The Potential for Energy Arbitrage Using Battery Energy Storage Systems in Norwegian Power Markets : An Economic Viability Study through Financial Valuation

Abstract

arbitrage, the process of storing energy when prices are low and offering it when prices are high, has, through increased electricity prices and price volatility, shown greater economic potential over the past couple of years. In light of these developments, this study analyzes the economic viability, through a financial valuation, of a 10MW/10MWh Battery Energy Storage System (BESS) performing energy arbitrage in the Norwegian power markets over a 30-year project. To account for the latest developments in electricity prices and evaluate the economic viability of the BESS, the study incorporates 2022 electricity price data. Furthermore, the analysis includes electricity price data from the period of 2016-2019 to assess the BESS's economic viability in the event of a return to historically “normal” Norwegian electricity prices. The study aims to present a comprehensive and holistic valuation of the BESS through the inclusion of all factors affecting the profits generated and the related costs of performing the energy arbitrage. The optimal energy arbitrage trading pattern is identified through a Mixed-Integer Nonlinear Programming (MINLP) model, and the resulting trading profits are valued through a Discounted Cash Flow (DCF) encompassing all relevant expenditures. The discount rate in the DCF is derived from an estimated Weighted Average Cost of Capital based on a Comparable Companies Analysis. The results from the analysis show that a BESS performing energy arbitrage in the Norwegian power markets is not economically viable with the current BESS cost estimations and power market conditions. The results for the 2022 electricity price scenario show the greatest promise in the southern price zones of Norway due to the historically high electricity prices and price volatility. However, the Net Present Value (NPV) of the cash flows for the BESS in the best performing price zone is still significantly negative. With optimal trading profits of 39.6 MNOK, the best performing project generates a NPV of -120.4 MNOK when considering all Capital Expenditure (CAPEX), Operations and Maintenance (O&M) costs, and trading profits. When utilizing 2016-2019 electricity price data, the results worsen significantly due to the lower electricity price and price volatility in the period, resulting in a total trading profit of 2.3 MNOK and a total NPV of -157.7 MNOK for the BESS in the best performing price zone.