Is "virtual cycling" a useful concept?

Just asking...

I first came across the term ‘virtual cycling’ in around October 2023. The concept has caught on with market analysts and investors. But is ‘virtual cycling’ a useful concept? And, given the range of views and alternative definitions (I’ve mixed some of them into this post), is there a chance of agreeing on an answer?

Broadly, ‘virtual cycling’ links a concept from the commodities (futures) markets with a battery concept. In commodity markets, a position in a contract can be offset before expiry, avoiding physical delivery. In the context of BESS, a cycle involves charging and discharging the full energy capacity of the system.

Trading revenues can be further increased without stressing the battery storage system by trading a product between markets or in the same market several times such that volumes neutralize themselves and the battery does not have to be used physically ("financial trades / asset-backed trading").

suena

Electricity markets are complex and beautiful systems that we all depend on. Battery Energy Storage Systems (BESS) are important and fascinating systems that have an increasingly important role to play in the energy markets. We are still in the early days of integrating storage systems into the energy markets. EPEX still considers that “[e]lectricity is a particular commodity that cannot easily be stored.”

To execute a ‘real’ cycle is to fully charge and discharge a BESS. Consider, for example, a 10 MW/20MWh system. A cycle involves charging and discharging 20MWh of energy (which will take four hours).

Virtual cycling, also known as virtual trading or proprietary trading, involves buying and selling energy for the same delivery period, with a focus on leveraging real-time market dynamics to optimize trading decisions. This approach aims to identify opportunities and execute trades continually, ultimately significantly increasing revenue.

Entrix

What then makes a ‘virtual’ cycle? Let us zoom in on a particular 15-min product in the continuous intra-day market. Volumes are quoted in MW, while prices are given in MWh terms. Suppose the algorithm trading on behalf of your BESS first buys 4MW and then sells 8MW into the 12:00-12:15 continuous intra-day market product.

Trading stops 5 mins before delivery at 11:55. At this point you have sold 4MW more than you have bought, and so your net position is -4MW between 12:00-12:15. You are short 1MWh which you are obliged to physically deliver into the grid between 12:00-12:15.

…virtual cycling - financial transactions without physically activating the battery, so to speak.

ESFORIN

A ‘virtual cycle’ is made up of the trades that are invisible due to offsetting. The reason such trades are made is that a trader (usually via an algorithm) sees opportunities to exploit price movements—buy low, sell high. In the example above, 4MW of traded volume was offset, netted, cancelled out (use whatever term you prefer) before time ran out for further trades at 11:55. These offset 4MW are now translated into cycle terms.

Charging 4MW for 15 mins and then discharging 4MW for 15 mins is equivalent to charging and discharging 1MWh. For our 10MW/20MWh example BESS this is one-twentieth of a cycle. So, a trader reporting a ‘virtual cycling’ metric would add 1/20 to their virtual cycle count for this particular BESS.

Rebalancing factor: Ratio of traded and physically dispatched battery capacity. Let’s simplify this and say you sell energy for 100€, and then the price drops to 60€ - in this scenario, it would be more cost effective to buy the amount you sold in the market instead of producing it for dispatch.

ENSPIRED

Is ‘virtual cycling’ a useful concept? I’ll argue my perspective in a next post. I’ll then trace the concept of ‘virtual cycling’ to thoughts on market design. This may lead us onwards to think about how to decompose value available in the short-term electricity markets.

‘Virtual cycling’ may or may not be a useful concept, but it is certainly thought-provoking.

Reading

• https://www.epexspot.com/en/basicspowermarket, “Electricity is a particular commodity that cannot easily be stored.” Recently (re)elected members to the EPEX council with BESS experience may help to develop nuances to this statement.

• suena, talking about trading ‘without stressing the battery’ https://www.suena.energy/suena-explained, a blog entry on virtual cycling by Entrix https://blog.entrixenergy.com/entrix-virtual-cycling, ESFORIN mentioning the concept https://www.esforin.com/en/battery-energy-storage-system-bess/, Enspired’s BESS glossary which talks about a ‘rebalancing factor’ instead of ‘virtual cycling’ https://hub.enspired-trading.com/glossary-all-about-that-bess-battery-glossary

Here’s the next post….