AFRR, FCR and Energy Arbitrage Explained

A complete technical guide to Romanian balancing markets and energy arbitrage strategies for BESS storage systems. Learn how to maximize revenues from energy trading on DAM, IDM and Transelectrica ancillary services.

Romanian Energy Markets: An Overview

The Romanian energy system operates on multiple interconnected markets, each with specific roles and distinct profit opportunities for battery energy storage systems (BESS):

1. Wholesale electricity markets

2. Balancing services markets (Ancillary Services)

For a BESS system, balancing services markets represent the primary revenue source (60-70% of total), while energy arbitrage on DAM and IDM contributes 20-30%, with the rest coming from additional services.

AFRR (Automatic Frequency Restoration Reserve)

AFRR represents the secondary balancing reserve, automatically activated by Transelectrica to restore grid frequency to 50 Hz and restore FCR reserves to nominal level.

How does AFRR work?

When an imbalance occurs in the grid, the system reacts in three stages:

1. 0-2 seconds - FCR: Primary reserves respond automatically, proportional to frequency deviation
2. 30 seconds - 15 minutes - AFRR: Secondary reserves take control, allowing FCR reserves to return to availability
3. 15+ minutes - mFRR: Tertiary reserves take control for sustained activations

Technical requirements for AFRR participation

• Minimum capacity: 1 MW (until 2026), then 5 MW for new entrants
• Response time: Full activation in maximum 5 minutes (BESS systems: under 1 second)
• Availability: Minimum 95% per year, penalties for unavailability
• Minimum activation duration: 15 minutes continuous
• Bidirectionality: Capacity to supply (+) and absorb (-) power
• Communication: Real-time SCADA connection with CND (National Dispatch Center)

AFRR revenue structure

AFRR revenues come from two components:

1. Capacity payment (Availability Payment)

The operator receives a fixed payment for availability to provide the service, regardless of whether it is activated or not. Prices are established through daily auction:

Capacity revenue calculation example:

• BESS system: 15 MW capacity allocated to AFRR
• Average price: 100 EUR/MW/day
• Operational days: 355/year (10 days maintenance)
• Annual capacity revenue: 15 MW × 100 EUR × 355 days = 532,500 EUR

2. Activation payment (Activation Payment)

When Transelectrica activates AFRR reserve, the operator receives additional payment for energy actually supplied or absorbed:

• Up-regulation activation price (energy supply): 100-200 EUR/MWh
• Down-regulation activation price (energy absorption): 80-150 EUR/MWh
• Activation frequency: 2-4 hours/day on average, up to 12 hours on high volatility days

Activation revenue calculation example:

• Average activations: 3 hours/day × 365 days = 1,095 hours/year
• Activated energy: 15 MW × 1,095 h = 16,425 MWh/year
• Average activation price: 150 EUR/MWh
• Annual activation revenue: 16,425 MWh × 150 EUR = 2,463,750 EUR

BESS advantages for AFRR

Battery storage systems are ideally suited for AFRR service:

• Fast response: Activation in <1 second vs 30-300 seconds for thermal plants
• Precision: Can deliver exactly the requested power (e.g., 7.348 MW)
• Flexibility: Instantaneous transition between charging and discharging
• Zero emissions: No need to keep engines running (zero fuel costs)
• Low operational costs: Minimal maintenance, no 24/7 personnel
• Acceptable degradation: One AFRR activation cycle = 0.05-0.1 full cycles (minimal battery impact)

FCR (Frequency Containment Reserve)

FCR is the primary frequency reserve, activated instantaneously and automatically to stop frequency deviation in the first seconds after an imbalance. FCR acts proportional to frequency deviation and must be fully activated in maximum 30 seconds (ENTSO-E standards).

FCR operating principle

FCR operates based on a droop characteristic:

• Nominal frequency: 50.000 Hz
• Dead band: ±10 mHz (49.990 - 50.010 Hz) - no FCR activation
• Proportional activation: For each ±200 mHz deviation, system supplies 100% of FCR capacity
• Continuous activation: FCR operates permanently, continuously adjusting to small frequency variations

Example: A BESS system with 5 MW FCR capacity will supply:

• 0 MW at 50.000 Hz (nominal frequency)
• +2.5 MW at 49.900 Hz (frequency down 100 mHz → 50% capacity)
• +5.0 MW at 49.800 Hz (frequency down 200 mHz → 100% capacity)
• -2.5 MW at 50.100 Hz (frequency up → energy absorption)

Technical requirements for FCR participation

• Minimum capacity: 1 MW
• Response time: Activation in <2 seconds, full power in 30 seconds (BESS: <300ms)
• Availability: Minimum 98% per year
• Operating mode: Automatic continuous, without operator command
• Symmetry: Must be able to supply and absorb energy (up/down regulation)
• Droop control: Implementation with ±10 mHz dead-band and linear gradient

FCR revenue structure

Unlike AFRR, FCR has a simplified revenue structure:

Capacity payment (single component)

FCR operators receive only availability payment, without separate payment for activated energy (because activation is continuous and small amplitude):

FCR revenue calculation example:

• BESS system: 5 MW capacity allocated to FCR
• Average price: 60 EUR/MW/day
• Operational days: 350/year (15 days maintenance/unavailability)
• Annual FCR revenue: 5 MW × 60 EUR × 350 days = 105,000 EUR

Special considerations for BESS in FCR

1. State of Charge (SOC) management

Because FCR operates continuously and bidirectionally, there is risk that battery reaches 0% or 100% SOC, making it unable to respond in needed direction. Solutions:

• SOC target: 50% - Battery is maintained at half capacity to allow regulation in both directions
• Automatic rebalancing: When SOC reaches 30% or 70%, system buys/sells energy on IDM to return to 50%
• Asymmetric bidding: At low SOC, offer more up-regulation than down-regulation

2. Battery wear and tear

FCR causes continuous cycling of small amplitude. Battery impact:

• Micro-cycles: 10-20% SOC swing/day on average
• Equivalent: 0.15-0.25 full cycles/day
• Annual impact: 50-90 equivalent cycles/year
• Degradation: 0.5-1% capacity/year for LFP batteries (acceptable)

FCR vs AFRR: Which is more profitable?

Conclusion: AFRR is much more profitable for BESS, but allocating a portion (10-20%) to FCR diversifies risk and maximizes capacity utilization.

mFRR (Manual Frequency Restoration Reserve)

mFRR is the tertiary frequency reserve, activated manually by system operator when:

• AFRR activation lasts more than 15 minutes
• There are forecasts for sustained imbalances
• Desire to release AFRR reserves to restore availability

mFRR technical requirements

• Minimum capacity: 5 MW
• Activation time: 15 minutes from command
• Minimum activation duration: 1 hour
• Availability notice: 24 hours (previous day)

mFRR revenues

For BESS, mFRR is less attractive than AFRR because:

• Lower capacity price (30-60 vs 80-150 EUR/MW/day)
• Rarer but longer activations (high SOC impact)
• High competition with hydro plants and flexible thermal plants

Recommended strategy: Opportunistic participation on mFRR only when capacity is not allocated to AFRR or arbitrage.

Complete Comparison: FCR, AFRR, mFRR

Energy Arbitrage on Day-Ahead Market (DAM)

The Day-Ahead Market (DAM), operated by OPCOM, is the central electricity market in Romania, representing over 95% of total traded volume. Prices are established through hourly auctions for the next day, with market closure at 12:00.

How does DAM work?

1. Participants submit bids: Producers (sell offers), consumers and traders (buy offers)
2. Matching algorithm: Balances supply and demand for each hour, establishing clearing price
3. Results published: Prices for all 24 hours are published at 13:00
4. Delivery: Energy is delivered according to schedule the next day

DAM price profile in Romania

DAM arbitrage strategies for BESS

1. Simple arbitrage (Buy Low, Sell High)

The most direct strategy: buy energy at minimum prices (night/early morning) and sell at maximum prices (peak hours).

Numerical example:

• System: 15 MW / 30 MWh
• Charging: Hour 03:00, price 30 EUR/MWh, 30 MWh = 900 EUR cost
• Discharging: Hour 19:00, price 120 EUR/MWh, 27 MWh (90% efficiency) = 3,240 EUR revenue
• Net profit: 3,240 - 900 = 2,340 EUR/cycle
• At 200 cycles/year (combined with AFRR): 468,000 EUR/year

2. Intra-day arbitrage (multiple cycles)

On high volatility days, 1.5-2 cycles can be executed:

• Cycle 1: Charge 02:00-06:00 (off-peak), discharge 08:00-10:00 (morning peak)
• Cycle 2: Charge 12:00-15:00 (solar peak, low prices), discharge 18:00-22:00 (evening peak)

Impact: +50% arbitrage revenues, but +30% battery degradation (trade-off to optimize).

3. Seasonal arbitrage

DAM prices vary significantly throughout the year:

Strategy: Prioritize arbitrage in winter (higher spreads), allocate more capacity to AFRR in summer (lower arbitrage prices).

DAM limitations and risks

Energy Arbitrage on Intraday Market (IDM)

The Intraday Market (IDM) allows adjusting energy positions after DAM closure, up to 5 minutes before delivery. IDM is extremely volatile, offering large profit opportunities but also high risks.

IDM characteristics

• Continuous trading: 24/7, from DAM closure until 5 minutes before delivery
• Granularity: 15 minutes (vs 1 hour on DAM)
• Volatility: 100-300 EUR/MWh swings between consecutive periods
• Low liquidity: 3-5% of DAM volume, higher bid-ask spread
• Event reaction: Unexpected plant shutdowns, wind/solar forecast errors, extreme weather conditions

IDM arbitrage opportunities

1. DAM → IDM arbitrage

Buy on DAM when price is low, then sell on IDM when price increases due to unforeseen events.

Example:

• DAM (12:00, day D-1): Buy 30 MWh for hour 19:00 at 80 EUR/MWh = 2,400 EUR
• IDM (17:00, day D): Price for hour 19:00 increases to 180 EUR/MWh due to unexpected plant shutdown
• Sell 27 MWh on IDM at 180 EUR/MWh = 4,860 EUR
• Profit: 4,860 - 2,400 = 2,460 EUR (from trading alone, without using own storage capacity for cycle)

2. Intra-IDM arbitrage

Profit from rapid price fluctuations throughout the day:

• Morning: Weather forecast shows strong wind → low anticipated prices
• Afternoon: Wind doesn't materialize → prices increase rapidly
• BESS buys at 40 EUR/MWh morning, sells at 140 EUR/MWh afternoon
• Profit: 100 EUR/MWh × 27 MWh = 2,700 EUR

3. Renewable forecast correction

Renewable energy producers have forecast errors (wind, solar), creating imbalances on IDM market:

• Optimistic wind forecast → Lower actual production → Deficit → IDM prices increase
• BESS can sell energy on IDM at premium prices
• Pessimistic solar forecast → Higher actual production → Surplus → IDM prices drop
• BESS can buy cheap energy for later cycles

Tools for IDM trading

To profit from IDM, an advanced EMS must integrate:

• Machine Learning models: IDM price prediction based on historical data, weather, production schedules
• Real-time monitoring: Live IDM prices, open positions, battery SOC
• Automated execution: Automatic order placement when conditions are met
• Risk management: Exposure limits, automatic stop-loss

Balancing Market

The balancing market activates post-delivery to settle imbalances between scheduled energy and actually consumed/produced energy. Prices are extremely volatile, reflecting critical grid situation at that moment.

How does balancing market work?

1. Each participant has an approved schedule (energy quantity to produce/consume for each hour/15min)
2. After delivery, actual energy delivered/consumed is measured
3. Imbalance = Actual energy - Scheduled energy
4. Transelectrica invoices or pays participants at imbalance price, which can be:

• Single pricing: Same price for all, regardless of imbalance direction (in force in Romania since 2023)
• Price determined by: Marginal price of last unit activated for balancing

BESS strategies on balancing market

1. Deliberate imbalance strategy

Deliberately create an imbalance to profit from favorable balancing prices:

• Scenario: You forecast energy deficit (low frequency, high balancing price)
• Action: Don't buy enough energy on DAM/IDM (under-schedule)
• Result: You'll have a negative imbalance, but buy energy at balancing price which may be lower than price you would have paid on IDM
• Inverse: If you forecast surplus (low balancing price), over-schedule and sell surplus on balancing

Numerical example:

• Schedule discharging 10 MW for hour 19:00 (27 MWh energy you must deliver)
• Buy only 20 MWh on DAM at 100 EUR/MWh = 2,000 EUR
• Leave -7 MWh imbalance (shortage) that you bet will be covered at favorable price
• If balancing price is 80 EUR/MWh: pay 7 × 80 = 560 EUR (saved 7 × 20 = 140 EUR)
• If balancing price is 150 EUR/MWh: pay 7 × 150 = 1,050 EUR (loss of 350 EUR)

2. Portfolio optimization with balancing exposure

Integrate balancing market into overall portfolio optimization:

• Allocate 70% capacity to AFRR (secure revenues)
• Allocate 20% to DAM/IDM arbitrage (medium risk)
• Leave 10% for opportunistic trades on balancing market (high risk, high reward)

Advanced Energy Trading Strategies

1. Multi-market stacking

Participate simultaneously on multiple markets to maximize capacity utilization:

This strategy allows 150-200% utilization of nominal capacity (through overlapping), maximizing revenues.

2. Weather-based trading

Integrate detailed weather forecasts to anticipate:

• Solar production: Cloudy days → higher prices → more discharge arbitrage
• Wind production: Storms → low prices → more charge arbitrage
• Temperature: Heat/cold waves → extreme demand → volatile prices → IDM opportunities

3. Cross-border trading (Romania - Hungary)

Romania and Hungary started AFRR market coupling in 2024, allowing participation on both markets:

• Hungary AFRR prices: 100-180 EUR/MW/day (higher than Romania)
• BESS systems at RO-HU border (e.g., Zalau) can bid on both markets
• Automatic optimization: EMS chooses market with higher price for each interval
• Additional revenue potential: +15-25% vs participation only on Romanian market

Portfolio Optimization: Maximizing BESS Revenues

A profitable BESS system requires continuous optimization of capacity allocation between markets. Here's an optimized portfolio example for 15 MW / 30 MWh:

Annual revenue projection (15 MW / 30 MWh)

EBITDA margin: 70% (operational costs 900,000 EUR: insurance, O&M, land lease, salaries)
Annual EBITDA: 2,300,000 EUR
ROI: ~14% from operations alone (without depreciation and taxes)

Risk Management in Energy Trading

Energy trading carries significant risks that must be proactively managed:

1. Forecast risk

• Problem: Incorrect price predictions → unprofitable transactions
• Mitigation: Use ML models with validated accuracy (>70% accuracy), backtest strategies on historical data, limit exposure on high uncertainty transactions

2. Technical performance risk

• Problem: BESS system failure during AFRR activation → severe penalties
• Mitigation: Redundancy of critical components (inverters, BMS), O&M contract with 99%+ SLA, business interruption insurance

3. Battery degradation risk

• Problem: Excessive cycling → accelerated degradation → replacement costs
• Mitigation: Optimization algorithm that includes degradation cost in profit calculation, cycle limits/day (e.g., max 1.5 equivalent cycles), battery warranty with performance guarantees

4. Regulatory risk

• Problem: Changes in market regulations or pricing methodology
• Mitigation: Revenue source diversification (don't depend 100% on AFRR), lobbying through industry associations, protection clauses in contracts

5. Liquidity risk

• Problem: IDM/Balancing market with low liquidity → inability to execute trades at target prices
• Mitigation: Limit IDM transaction sizing (max 30% capacity), diversify on DAM, maintain relationships with institutional traders for OTC deals

Conclusion

Romanian energy markets offer extraordinary opportunities for BESS storage systems, with multiple revenue streams that can be optimized through sophisticated trading strategies:

• AFRR remains the most profitable market (60-70% of revenues), with stable prices and moderate activations
• FCR offers complementary revenues (5-10%) with strict technical requirements but automatic operation
• DAM/IDM arbitrage adds 20-30% revenues by exploiting price volatility
• Multi-market participation simultaneously maximizes capacity utilization and reduces risk exposure

Success of a BESS project depends on advanced EMS capable of real-time optimization of capacity allocation, accurate price forecasting, and proactive risk management. Battery.Network develops proprietary trading algorithms based on machine learning, ensuring superior performance vs competitors.

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