Influence of Market Rules on Energy Storage Investment
1. Revenue Opportunities and Market Participation Models
Current wholesale electricity market rules often remain tailored to traditional, legacy assets, which limits the ability of energy storage to fully monetize its multiple services such as energy arbitrage, ancillary services, and capacity provision. For example, energy storage can earn more revenue in real-time markets with higher price volatility and power-to-energy ratios, yet many Independent System Operators (ISOs) have rules that restrict how storage bids and operates across different market segments. In regions like ERCOT, energy-only markets with price spikes create strong investment signals for storage, whereas other markets with less price variation reduce storage profitability.
Even markets with co-optimized energy and ancillary services markets, such as ISO New England, impose constraints like “de-rating” batteries when bidding in energy markets, limiting peak output and thus potential revenues.
2. Investment Uncertainty and Regulatory Frameworks
Uncertainty in market rules affects investor confidence. Clear, supportive frameworks such as the UK’s “cap and floor” scheme for Long Duration Electricity Storage (LDES) provide minimum guaranteed returns while capping revenues to avoid windfall profits. Such regulatory certainty facilitates investment by mitigating financial risks and encouraging rapid deployment of storage infrastructure.
3. Policy Incentives and Tax Credit Phases
Changes in tariffs and phase-outs of tax incentives can reduce the base-case economics of storage projects by around 20% over a five-year horizon, directly impacting investment feasibility. Policies that provide tax credits or subsidies enhance the return environment and attract capital.
4. Social vs. Private Returns and Ownership Models
Energy storage investments generate social benefits such as increased consumer surplus, grid reliability, and CO2 reductions, but private returns may be insufficient under current market rules, leading to underinvestment. This market failure suggests the need for capacity markets or public policy mechanisms to bridge the gap. Different ownership models—utility-owned, consumer-owned, or competitive providers—also affect economic outcomes and market dynamics, with consumer-owned storage potentially delivering greater consumer surplus.
Summary Table of Market Rule Influences on Energy Storage Investment
| Market Rule Aspect | Impact on Investment |
|---|---|
| Legacy Market Design | Limits storage from fully capturing value; restricts bidding and operational flexibility |
| Real-Time Market Price Volatility | Higher volatility increases arbitrage revenues, attractiveness of storage |
| Co-Optimization and Ancillary Market Rules | Can cause output “de-rating,” reducing potential revenues from peak events |
| Regulatory Certainty/Support Schemes | Schemes like “cap and floor” reduce investment risk, boost investor confidence |
| Tax Credits and Tariffs | Phase-outs can reduce project economics by ~20%, affecting investment timing and scale |
| Ownership and Market Participation | Public ownership or capacity markets may be required to address underinvestment due to insufficient private returns |
In conclusion, market rules shape the financial viability and attractiveness of energy storage investments by determining how storage can participate in markets, the revenue streams available, and the regulatory risks faced. Modernizing wholesale market structures to better integrate energy storage and creating stable policy frameworks are crucial to unlocking broader investment and deployment of storage technologies.
Original article by NenPower, If reposted, please credit the source: https://nenpower.com/blog/how-do-market-rules-influence-the-investment-in-energy-storage/
