More renewable energy is coming online to global grids. While this indicates great progress toward decarbonization goals, the wind and sun produce power intermittently, which can lead to mismatches in electricity supply and demand. Electricity demand often peaks during the evening when solar production drops. Utilities are faced with challenging periods of renewable energy surpluses or shortages. Grid operators are faced with the complex task of maintaining a constant balance between supply and demand to ensure a reliable source of power.
In fact, supply and demand must always match for the sake of grid infrastructure. Having too much excess renewable energy on the grid when it’s not needed can lead to voltage or frequency fluctuations that can cause grid instability. Without adequate storage or other infrastructure, utilities may have to curtail renewable energy generation, essentially wasting it.
One way utilities seek to balance supply and demand is by influencing consumption patterns through demand response programs such as time of use (TOU) rates. Energy prices fluctuate according to TOU rates, demand and available renewable energy. Having more intermittent clean energy resources like wind and solar on the grid has led to more price variability according to energy supply but also more chances for ratepayers to adjust their electricity usage to save money.
Increasing electricity demand and focus on decarbonization make energy arbitrage a more critical strategy for utilities and EV charge point operators (CPOs) to manage renewable energy, control energy costs and ensure grid reliability. As energy markets evolve, mastering energy arbitrage will become key to maintaining a successful charging business. Here’s a closer look at how energy arbitrage works as well as the opportunities and benefits it can bring when implemented at EV charging sites.
What is energy arbitrage?
TOU rates
Understanding energy arbitrage begins with understanding TOU rates. Utilities use these pricing structures to charge different rates for electricity based on the time of day, day of the week and even season. Electricity is more expensive during peak demand periods such as late afternoons and early evenings when many households and businesses consume the most power. On the other hand, rates are lower during off-peak hours such as late at night or in the early morning when demand is lower.
Therefore, TOU rates help encourage ratepayers to shift their energy usage to off-peak times, reducing strain on the grid, minimizing the need for costly infrastructure upgrades and optimizing the use of renewable energy sources that may produce more power during certain times, like midday for solar power.
In the context of EV charging, energy arbitrage refers to the practice of strategically purchasing electricity during periods of low demand and lower TOU prices and then using or storing it in a battery energy storage system (BESS) for use during peak demand when electricity prices are higher. Avoiding high grid costs results in significant reductions in operating expenses and increased profits for CPOs.
Additionally, energy arbitrage helps support overall grid stability by smoothing out demand spikes, aligning with broader sustainability goals and helping integrate renewable energy into the charging ecosystem.
Market conditions that influence energy arbitrage
Energy arbitrage plays a significant role in the global energy space, particularly in regions with deregulated electricity markets (where multiple energy suppliers compete for ratepayer business) and high penetration of renewable energy. In these markets, energy storage systems, particularly large-scale batteries, are used to hold electricity when prices are low, such as during periods of excess solar or wind production, and release it during high-demand periods when prices spike. This practice is also prevalent in markets with significant time-of-use pricing or dynamic pricing mechanisms, as operators make decisions in light of price differences to optimize costs and profits. Additionally, energy arbitrage is critical in integrating renewable energy into the grid while reducing reliance on fossil-fuel-based peaker plants.
Here’s a closer look at some of the factors that are driving energy arbitrage to play a more significant role in the global energy market:
Electricity pricing variability: Energy arbitrage relies on price differences throughout the day, driven by demand fluctuations, renewable energy availability and market dynamics. The greater the price difference between low-demand (off-peak) and high-demand (peak) periods, the more lucrative energy arbitrage becomes.
Renewable energy penetration: High levels of solar and wind energy in the market create periods of oversupply, leading to lower or even negative prices during peak production times that can impact the financial viability of energy producers. Conversely, reduced renewable output during high demand can drive prices up, enhancing arbitrage opportunities.
Time-of-use rates and tariffs: Fixed pricing structures like TOU rates or real-time pricing based on grid conditions signal when electricity is cheaper or more expensive, enabling arbitrage strategies.
Energy storage costs and efficiency: The feasibility of energy arbitrage depends on the availability and cost of energy storage solutions such as lithium-ion batteries. Higher efficiency and lower storage costs make arbitrage more profitable.
Grid demand patterns: Seasonal and daily variations in electricity consumption influenced by factors like weather, industrial activity or consumer behavior create predictable opportunities for arbitrage.
Regulatory policies: Government incentives, carbon pricing (which assigns a cost to greenhouse gas emissions to encourage businesses to reduce their environmental footprints) and policies encouraging renewable energy adoption can shape arbitrage economics. For example, consider markets that allow energy storage operators to participate in ancillary services or capacity markets that offer additional revenue streams.
Interconnection and transmission constraints: Limited transmission capacity in certain areas can create localized price spikes, increasing the profitability of storing and releasing energy strategically.
Energy arbitrage market examples
Countries like the United States, Germany and Australia are leveraging energy arbitrage to balance supply and demand amid the increasing variability of renewable generation. Let’s explore what’s happening in these energy markets a bit more in-depth.
United States
Utility-scale battery storage capacity had already tripled in 2021 before being further spurred by the Inflation Reduction Act with a 30% tax credit for stand-alone and hybrid battery storage systems. Now, U.S. battery storage capacity is expected to triple again by the end of 2028 as electric utilities report using batteries for arbitrage and grid stability. Most of the nation’s energy arbitrage activity is occurring in California Independent System Operator (CAISO) and Electric Reliability Council of Texas (ERCOT) territories, which accounted for almost three-quarters of U.S. battery storage capacity at the end of 2023.
With its high level of renewable energy penetration and significant electricity price variations, California is using energy arbitrage extensively. CAISO has implemented policies to manage energy storage colocated with storage and support energy arbitrage strategies that aim to maximize the value of the state’s renewable energy resources while enhancing grid stability and reducing overall energy costs. Meanwhile, Texas, which added 16 GW of solar capacity in 2023 alone, is also seeing high price differentials and similar market conditions to California. This is driving energy arbitrage in ERCOT territory as well.
Note: Estimates include operational installed generating capacity and planned capacity additions.
Germany
Germany is a European leader in energy storage and renewables like solar. While 2023 was a record-breaking year for European energy storage capacity in general, Germany led the way reaching 1.3 GWh. It’s expected to reach up to 15 GWh by 2027. Solar generation continues to outpace storage additions, with more than 90 GW of solar installed leading electricity prices to drop down on sunny days. Currently, batteries are profiting from the electricity market dynamics including differences between high and low electricity prices. Regulatory changes such as Germany’s Solarpaket 1 and the Renewable Energy Sources Act are continuing to support the PV sector, driving the need for large-scale energy storage expansion and ripening electricity arbitrage markets.
Australia
Energy arbitrage is also a growing practice in Australia, particularly in the National Electricity Market (NEM) covering the southern and eastern portions of the country. Coal power plant outages, natural disasters impacting grid infrastructure and more renewable energy have all increased market volatility in recent years. In 2022, large-scale batteries earned record-high revenue from energy arbitrage. New South Wales captures the highest net revenue for BESS assets but energy arbitrage is overall becoming increasingly important to the nation, helping to balance supply and demand and integrate renewable energy onto the grid.
As more nations look to electrify and decarbonize with growing levels of renewable energy, energy storage and energy arbitrage will continue to play a major role in managing grid resources while opening up opportunities for revenue generation.
How can EV charging benefit from energy arbitrage?
EV charge point operators can gain advantages from energy arbitrage by strategically purchasing electricity when prices are low, such as during off-peak hours or periods of high renewable production, and either using or storing it to charge vehicles during peak demand times when electricity prices are higher. This approach allows CPOs to reduce operational costs, maximize profit margins and offer competitive pricing to more EV drivers.
Additionally, energy arbitrage enables CPOs to integrate energy storage systems like batteries into their operations, providing greater flexibility and resilience. Stored energy can be used to avoid peak electricity rates or ensure continuous service during grid constraints. By aligning with TOU pricing and grid stability needs, CPOs can participate in demand response programs and earn additional revenue while supporting grid reliability and sustainability. This helps renewable energy producers better manage resource variability, enabling utilities to integrate more renewable energy and balance supply and demand successfully while allowing grid operators to maintain grid stability.
Here is a deeper drive into some of the benefits CPOs can realize by participating in energy arbitrage markets.
Electricity savings: By purchasing electricity during off-peak hours when prices are lower and using or storing it for peak demand times, CPOs can significantly reduce their energy costs. This is particularly beneficial in regions with high price volatility or TOU rates.
Increased profit margins: Strategic energy arbitrage allows CPOs to capitalize on the difference between low off-peak and high peak prices, improving profit margins for each kilowatt-hour sold to drivers or used by fleets.
Competitive pricing: By managing costs effectively, CPOs can offer more competitive rates to EV drivers, attracting a larger customer base and increasing station utilization.
Energy storage benefits: Adding a battery storage system enables CPOs to store cheap electricity and release it during high-demand periods to ensure a steady supply even when grid electricity prices spike or availability is limited.
Additional revenue: In some markets, energy storage systems can participate in grid ancillary services like frequency regulation or voltage support. This provides CPOs with additional revenue streams beyond charging fees.
Demand response programs: CPOs can align with demand response initiatives by adjusting energy usage patterns to help stabilize the grid. This often comes with financial incentives or rebates from utilities or grid operators.
Grid resilience: Energy arbitrage strategies, combined with storage, help CPOs manage grid outages or disruptions. They can continue operations during peak load events or grid constraints, providing reliable service and building customer trust.
Better use of renewables: By leveraging renewable energy when it’s abundant and cheap, CPOs can reduce their carbon footprint, align with sustainability goals and appeal to eco-conscious drivers, partners and other stakeholders.
Mitigated regulatory risks: Energy arbitrage helps reduce dependence on grid electricity during peak periods, which could become increasingly expensive as governments implement carbon pricing or other penalties for high-emission energy use.
Improved asset utilization: With energy arbitrage, CPOs can optimize their charging infrastructure throughout the day, maximizing return on investment.
All of these benefits help position CPOs to operate more efficiently and sustainably while meeting the growing demand for EV charging.
How can EV charging sites implement energy arbitrage?
To participate in energy arbitrage, CPOs will need to leverage battery storage and advanced energy management systems.
Battery energy storage system
Battery energy storage systems (BESS) are composed of several key components that work together to store and manage electrical energy: battery cells and modules, a power conversion system and a battery management system. These components work together to store and release electricity as needed for energy arbitrage. A BESS also adds other value to an EV charging site such as integrating with onsite renewables to increase site resiliency by islanding (disconnecting from the grid) during outages, or providing an extra boost of power when available grid supply is limited to maintain reliable charging without making expensive upgrades.
Energy management system
The EMS serves as the brains of the EV charging site, using sensors and meters, a controller and cloud-based software to allow communication and control among site devices, optimizing energy deployment and energy consumption. In energy arbitrage, the EMS automatically controls charging and discharging the BESS according to when electricity prices are favorable and in line with grid and site energy needs. An EMS can optimize battery systems and battery life considering real-time data and predictive analytics as well as customizable business goals.
Smart meter
A smart meter provides real-time data on electricity usage and prices to enable precise monitoring and control of energy consumption. It allows CPOs to optimize when to purchase, store or use electricity based on price fluctuations. Smart meters are essential for participating in TOU pricing as they can bill in shorter intervals (typically 15 minutes to an hour). The smart meter integrates with the battery and energy management system as well to perfect energy usage and make cost savings efficient.
For example, Sparkion’s smart energy management system uses AI-driven algorithms to analyze grid and site data to make intelligent decisions about how an EV charging site should work to meet a CPO’s business goals. Sparkion’s software directs its proprietary controller to facilitate seamless and continuous communication between all onsite assets and the grid for multiple use cases—performed automatically and simultaneously—resulting in maximum value and peace of mind for site owners.
Peak shaving provides one use case concerning energy arbitrage. Demand charges are typically based on your highest level of grid use during a billing period. Sparkion’s SparkCore™ energy management system helps align your business operations with grid conditions, ensuring your battery charges before and deploys during your peak demand times to reduce your grid consumption and avoid extra utility costs for the highest profit margins. Sparkion can also enable participation in ancillary services to increase the value of your onsite renewable energy, EV chargers and energy storage system. Sparkion is the only solution that integrates with all your site assets and uses real-time insight to automatically bid into these programs when opportunities arise, so you can generate additional revenue while seamlessly maintaining your everyday operations.
SparkCore™ resides between the grid, onsite energy assets and EV infrastructure to function as your onsite energy hub.
What is the future of energy arbitrage?
Smarter battery and energy management technologies will continue to transform the future of energy arbitrage around the globe. The real-time data and predictive analysis energy management systems bring will only enable CPOs to be more successful and profitable with less oversight. These tools will allow EV charging sites to be ready as regulatory frameworks keep evolving and opening doors for energy arbitrage strategies across Europe, the U.S. and elsewhere.
