​Gas prices have been in the spotlight a lot in recent years. And for battery operators, they still matter more than many would like to admit. Gas and carbon prices together continue to set the price in the hours that matter most, defining the peak prices that batteries capture.

That exposure isn’t going away - and gas volatility likely won’t either. Europe’s new reliance on the global LNG market means gas prices can shift quickly and strongly in reaction to global events.

The sensitivity of BESS revenues to shifting gas prices is substantial. A 50% fall in gas prices, combined with a 40% drop in carbon allowance prices, would cut day-ahead battery revenues by 37%. At the same time, the upside is lower: a 50% rise in gas prices and a 40% increase in carbon prices lifts revenues by just 28%.

For any further information on this topic, reach out to the author - till@modoenergy.com

This article is part of a series on revenue risk and fundamentals sensitivity:

• What 50% lower demand growth means for batteries
• How gas and carbon prices affect BESS revenues
• How BESS overbuild could cannibalise revenues (upcoming)

European gas prices carry material upside and downside risk

Gas prices are forecast to fall in the near term, as LNG capacity buildout, especially in the US, progresses. Over the long term, European gas production will decline, while demand growth in the developing world is expected to keep the global LNG market in balance.

But upside risks are significant. Any change to liquefaction terminal timelines or profitability, combined with geopolitical supply chain shocks, could result in structurally higher gas prices. Recent near-misses, for example the potential delay to Qatar’s North Field expansion and risk of closure of the Strait of Hormuz following Iranian strikes in mid-2024, underline how exposed the market remains.

Downside risks are equally substantial. Slower demand growth in the Global South - for example when cheaper renewables additions eat into gas plant running hours - could tip the LNG market into oversupply. A return of Russian pipeline gas to Europe would further loosen the balance, materially lowering gas prices.

To test how this uncertainty translates into battery revenues, we model a set of symmetric price scenarios. In the High Case, we increase gas prices increased by 50%; in the Low Case, we reduce them by 50%. Given the strong historical correlation between gas and carbon prices, we increase ETS prices by 40% in the High Case and reduce them by 40% in the Low Case.

Finally, we stress-test revenues against extreme but observed outcomes. Gas prices fell to around €3/MWh in 2020 and peaked near €250/MWh during the 2022 gas crisis. We model these as one-year shock events, holding ETS prices constant, to isolate the revenue impact of extreme gas price volatility.

Gas and carbon prices influence spreads by setting peak prices

Because thermal generation continues to set the peak price on most days while renewables keep the floor just below zero, changes in gas and carbon prices translate directly into the spreads batteries rely on.

But this effect isn’t linear: lower gas and carbon prices compress spreads more than higher prices expand them.

In Germany, gas competes with multiple price-setting alternatives. Coal and lignite remain active in the merit order, and imports are priced competitively against domestic thermal generation.

When gas and carbon prices fall, gas sets the price more often, coming in at roughly equivalent levels to the cheaper lignite and coal plants.

By contrast, when gas prices rise, higher-cost imports and coal-fired generation can instead set the peak price during more hours. This caps the uplift from higher gas and carbon prices, dampening the expansion in spreads available to batteries.

Changes in the generation stack cap upside and deepen downside in spreads

Across all scenarios, the forecast annual TB2 spread broadly tracks the combined trajectory of gas and ETS prices.

In the Central Case, spreads soften in the near term as gas prices fall, then rise again as carbon prices tighten, lower-cost coal and lignite capacity exits the system, and power demand grows.

This overall narrative is consistent across scenarios.

But in the high-price scenario, the spread trajectory diverges slightly in the late 2030s. Once coal and lignite are no longer available, higher gas prices begin to pull expensive alternative technologies, such as hydrogen-fired peakers (which do not pay carbon prices), into the generation stack. This means the uplift from higher gas prices is less extreme.

In the low-price scenario, spreads rise more slowly in the early 2030s. As many gas plants are already lower in the merit order when setting peak prices, the impact of retiring coal and lignite plants on peak prices is less pronounced.