With renewable energy sources like solar and wind increasing grid volatility, energy storage systems are often touted as a solution to supply-demand imbalances. Yet, McKinsey’s analysis suggests that investors underestimate the value of energy storage, often influencing investment decisions negatively.
This gap highlights the complexity of evaluating potential revenue streams from energy storage technologies. Conventional valuation models fail to accommodate the dynamic market conditions, missing out on crucial factors like portfolio effects, market evolution, and regulatory frameworks.
Energy storage revenue relies on diversified markets: wholesale markets, grid services, and capacity payments. The key to maximizing returns lies in “revenue stacking,” which offsets the insufficiency of sole reliance on wholesale market arbitrage. McKinsey advocates for a comprehensive evaluation of market conditions with advanced tools like stochastic modeling to fully capture potential value. For instance, in the 2023 Electric Reliability Council of Texas (ERCOT) market, revenue discrepancies between average and top-performing assets underscored the importance of strategic decision-making.
Despite the allure of wholesale market arbitrage—with its contribution expected to rise from 20-50% to over 60% by 2030—the reality is complex. Battery operators face constantly adjusting trading positions due to price fluctuations. Ancillary services currently account for 50-80% of storage revenue but could decline to less than 40% due to future market saturation. As the energy landscape evolves, storage assets can explore opportunities in emerging services like inertia and reactive power management, historically dominated by thermal power plants.
Capacity payments represent an average of 20-30% of revenue, highlighting how regulated incentives are crucial, especially in regions offering storage-friendly infrastructure schemes. Competitive auctions that award capacity payments to secure power supply have become prevalent, and new schemes are anticipated as more countries push for storage to bolster the energy transition.
A successful strategy for storage operators requires adaptive modeling that factors in variables like commodity prices, weather, and outages. Stochastic modeling emerges as a vital method to project market dynamics by producing diverse pricing scenarios. This approach reveals the extrinsic value of storage assets, often hidden due to traditional models’ lack of granularity.
Storage technologies also offer intrinsic flexibility, advantageous under market uncertainties. By diversifying portfolios and developing hedging products, stakeholders can harness positive portfolio effects and unlock commercial upsides. Such strategies align with evolving market situations, ensuring that energy storage becomes a linchpin in facilitating the renewable energy transition.
