Is it time to invest

in battery energy
storage as a
standalone asset?
Exploring commercial viability and
strategic levers of battery energy
storage systems (BESS)
Contents
Introduction 03

1. Flexibility is critical as energy transition takes hold 04

2. How BESS can unlock the grid 07

3. T
 he underlying trends supporting BESS evolution 10

4. B
 ESS as a standalone system: Alternative business
models facing the profitability challenge 13

5. S
 even strategic levers that will define the outlook for
standalone BESS 19

Conclusion 22

Is it time to invest in battery energy storage as a standalone asset? 02

 Introduction
Battery Energy Storage Systems (BESS) are set to emerge as
key enablers in the dynamically evolving energy transition.
Driven by regulatory support, subsidies, declining costs,
and ambitious clean energy targets, BESS stationary power
system applications are poised for exponential growth. They
are forecasted to grow by more than 10x from 160 GWh
currently to nearly 1800 GWh by 2030 globally1.
Multiple players are investing in the BESS market across
the value chain, from system providers to system operators
and system integrators, through strategic acquisitions
and partnerships. Consequently, the BESS market
has witnessed strong transaction growth, with global
transactions reaching more than US$24 billion since 20202.
This indicates increasing investor confidence, amplified
by the strategic emergence of favorable business models
and ownership frameworks that are shaping the future of
energy storage investments.
EY Parthenon anticipates attractiveness of the standalone
BESS market to grow, especially in countries such as
the US, UK, Italy, Germany, Spain, and Australia. This is
driven by improving commercial viability and strong policy
measures. The three business models which we believe
are going to offer strong revenue potential for standalone
BESS are ancillary services, energy arbitrage and capacity
mechanisms. However, as a result of evolving market
conditions and different policies across geographies, these
models will have different levels of applicability in the context
of revenue potential from country to country.
Due to ongoing gas price volatility, BESS has become the
dominant contracted capacity for ancillary services in the
US and the UK over the last year. This has direct implication
on the prices for grid ancillary services as battery becomes
the new price setter, hence impacting the revenue potential
of BESS in the ancillary market. As a result, the share of
contracted ancillary services in total BESS revenue has
Giacomo Chiavari
Partner, EY-Parthenon, EY Advisory S.p.A.,
Europe West Energy Strategy and Transactions Leader
1. New battery storage capacity to surpass 400 GWh per year by 2030 (rystadenergy.com)
2. Global Data Power Intelligence Center
declined by close to 30%-50% across key markets, with other
models starting to take centre stage. We envisage increased
revenue opportunities in energy arbitrage business model
due to rising price spread between maximum and minimum
average energy prices during the day, as renewables
continue to replace dispatchable capacity.
Additionally, there is an increasing need for grid operators
to have secured capacity in the future, which is pushing
regulators to introduce or reform capacity market
mechanisms. We are witnessing this in European markets
with Italy transitioning its existing mechanism to a regulated
model that improves chances of better returns on BESS
investments by minimizing market risk.
While existing mechanisms continue to provide a level of
uncertainty, we are witnessing a strategic shift towards
stacking of BESS services. This approach is becoming critical
to achieve a viable business case for BESS. EY Parthenon
analysis suggests that a typical standalone 20 MW, 4-hour
battery with service stacking opportunity has a high
potential of achieving consistent revenues and an unlevered
IRR close to 9%-10%.
However, achieving profitability will depend on the
application of certain strategic levers critical for the
scalability of BESS across global markets. These include
enhancement of revenue certainty, CapEx reduction, better
location strategy, effective regulatory mechanisms, scaling
connections, strengthening the supply chain and monitoring
of new competing technologies. These levers are pivotal in
realizing the full potential of BESS across various markets.
To make BESS a viable commercial solution on the path to a
sustainable energy future, it is necessary for all stakeholders
involved to engage, invest, and collaborate. With careful risk
management, strategic partnerships, and a dedication to
innovation, the future of BESS as a standalone asset looks
more promising than ever before.
Is it time to invest in battery energy storage as a standalone asset? 03
1 Flexibility is critical as energy
transition takes hold

4 | Document title Additional text

The energy transition has passed an inflection point. From
here on in, it will accelerate, regardless the amount of
government support.
A greater focus on greener, cheaper, more localized, and
secure energy supply means renewable energy is expected
to become the dominant source of power generation
before 2040. In parallel, the rapid electrification of multiple
industrial and residential applications is ongoing, resulting in
1.7x growth in electricity demand by 2050.
The rollout of these intermittent technologies presents
significant challenges to system adequacy, grid management
and price volatility. This is due to the sum of unpredictable
shape of both energy production and consumption.
Moreover, rising volumes of renewable energy, and limited
growth in interconnection capacity, contribute to curtailment
issues in the grid. For example, in the UK, the US, Germany
and Ireland, curtailment rates have risen from around 1%
in 2015 to 5%-8% in 2022 as the share of renewables has
doubled in the system1.

Simultaneously, consumer technologies, such as electric
vehicles (EVs), rooftop solar, and heat pumps are entering
mainstream adoption, driven by regulatory push and improved
affordability. Together, these megatrends will reshape the
energy system for both energy producers and consumers
globally. But the landing point is likely to be volatile.
This, in turn, puts pressure on grid operators to maintain
a supply-demand balance, making system flexibility an
imperative. Between now and 2050, a fivefold surge in global
demand for power flexibility is expected, underscoring the
urgent need for demand-response services and
battery storage2.

Global power flexibility supply (TWh), 2022-2050

~5x increase
8,000

7,000

6,000

5,000
TWh

4,000

3,000

2,000
Batteries
Demand Response
1,000
Hydro
Thermal
0 Curtailment
2022 2030 2050

Source: EY proprietary Energy & Resources Transition Acceleration model - current trajectory scenario, IEA

1. Will more wind and solar PV capacity lead to more generation curtailment? — Renewable Energy Market Update — June 2023
2. World Energy Outlook 2023 — IEA, EY Analysis

Is it time to invest in battery energy storage as a standalone asset? 05

 Long-duration energy storage:
the next level opportunity for competing technology?

Long-duration energy storage (LDES) is emerging as a technology to integrate

high volumes of low-carbon power and resolve the challenges that come
with seasonal variations in renewable generation, by storing and dispatching
energy for weeks and months, improving grid security.

It is becoming a viable and faster alternative to investment in interconnections

and has the potential to help countries manage their monthly flexibility
requirements, which are set to triple in Europe from 3%-4% in 2021 to
15% by 20504.

Since 2019, US$58 billion has been committed to LDES projects globally.
Many markets are also setting stringent targets to accelerate LDES adoption.
California, for instance, aims for 55 GW LDES by 2050, while Australia is
targeting 2.6 GW by 2030.

4. Flexibility requirements and the role of storage in future European power systems — Publications Office of the EU (europa.eu)

Is it time to invest in battery energy storage as a standalone asset? 06

2 How BESS can unlock
the grid

7 | Document title Additional text

Energy storage includes a mix of tried-and-tested solutions as well as new ones, all capable of resolving the challenges of
flexible generation. Pumped hydro, an early storage technology, has been challenged by battery and other mechanical
systems, alongside thermal, electrical, and chemical technologies. Each has become an established commercial application in
the power sector.

Comparison of energy storage technologies

Capital Environmental
Feature Modularity Energy density Efficiency Responsiveness Lifetime
Efficiency6 friendly

BESS1

Mechanical2

Thermal3

Electrical4

Chemical5

Reference BESS provides Chemical have BESS leads BESS and Electrical Mechanical has BESS has
value more modularity extremely high with 80%-95% electrical exhibits long lifecycle material and
functions, such energy density efficiency, responds high CapEx, (40-60 years) waste concerns,
as independent followed by mechanical quickest US$276/kWh to followed by while electrical
Low unit development, BESS which is follows closely (up to seconds) US$1,840/kWh, thermal and are more
or modification 5x denser than with (70%-95%), compared to while BESS chemical with environmentally
compared to electrical and chemical other storage and mechanical 10-30 years friendly
High other storages having the least systems range from
(50%-70%) US$92/kWh
to US$644/kWh

Inevitably, as the power systems’ needs evolve, some

energy storage technologies will be better suited to specific
applications, based on their response rates, discharge
capabilities and power density.

Battery energy storage systems, however, with enhanced

modularity, energy density, energy efficiency, capital
efficiency, and response time, show the most promise among
existing technologies. As a result, BESS can provide a series
of balancing services to the grid that ranges from just a few
seconds to several days duration, with power capacity needs
from 1 kW to 1 GW across the power system.

Note
1. Battery energy storage systems: Lead acid batteries, Lithium-ion batteries, Flow batteries, Zinc batteries, etc;
2. Mechanical energy storage systems: Pumped hydro, Gravity technologies, Compressed air, Flywheel;
3. Thermal energy storage systems: Latent heat, Thermo-chemical, molten salt, Sensible heat;
4. Electrical energy storage system: Superconducting magnetic energy, Supercapacitors;
5. Chemical energy storage systems: Power to gas, Hydrogen, methane;
6. Capital efficiency is defined as how efficient is capital in terms of energy stored in $/kWh, so a bigger circle = less CapEx

Source: EY analysis

Is it time to invest in battery energy storage as a standalone asset? 08

Power system issues solved by BESS applications across the value chain

Positive effects BESS provides across the value chain

Generation Network End-user

Power system issues T&D Demand
RE Black RE Ancillary Energy Frequency Voltage Backup
Peakers congestion charge
firming start smoothening services arbitrage regulation regulation generation
relief reduction
Increase in
forecasting
errors
Increase
in voltage
fluctuations
Renewable
energy Reduction
implications in system
inertia
Higher
ramp rate
Peak
energy shift
Nodal
congestions
Voltage
T&D
fluctuations
constraints
Error in
demand
forecasting
Consumer
Cost of affordability
energy Consumer
security

High cost
of gas
Cost of
Retiring
energy in
power plants
peak hours
Carbon
emissions

Source: EY analysis

Battery storage’s ability to provide a wide range of services
is helping to address specific power sector issues across
the value chain, which makes it an ideal contributor to the
power system.
At the generation level, BESS can smooth output from
intermittent renewable generation sources and store surplus
capacity. This allows operators to participate in energy
arbitrage by buying power during off-peak hours and selling it
when increased demand pushes prices up during peak time.
For grid operators, BESS can relieve strain on congested
lines, facilitate new connections and defer costly upgrades to
transmission and distribution systems. For commercial and
industrial customers with their own energy production (i.e.,
prosumers), BESS enables them to strengthen their energy
independence from the grid and achieve operational savings.
For instance, customers with high-load peaks who invest in
solar-plus-storage plants can expect a return on investment
in as little as two years.
And so, over the next 20 to 30 years, we anticipate a big
shift in the new installations of storage systems, with battery
storage most likely to become the dominant player in terms of
new storage capacity added. The cumulative BESS capacity is
expected to grow by more than 10x from 160 GWh currently
to nearly 1800 GWh by 2030, with an average annual addition
of nearly 250 GWh, the fastest of any other technology3.

3. New battery storage capacity to surpass 400 GWh per year by 2030 (rystadenergy.com)

Is it time to invest in battery energy storage as a standalone asset? 09

3 The underlying trends
supporting BESS evolution

10 | Document title Additional text

 As demand for grid-scale storage systems intensifies, the BESS market is rapidly taking shape. Several drivers supporting
BESS market growth:

1. Technology economics 2. Regulatory push and tax incentives

Between 2020 and 2022, grid-scale storage system costs
across markets have risen due to increase in critical mineral
prices, supply chain disruptions and soaring inflation,
reversing a decade of cost declines. However, for the first
time in three years, the average price of battery pack
decreased by 14% in 2023 year-on-year, due to reduced
raw material and component costs, in addition to increased
production capacity and stagnating demand from end-use
industries such as e-mobility5.
Driven by capacity and efficiency improvements, increasing
investments with over 400 gigafactories with a combined
capacity of 9 TWh, the cost is expected to fall further by
15%-20% across key markets by 2030 despite the recent
cost increases 6.
Creating the right environment for investment is critical:
lowering risk is as important as increasing returns. Favorable
government policy and supportive regulation reduce risks
for investors, while incentives and rebates cushion the initial
financial commitment. Collectively, these mechanisms build
investor appetite for new and alternative technologies, which
drives ongoing innovation.
The US has already put a number of measures in place
via its Inflation Reduction Act, including supportive tax
incentives and a subsidy structure promoting energy storage.
Additionally, the wholesale markets are opening to battery
system owners, enabling them to sell their excess power to
the grid. It is a move designed to balance energy demand and
allow investors to increase their revenues, enhance returns
and recover costs sooner.

Global grid-scale Li-Ion battery storage system average cost outlook, 2030 (US$/kWh)

400

380

360

Impact of increase in
US$/kWh

340 critical mineral prices,

-16%
supply chain disruptions
and soaring inflation
320
Actuals Outlook
300

280

260
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Source: EY analysis, Wood Mackenzie

5. Bloomberg NEF
6. Where are the world’s gigafactories? | Benchmark Source (benchmarkminerals.com)

Is it time to invest in battery energy storage as a standalone asset? 11

A similar trend is unfolding in the UK, where energy storage
is now recognized as a generation asset under the Energy
Bill (2023). National Grid, the UK’s transmission system
operator, has also introduced a capacity mechanism so that
battery system owners can provide flexibility services to the
market and be compensated.
Additionally, markets such as Germany, Italy, Spain, and
Australia are also following suit. The investments and
subsidies are racking up for accelerated development, with
Spain allocating more than €620 million to support storage
and flexible technologies until 2026 and with Germany
supporting BESS investments in 10 of its 16 federal states
through direct upfront subsidies, ranging between €200/
kWh–€300/kWh. From a regulatory perspective, Italy recently
abolished double payment charges, which were imposed
on BESS operators during both charging and discharging
duration, negatively impacting the economic viability. In
addition, the regulatory body in Australia, the Australian
Market Energy Commission (AEMC), has introduced rules to
ease costs for storage projects and added two new ancillary
market services to enhance BESS revenues.
3. Technology breakthroughs disrupt
market
Battery storage technology is evolving rapidly. While
lithium-ion batteries have become widely commercialized
and are expected to remain the dominant technology until at
least 2030, the market is ready for a big swing. We estimate
that lithium-ion’s market share will fall from 80% to 60% by
2040. We envisage that 40% of the market will be captured
by newer, more efficient, and cost-effective technologies.
Among the most mature contenders are vanadium flow
batteries. With near-infinite lifecycles and deep discharge
tolerance, they are set for mass production by 2025. Over
a 20-year lifespan, they will become more cost-competitive
than lithium-ion batteries. In addition, sodium-ion batteries
are becoming competitive for use in low-performance and
price-sensitive applications. Even though their energy
density is lower, and their life cycle is shorter, they offer
better safety at lower cost, perform well at low and high
temperatures, and are manufactured from a naturally
abundant and geographically available resource.
4. Value chain expansion
Many players are setting targets for their BESS portfolios and
expanding their storage capabilities, which has contributed
to a surge in transactional activity. BESS-related mergers and
acquisitions saw deal value top more than US$24 billion since
2020, driven primarily by the US and Europe. Over the past
three years, 15 transactions in the UK equated to more than
4 GW of total storage capacity.
While some utility players are pursuing strategic acquisitions,
others are developing challenger brands to operate in the
battery space. Vertical integration is reshaping the value
chain too. The utility-scale BESS market, currently dominated
by Tesla and Fluence, is facing competition from disruptive
players, who are now investing in new capabilities, ranging
from project development, software, installation and asset
operations. The growth will require new skills, resources, and
knowledge, not always readily available in the fast-developing
energy transition markets. As such, there is significant
potential for new partnerships and further merger and
acquisition activity as the standalone BESS market takes hold.
Is it time to invest in battery energy storage as a standalone asset? 12
4
BESS as a standalone system:
Alternative business models
facing the profitability
challenge

13 | Document title Additional text

 The first application of battery energy storage systems has
been the co-located BESS installed alongside solar and wind
farms to manage the intermittency challenge. However,
as use cases evolve, we are seeing a surge in demand for
BESS as a standalone asset, where a battery plant is directly
connected to the grid and can be used to store electricity for
a later discharge.
Despite resilient growth, profitability of BESS remains the
biggest question mark. BESS are highly capital-intensive
projects and with a levelized cost of storage (LCOS) higher
than traditional storage technologies. Therefore, a cost-
benefit analysis becomes paramount for anyone looking to
identify the best available business model to invest in.
There are multiple business models available to BESS
operators aiming to secure consistent revenues, both front-
of-the-meter (FTM) and behind-the-meter (BTM). However,
we believe that the most profitable business model for a
standalone asset adopts a front-of-the-meter business model
with a focus on ancillary services, energy arbitrage, and the
provision of capacity market.

Major BESS revenue streams by size, user type, financial flow and connection to the grid

Revenue
Description BESS size (MW) User type Financial flow Connection to
streams

• Shifting RES • Price arbitrage

RES Time production to Utilities • RE asset
1 5 – 300+ • Demand
shifting phases of higher Corporates • Generation
network demand management

• Providing
frequency
Front-of-the-meter1

Grid and regulation • Ancillary

2 ancillary 5 – 300+ Utility • Networks
services, voltage revenues
services
control and peak

Focus for standalone

damping

• Buying low-cost
Price electricity and
3 50 – 300+ Utility • Price arbitrage • Networks
arbitrage selling when
prices rise

• Participating in
Capacity capacity auctions • Long-term
4 5 – 300+ Utility • Networks
market by offering BESS contracts
storage capacity

• Storing excess • Reduction

Microgrid energy and Commercial in volumes
5 0,1 – 10+ • Prosumer
autonomy supplying services & Industrial purchased from
to stabilize the grid the grid
Behind-the-meter2

• Supplying reserve • Reduction

Domestic energy and/or in volumes
• Prosumer
6 auto storing excess 0,01 Civil purchased from
consumption the grid • End-user
self-generated
electricity (PV) • Incentives

• Supporting • Reduction
Electric • Network
energy demand Commercial in volumes
7 vehicle <1
for electric vehicle & Industrial purchased from • End-user
charge
charging the grid

1. ‘Front-of-the-meter’ refers to electricity generated by suppliers delivering power to the grid for sale
2. ‘Behind-the-meter’ refers to electricity that is generated and consumed directly on the consumer’s side of the power meter

Source: EY analysis

Is it time to invest in battery energy storage as a standalone asset? 14

 There are three revenue models for front-of-the-meter standalone BESS:
1. Ancillary markets provide interesting prices, but they are highly saturated
The ancillary market can be a big source of revenues for storage solutions such as hydro-pumped power plants. At
present, the market is becoming more and more saturated resulting in decreasing prices (as compared to historical
rates in key markets such as the UK and US), impacting BESS project inflow. One of the primary reasons is the
increased participation of BESS as a dominant source (more than 50%-60%) for ancillary services contracted
capacity, replacing traditional coal and gas. This has resulted in BESS projects becoming the new price setter for
ancillary services, which is not providing enough incentive for the BESS owners to charge or discharge during the
day. Under the current ancillary market conditions, investors need to depend on other services to build a positive
business case.

Revenue model potential

2. Renewable energy drives price arbitrage opportunities in the wholesale market

The rising share of renewables in the grid and increased peak demand is driving more energy price volatility and higher
spreads between the maximum average day price and the lowest average day price. Over the last five years, the price
spreads have doubled on average in Europe and has grown sixfold in Australia, increasing the share of revenues from
energy arbitrage for BESS operators from 12% to 30%-40%7. In the US, the peak demand surge in Texas combined with
the doubling of solar and wind capacity has boosted BESS revenues by 60% in 2023. With rising additions of renewables
in the grid, the opportunity to arbitrage (via energy time-shifting), will grow further and BESS revenues are expected to
follow with 50% growth by 2030.
Revenue model potential

3. Capacity market provides revenue certainty, but lower returns and upsides
The capacity market offers a secure and steady income source for the contracted capacity, irrespective of energy
prices. With increasing need for new capacity to replace older generating units, regulators are looking to pay a
premium to get capacity contracted for future system requirements. This has allowed BESS operators to attain
certainty in investment returns. This was showcased by the capacity growth of nearly 70% in T-1 auctions and 80% in
T-4 auctions over the last three years in the UK8. Additionally, Distribution System Operators (DSOs) and Transmission
System Operators (TSOs) are advocating for capacity markets to ensure sufficient capacity, thereby deferring
critical grid investments. This trend makes the capacity market mechanism increasingly appealing from an investor
perspective, as exemplified by Mechanism for the Acquisition of Storage Capacity (MACSE).

Revenue model potential

We are witnessing the impact of this business model volatility
in most of the key BESS markets. Many mature markets
such as the UK, the US, Italy, and Spain are facing reduced
ancillary market revenues, whereas Germany and Australia
are still highly dependent on frequency control as capacity
markets are not yet developed. In addition, the growing
regulatory push to treat BESS as a generation asset and
provide access to the wholesale market, has given significant
momentum to BESS owners to earn revenues from arbitrage
and time-shifting in almost every market.

7. Energy Synapse | Brighter Energy Decisions

8. How important are Capacity Market contracts to battery revenues? — Modo Energy, EY analysis

Is it time to invest in battery energy storage as a standalone asset? 15

 Volatility of business models in key BESS markets

Drivers UK US Italy Germany Spain Australia

 xisting
E  xisting
E  artially
P  xisting
E  artially
P  xisting
E
and and existing and mature existing and mature
saturating saturating
Ancillary services

• Rise in BESS Increase in Market is BESS participates The well- BESS can access 80%-90% of
capacity/decline reliance on diverse and in the MSD3 established balancing grid-scale
coal or gas wholesale less unified through pilot like ancillary markets. energy storage’s
• System inertia as and balancing than Europe, for frequency services Non-frequency revenues in
RE1 rises market with only some regulation, with full market ancillary Australia come
mechanism due regions such as access expected presents services are from FCAS5
• Quality of grid
to saturation PJM2 offering soon significant acquired via the services
of ancillary better revenue revenue TRM4
service market opportunities opportunities
for BESS

 xisting
E  xisting
E  artially
P  xisting
E  artially
P   artially
P
Energy arbitrage in wholesale market

and mature and mature existing and mature existing existing

• Liquid • Less volatile • Electricity • Liquid • Electricity • Deregulated

• Supply volatility wholesale market spread grew by wholesale spread grew electricity
as RE increases market with with lower 35% CAGR in market with by 25% CAGR market with
• Market price high price wholesale 5 years, boosting high price in 5 years, high price
volatility means volatility prices, and arbitrage revenue volatility boosting volatility
higher spreads • BESS varying state • Grid congestion • One-hour arbitrage • Energy
arbitrage regulations in some areas systems earn revenue arbitrage
• Wholesale
market access revenues • In 2021, 59% can limit 40% through • Grid surged to
surged due to of battery opportunities arbitrage; infrastructure 40% of BESS
increased RE1 capacity used two-hour limitations revenue in
output in last for arbitrage. systems, over can restrict 2022 from
2 years 70% opportunities 12% previously

 xisting
E  artially
P  artially
P  on
N  nder
U  nder
U
and mature existing existing existing development development
• Power objectives
Capacity market

set by the TSOs UK’s capacity BESS are Capacity market There is no Spain is Australia
• Clarity of power market is eligible for is mature in Italy, capacity planning to currently lacks
market rules increasingly capacity however, new mechanism in implement the a capacity
and policy favoring LDES6, markets, rules MACSE mechanism Germany capacity market mechanism but
with around vary by region offering high across the next is exploring its
• Certainty of
60% of projects revenue potential two years, given implementation
positive returns
in the 2025-26 under development EU approval
T-47 auction timelines

Revenue potential
Low High
Non Under Partially Existing and Existing and
existing development existing saturating mature

Note:
1. RE: Renewable Energy
2. PJM: Pennsylvania, New Jersey, and Maryland
3. MSD: ancillary services and balancing
4. TRM: Technical restriction market
5. FCAS: Frequency Control Ancillary Services
6. LDES: Long duration energy storage
7. T4 Auction: Conducted four years in advance of the delivery year, designed to secure longer-term electricity capacity needs
8. MACSE — Mechanism for the Acquisition of Storage Capacity

Source: EY analysis,ENTSO, EIA, NEM and other public sources

Is it time to invest in battery energy storage as a standalone asset? 16
 The solution: Stacking of services to capture flexibility
We are already witnessing a growing focus on the stacking of
services in multiple geographies due to the complementary
abilities of numerous business models to play alongside each
other in order to deliver profits. In Europe, the contribution
of ancillary services in the BESS revenue share has reduced
from 80% in 2018 to around 33% in 2023, with similar
contribution coming from wholesale market price arbitrage
and capacity payments9. In addition, key US regional system
operators (CAISO and ERCOT) are already earning 40+%
revenues from energy arbitrage in 2022, which was earlier
dominated by ancillary revenues10. Overall, the stacking
of services provides opportunities for positive business
cases, but difficulty in predicting future prices, and delayed
regulatory changes, will always be a blind spot for investors.
EY analysis of a typical battery project of 20 MW, with a
4-hour duration, suggests that the stacking of services will
have a high probability of consistent revenues, with positive
returns of 10% and a payback period of 13 years for a typical
battery storage project.

Financial analysis of a typical BESS project (20 MW, 4-hr battery)

48.5

- ~9-10%

13.5 Unlevered IRR

12
US$ million

23

DCF CapEx DCF OpEx NPV DCF Revenue

Note: DCF- Discounted Cash Flow; Assuming discounted rate of 8% for calculation

Source: EY analysis

9. Europe grid-scale energy storage outlook 2023, December 2023, Wood Mackenzie
10. North American energy storage revenue analysis 2023, September 2023,Wood Mackenzie

Is it time to invest in battery energy storage as a standalone asset? 17

Spotlight on: Italy’s evolution of capacity market
to the Mechanism for the Acquisition of Storage
Capacity (MACSE) model is a credit positive
for investors.

The Italian market transition to a regulated MACSE model appears to be

a positive move to make BESS investable, by minimizing market risk and
bringing the business case closer to a regulated one. The schemes will
help to recover CapEx through the premium, and OpEx through the OpEx
quota, with an additional bonus coming from the sale of dispatch services.
By ensuring a steady cash flow, it also minimizes the overall investment
risk (thus reducing the WACC ). This contrasts with a merchant or capacity
market scenario, where trading plays a prominent role in the business.
Expectations of earnings are around single digit returns.
In conclusion, early, and proactive strategy with focus on the stacking
of services, coupled with a well-planned business model and a strategic
location selection is crucial. The profitability of BESS increases when they
are situated near more congested nodes, making these factors essential
for a positive business case.

Is it time to invest in battery energy storage as a standalone asset? 18

5
Seven strategic levers that
will define the outlook for
standalone BESS

19 | Document title Additional text

For investors looking to invest in BESS for power sector applications, there are seven
strategic levers that can help to accelerate BESS investments.

Revenue
certainty
New
Technology Effective
maturity regulatory
evolution mechanisms

Seven
strategic levers to
accelerate BESS
Supply investment
CapEx
Chain
reduction
redefinition

Connection
Location
at scale and
analysis
on time

1. Revenue certainty 2. Effective regulatory mechanisms

For non-regulated business models, the rising correlation
between gas prices, the intraday power price spreads and
BESS revenue is becoming more and more evident. The
data highlights a substantial 60%-70% decline in gas prices
year-on-year in 2023, resulting in the lowest BESS revenues
in recent years. For BESS investors, factoring in gas pricing
dynamics in their long-term business plan will be critical.
To address the gas price uncertainty, investors need to
engage in aggressive bidding on energy supply in day-ahead
and intraday markets to capitalize on short-term price
fluctuations. They will also benefit from leveraging price
differences across interconnected European markets, and
implement advanced software for precise electricity price
predictions, thereby optimizing arbitrage cycles.
For regulated standalone BESS business model to become
a success, effective regulation is essential. This especially
concerns the need for a capacity market mechanism that
provides revenue certainty for investors, as well as enough
capacity for grid operators when required. Currently, there are
fundamental issues, including resource adequacy challenges
due to failure to meet extreme peak demands, higher clearing
prices increasing end consumer costs, and not enough
regulatory penalties to maintain a cost-effective market
mechanism. In addition, frequently changing de-rating factors
(which reflects the availability of every generation class
during system stress) by regulators in capacity markets has
impacted the profitability of shorter duration battery assets,

Is it time to invest in battery energy storage as a standalone asset? 20

as the number of longer stress events in the grid rises. These
challenges underscore the need for additional reforms to
enhance effectiveness of capacity market mechanisms.
3. CapEx reduction
Like many power generation projects, a major proportion of
the lifetime investment in battery storage systems happens
initially. The cost structure, which prioritizes upfront expenses,
and in situations where the future revenue streams are
uncertain is a significant obstacle. The sensitivity analysis
for a typical battery energy storage project demonstrates
that the battery cell price, is the key driver of the CapEx; a
30% increase or decrease in just the cell price can move the
overall CapEx by 20%11. As a result, achieving economies of
scale in upstream aspects of battery cell manufacturing and
packaging through improved supply chain, more investments
in gigafactories, and government subsidies, will be critical to
reducing the capital outlay needed for BESS projects.
4. Location analysis to find nodes
with the strongest flexibility needs
Identifying the most congested location means guaranteeing
a greater profitability of BESS. Investors must weigh the
balance between awaiting technology cost reductions and
securing strategic sites (EYP has developed a proprietary
tool for Italy to pinpoint the most profitable location).
Additionally, in high demand locations, where there is
potential oversupply of renewable energy throughout the
day, the opportunity for BESS to fully charge and discharge
at an arbitrage will be minimal, resulting in low revenues.
Grid operators and investors should invest in sophisticated
tools to identify nodal points with higher grid constraints.
Such tools produce location signals enabling BESS to provide
services and earn revenues. The government and regulators
also need to make it simpler for developers to get land
clearances near the demand centers and convert abandoned
land into BESS sites, where feasible.
5. Connection at scale and on time
The prolonged permit process resulting in increased
connection delays poses a considerable risk of budget and
time overruns, ultimately impacting the profitability of BESS
projects for developers. Over the past five years, there has
been a significant 2.5x increase in the median project queue
duration and a substantial 680 GW capacity of battery projects
11. Rystad Energy BESS Whitepaper | January 2023
12. T&E Battery risk report (transportenvironment.org)
13. Vanadium Flow Battery Economy — Invinity, EY analysis
in the US awaiting approval to connect. To effectively tackle
this challenge, it is imperative to implement strategies such as
the ‘First Ready, First Served’ model, adherence to stringent
timelines, and foster seamless and enhanced collaboration
among stakeholders.
6. Supply Chain redefinition
With over 75% of China’s contribution to the global lithium
supply chain, supply chain vulnerability and lengthy lead
times persist, aggravated by volatility in lithium prices (a
15x increase) over the last three years. As a result, nearly
70% (1200 GWh) of European battery cell capacity is at
risk as multiple announced battery gigafactories lack
secured financing and operational permits, raising concerns
over potential delays or cancellations12. To address these
challenges, an estimated US$169 billion investment is needed
by the US and EU to localize the supply chain by 2030, with
regulations prioritizing the localized battery value chain
including production, critical metal refining, and processing.
7. New Technology maturity evolution
Advancements in BESS technologies have the potential to
enhance profitability of BESS plants, especially for long
duration storage. The LCOS of batteries such as vanadium
flow over a period of 20 years, is 21% more economical than
traditional lithium-ion batteries, reducing the initial outlay
requirement and improving the business case13. In addition,
reducing electrolyser costs could result in hydrogen storage
posing a potential challenge to the dominance of BESS in the
long term. A significant 51% reduction in electrolyser CapEx in
recent years, suggests a potential turning point around 2027,
indicating the emergence of hydrogen storage as a cost-
competitive alternative.
Is it time to invest in battery energy storage as a standalone asset? 21
 Conclusion: Standalone BESS is at an inflection point,
and is reaching critical investor momentum
The fundamental shift towards energy transition over the
last few years has made battery technology a very attractive
proposition for managing risks associated with renewables
and rising peak demand. Despite its potential, the global
standalone BESS market remains in a nascent stage, facing
challenges from multiple uncertainties.
We believe that under the right circumstances, standalone
BESS has the potential to present as a credit-positive
opportunity for investors. With the support of a robust
regulatory framework that promotes the stacking of services,
mandatory capacity premiums, technology advances
and diminishing capital requirements, along with faster
connection provisions, the market is expected to move in
the right direction. Our analysis indicates we can expect
significant growth momentum for standalone BESS in markets
such as the US, UK, Italy, Germany, Spain, and Australia,
and are anticipated to be the most investable markets in the
future. In terms of business models, we observe that investors
are increasingly focusing on energy arbitrage and capacity
markets as the primary sources of revenue, in anticipation of
a potential saturation in the market for ancillary services.
Currently, the value chain is experiencing expansion driven
by investor appetite, as demonstrated by the growing
interest around BESS. This indicates that operators are
developing their investment strategies in the market. It’s
time for regulators to take note of this rising interest as well
as the necessity of a successful business case for standalone
BESS on the path to energy transition. Once a conducive
environment is established, the revenue and profitability
challenges that many BESS operators and investors currently
face, will diminish, advancing the energy transition movement
with yet another win.
Is it time to invest in battery energy storage as a standalone asset? 22
 Thanks
EY SMRs

Stephanie E Chesnick – Partner, US

Issam Taleb – Partner, France
Alexis Gazzo – Partner, France
Sunny Aurora – Partner, UK
Andrew Horstead – Director, UK
Antonio Martinez Mozo – Partner, Spain
Alfredo Salcedo Rivas – Partner, Spain
Paul J Micallef – Partner, UK
José Roque – Executive Director, Portugal
Frank Matzen – Director, Germany
Adrian Bocher – Director, France
Daniel Seeney – Senior Manager, UK
Piyush Patel – Senior Manager, UK
Selcan Kayihan – Senior Manager, UK
Francisco Coca – Senior Manager, Spain
Ali Ahmadi – Senior Manager, UK
Francisco Fontoura – Senior Manager, Portugal
Aurora Saez Armenteros – Manager, UK
Theo Duffas – Manager, France
Iñigo Marin Alcala – Manager, Spain
Vasco Gomes – Consultant, Portugal
Bernardo Canudo – Consultant, Portugal

EY Contributors

Carlo Savarese – Senior Consultant,

EY-Parthenon, Strategy
Davide Monina – Senior Consultant,
EY-Parthenon, Strategy
Ravisha Munjal – Energy Analyst,
Business Insights, Markets Enablement
Sujal Narendra Patel – Energy Analyst,
Business Insights, Markets Enablement
Sanket Nirmal Dangra – Energy Analyst,
Business Insights, Markets Enablement

Is it time to invest in battery energy storage as a standalone asset? 23


Authors
Giacomo Chiavari
Partner, EY- Parthenon;
EY Advisory S.p.A., Italy
giacomo.chiavari@parthenon.ey.com
Giorgio Palma
Senior Manager, EY- Parthenon;
EY Advisory S.p.A., Italy
giorgio.palma@parthenon.ey.com
Simona Horelicanova
Assistant Director,
Markets Enablement, EY LLP, UK
simona.horelicanova@uk.ey.com
Amit Gupta
Advanced Manager, Power & Utilities —
Markets Enablement, EY LLP, India
amit.gupta@gds.ey.com
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