By Lee Moscovitch, Partner at Schroders Capital

Renewables are making up a growing share of the global energy mix. This reflects the continuing commitment to decarbonising power generation by governments around the world – and, globally, the cost competitive nature of renewables that makes them a compelling option to boost energy security and affordability.

According to the International Energy Agency’s Global Energy Review 2025, renewables and nuclear accounted for more than 40% of electricity generation in 2024, with renewables alone accounting for around a third. Moreover, new renewables and nuclear power accounted for more than 80% of the growth in electricity generation last year, a new record and significantly higher than the roughly two-thirds share of growth accounted for in both 2022 and 2023, with renewables responsible for more than three-quarters of the increase.

The figures are far higher in regions that are more advanced in their energy transition journey, with the European Union, for example, producing around three-quarters of energy from renewables and nuclear in 2024, with renewables in particular making up the largest share and more than half of all electricity production.

Under and overload: renewables, intermittency and integration challenges

This much is well known – and, from the perspective of attempts to reduce global carbon emissions, or simply to enhance energy security and affordability, these figures highlight the positive progress that has been made, and the ongoing acceleration of the energy transition over recent years.

What is less talked about is the challenge this growing reliance on renewables places on national energy grids, largely owing to the intermittent nature of renewable power. Sunshine on solar panels, the presence (and speed) of wind to turn turbines, and other weather-related natural elements that drive these power sources are not consistent through a given day – and can significantly differ even from day-ahead forecasts, posing challenges for energy capacity planning.

This works both ways – there are times when these sources are producing so much power that they can create an overload of electricity on the grid for which there is insufficient demand (think of a sunny, windy Saturday); and times when electricity production is insufficient to meet demand (such as a cold, dark weekday in winter with low wind speeds). What is more, within a given day these peak production times can be out of kilter with peak demand.

One way of showing this is by looking at power prices, which have exhibited increased volatility in recent years as renewables penetration has grown and gas prices have shifted – including with more cumulative hours where power prices are at or below zero, reflecting those periods when there is an overload of electricity. In Europe, renewables account for the largest share of electricity production.

These integration challenges are important, not least given the increasing demand for power that we have seen – and that is only expected to increase further with electrification of heat and transport sectors in the coming years – globally. This reflects a confluence of trends, including the growing consumption of data and use of artificial intelligence, increased adoption of electric vehicles, ongoing expansion in green hydrogen production, rising penetration of heat pumps and related technologies, and so on.

It is also the case that solving the challenge of the impact of renewables intermittency on the grid is key to the continued build out of renewables themselves. In short, if the value of green electrons is volatile and can be eroded during periods of oversupply, this has a knock-on effect to the economic incentives to construct and operate renewable power.

Battery build-out: solving the renewables riddle

This is where battery storage solutions come in. By providing a mechanism to support grid stability and create consistency of electricity supply, battery systems can be seen as a critical enabler of renewable power sources and increased renewables penetration – and, as such, an integral building block in the global energy transition.

The basic principles are straightforward. Batteries can store power generation when there is either higher levels of supply, or lower levels of demand – and then provide this back to the grid several hours later when supply dips or demand increases, driven by pricing signals in the market or through other mechanisms. This smooths out the supply and demand dynamic, providing a more consistent supply of power that better reacts to the variability of demand. It also helps to ensure over-supply is not ‘wasted’ –  for example, in the winter of 2022 and 2023, the UK generated excess wind energy that could have powered 1.2 million homes.

Of course, battery storage is not new as a concept, but the adoption of this technology at grid-level has historically been held back by technical limitations. For example, as recently as two years ago the ability of a battery to store and discharge power for one hour or more was considered relatively cutting edge – but such short-duration batteries clearly limited storage system services, restricting their ability to support intra-day demand-supply fluctuations. Short-duration batteries could generally only offer grid frequency response and restoration services (see below) which, while still important, are not the main service and therefore revenue source for today’s battery systems.

Longer-duration storage (up to four or even eight-hour battery systems) is becoming increasingly economically viable, while at the same time we are seeing improvements in the number of times such systems can be ‘cycled’ (charged and discharged), giving them longer operational life. Ongoing technological evolution is changing the rules of the game – and so catalysing more investment in the space.

Governments around the world are recognising the enhanced benefits of battery energy storage, which are increasingly being added as part of national energy transition plans. This is especially true in Europe – where, again, renewables penetration is highest, and where no less than 14 governments already have growing battery storage included within their energy policies. This translates into policy support to develop and redesign battery markets, and providing ongoing subsidies to install systems and enable stable, attractive income to battery owners.

Opportunities for investors in the battery storage revolution

Such a high level of required investment clearly brings potential opportunities for investors. Battery storage can therefore be seen as one of the key growth technologies in the global energy transition, and there is an obvious need for private capital to partner with governments to help power the revolution and fund the installation of new capacity globally.

To boot, the cost of implementing battery technology has fallen substantially, which further enhances the investment case, and the potential yield and return, for investors in new battery facilities.

But how do investors make a return from these battery investments? The answer is in several ways. Historically, in Germany for instance, the main income stream was generated by ‘frequency restoration’ services, whereby the battery would earn revenues in return for being available to the grid operator to stabilise grid frequency at very short notice. Timeframes vary from 30 seconds to 12.5 minutes depending on the nature of the reserve service being utilised, with pricing determined by auctions and prioritised so that power from the lowest bidder is drawn first.

Similar ‘frequency response’ services are active in the UK’s well-established battery market. However, these markets are limited in size and saturate quickly with the growing number of batteries being deployed, keeping in mind that other technologies can also participate into these markets.

Another income stream is generated by power price “arbitrage”, whereby battery traders seek out price ‘spreads’ across half-hourly power prices (i.e. the difference between the lowest and highest power prices on that day).

As noted above, income can be further augmented through government support schemes, such as in the UK where the Capacity Market Mechanism provides financial support (availability payments) to assets available to provide back-up power to the grid in the event of a near-term supply shortage.

Both frequency restoration and arbitrage strategies show a high level of volatility, which battery owners may seek to mitigate through fixed-price contracts. These give the offtaker (“optimiser” - the entity buying and selling the power) control over the battery operation, and full flexibility to optimise the battery’s revenue stack across the various markets.

We are seeing an evolution in battery storage optimiser proposals to the market, with solutions including:

• ‘Floor’ agreements: the optimiser commits to paying a minimum amount (“floor price”), with the battery owner entitled to a share of the revenues generated above that price.
• ‘Tolling’ agreements: the optimiser pays a fixed price regardless of market conditions; the fixed price is only subject to the battery delivering certain performance criteria.

Battery owners can structure their revenues through a combination of tolls and floor agreements, and keep some ‘merchant’ price (trading) exposure, depending on their return expectations and appetite for risk.

Finally, there are also emerging opportunities in co-location of battery storage, for example as part of new renewables or data centre developments, to provide direct power storage solutions to specific assets – and that still offer the opportunity to buy and sell power from the grid. This can enable additional economic incentives to support the initial installation of battery storage and, critically, means there is a co-located and primed buyer for the energy being stored.

Powering the global energy transition – and portfolio opportunities

It is clear battery storage can play a key role in enabling the global energy transition. Key challenges related to increased renewables roll-out create a need in the market for solutions to store energy to smooth out supply and demand – and therefore opportunities to generate attractive, regular income streams.

Improvements in technologies – and growing support from governments – is increasing speed of deployment and creating the conditions for this sector to expand at scale. In parallel, costs of manufacturing and installation continue to fall, further enhancing the economic viability of battery storage as a diversifying investment within energy transition infrastructure portfolios.

Moreover, increasingly sophisticated trading techniques have developed in rapidly maturing markets, such as in the UK and other parts of Europe, which create the specific opportunity to maximise revenues through arbitrage of volatile power prices. For those seeking more contracted, classically ‘infrastructure-like’ returns, there are also a growing array of contractual mechanisms in the market.

All of which adds up to a strong investment case for battery storage. Perhaps most importantly, growth in the battery sector could be instrumental in helping to tackle challenges related to the intermittency of renewables and so underpinning the value of green electrons, which could hold the key to powering the next phase of the global energy transition.

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