The merchant investment case for grid-scale batteries in the National Electricity Market is changing.

Coal retirements are reshaping price formation, while rapid battery deployment is compressing spreads and increasing competition between storage assets. FCAS revenues have declined as markets saturate, shifting the earnings mix toward energy arbitrage.

Returns now depend more heavily on duration and location. Four-hour systems are becoming the new default for battery energy storage as the cost of batteries falls and price shapes evolve. At the same time, Marginal Loss Factors and network constraints materially affect realised revenues.

This report assesses the merchant case for two-hour and four-hour batteries using our latest NEM forecast across Central, High and Low scenarios.

Executive Summary

• The next decade defines the merchant opportunity. Coal retirements in the late 2020s and early 2030s lift energy price spreads and support high IRRs, before rising storage penetration compresses margins.
• Four-hour batteries deliver the strongest returns. Across most regions and scenarios, four-hour systems achieve higher IRRs than two-hour configurations, supported by higher capture rates and competitive capital costs.
• Energy arbitrage underpins the revenue stack. Frequency control markets have matured, making energy spreads the primary driver of merchant earnings over the asset life.
• Returns compress beyond the early 2030s. As battery capacity expands, spreads narrow and project outcomes become more sensitive to duration, timing and region.
• Merchant revenues aren’t the only way to build a battery business case. Investors can increase their project returns by including offtakes, cap contracts, and network support contracts.

Key modelling inputs

The following assumptions underpin all internal rate of return results presented in this report.