Hedging strategies to mitigate electricity price volatility exposure using storage units

Abstract

The ambitious energy policy goals set by the European Union have accelerated the pace at which energy efficiency and clean energy measures are being adopted. The Netherlands, lagging behind by a massive margin in transitioning to a green energy infrastructure, feel the need, now more than ever, to push the integration of renewable energy into the grid. The state of the electricity industry has remained almost the same ever since its inception, but has undergone relatively significant changes in the past two decades. The main advancements being decreasing costs of clean energy technologies like solar panels and storage solutions, increasing electricity demand, changing policy & regulations to achieve decarbonization and the active attempt to phase out fossil fuel energy sources like coal. However, changing the energy mix in the electricity grid is bound to make grid management more cumbersome, owing to the intermittency posed by the renewable energy sources and their lack of flexibility, leading to extreme volatility in the electricity market prices. The inertial characteristics of the heavy rotating masses of fossil-powered plants allow traditional power plants to provide flexibility in the grid. Flexibility, in this thesis, is defined as the system’s ability to respond to uncertain generation and demand, while maintaining a constant energy balance. Inertia, in the simplest terms, refers to the resistance provided by an object to a sudden change in motion. As renewables begin replacing conventional power plants, the flexibility required will have to be provided by solutions that allow the electricity generated from the renewables to be stored and used later, which also provides an avenue to hedge the risks from volatile electricity prices. Energy Storage is identified by the Dutch government as one of the most important techniques to provide flexibility surpassing alternatives like Demand Response and Energy Efficiency.
This thesis proposes a new approach to design a hedging strategy using energy storage systems. It aims to hedge the risks arising from daily price volatility in the electricity market, that the various stakeholders in the distribution grid are subjected to, caused by factors like increasing grid penetration of renewables, increasing carbon prices etc. “Hedging” in this study, is the act of risk aversion by taking a certain action in the present to avoid a future consequential risk.
The ability to store electricity after purchasing from the wholesale market, when looked at from an economic point of view, directly points to being able to store electricity when its in excess (accordingly also cheapest) and to sell it when it is most expensive. This is referred to as “energy arbitrage via electricity prices” and is carried out in the research presented in this work. Along with arbitrage, the strategy also proposes the idea of also being self-sufficient during period of high electricity prices. The significance of emphasizing electricity prices in the term “energy arbitrage via electricity prices” is because energy arbitrage can also be used for technical services like peak shaving that looks into the capacity constraints of the grid, which is beyond the scope of this thesis. The scope of this thesis is to find an analytical approach to design a hedging strategy, to monetize on volatility in the day-ahead electricity market to its maximum potential, for the stakeholders like energy suppliers (that do not own generation assets) in the distribution grid.