Unlocking the next wave of battery storage development

Batteries help address the intermittency of renewables and constraints in the grid. For the built environment, this means real estate developers are increasingly integrating battery storage into residential, commercial and mixed use projects to boost resilience, meet planning requirements, and enhance long term value.

Early adopters profited from frequency-response revenues, but the market has since diversified. Operators now access capacity market contracts and trading opportunities in intraday, day ahead and balancing markets. Despite this, financing for ready-to-build projects in the utility scale battery market has recently slowed.

Strong fundamentals 

The goal for a net zero grid by 2030 and an increase in energy security,  demands a substantial ramp up in renewable power generation which in turn drives increased volatility. Therefore, the need for fast response and longer duration batteries is unlikely to change as these remain essential for balancing the grid, providing ancillary services and securing energy independence for the UK.

Continued technological advancements, such as longer cell replacement cycles and increased power density, enable longer duration and lower levelised cost of storage, which in turn increases the addressable market and continues to provide healthy returns for investors.

Stalling transactions

Battery projects are easier to develop due to their lower planning risks than other renewable technologies and their high appeal to landowners given smaller footprint and significant rents.

This combination has driven substantial oversupply, with the total UK battery development pipeline at around 127GW, more than five times the 25GW required under Clean Power 2030, according to RenewablesUK. Grid queue reforms have not eased the funding landscape for battery projects with secured grid connections. Uncertainty remains on the results of grid queue reforms while accepted grid offers no longer carry a significant ‘developer premium’, as later stage connections can often be brought forward in place of projects earlier in the grid queue.

An evolving market

The challenging financing  conditions combined with the pull of healthy cash flows from battery storage trading, are giving rise to a change in the investor market dynamics. 

Traditional renewable energy infrastructure investors are averse to volatile merchant based revenues, therefore, a battery revenue stack increasingly weighted towards arbitrage and trading revenues has resulted in a drop in market appetite. This poses a prime opportunity for new entrants with experience in active trading strategies such as hedge funds, commodity trading energy suppliers and utilities to fill the funding void.

Standalone battery projects continue to offer attractive returns, both now and over the long-term, driven by energy market volatility, and opportunities in imbalance trading.

While listed YieldCos may struggle with the risks tied to merchant-based revenues, as reflected in their current market discounts, private capital still has a strong opportunity to step in. Falling battery costs and longer durations now make it possible to offer floor or tolling arrangements, which could help deliver more stable, predictable returns and potentially revive interest in the YieldCo model.

That said, investors must remain balanced, mindful of the dangers of becoming overexposed to volatile markets.

A new reality

The standalone battery market is adjusting to the realities of merchant risk, growing competition, and evolving investor expectations. What’s needed now is capital discipline, sophisticated market participation from investors, and well-structured projects. With strong fundamentals and a central role in delivering energy security and net zero, the long-term outlook for battery storage remains promising and resilient.

Further information

Contact Domenico Ceballos Hübner

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