Battery energy storage systems in Great Britain earn revenue through a variety of markets with different mechanisms. The revenue stack for batteries has shifted away from ancillary services towards merchant markets. But what are the main markets, how do they operate, and how will prices develop over time?
This article was updated in Q4 2024 with the latest market data and results from version 3.2 of the forecast. For more details on the GB BESS Outlook, head to our executive summary here.
Batteries maximize revenues by performing actions across multiple markets, ‘stacking’ revenues from each. These markets and corresponding actions occur across different time horizons. Some operate years out, such as for the Capacity Market. Others occur within the day or even in real-time.
Click on the links below to navigate through each section of the article:
- Wholesale trading
- Balancing Mechanism
- Ancillary services: frequency response and reserve
- Capacity Market
- Network charges
Wholesale trading
Trading power on the wholesale markets has become the largest revenue stream for battery energy storage. Over the lifetime of a battery built today, we forecast wholesale trading to represent 52% of total revenues.
Batteries profit from the spread between their charge and discharge prices. Price spreads, measured as the difference between the maximum and minimum price each day, largely determine the value batteries can earn from trading.
Fundamentals such as gas and carbon prices, the amount of renewable generation, and prices in connected European markets drive these price spreads.
Day-ahead price spreads increased to an average of £158/MWh in 2022 due to a spike in gas prices and increased winter pricing volatility. These subsequently reduced to £71/MWh in 2023, and are forecast to average £64/MWh until 2030.
We forecast spreads to increase by 16% in the 2030s to £74/MWh on average, due to higher levels of renewable generation and increasing carbon prices.
As well as the maximum daily spread, the price ‘shape’ is important for battery trading. This can provide batteries with multiple opportunities to perform profitable charge-discharge cycles within one day.
Rising solar generation will erode prices during the middle of the day, increasing the number of opportunities to perform multiple trading cycles. Additionally, as average prices decrease over time, the peak price increases as a percentage of the average price. In 2024, trading two daily spreads resulted in 25% higher revenues than trading one. This rises to 84% by 2035 as the price shape becomes more favorable.
Re-trading in intraday markets - or using the system price - can increase wholesale revenues
Several wholesale power markets exist in Britain. Batteries can earn additional revenue by trading across these markets; for example, re-trading their day-ahead positions in intraday markets. Intraday prices can diverge from the day-ahead price as actual supply and demand levels become clearer.
These divergences create higher spreads in this market. The additional value available depends on the prices captured. Historically a battery trading across intraday and day-ahead markets could earn 35% higher revenues than a battery trading only in day-ahead markets.
If operators generate more or less than their traded position, they will create an imbalance that receives the system price. Balancing Mechanism-registered batteries are required to deliver their traded positions. Non-Balancing Mechanism registered assets, however, can deliberately create an imbalance to access the system price in a ‘NIV chasing’ strategy. This deliberately exposes the battery to the system price to profit from the higher volatility in this market.
Balancing Mechanism
The ESO uses the Balancing Mechanism to adjust supply and demand in real-time, up to the point of delivery. Balancing Mechanism-registered units submit ‘Bids’ (payments to reduce generation or increase demand) and ‘Offers’ (payments to increase generation or reduce demand). The ESO then dispatches units from the Bids and Offers made available.
When the system is in balance, prices follow the wholesale price
Bid and Offer prices follow the same fundamental drivers as wholesale prices. These prices represent the marginal cost of generators to increase or decrease generation. However, they usually carry a premium to wholesale prices. This is because cheaper options will often be dispatched into the wholesale market.
Some units, such as wind generators earning a subsidy, require a negative Bid price in order to offset the cost of losing this subsidy. This results in these units being paid to turn down generation.
Batteries do not have the same fixed drivers of Bid and Offer pricing. Instead, they price competitively versus others in the market and incorporate the costs of balancing any energy dispatched.
Batteries can utilize the Balancing Mechanism similarly to the wholesale market - charging through Bids and discharging through Offers. They profit from the spread between these prices, or the spread between these prices and the wholesale price.
Trading the Bid-Offer spread provides the most value to batteries
Because of the higher prices of Offers and lower prices of Bids, compared to the wholesale price, trading in the Balancing Mechanism can deliver more value for batteries. The spread between volume-weighted average Bid and Offer prices was £125/MWh in 2023, a 1.8x increase over the spread available in the day-ahead power market.
The premium to spreads in the Balancing Mechanism is forecast to grow over time, mostly due to an increase in Offer prices. By 2045, the maximum daily Offer price will be £84/MWh higher than the maximum daily wholesale price. The minimum daily Bid price, however, will only be £22/MWh lower than the minimum wholesale price.
This is because the retirement of Combined Cycle Gas Turbines (CCGTs) results in higher-priced alternatives to generation that can be turned up. On the other hand, the generation capacity that can be turned down via Bids continues to grow as more renewables are built out.
The opportunity for batteries is limited by dispatch rates
Unlike the wholesale market, which is self-dispatched, the Balancing Mechanism relies on dispatches by the ESO. The most cost-efficient Bids and Offers should be dispatched first. However, these are sometimes ‘skipped,’ due to system constraints, technology limitations, or human error.
This means dispatches and subsequent value can be more uncertain for batteries in the Balancing Mechanism than in the wholesale, despite the higher price spreads available.
Historically, the ESO has not utilized batteries as much as other technologies, such as CCGTs. The ESO started addressing this through the Open Balancing Platform, launched in December 2023. This has contributed to dispatch volumes for batteries increasing by 2.3 times in the five months since.
Several future developments are planned, which should continue to improve how batteries are dispatched into the Balancing Mechanism.
With future improvements to the Open Balancing Platform expected, dispatch rates—the percentage of available capacity dispatched as Bids or Offers—are forecast to increase by threefold through 2027.
The impacts of these changes are locational, as exact system needs differ based on where batteries are placed. This results in different dispatch profiles for different systems. Batteries in supply-constrained regions receive Bids, and those in demand-constrained regions receive Offers to decrease transmission volumes.
Higher dispatch rates, combined with more valuable Offers, mean that batteries in demand-constrained regions see the largest revenue potential from the Balancing Mechanism—having 9% higher revenues on average than batteries in unconstrained regions.
Ancillary services: frequency response and reserve
In addition to delivering energy through wholesale markets and the Balancing Mechanism, batteries can be paid to support the grid's stability and frequency through ancillary services. These services are delivered through short-term contracts with the system operator, won through auctions held at the day-ahead stage.
Frequency response
The ESO maintains grid frequency at 50Hz in real time. It does this through a combination of manual dispatches and contracted frequency response.
Systems contracted in frequency response deliver an automated power response to changes in grid frequency. This is the fastest-acting response to frequency deviations, giving the ESO time to dispatch slower-responding assets.
There are three main frequency response services batteries participate in:
- Dynamic Containment, which acts post-fault in under a second.
- Dynamic Moderation, which acts pre-fault in under a second.
- Dynamic Regulation, which acts across the widest frequency range, in under 10 seconds.
Service energy delivery and utilization vary significantly
Each service has different response requirements, leading to different energy outputs and state-of-charge requirements.
A 50 MW battery contracted in Dynamic Containment is required to reserve 12.5 MWh for delivery of the service. Of this, the control room would typically only dispatch 1.2 MWh over a four-hour contract.
The same battery contracted in Dynamic Regulation would need to reserve 50 MWh of capacity, of which 23.2 MWh would be dispatched.
Each service has a high and low product - to respond to low and high frequencies, respectively - which can be priced differently.
Prices have dropped due to saturation and increasing auction efficiency
In 2022, frequency response services represented an average of 84% of a battery’s revenue stack - as an unsaturated market led to high prices. Operators favored these markets as the short response times limited battery cycling, reducing cell degradation.
Two significant changes have reduced frequency response prices since the highs seen between 2020 and 2022: market saturation and the launch of a more efficient auction mechanism.
Saturation occurred as the amount of batteries competing for contracts began to exceed ESO’s requirements. Prior to this point in late 2022, prices could clear up to ESO’s caps for each service. Since saturation, competition sets prices. These are now more clearly linked to the other markets that batteries participate in.
In November 2023, the ESO launched a new auction mechanism - the Enduring Auction Capability (EAC). This further decreased prices in the market. The EAC allows participants to bid into multiple different services, and also to submit negative prices. The combination of these increased the efficiency by which ESO can procure frequency response.
Frequency response prices are forecast to remain at these lower levels from now on. High services should increase in price due to an increasing frequency of zero or negative wholesale prices, but they will still remain well below prices from prior to saturation.
Reserve services
In addition to frequency response services, the ESO contracts Reserve to ensure it has longer-lasting flexibility to dispatch in response to frequency deviations. It is in the process of introducing three new reserve services to replace legacy markets and alternatives taken in the Balancing Mechanism.
The first of these, Balancing Reserve, launched in April. Since then, batteries have competed for contracts with gas peakers and CCGTs, with prices averaging £2.65/MW/hr in the positive service and £0.90/MW/hr in the negative service.
The negative service has remained capped since launch. This is reflective of the low volume currently procured with only 400 MW of Balancing Reserve currently contracted. However, this could increase up to 2.5 GW at times.
The ESO will launch Quick Reserve in November 2024. We expect batteries to be the sole technology competing for contracts in the service. However, a low requirement of 300 MW at launch means prices are not likely to exceed that in Balancing Reserve.
Slow Reserve will be launched in 2025, and is not expected to be competed for by batteries.
The depth of the market for ancillary services contracts will increase - but not as quickly as battery capacity
The volume of these services procured is linked to system inertia (broadly the amount of synchronous generation that can dampen changes in frequency) and the largest possible loss of load from the system.
Over time, system inertia will decrease, while the largest loss of load will increase. This will increase the requirement for ancillary services to manage the grid. Ancillary service requirement available to batteries is forecast to almost triple to 6.9 GW by 2030.
However, installations of new battery capacity will outpace this growth. 22 GW of battery energy storage capacity is forecast to be operating in 2030. This means the proportion of battery capacity contracted in ancillary services will decrease from 85% in 2022 to 14% by 2030.
Capacity Market
The Capacity Market is a government subsidy that ensures there is enough capacity to maintain security of supply. It provides long-term contracted revenues to generators to either build new capacity or stay online.
Contracts are secured through competitive auctions held either four years (T-4) or one year (T-1) ahead of delivery. The value of these contracts for battery energy storage is determined by the auction clearing price and the storage de-rating factor.
Prices in the most recent T-4 auction reached a new high of £65/MWh due to falling competition in the market. However, we forecast prices to fall from this point to £21/MWh by the 2039/40 delivery year. This is because the cost of new generation is expected to fall over time, meaning participants bid at more competitive prices in future auctions.
Storage de-rating factors have decreased over the past few years. Changes for the 2024/25 Capacity Market have increased these in the short term. However, they will continue to fall over time, as shorter-duration storage is less important in solving longer potential Capacity Market events.
Network charges
Transmission and distribution charges can result in batteries being paid, or paying, for their connection to the grid.
Batteries can be liable for two main network charges: Transmission Network Use of System (TNUoS) charges, and Distribution Use of System (DUoS) charges.
Site specifics determine the exact mix of these charges, which can be modeled using the custom-run workflow.
Transmission Network Use of System (TNUoS)
Transmission charges are levied on batteries through one of two mechanisms: Generation TNUoS tariffs, and Triads. Both of these can result in either a payment or cost, based on location and operation.
Transmission-connected systems face Generation TNUoS tariffs, a fixed, annual charge. These tariffs are generally negative in Southern England, meaning batteries are paid for connecting, and positive in Scottish regions, meaning they have to pay.
Distribution-connected systems are not liable for these tariffs if they have a capacity lower than 100 MW. These batteries are exposed to triads, which can result in a benefit through the Embedded Export Tariff. Regions in the north of England and Scotland, do not receive any Triad benefit
Distribution Use of System (DUoS)
Batteries connected to the distribution network face DUoS charges. These are based on location and connection voltage level and can consist of a fixed charge, capacity charge, and volumetric charge.
Exports receive a payment, based on the generation volumetric charge. These are generally low for batteries connecting at Extra High Voltage (EHV) but can result in significant value for systems connecting at lower voltages.
Other revenue streams
Although these are the main markets available for batteries today, the shape of the market will continue to evolve. In the future, other revenue streams may become more widely available. For example, stability markets to contract inertia, and local constraint markets to provide an alternative to the Balancing Mechanism.
Ultimately, the ongoing REMA consultation could completely restructure energy markets in Great Britain. Fundamental price drivers - weather, location, constraints - will remain, but these will be expressed in different markets across different timescales. If the wholesale market became zonal, for example, location constraints would drive prices here rather than in the Balancing Mechanism.