With the passage of the Inflation Reduction Act (IRA), battery energy storage owners can now receive a big investment tax credit - 30 percent for 10 years - which is predicted to stimulate massive growth in the sector. Investors are especially interested in energy storage now, because the tax credit can make many previously unprofitable projects profitable. The tax credit has even opened the possibility of storage projects in regulated wholesale markets, such as the Southeast. All energy storage projects hinge on a successful business model - and there are a growing number of them, as energy storage can provide value in different ways to different market segments. But what are those models and how are they distinguished?
This article serves as a developer primer on current energy storage business models, considering three primary factors: where the service is in the electricity value chain, the benefit it provides, and the revenue it generates.
Energy Storage in the Electricity Value Chain
Key to each energy storage business model is where in the electricity chain the system provides value. Because it is the rare grid asset that can both "consume" and dispatch energy, energy storage is extremely flexible and can provide a wide range of benefits to stakeholders throughout the entire value chain, from generators to end users.
The electricity value chain is commonly differentiated, based on the grid infrastructure terms "behind the meter" (BTM) and "front of the meter" (FTM). Customer-sited stationary storage systems connected to the distribution system (on the customer side of the utility service meter) are known as BTM. Everything on the other side of the service meter is known as FTM. BTM systems, which often range between 5 kilowatts (kW) to 5 megawatts (MW), are installed on end user premises to provide savings or other benefits to the owner/end user. FTM systems are usually at least 5 MW in size and are connected to transmission or distribution networks.
Figure 1 below shows the most common applications of energy storage and where each one is used along the electricity value chain. Many will be described in greater detail later in this article.
Figure 1. Energy Storage Applications and Associated 'Duration of Need' on the Electricity Value Chain
Figure adapted from Roland Berger
Each application in this figure also shows a "duration of need," from several minutes to seasonal. It's important to note that in this context, the "duration of need" does not necessarily equal the industry standard definition of "duration," which is the amount of time that the battery can continuously discharge its energy. In this case, "duration of need" refers to how long the battery may hold on to its stored energy before being discharged. For example, when used for wholesale arbitrage, the battery may be discharged within minutes of being charged, or not until several months later.
Common Energy Storage Applications
Just as the previous section describes, energy storage can provide value in a variety of applications throughout every segment in the market. Table 1 below highlights current top applications. The first three applications in the table are part of ancillary services, which refers to FTM services that support grid reliability and security. An energy storage project supports this by stabilizing frequency and voltage, and enabling a grid "reboot" after an outage. Resource adequacy and peak shaving can provide FTM capacity services, meaning they support providing sufficient power to the grid. BTM energy storage can also be used for shaving the system owner's peak energy demand to reduce costs, which is considered load shifting, along with energy arbitrage and backup power services, because each one provides energy across time.
Table 1: Energy Storage Applications
Type of Application
Electricity Value Chain
Stabilize the frequency of the power supply
Stabilize the voltage of the power supply
Restart part of the electricity grid after a power outage
Add energy during times of unforeseen changes to the demand or generation profile
Peak Shaving of Supply or Demand
Smooth out supply and demand curves and shave peak energy usage
Capacity; Load Shifting
Buy and Sell Energy
Improve power trades; add energy during times of unforeseen changes to the demand or generation profile
Provide backup energy to bridge a power outage
Table adapted from U.S. Department of Energy, Office of Electricity, Energy Storage
Energy Storage Revenue Streams
Energy storage revenue is broadly divided into three primary categories: cost avoidance, investment deferral, and energy arbitrage.
Energy Storage Business Models
Energy storage business models come from providing one or more of the applications outlined in Table 1, across a temporal scale shown in Figure 1, and delivering one of the three revenue types mentioned in the previous section.
Given the applications and revenue streams that currently exist for energy storage, the most economically viable business models for developers are described in the section below, divided into FTM and BTM services. It's interesting to note that energy storage systems may provide and be compensated for multiple services while in operation, especially if some applications are used infrequently. This strategy of "value stacking" is often pursued by owners, as it has greater remuneration potential - but not all markets currently allow for it.
Front of the Meter Services
Frequency Regulation: There must be a continuous balance between energy generation and load for grid reliability. In North America, grid reliability requires keeping the frequency of the alternating current on the power grid at 60 Hz, but frequency at any given moment fluctuates, depending on how much energy is being used and generated at that time. In the past, frequency regulation has been provided by fossil fuels, but battery energy storage provides this service more quickly. The wholesale market operator sets the frequency service price by auction, and an energy storage developer can bid into that market and get paid for each hour it is successfully able to deliver power.
Capacity Payments: Energy storage systems can provide power capacity to the grid or serve as a generation source for meeting peak demand. In this business model, an energy storage developer signs a power purchase agreement (PPA) with a utility for a capacity payment, where the system charges or discharges from the energy storage system under agreed parameters. A utility in essence uses an energy storage system to move power where and when it is needed, because energy storage systems ramp up and down quickly. In this way, the energy storage system serves as an alternative to building a natural gas peaker plant. Utilities in California are signing 10-year PPA agreements for energy storage systems, and it is becoming more and more commonplace.
Transmission & Distribution (T&D) Deferral and Replacement: Placing storage near load can reduce transmission and distribution losses and relieve congestion, helping defer T&D upgrades and/or replacement. It can be co-located near energy demand centers with fewer siting problems than conventional generation.
Behind the Meter Services
Demand Charge Management: Demand charge management occurs when a large energy customer compensates an energy storage developer for managing energy demand. An energy storage system is charged when grid prices are low and discharges when grid demand and prices are highest, thus reducing expensive peak demand charges. A developer may charge the large energy customer a monthly fee, based on project cost savings. As an example, the company Stem and CPower formed a partnership in California to provide this service to large energy customers.
Energy Arbitrage: Buying electricity during off-peak times - when electricity is less expensive -and selling it back to the grid when the price is much higher has become a common energy storage application. The difference between on-peak and off-peak pricing has become larger in many states due in part to the high deployment of utility scale solar. In fact, the preponderance of energy storage battery capacity added in the California ISO last year was used for price arbitrage.
The value of energy storage depends to a great extent on state and market rules that determine the revenue base and value stacking potential. It is expected that in states and markets that incorporate energy storage-friendly policy and regulations, energy storage will continue to proliferate, especially with boosted economics from the IRA's new standalone storage tax credit.