Techno-Economic Investment Risk Modeling of Battery Energy Storage System Participating in Day-Ahead Frequency Regulation Market

Owing to its high capital cost, Battery Energy Storage System (BESS) investment risk has received considerable attention in recent years. Currently, day-ahead frequency regulation service is one major revenue source for BESS, and the revenue is exposed to a compound of stochastic market risk and technical risk. On the market risk side, due to a lack of long-term contracts, investors are exposed to “price risk” and “volume (revenue hours) risk” over the entire investment horizon of 5–10 years. On the technical side, performance issues such as equipment degradation and inherent defects can result in reduced or even negative revenue for BESS under the pay-for-performance remuneration structure. Quantifying these risks is important for investors and banks to assess a project’s investability and bankability. However, existing BESS techno-economic literature has mostly focused on developing optimal control strategies to maximize revenue or optimal battery sizing to reduce capital expenditure. To our knowledge, none of the literature to date has addressed the long-term risk perspective of BESS investment. This study aims to fill this gap by developing a long-term probabilistic revenue estimate that considers these risk factors using Monte Carlo simulations. A case study using Taiwan’s newly launched day-ahead market, which has similar grid dynamics and revenue risk factors as in most markets, is also presented in this paper. Simulation result shows that, for the conservative P90 (90% exceedance probability) scenario, expected return of a hypothetical 10MW (half-hour battery) BESS investment is 8.65% and its debt service coverage ratio is 1.189.