Backup power for Europe - part 2: The UK's BESS leadership and evolving revenue stacks

In the first part of this series, we identified the UK as one of the most attractive European countries for Battery Energy Storage System (BESS) investments. The UK currently has the highest installed grid-scale BESS capacity, offers the most diverse revenue streams, and enjoys strong support from both the government and grid operators for increasing battery capacity. In this article, we will delve deeper into the UK BESS market, exploring its main opportunities and key challenges for current and potential investors.

The UK government has set ambitious plans to reform the energy sector toward a clean and reliable system. In December 2024, the newly installed Labour government published the Clean Power 2030 Action Plan, setting a target for the UK to produce at least as much clean power as it consumes by 2030. Achieving this goal will require a significant increase in renewable energy sources such as solar and wind. This, in turn, demands greater flexibility in the UK energy system – for example, in terms of battery storage.

The UK is a global leader in the deployment of grid-scale BESS, and was among the first countries to actively pursue BESS investments. The island has limited interconnection capacity and a heavy reliance on wind energy, which is why it needs BESS to ensure stability in its electricity system.

The electricity system in the UK is rapidly evolving. In 2005, the bulk of electricity was generated by coal, gas, and nuclear power (see figure 1). In that same year, wind and solar provided less than 1% of the UK's electricity. Fast forward to 2025, and wind and solar now generate close to half of the UK's electricity, and the last coal plant has just been shut down.

In the coming decades, renewable generation is projected to grow to as high as 80% of power supply. This scenario is supported by the government's latest targets in the Clean Power 2030 Action Plan (see figure 2). According to the plan, the installed capacity of variable renewable generation will significantly increase, while firm and dispatchable capacity will remain more or less constant. A substantial amount of additional flexible sources will be required to accommodate the higher share of variability in the generation mix.

Batteries are expected to play the biggest role in providing flexibility to the UK grid. The Clean Power 2030 Action Plan anticipates a sixfold increase in installed BESS capacity, from 4.5 GW in 2024 to 23 GW to 27 GW by 2030. This expected capacity significantly exceeds the 14 GW to 16 GW expectation we reported in part 1 of this series, based on scenarios by BloombergNEF.

The current pipeline (see figure 3) suggests that achieving the national target is possible. In early March 2025, the installed capacity is already up 1 GW from the 4.5 GW stated in the Climate Action Plan, according to the European Commission’s recently launched European Energy Storage Inventory. When we also count the projects currently under construction and those that have obtained permitting, the capacity amounts to 20 GW, and another 18 GW of projects have already been announced.

Nevertheless, achieving up to 27 GW of battery capacity by 2030 will depend on many factors, particularly investor and developer confidence in return on investments (ROI). Lower confidence may result in a slowdown of projects coming online, as seen in 2024, when revenues decreased due to frequency market cannibalization. Although decreasing battery prices will improve the investment case for new projects by lowering CAPEX requirements, investors and developers must beware the dynamics affecting the revenue streams available for BESS projects.

The UK revenue stack for BESS is the most diverse in Europe. Most UK Wholesale markets and ancillary services are accessible to batteries (see figure4), but the dynamics of each revenue stream can change significantly over time, making business strategy design complex.

Shifting priorities from frequency services to energy arbitrage

The composition of the revenue stack of a typical BESS project is anything but stationary (see figure 5), and the focus has shifted from frequency services to energy arbitrage. The share of frequency services in the stack has decreased significantly, from 80% in 2022 to just 20% in 2024, due to market saturation. Looking ahead to 2030, we expect energy arbitrage to dominate the revenue stack, with most of this revenue coming from participation in the Balancing Mechanism.

In the following sections, we will dissect the different revenue streams and their expected roles in the future of BESS projects in the UK.

Energy arbitrage on the wholesale market

Energy arbitrage has become the most important revenue stream on the wholesale market over the past two years. In 2022, it accounted for about 8% of an average BESS revenue stream. By 2024, energy arbitrage made up nearly 50% of an average project's revenue, according to Modo Energy, and this share is expected to increase in the coming years.

The revenue potential from energy arbitrage is largely determined by the electricity generation mix. Due to the smaller solar capacity in the UK, summertime price spreads are lower than those in Germany and the Netherlands (see figure 6). During winter, price spreads tend to increase. Wind generation results in low minimum prices, while increased gas prices lead to higher maximum prices.

Looking ahead, the increasing share of wind and especially solar energy in the British power mix is likely to boost arbitrage opportunities by causing larger price spreads. Similar to Germany and the Netherlands, an oversupply of solar power may result in lower daytime prices. Meanwhile, as gas remains the UK's main choice for dispatchable generation, we expect to see continuing high peak prices.

Cannibalization is a low threat in energy arbitrage due to the depth of the wholesale markets. Although increased battery capacity may reduce extreme price swings, the further penetration of renewable energy sources in combination with the expected unchanged role of gas turbines will sustain arbitrage opportunities. This contrasts with frequency services, where the installed battery capacity has now overtaken the fixed market depth, resulting in a sharp decrease in prices.

Balancing mechanism and skip rates

Another driver of the increase in energy arbitrage in the revenue stack is the redesign of the Balancing Mechanism in favor of batteries. The Balancing Mechanism potentially offers higher returns than the wholesale market because energy is bought or sold at a premium.

Currently, batteries are often skipped, even when their bids and offers are the most competitive options available. Due to limited data on the available energy capacity in batteries, control room engineers often activate conventional Balancing Mechanism Units instead of BESS. This results in higher costs for the entire system and missed revenues for BESS projects.

The Open Balancing Platform, introduced in December 2023, has improved BESS participation in the Balancing Mechanism. The platform allows for more efficient communication of instructions from control room engineers to Balancing Mechanism Units, enhancing the participation of smaller units, including batteries. This improvement is evidenced by the decrease in battery skip rates from 90% in 2023 to 75% in 2024.

Further improvements in battery skip rates can be expected with the deployment of additional measures, such as grid code GC0166 in Q3 2025. This grid code will introduce new parameters to further enhance the control room’s utilization of BESS in the Balancing Mechanism.

Frequency services

Revenues from frequency services have plummeted over the past two years due to market saturation. Until 2022, battery operators could ask high prices for their services. As of 2023, BESS capacity began to exceed the total frequency market depth, causing prices to fall due to increased competition. While a BESS portfolio could typically earn over GBP 110,000 per MW per year from frequency services, this figure dropped to below GBP 30,000 per MW per year in 2023, according to BloombergNEF. In 2024, frequency prices in the UK were already less than half the European average due to an oversupply of battery capacity.

Therefore, we expect the share of frequency services in a BESS revenue stack to continue to decrease (see figure 5). By 2030, installed BESS capacity might be up to six times larger, but the market depth for frequency services will have only tripled. As a result, frequency services will remain dominated by batteries but will make up only a small fraction of their revenue stack in the long run.

Capacity markets

Unlike energy arbitrage and frequency services, capacity markets offer stable revenue streams. The UK organizes two types of auctions: T-4 (four years ahead of delivery) and T-1 (one year ahead of delivery). These auctions are open to existing and planned electricity generators and storage facilities. T-4 auctions provide the bulk of capacity market volume and offer the longest contracts, up to 15 years. Securing a T-4 capacity market contract can provide a stable revenue stream for a BESS project, even before it is built.

However, for existing projects, the four-year delay in income can pose significant challenges. In recent capacity market auctions, the National Energy System Operator (NESO) has contracted many BESS projects to increase battery capacity on the grid. Meanwhile, revenues from frequency services have declined sharply. As a result, a number of projects that have come online have been seeing disappointing returns, while the deployment of other projects has been postponed.

Prices of capacity market contracts have varied significantly over the past years, partly due to varying participation rates of BESS projects. Price dynamics are also influenced by the generation costs of competing technologies, mainly gas generation. For the coming years, Modo energy expects capacity market revenues to make up between 10% and 20% of BESS revenues.

Grid services

Grid services typically play a small role in a battery’s revenue stack, but may offer additional low risk income to solidify a business case. Remuneration and bidding processes vary by services. Recently, there have been a number of reforms in the grid services managed by NESO that benefits BESS.

Voltage, stability, and restoration (Black Start) services have traditionally been procured from thermal generators. Due to their physical characteristics, these generators are able to generate and absorb reactive power and to provide inertia. However, although batteries are non-synchronous, their inverters can produce reactive power and provide virtual inertia.

NESO is now procuring these services from batteries. In 2022, five BESS projects secured contracts in a tender to provide stability services. One of these projects, located in Blackhillock, Scotland, came online in March 2025 and is the world’s first BESS project to provide stability services. In late 2024, three BESS projects secured ten-year voltage contracts. Restoration services contracts have not yet been awarded to BESS projects, but batteries have been included in feasibility studies for new black start technologies by NESO.

Network charges can be divided into two types, Transmission Network Use of System (TNUoS) and Distribution Use of System (DUos), referring to the transmission and distribution grid. Network charges are location specific. Battery projects that are close to demand, such as in Southern England are paid network charges, while battery projects that are further away from demand, such as in Scotland and Wales, must pay the charges.

Another location-dependent service that is available for BESS is constraint management. Battery projects in Eastern England and in Scotland can compete in tenders to be contracted for being available to trip offline in case of transmission faults. To date, only one battery project, Wishaw, has secured a constraint management and the revenue potential from this service is not yet fully clear.

Tolling agreements

The decline in merchant revenues in 2023 and 2024 has increased the interest from BESS operators in contracted revenues, such as tolling and floor agreements. In 2024, BESS asset manager Gresham House and optimizer Octopus Energy signed the first tolling agreement for BESS in the UK. The agreement allows Octopus Energy to operate 568 MW/920 MWh of battery capacity for two years. In return, Gresham House will receive GBP 57,000 per MW per year, which exceeds the average BESS revenue in 2024. Whether tolling agreements will become more common for BESS projects or not will be determined by the returns and stability provided by merchant revenue streams.

Bigger, better, longer

UK BESS projects are getting bigger in terms of rated power and in duration. At the end of 2024, the biggest BESS projects were 100 MW. 2025 will see 300 MW and bigger batteries coming online, while 1 GW batteries are entering the pipeline and are scheduled to be developed by 2027.

The rapid decrease in battery prices has resulted in an increase in duration from one-hour batteries to two-hour batteries being the standard. Some announced projects are even up to six hours in duration.

Location, location, …

Revenues are increasingly location-dependent due to grid constraints. According to Modo, battery projects in northern Scotland and in southeast England earn more than average, whereas battery projects in the midlands and southwest England earn less than average. The main reason for this discrepancy is that the Balancing Mechanism is locational.

The importance of project location would further increase if the UK adopts zonal pricing, which the UK government is considering. Having different price zones can result in one zone offering more attractive wholesale price spreads than others. The effect of the generation mix, demand, and interconnection on electricity prices should in that case be assessed at a local level.

... and co-location

Batteries are expected to play an increasing role in colocation to wind and particularly solar generation. Placing batteries at the same site as intermittent generation allows for optimizing grid use and for managing profile risk, which can for example benefit Power Purchase Agreements (PPAs).

However, the business case for co-located BESS is different from that for standalone BESS and requires new expertise. On top of that, policies such as the current Contract for Difference Rules may need to be adjusted to better accommodate co-located projects. Nevertheless, large-scale co-located projects such as Ørsted’s Hornsea Wind Energy Storage project (300MW/600MWh) are in the pipeline.

New potential revenue sources will become available

The British electricity system is in a state of reform and a number of new grid services contracted by NESO will become available to BESS. These include an additional Quick Reserve for non-Balancing Mechanism registered batteries, Slow Reserve, stacking possibilities for Dynamic Response with Reserve, Static Recovery Product, locational procurement of Dynamic Response and Reserve, and additional stability, voltage, and constraint markets.

After a successful period for British BESS operators, traditional revenues are declining, mainly due to the saturation of frequency markets. Since traded volumes in frequency markets will only increase slightly compared to BESS capacity, the high revenue streams from frequency services are unlikely to return. BESS investors must therefore carefully adapt their business models to the new reality by selecting merchant and/or contracted revenue streams.

On the merchant side, opportunities are expected to increase from the rapid increase in renewables and developments in the Balancing Mechanism. However, it is important to stay updated on the possibility of zonal pricing, which could lead to significant differences in arbitrage opportunities by region.

On the contracted side, the capacity market will continue to offer guaranteed revenues. Floor and tolling agreements are likely to become more common for BESS projects to ensure income, while other contracted revenues, such as PPAs, may also become available to batteries.

Declining battery prices will reduce the capex for new projects and for augmenting or replacing existing ones. However, there are no guarantees, and the risks of supply chain disruptions and tariffs should not be ruled out.

Despite the uncertainties in the evolving BESS market, the need for increased battery capacity on the UK grid is evident. Governmental plans provide a clear direction for future developments, while extensive market data and analysis on the UK BESS market signal opportunities for investors. The path forward may be more complex, but the opportunities for growth and innovation in the UK BESS market remain substantial. By staying informed, adaptable, and seeking partnerships with financiers comfortable with this new market, investors can navigate these challenges while contributing to the UK’s energy transition.

BESS are becoming a key component of the European electricity system, providing much-needed flexibility by storing surplus renewable energy and supplying it during peak demand. However, market conditions for BESS projects vary across countries and continuously change with the progression of the energy transition. As a result, evaluating a BESS business case is far from straightforward and requires a holistic assessment.

This article is the second part in our series on backup power for Europe. In part 1, we summarized the market attractiveness across the UK, Italy, Spain, the Netherlands, Germany, and France.