Co-located utility-scale battery energy storage: Modeling and economic evaluation

Accelerating the integration of variable renewable energy is essential to meeting climate targets, yet increasing solar photovoltaic penetration creates operational and economic challenges for power systems. This study examines the economic impact of co-locating utility-scale battery energy storage systems with photovoltaic plants in Germany, explicitly accounting for the operational restrictions imposed by the current Innovation Tender subsidy scheme. A representative hybrid configuration consisting of a 15 MWp photovoltaic plant and 5 MW/10 MWh battery energy storage systems is evaluated using historical market and generation data from 2019 to 2023. Three operating strategies are analyzed: peak shaving under subsidy restrictions, unconstrained market-based energy arbitrage, and revenue stacking combining arbitrage with participation in the Frequency Containment Reserve market. A rolling-horizon mixed-integer linear programming framework is applied to optimize hourly charging and discharging decisions under perfect-foresight conditions. The results reveal that the Innovation Tender's requirement to restrict battery charging exclusively to on-site photovoltaic generation significantly limits operational flexibility and leads to low utilization of the co-located battery energy storage systems. Compared to peak shaving, external arbitrage yields considerably higher additional revenues, while revenue stacking provides the largest economic gains. A financial assessment, based on discounted cash flow modeling, quantifies the economic opportunity costs associated with participating in the Innovation Tender. These findings offer valuable guidance for investors assessing hybrid photovoltaic battery energy storage systems projects and provide policymakers with evidence-based insights to refine support scheme design and improve the cost-effectiveness of future storage deployment. • Current support design does not fully utilize the potential of co-located BESS. • Expanding use to grid-based arbitrage increases revenues by roughly 64%. • Additional FCR provision would increase revenues by roughly 276%. • Expanded use does not prevent meeting the intended dispatch profile of the scheme. • Allowing more market-based operation can significantly reduce subsidy needs.