Battery energy storage revenues have dropped by two-thirds since 2022 while operating capacity has tripled. The GB BESS Outlook covers three key areas—markets, revenues, and investment—to see how this might change in the future. In this executive summary, we highlight the main themes to get you up to speed.
This article was updated in Q4 2024 with the latest market data and results from version 3.2 of the forecast. The Markets and Revenue outlook articles have also been updated. An updated Investment outlook, with refreshed Capex estimates, will be published later in the quarter.
Overall, revenues have decreased as frequency response markets have become saturated and prices have fallen. In the future, we project fundamentals such as an improving price shape and a growing proportion of intermittent generation to increase the value of trading markets.
In this three-part GB BESS Outlook series, we look at:
- Markets: the evolution of the main markets that batteries trade in.
- Revenue and dispatch: how optimizers consider prices, risks, and physical constraints when dispatching batteries into these markets to maximize revenues.
- Business case and investment: how these revenues are considered alongside project costs to determine the investment case for battery energy storage.
For more detail, the links throughout will take you straight to the relevant sections of each article.
Battery revenues have shifted from ancillary services to trading markets, which will deliver 86% of lifetime revenues
Battery energy storage systems maximize revenues by performing actions across multiple markets, ‘stacking’ revenues from each.
In 2022, 84% of revenue came from frequency response services - short-term availability contracts for batteries to respond to minor changes in grid frequency. Operators secure these contracts at the day-ahead stage in a competitive auction.
From 2022 to 2024, installed battery capacity has almost tripled to over 4GW. Procured volumes for ancillary services, meanwhile, have only increased by 50%. This has saturated the market and prices across frequency response markets are 7x lower today than in 2022.
This means frequency response services now only make up around 20% of the revenue stack, as batteries have shifted to a merchant-focused strategy. Batteries charge with cheap power in the wholesale market when demand is low. They discharge at peak times for a higher price, profiting from the price spread.
Batteries can also earn a premium by being dispatched in real-time to balance supply and demand, or manage transmission constraints, via the Balancing Mechanism. This trading strategy is higher-risk as there is no guarantee of dispatch.
These two revenue streams represent 99% of future revenues for a battery built today. Fundamentals such as a changing price shape and a growing proportion of intermittent generation will drive this value. Technological improvements in the control room should also enable batteries to take advantage of increasing volumes in the Balancing Mechanism.
New ancillary services markets are unlikely to change this
Despite the launch of new services—Balancing Reserve in March and Quick Reserve later in the year—system needs ultimately limit the procured volumes of ancillary services. These requirements, such as the capacity to cover the largest single loss of load, will grow less quickly than installed battery capacity.
By 2030, we project procured volumes of ancillary services to almost double. However, installed battery capacity will increase by 4x, meaning that these markets will remain saturated.
Read the full market outlook here.
Optimization decisions balance revenue potential with risk and physical battery limitations
Market prices are not the only consideration for optimizers dispatching batteries. They must also take account of a battery’s physical limitations and and investor’s risk appetite.
The different markets available for battery energy storage exist on a risk spectrum. Operators secure Capacity Market revenues through contracts for up to 15 years. These contracts are secured at a known price years ahead of delivery. Balancing Mechanism revenues, on the other hand, are captured in real-time—neither prices nor dispatch are guaranteed in advance.
Optimizers can secure positions at day-ahead (or earlier) or try to increase revenues by securing higher prices at a later stage, with greater risk.
Battery dispatch decisions must also respect duration and cycling restrictions. Battery warranties limit the number of cycles a battery can perform each day. Each cycle degrades the battery, reducing energy capacity and increasing the need for repowering.
Typically, ancillary services are paid on availability and have low cycling requirements, with small bursts of energy delivered to manage grid frequency. Wholesale trading and the Balancing Mechanism, on the other hand, are paid on energy. These can provide more revenue at higher cycling levels.
As a result, shorter-duration batteries with lower cycling limits allocate more capacity to ancillary services to limit cycling while maximizing revenues. A one-hour, one-cycle battery contracts 48% of its capacity into ancillary services. A two-hour, two-cycle battery allocates just 17%.
Lower prices now available in ancillary services markets mean that energy capacity has the largest impact on long-term battery revenues. Two-hour batteries earn 38% more than one-hour batteries across their lifetime.
Read the full revenues and dispatch outlook here.
Two-hour batteries achieve the highest returns, but falling Capex could change this
Longer-duration systems require a greater initial Capex investment, as most battery costs scale with energy capacity rather than rated power. We estimate that a two-hour system requires 70% more Capex than a one-hour system.
However, the increase in revenues from a two-hour system more than offsets this increase in Capex costs. Two-hour systems have the highest returns, with an average unlevered IRR of 11.2%.
These Capex figures have fallen by 30% in the last year, and we expect them to continue decreasing in the future. This reduction will be steepest for longer-duration batteries, as a higher proportion of total Capex is from cell costs—the component that falls the fastest.
A 10% reduction in Capex for a four-hour battery would increase IRRs for these systems by 1.5%.
However, revenues need to increase from current levels for projects to be viable in the long term. Two-hour batteries need to generate revenues of between £74 and £85k/MW/year, compared to the 2024 average of £61k/MW/year.
Investors can use different contract structures to manage these revenue risks. Floors and tolls are agreements that guarantee revenues to varying degrees, although at a lower level than they would be in a typical merchant profit-share agreement.
Read the full battery business case and investment outlook here.