- Insights
Europe is moving rapidly towards a decarbonized future, but this transition brings challenges in maintaining balance in power markets. Wind and solar energy are increasing significantly, yet their variable nature creates difficulties in ensuring a stable supply. To address this, integrating flexible resources such as Battery Energy Storage Systems is becoming essential. The latest expansion in power market modeling now includes forecasting frequency response ancillary services and offering insights into revenue opportunities for batteries and other flexible assets. These resources will play a critical role in supporting Europe’s evolving energy mix.
The demand for flexibility in European power markets is increasing. The shift towards renewable energy sources has led to significant growth in wind and solar power generation. In the first three quarters of 2024, wind and solar power generation increased by 10 percent year-on-year across major European markets, while coal and gas generation declined by 19 percent. Although this is a step forward in reducing carbon emissions, it has also highlighted inefficiencies in Europe’s power systems. The inflexibility in the system is becoming more evident as the number of negative price events rises. In 2024, negative wholesale electricity prices have occurred over 8,400 times, compared to 6,555 times in the previous year. This growing imbalance indicates the need for more flexible assets and improved market mechanisms to manage fluctuations and reduce costs.
Battery deployment across Europe is progressing unevenly, reflecting variations in revenue opportunities. Traditionally, battery storage systems have relied on ancillary markets, but growing market volatility is now influencing revenues from wholesale and intraday markets. As batteries saturate ancillary services, market participants are benchmarking their bids against alternative revenue opportunities. The increase in within-day price fluctuations signals more opportunities for battery storage systems to participate in arbitrage trading. However, revenue trends vary across regions. In Germany, indicative revenues from wholesale market arbitrage have risen by six percent to 74 euros per kilowatt per year, while in Poland, they have increased by 59 percent to 78 euros per kilowatt per year. In contrast, Great Britain and Spain have experienced declines in arbitrage revenues.
Several factors contribute to these regional differences. In Great Britain, the rapid expansion of battery storage, along with higher power imports from France due to low demand and strong nuclear generation, has reduced arbitrage opportunities. Additionally, the lower presence of solar energy in Great Britain limits the market fluctuations typically seen with solar power. In Spain, while solar penetration has widened within-day price spreads, strong hydroelectric generation has offset some of the price variations. High water availability during spring, combined with wind and solar generation, has led to prolonged periods of low prices, reducing the price peaks that usually create profitable conditions for battery storage.
Despite the increasing need for flexibility in power markets, developing new battery storage projects remains challenging. Most battery projects in Europe depend on merchant revenue, making it crucial to forecast potential earnings from different revenue streams, such as energy trading and ancillary services. Unlike traditional energy assets with stable revenue sources, battery storage must rely on multiple income streams. This complexity highlights the need for accurate market forecasts that incorporate regional factors and competitive bidding strategies.
New modeling capabilities for ancillary services now provide detailed forecasts on market volumes and prices, helping to identify revenue opportunities for battery storage. Ancillary services, particularly those used to maintain system frequency, are becoming more important in Europe. These services help balance electricity supply and demand, providing a key revenue source for battery storage systems. System operators pay for both the availability of energy reserves and actual energy activation when needed. As more flexible assets enter these markets, concerns about price saturation are emerging. However, rising demand for these services, driven by the increasing reliance on renewable energy, suggests continued revenue potential for battery storage.
While ancillary services provide a stable income source, battery storage systems require additional revenue streams to remain profitable. Research indicates that energy trading, including wholesale market arbitrage and intraday market participation, will contribute the most to battery storage earnings. Capacity market contracts and government subsidies, where available, will also play a key role in making battery storage projects financially viable.
The European power sector urgently needs more flexible energy solutions, but the success of battery storage depends on strong business cases tailored to each market. Understanding how revenue streams will evolve is essential for investors and operators looking to participate in the energy transition.
