Storage Economics - Insights from the Electricity Market Outlook
The paradox of energy storage economics
Energy storage stands as a cornerstone of the renewable-powered future, yet its economic reality is shaped by a paradox that challenges its long-term viability. While storage technology provides critical stability to the grid and unlocks greater renewable energy potential, its success in doing so can undermine its own financial viability, creating a volatile and uncertain environment for investors.
The latest projections of Ricardo’s Electricity Market Outlook highlight how increasing storage capacity flattens the wholesale electricity price curve. This effect benefits consumers and system operators by reducing price volatility, but it simultaneously erodes the arbitrage opportunities – buying low and selling high – that underpin a core revenue stream for storage assets. In short, the more storage is deployed, the harder it becomes for individual projects to generate sustainable returns.
Revenue compression and market vulnerabilities
This dynamic leads to a market structure where early investment does not confer long-term advantage. Unlike sectors where first movers can secure enduring profitability, storage investors take on significant risks only to see their high margins disappear as new entrants flood and saturate the market. With low barriers to entry, initial profitability quickly attracts competition, accelerating revenue compression across the board.
The investment landscape becomes even more challenging as policy support mechanisms – such as incentives and guaranteed remuneration schemes – are phased out. In their absence, the bankability of storage projects hinges on volatile and unpredictable market revenues.
The Electricity Market Outlook report analyses and breaks down the two primary revenue streams for storage and exposes their vulnerabilities:
- Arbitrage: This revenue stream is highly dependent on a multitude of uncertain factors, including gas and ETS prices, wind and solar generation levels, demand response, and cross-border energy flows. This uncertainty causes resulting price spreads that can vary dramatically, from €20/MWh to €120/MWh, making it nearly impossible to build a robust business case on arbitrage alone.
- Ancillary Services: Although demand for grid-balancing services is rising with the growth of renewables, prices remain low. Moreover, the existing balancing market fails to efficiently remunerate some of the most valuable services that batteries can provide, their ability to react within milliseconds. This is often referred to as the “missing market problem.”
Pathways to financial resilience
Addressing these challenges requires reform of the European balancing market. Greater openness, competitiveness, and harmonisation are essential. Simplifying technical requirements for participation in products like Frequency Containment Reserve (FCR), and resolving inconsistencies across national rules on platforms such as MARI and PICASSO, would enhance liquidity, improve revenue streams for storage, and reduce overall system costs.
Breaking the cycle of self-defeating economics calls for a shift towards a path focused on de-risking investment and improving market design. Transferring risk from project developers to counterparties better equipped to handle it is key. This can be achieved through a combination of mechanisms that offer stable, long-term cash flows, including:
- Power Purchase Agreements (PPAs)
- Contracts for Difference (CfDs), potentially paired with derivatives
- Hybrid renewable-plus-storage projects
By diversifying revenue streams beyond the volatile wholesale market, developers can build greater financial resilience into their projects.
About the Electricity Market Outlook
The Electricity Market Outlook is Ricardo’s one-stop-shop for electricity market intelligence, providing medium to long term electricity projections and robust insights, in the form of regular market reports, market outlooks and expert analysis.
