Analysis of Energy Storage Revenue Potential

As the global build-out of renewable energy sources continues at pace, grids are seeing unprecedented fluctuations between oversupply and undersupply due to the intermittent nature of renewables, such as solar photovoltaics and wind. Energy storage systems provide an important solution for addressing this challenge: time-shifting renewable energy from periods of excess generation to times of undersupply at peak load.

While energy storage is already being deployed to support grids across major power markets, new McKinsey analysis suggests investors often underestimate the value of energy storage in their business cases. Traditional valuation approaches are no longer fit for purpose under new market dynamics or may neglect to consider portfolio effects, potentially miscalculating the full revenue at stake. This can make the business case for energy storage appear less attractive than expected for many investors.

There is a reason for this. Evaluating potential revenue streams from flexible assets, such as energy storage systems, is not simple. Investors need to consider the various value pools available to a storage asset, including wholesale, grid services, and capacity markets, as well as the inherent volatility of the prices of each. Assessing future value in these markets often demands sophisticated modeling capabilities to calculate the evolution of market conditions and the impact of external factors on the business case. Such complexity means the expected economic returns are often undervalued, especially if shortcuts are taken to simplify the analysis.

Sources of revenue for energy storage

Owners of energy storage systems can tap into diversified power market products to capture revenues. So-called “revenue stacking” from diverse sources is critical for the business case, as relying only on price arbitrage in the wholesale market may be insufficient to meet investment return requirements. Further, these markets are expected to become increasingly competitive as more sources of flexibility (including storage but also other technologies) are added to the system, placing greater emphasis on a need to understand and capture the full set of available revenues.

There are several important factors that need to be considered to optimize returns. It is important, for example, to right-size the battery for both energy capacity and power capacity available for charging and discharging. The optimal energy dispatch allocation across market products is also critical, including for both charge and discharge. Capacity might also be “overbooked”—committed across multiple market products exceeding 100 percent capacity—with the expectation that not all services will be called upon simultaneously. Importantly, these factors must continuously be monitored to inform decision-making and profit-maximizing strategies going forward.

These decisions matter. For example, the average revenue of an Electric Reliability Council of Texas (ERCOT) battery in 2023 was $182 per kilowatt per year, but the best-performing asset in the same region was closer to $300 per kilowatt per year, a 60 percent increase. Similar dynamics—where there is a large spread between the best and worst performers—are observed in other grid-scale battery markets, such as the United Kingdom. A variety of factors, including design choices such as battery duration and commercial strategy, can affect these outcomes.

Wholesale market arbitrage

Wholesale market arbitrage in day-ahead and intraday markets typically represents 20 to 50 percent of the full storage revenue stack today and is expected to increase to more than 60 percent by 2030 in some markets, driven by the build-out of renewable energy sources.

Battery operators could take advantage of market dynamics by charging their batteries at times of the day when renewables supply is high and prices are lower, and selling during peak periods when prices are driven by more expensive assets such as gas turbines. Imbalances between power supply and demand post day-ahead to delivery can also provide strategic opportunities to charge or discharge.

It is in the context of wholesale market arbitrage that the phrase “buy low, sell high” is typically well understood. But the reality of wholesale market participation is more complex, with commitments made at different points in time and trading positions potentially being readjusted over the course of operation.

Grid services

Ancillary services that stabilize the power grid typically represent 50 to 80 percent of the full storage revenue stack of energy storage assets deployed today. This is observed across multiple mature storage markets but is expected to decrease to less than 40 percent by 2030. This change is driven by the predicted saturation of these markets as energy storage systems become widely deployed in the future.

Operators of storage assets with fast reaction times typically provide frequency regulation, but there is growing demand for additional services.

Capacity payments and other regulated incentives

Capacity payments or similar regulated incentives can represent an average of 20 to 30 percent of the total storage revenue stack in selected geographies, with some cases reaching almost 100 percent when supported by infrastructure-like incentive schemes. This new, regulated mechanism is designed to procure storage capacity for the power system, remunerating storage developers based on their installed capacity.

Capacity payments—awarded through competitive auctions—are the most common form of incentive, remunerating installed capacity to secure sufficient power supply for the system. New schemes are emerging as more countries offer incentives for storage deployment to support the energy transition.

Individual market context matters

Across all these opportunities, the actual revenue potential of energy storage assets will depend on the local context: power market conditions in the country, storage-specific regulations and incentives, commodity or carbon prices, and the expected evolution of the power supply versus demand mix.

To act on the opportunities, operators could improve their power market models to better assess the implications for storage revenue potential. We simulated revenues across different scenarios in a southern EU country to showcase how revenues can vary between different outlooks on power system evolution.

Embracing opportunities in emerging system services

While the value pools described above are established storage revenue streams, as the power system evolves and decarbonizes, so do the products, services, and markets available.

For example, increased electrification and renewables integration can introduce challenges such as grid congestion, imbalance, and instability. New market mechanisms and compensation schemes are emerging to leverage flexible assets to solve these challenges. By staying alert to changing market dynamics, energy storage operators could capture new opportunities as they arise.

Opportunities are also emerging in inertia and reactive power management. Traditionally, these services have been provided by conventional thermal power plants, such as combined cycle gas turbines. However, when power demand is low and renewables are providing most of the energy supply, these thermal assets will not be running as frequently. Rather than system operators specifically dispatching these gas-fired plants to provide these services, they could instead call upon energy storage assets as an alternative.

A stochastic approach to assessing potential revenue streams

Energy system operators may now need to develop capabilities to determine the true business case of their storage assets in a changing power market.

To effectively calculate wholesale market arbitrage, a robust stochastic model is needed to assess the outlook of both spot and intraday market prices at hourly granularity across scenarios. Without such detailed pricing knowledge, opportunities are harder to pinpoint.

In a stochastic fundamental model, input variables—including weather, commodity prices, and outages—are randomized to generate hundreds of thousands of prices and thereby create a distribution of outlooks. As these spikes are typically skewed to the upside, a more robust modeling approach can capture this asymmetry and better assess the potential of energy storage. Indeed, studying this upside potential can have a dramatic impact on revenue projections.

Capturing the upside value of storage systems with renewable sources

Given their inherent flexibility to charge and discharge power on demand, storage assets are well-positioned to perform under uncertain and volatile conditions. This could unlock further value creation through positive portfolio effects and adjacent trading opportunities.

• Unlocking value at the portfolio level: Stakeholders with multiple assets across technologies could diversify their portfolios by adding storage, potentially reducing their overall risk and market exposure.
• Commercializing hedging products: Developing and offering hedging products could enable storage operators to provide value-added services to both energy producers and consumers.

By exploring these upside opportunities from portfolio effects and commercial hedging products, sophisticated players can extract further value from energy storage assets.

FAQ

Q: What are the key revenue sources for energy storage systems?

A: Energy storage systems can generate revenue from wholesale market arbitrage, grid services, capacity payments, and other regulated incentives.

Q: How can operators optimize returns from energy storage assets?

A: Operators can right-size their batteries, allocate energy dispatch efficiently, and monitor market conditions to maximize returns.

Conclusion

As the energy sector transitions towards more sustainable and renewable sources, the role of energy storage technologies becomes increasingly vital. By understanding and leveraging the diverse revenue streams available, operators can maximize the potential returns from their storage assets. Implementing stochastic models and exploring portfolio effects can further enhance the business case for energy storage, driving continued growth in the energy transition.