EMC Working Papers

Abstract

Europe is scaling wind and solar rapidly, but a renewable power system runs on flexibility, not energy alone. Utility-scale, front-of-the-meter lithium-ion battery storage – meaning grid-connected systems that participate directly in wholesale and balancing markets – is increasingly expected to provide that flexibility. The investment case is attractive in principle yet uncertain in practice because most revenues remain merchant and depend on price spreads, market access rules, and the speed at which competition compresses those spreads. This paper explains how utility-scale batteries earn revenue in European day-ahead, intraday, and ancillary service markets, and why merchant risk translates directly into the cost of capital. Germany serves as the case study because it is Europe’s largest and most liquid merchant-battery market, and therefore a practical stress test for revenue stacking, saturation and bankability. A stylised financing illustration, anchored to identified empirical downside drivers, shows that a fragile downside cash-flow distribution can raise a project’s weighted average cost of capital by several percentage points. The central finding is that merchant-only revenue stacking can support utility-scale battery investment, but that bankability becomes fragile at scale unless downside cash flows remain resilient under spread compression, ancillary service saturation, and policy or fee uncertainty.

Why the EU needs batteries, and how renewables reshape prices

In 2025, zero and negative wholesale electricity prices became a routine feature of several European markets rather than an occasional anomaly. This is not merely a pricing curiosity; it signals that variable renewable output is increasingly colliding with limited flexibility, grid constraints, and slow demand response (SolarPower Europe, 2026a). When renewable output is high, particularly around the midday solar peak, net load falls and prices can compress sharply. As solar output declines into the evening while demand persists, net load rises again and prices can climb quickly. This intraday pattern is a structural feature of high-renewable systems, not a transient one.

Research Topics: Climate Change and the Environment Sustainability and Corporate Social Responsibility Ethics Energy Efficiency