irish electricity sector having worked on the delivery of ISEM for a major Irish utility and advising an Irish distribution network operator on smart metering and strategic programs to address the challenges of the Government’s Climate Action Plan for 2030. Prior to joining EY, David worked for 6 years at EirGrid Group where he worked in the Power Systems Operation Department. He was responsible for leading key workstreams in the DS3 program for defining future policies for system operations and for engaging with key decision-makers, including industry regulators, large generators, and Distribution Network Operators. David played an active role in the design of the DS3 System Services framework by designing products, leading studies on system requirements, and identifying opportunities for new technologies. David holds a Masters in Business Administration from the Michael Smurfit Business School, a PhD in Electrical Engineering, and a Bachelors of Electrical and Electronic Engineering from University College Cork.

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