Spot the spread: Are current battery revenues enough to encourage further investment?

In AEMO’s ‘Step Change’ scenario, it was estimated that storage capacity in the NEM would need to increase by a factor of 30 between 2022 and 2050 to support a grid transformation that limits temperature rises below 2 degrees. This represents about 13GW of new storage capacity by 2030 and 39GW required by 2050[1]. Undoubtedly, there is plenty of interest in building battery capacity in the NEM, with an estimated 43GW of battery capacity publicly announced, according to AEMO’s NEM Generation Information spreadsheet.

However, in order to reach financial close, these publicly announced projects will need to identify sufficient revenue streams to attract the investment required to build and maintain the storage capacity identified as so important by AEMO. This Chart of the week looks to address two questions:

  1. What revenue per MWh would provide a rate of return attractive enough to encourage investment in battery storage[2]?
  2. What returns are current battery operators achieving in the NEM (if measured on a merchant basis)?

What operating profit per MWh would provide a rate of return attractive enough to encourage investment in battery storage?

The following assumptions were used to calculate an operating profit/MWh discharge value under different rate of return scenarios.

Table 1: Financial model assumptions

Battery size100 / 200MW/MWh
Battery life20Years
Capex build + connection cost1,392$/kW
Cost contingency10%
Equity / Debt50 / 50%
Cost of debt6%

In addition to these financial parameters, we have assumed the battery is discharged for a full cycle over the 20 years and a degradation rate of 3% per annum. Using these assumptions, an operating profit/MWh discharged value was calculated. This reflects the spread between charge and discharge costs that a battery would need to meet over the lifetime of the asset to meet the different equity targets. These are illustrated below in Figure 1.

What returns are current battery operators achieving in the NEM (if measured on a merchant basis)?

With these baselines in mind, we have looked at the operating performance of some batteries currently operating in the NEM to understand how current performance compares to the kind of returns that would be considered satisfactory for investors.

The assets we looked at, over a period of 1 January 2023 to 23 May 2023, are:

  • SA, Lake Bonney BESS (25MW / 52MWh),
  • VIC, Victorian Big Battery (300MW / 450MWh),
  • NSW, Wallgrove Grid Battery (50MW / 75MWh), and
  • QLD, Wandoan South BESS (100MW / 150MWh)

It should be noted that these estimated revenues are based on wholesale prices and assume the respective battery assert is operating on a merchant basis. This means the numbers in Figure 2 below ignore the impact of any contracted revenues. For example, the Victorian Big Battery has a contract with AEMO to reserve 250MW of capacity between November-March each year under a System Integrity Protection Scheme contract.

Three of the four storage assets above would be earning an operating profit resulting in at least a 7% return to equity if maintained throughout the life of the asset[3], with Lake Bonney and Wallgrove providing particularly high returns.

The chart above highlights the significance of FCAS as a revenue source for batteries currently operating in the NEM. As new batteries enter the market, this revenue source in its current form will become increasingly competitive as a large number of batteries chase a relatively small pool of contingency and regulation provisions. However, there are a number of new revenue sources that are likely to emerge in the future, including:

  • Inertia,
  • Primary Frequency Performance Payments,
  • Operational Security Mechanism payments,
  • Congestion relief management,
  • System strength, and
  • Very Fast FCAS

If these new revenue sources are insufficient to cover declining FCAS revenues (in their current form), then it seems likely that the daily energy arbitrage spread will have to increase on current levels to ensure an adequate return for storage assets. One thing to note is that many of the new revenue streams are likely to be locational dependent, extending the criteria for ideal battery location beyond MLF and ease of connection considerations.

Cornwall Insight Australia’s Benchmark power curve and FCAS subscription service, and our in-house Storage investment model equip clients to successfully navigate these risks and opportunities in the NEM. Our NEM energy and FCAS models are based on market-validated assumptions and sound power systems principles. For more information on our subscription services or other bespoke consultancy products, please contact

[1] Note that storage includes virtual power plants and pumped hydro as well as batteries

[2] This article has assumed 2-hour storage for the calculation of costs

[3] Note these values are for comparison. The reader should be aware that while the baseline returns are based on a 2-hour battery costs, the batteries in this analysis are not all 2-hour storage assets.

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