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.1 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.2
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 (see sidebar, “Glossary”). 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.
Adopting a holistic approach that considers all revenue streams across a broad range of external events could improve the outlook of energy storage returns. This approach requires a thorough evaluation of potential power market evolution, in-depth analyses of local regulations, and the development of essential tools such as fundamental stochastic modeling.3 To capture the full predicted value, trading and portfolio risk management capabilities may need to be strengthened, or new partnerships may need to be formed with trading and optimization specialists.
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 (a storage asset might find attractive charging opportunities in ancillary services while discharging into wholesale). 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.4 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.5 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 (typically due to weather variance and/or renewable under-/oversupply) 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 (such as day-ahead) and trading positions potentially being readjusted over the course of operation (for example, intraday and continuous).
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 (for example, reserve, voltage or reactive power, and black start).
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 (for example, Italy and Poland), with some cases reaching almost 100 percent when supported by infrastructure-like incentive schemes, such as the Italian MACSE auctions.6 This new, regulated mechanism is designed to procure storage capacity for the Italian power system, remunerating storage developers based on their installed capacity, with limited access to merchant revenue streams.
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. For example, Greece is providing capital expenditure support and guaranteeing target revenue through a Contract for Difference scheme supported by the EU Commission.7
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 (for example, the relative renewables and storage capacity build-out including flexibility overbuild risk).
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 (Exhibit 1).
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. For example, in the Netherlands, the Transmission System Operators (TSOs) and Distribution System Operators (DSOs) are setting up a congestion management platform to remunerate assets that can mitigate local grid congestion caused by high power supply and limited grid capacity.8 Similarly, the German TSOs are developing “Netzbooster” assets, where storage assets are deployed instead of grid expansion to provide network management services and resolve constraints.9 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. This is particularly important for batteries and other flexible assets where revenues are driven by occasional spikes in power prices (and charging opportunities are enhanced with low or negative prices). 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. Different combinations of these inputs (for example, high demand and low renewables) produce possible extremes in power prices (such as the price spike in the German day-ahead market of up to approximately €900 per megawatt hour on December 12, 2024).10 As these spikes are typically skewed to the upside—due to the greater range of extremes, for example, in commodity prices—a more robust modeling approach can capture this asymmetry and better assess the (hidden) potential of energy storage (Exhibit 2). Indeed, studying this upside potential can have a dramatic impact—analysis in Texas shows that a selected few days (and time intervals within) can make up the majority of disproportionate revenue spikes.11
These stochastic price models are typically applied to day-ahead markets, given the relative ease of developing fundamental models for power plant dispatch, but could be approximated to also cover intraday and ancillary services markets. However, given the expected shift toward greater revenue contribution from wholesale markets, using stochastic models for these products is likely to have the greatest impact on the overall business case.
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 (such as wind and solar) could diversify their portfolios by adding storage, potentially reducing their overall risk and market exposure, such as imbalance cost. The gross margins of solar and storage assets are negatively correlated due to underlying value drivers of the electricity market, enabling further potential value creation for portfolio players. Adding a new asset can, therefore, result in lower incremental risk to the overall portfolio compared to the asset’s stand-alone risk while providing the same returns. Reduced incremental risk can also improve projected financials such as risk-adjusted cash flow, lowering risk management costs.
- Commercializing hedging products: Developing and offering hedging products (for example, offering a baseload product to renewables players) could enable storage operators to provide value-added services to both energy producers (by reducing their profile risk) and consumers (by meeting their need for decarbonized energy supply that matches their specific demand profile).
By exploring these upside opportunities from portfolio effects and commercial hedging products, sophisticated players can extract further value from energy storage assets, as shown by the incremental uplift on the illustrative revenue stack for a player in Central Europe (Exhibit 3).
The initiatives described in this article have focused on commercial model optimization and the maximization of revenues from a given asset. Such efforts typically represent 30 to 40 percent of the maximum achievable uplift on a given project’s internal rate of return. To capture the full potential of energy storage, storage investors could explore additional value creation levers, including optimal market (geography) selection, pipeline development in strategic locations, capital- and operational-expenditure excellence, and financing optimization.
As the energy sector continues to transition toward more sustainable and renewable sources, an important opportunity is emerging for owners of energy storage technologies. The use of stochastic models, coupled with innovative commercial strategies, could help operators better assess the potential of these assets—enhancing business cases and supporting the continued acceleration of the energy transition.
