Evaluating the Revenue Potential of Energy Storage Technologies

The revenue potential of energy storage is frequently underestimated. Investors might benefit from adjusting their evaluation methods for a more accurate estimate, which could enhance profitability and support sustainability goals. As the global expansion of renewable energy sources accelerates, power grids are experiencing unprecedented fluctuations between oversupply and undersupply due to the intermittent nature of renewable sources like solar photovoltaics and wind.

Energy storage systems offer a pivotal solution to this challenge by shifting renewable energy from periods of excess generation to times of undersupply during peak demand.

About the Authors

This article is a collaborative effort by Fransje van der Marel, Godart van Gendt, and Joscha Schabram, with contributions from Carlos Bermejo, Luca Rigovacca, and Yves Gulda, representing insights from McKinsey’s Electric Power & Natural Gas Practice. While energy storage is already being deployed to support grids in major power markets, new analysis from McKinsey indicates that investors often overlook the full value of energy storage in their business cases. Traditional valuation methods are often inadequate under new market dynamics, potentially leading to miscalculations of the total revenue at stake. This oversight can make energy storage investments appear less attractive than they truly are.

Glossary

• Ancillary services: A range of services procured by energy system operators to maintain the efficiency, reliability, and stability of the power grid.
• Arbitrage: The opportunity to purchase a product or service when its market value is low and sell it when its market value increases.
• Congestion: Localized constraints that occur when there is an imbalance of supply and demand due to physical limitations in network capacity.
• Frequency control: An ancillary service that adjusts power output or energy consumption to stabilize grid frequency, typically to a set point of 50 or 60 hertz.
• Inertia: A measure of an energy system’s ability to withstand disturbances that could negatively affect frequency.
• Portfolio or diversification effect: When the revenues of different assets (like solar, wind, and storage) are inversely correlated, stabilizing the average return of a portfolio.
• Reactive power: A component of modern alternating current power systems that maintains voltage profiles throughout the network for safe equipment operation.
• Stochastic modeling: An analytical approach that randomizes certain variables to simulate uncertainty in real systems.

Challenges in Evaluating Revenue Streams

Evaluating potential revenue streams from flexible assets like energy storage systems is complex. Investors must consider various value pools available to a storage asset, including wholesale, grid services, and capacity markets, along with the inherent price volatility of each. Accurately assessing future values in these markets often requires sophisticated modeling capabilities to predict market conditions and external factors affecting the business case. This complexity often leads to undervalued expected economic returns, particularly when analyses are oversimplified.

A holistic approach that encompasses all revenue streams and a wide range of external events could enhance the outlook for energy storage returns. This approach necessitates comprehensive evaluations of potential power market evolutions, detailed analyses of local regulations, and the development of critical tools such as fundamental stochastic modeling.

Sources of Revenue for Energy Storage

Owners of energy storage systems can leverage a variety of power market products to generate revenue. The concept of “revenue stacking” from diverse sources is vital for a successful business case, as relying solely on price arbitrage in the wholesale market may not meet investment return expectations. As more flexibility sources, including storage and other technologies, are integrated into the system, understanding and capturing the complete set of available revenues becomes increasingly crucial.

Several key factors must be considered to optimize returns. For instance, it is essential to appropriately size the battery for both energy capacity and power capacity during charging and discharging. The optimal energy dispatch allocation across market products is also critical, as a storage asset might find attractive charging opportunities in ancillary services while discharging into the wholesale market. Furthermore, capacity may be “overbooked” across multiple market products, with the expectation that not all services will be called upon at the same time. Continuous monitoring of these factors is necessary to inform decision-making and profit-maximizing strategies.

For example, the average revenue of a battery in the Electric Reliability Council of Texas (ERCOT) in 2023 was $182 per kilowatt per year, while the best-performing asset in that region generated close to $300 per kilowatt per year—a 60 percent increase. Similar patterns, characterized by a significant spread between the best and worst performers, can be observed in other grid-scale battery markets, such as the United Kingdom. Various factors, including design choices like battery duration and commercial strategy, can influence these outcomes.

Wholesale Market Arbitrage

Wholesale market arbitrage in day-ahead and intraday markets currently accounts for 20 to 50 percent of the total storage revenue stack and is expected to rise to over 60 percent by 2030 in some markets, spurred by the expansion of renewable energy sources. Battery operators can capitalize on market dynamics by charging their batteries during periods of high renewable supply when prices are lower and selling during peak times when prices are driven up by more expensive energy sources like gas turbines. Imbalances between power supply and demand after day-ahead forecasting can also create strategic charging or discharging opportunities.

While the concept of “buy low, sell high” is well understood within wholesale market arbitrage, actual participation is more complex due to commitments made at various points in time (such as day-ahead) and the potential for trading positions to be adjusted throughout operations.

Grid Services

Ancillary services that stabilize the power grid make up 50 to 80 percent of the total storage revenue stack for energy storage assets currently deployed. This trend is observed across multiple mature storage markets but is anticipated to decline to less than 40 percent by 2030 due to market saturation as energy storage systems become more prevalent. Operators of storage assets with rapid response capabilities typically provide frequency regulation, but demand for additional services, such as reserve, voltage control, reactive power, and black start, is growing.

Capacity Payments and Other Regulated Incentives

Capacity payments or similar regulated incentives may represent an average of 20 to 30 percent of the total storage revenue stack in select regions (like Italy and Poland), with some instances approaching nearly 100 percent when supported by infrastructure-like incentive schemes. These regulated mechanisms aim to procure storage capacity for power systems, compensating storage developers based on their installed capacity with limited access to merchant revenue streams. Capacity payments, awarded through competitive auctions, are the most common incentive form, ensuring sufficient power supply for the system.

Emerging Opportunities in Energy Storage

The actual revenue potential of energy storage assets will largely depend on the local context, including power market conditions, storage-specific regulations and incentives, commodity or carbon prices, and the anticipated evolution of the power supply-demand mix. Operators can enhance their power market models to better assess the implications for storage revenue potential.

As the power system evolves and decarbonizes, new products, services, and markets will emerge. For instance, increased electrification and renewable integration can create challenges like grid congestion and instability. New market mechanisms and compensation schemes are being developed to leverage flexible assets to address these challenges. In the Netherlands, Transmission System Operators (TSOs) and Distribution System Operators (DSOs) are establishing a congestion management platform to compensate assets that help alleviate local grid congestion. Similarly, in Germany, TSOs are developing “Netzbooster” assets, utilizing storage systems instead of expanding the grid to manage network services and resolve constraints.

Energy storage operators should remain vigilant regarding changing market dynamics to seize new opportunities as they arise. Emerging opportunities also exist in inertia and reactive power management, traditionally provided by thermal power plants. However, as power demand decreases and renewables contribute more energy, these thermal assets may not operate as frequently. Instead of relying solely on gas-fired plants for these services, energy storage assets could be utilized as alternatives.

A Stochastic Approach to Revenue Assessment

To accurately determine the business case for storage assets in a shifting power market, energy system operators may need to develop robust capabilities. Effectively calculating wholesale market arbitrage requires a strong stochastic model to analyze both spot and intraday market prices on an hourly basis across various scenarios. This is particularly crucial for batteries and other flexible assets, as revenues are often driven by occasional spikes in power prices.

In a stochastic fundamental model, input variables—such as weather, commodity prices, and outages—are randomized to produce a wide range of prices and generate a distribution of outlooks. Different combinations of these inputs can yield extreme power prices. For example, in the German day-ahead market, a price spike of up to approximately €900 per megawatt hour occurred on December 12, 2024. By employing a robust modeling approach, operators can better assess the hidden potential of energy storage and capture upside opportunities.

Capturing Value from Storage Systems with Renewable Sources

Due to their inherent flexibility to charge and discharge on demand, storage assets are uniquely positioned to thrive under uncertain and volatile conditions, unlocking additional value creation through positive portfolio effects and adjacent trading opportunities. Stakeholders with diverse asset portfolios across technologies like wind and solar can reduce overall risk and market exposure by integrating storage assets. The gross margins of solar and storage assets often exhibit negative correlation, further enhancing potential value creation for portfolio players.

Furthermore, 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, sophisticated players can extract additional value from energy storage assets.

To fully realize the potential of energy storage, investors should investigate further value creation strategies, including optimal market selection, strategic pipeline development, operational excellence, and financing optimization. As the energy sector continues to transition towards sustainable and renewable sources, significant opportunities are emerging for owners of energy storage technologies. Employing stochastic models alongside innovative commercial strategies can help operators better understand their assets’ potential, strengthen business cases, and facilitate the ongoing acceleration of the energy transition.

Authors: Fransje van der Marel, Godart van Gendt, Joscha Schabram, Carlos Bermejo, Luca Rigovacca, Yves Gulda. The authors extend their gratitude to Apostolos Zampelas, Diego Hernandez-Diaz, Federico Canti, Jonathan Nieman, Sam Woods, Shia Yamamoto, Simon Tywuschik, and Viktor Hanzlik for their contributions to this article.