The United Kingdom's energy market has several intrinsic features that make it particularly appealing for battery owners. One of the main attractions is the ability to easily 'stack' and switch between a diverse array of revenue streams to maximize returns. Battery owners in the UK can capitalize on revenue opportunities across four broad areas: wholesale arbitrage, the Balancing Mechanism (BM), the Capacity Market (CM), and ancillary services. This flexibility ensures that battery operators can optimize their income by participating in different market segments based on prevailing conditions, thus securing the best possible returns. The innovation in the energy market has made it possible for participants to navigate through these categories effortlessly.

The UK's system operator is instrumental in balancing supply and demand in the electrical grid, adjusting every 30 minutes. Participants in the energy market can make bids and offers to increase or decrease supply as necessary, making the entire system highly responsive and adaptive. To ensure long-term security of supply, fixed payments are made to generators, with capacity procured through competitive auctions well before delivery. This market structure not only incentivizes participation but also helps in maintaining a stable electricity supply. The interplay of different market segments allows battery storage operators to leverage their assets efficiently, tailoring their participation to where it suits them best.

A crucial role in this equilibrium is played by ancillary services, which National Grid procures to cover various needs essential for managing the electricity system. These services encompass tasks such as managing system frequency or voltage and providing reserve capacity to address supply imbalances. Ancillary services have been a reliable revenue source for flexible generators, including battery storage, within the UK. Remarkably, in 2022, ancillary services alone accounted for more than 80% of the country’s battery asset revenues, underlining their importance in the financial ecosystem for energy storage operators.

The year 2022 and early 2023 witnessed unprecedented high prices and volatility in gas and electricity markets. This turbulence translated into record high revenues for UK batteries. An example of this impact can be seen in an ancillary service known as dynamic curbing, a system frequency management tool. During 2022, this service generated average revenues exceeding £20 ($25.58) per MWh, with peak revenues nearing £80 ($102.33) per MWh. These high returns bolstered investor confidence in the UK battery market, stimulating growth and expansion within the sector. However, this boom period was not sustainable forever, and market dynamics began to shift.

With the changing landscape, falling wholesale prices and increasing saturation in the ancillary services market began to suppress these lucrative revenues through much of 2023 and early 2024. As 1.5 GW of battery storage capacity came online in this period, bringing the total capacity to 3.5 GW, the market started to stabilize. During this phase, the average revenue from dynamic curbing fell below £1.50 per MWh, further declining to less than 50 pence per MWh by February of the same year. This sharp decline led to a dip in investor and developer confidence, with some investors opting not to announce any new projects in 2024, reflecting the volatility characteristic of the energy market.

Despite these challenges, recent trends in the market suggest that the outlook for battery revenues might not be as bleak as previously feared. In April 2024, a considerable increase in wind generation, contributing to 35.1% of the UK’s monthly electricity generation, led to multiple periods of low or negative prices. This scenario presented an enhanced revenue potential from wholesale arbitrage, pointing toward a market shift. Battery operators have thus begun to focus more intensively on the wholesale market and balancing mechanism activities, complemented by ancillary services revenues. This alignment marks a significant evolution in the UK battery revenue structure, contributing to stabilizing the sector and driving long-term strength.

In conjunction with this shift, a new balancing reserve service was launched by the system operator in March 2024, which has already become an additional valuable revenue source for batteries. Although only 400 MW has been procured so far, this day-ahead service is designed to help correct supply and demand imbalances more effectively. The anticipation is that this new service will enable energy reserves to be procured ahead of day-ahead market transactions, thereby improving overall system security. This proactive approach underscores a commitment to maintain balance in the market and ensure that supply matches demand more precisely, even before the actual real-time transactions occur.

While the past few years have been turbulent for UK battery storage revenues, the overall investment outlook remains robust. The saturation of the ancillary services market and the resulting shift toward wholesale arbitrage and balancing mechanisms paint an optimistic picture for the future. The UK boasts a large number of viable renewable energy projects, and as the share of renewables in the energy mix increases, the need to manage generation intermittency and provide other critical system services will grow. Although revenues may not soar to the extreme levels seen in 2022, driven by unique external factors such as the conflict between Russia and Ukraine, the long-term trend for battery storage appears promising. Investors would do well to focus on this broader trajectory rather than be swayed by short-term fluctuations, ensuring sustained growth and stability in the UK battery storage market.