The Economics of Energy Storage

How batteries and other storage earn money by moving electricity through time, and why their costs have fallen so quickly.

Energy storage means capturing electricity when it is plentiful and releasing it later when it is needed. Since electricity must otherwise be used the instant it is produced, storage gives the grid something it has always lacked: the ability to move energy through time. As wind and solar grow, storage has become one of the most important and fastest-changing parts of energy economics.

The main kinds of storage

The oldest large-scale form is pumped hydro. When power is cheap, water is pumped uphill into a reservoir; when power is valuable, it flows back down through turbines to generate electricity. Pumped hydro still holds most of the world’s storage capacity, but it needs suitable hills and water and takes years to build. Batteries, especially lithium-ion batteries of the kind used in phones and electric cars, can be built almost anywhere and installed in months. Estimates suggest lithium-ion battery pack prices fell by roughly 90 percent between 2010 and the early 2020s, largely thanks to growth in electric vehicle production.

How storage earns money

The simplest business model is price arbitrage: buying electricity when prices are low and selling it when prices are high. A battery might charge from cheap midday solar and discharge in the expensive evening peak. Its profit depends on the gap between those prices, and on round-trip efficiency, the share of stored energy you get back out. Lithium-ion batteries typically return around 85 to 90 percent of what they take in; pumped hydro returns somewhat less. The rest is lost as heat.

Storage can earn money in other ways too. Grid operators pay for ancillary services, such as reacting within seconds to keep the grid’s frequency steady. Batteries are extremely fast, which makes them well suited to this job. Storage can also be paid simply for being available at peak times, reducing the need to build new peaker plants, and it can delay costly upgrades to wires in crowded areas.

Does one day of arbitrage pay?

A battery stores 100 megawatt hours of electricity at midday, when the price is 20 dollars per megawatt hour, spending 2,000 dollars. With 90 percent round-trip efficiency, it can sell 90 megawatt hours in the evening. If the evening price is 80 dollars, it earns 7,200 dollars, a gross margin of 5,200 dollars for the day. Whether the battery is a good investment depends on whether margins like this, repeated over hundreds of days a year for many years, cover its building cost, its financing and the gradual wear on its cells.

Storage changes the value of other power

Storage and renewables help each other. Without storage, when many solar farms produce at once, midday prices fall and each extra solar panel earns less. Batteries soak up that cheap power and move it to the evening, supporting midday prices and lowering evening ones. In this way, storage narrows the gap between peak and off-peak prices. That is good for consumers, but it also means each additional battery has a smaller gap to profit from, so storage too faces diminishing returns as more is built.

Short versus long storage

Most batteries today store a few hours of power, which is ideal for shifting solar into the evening. Covering several windless days, or storing summer energy for winter, is much harder and more expensive. Researchers are exploring other options, such as new battery chemistries, compressed air and hydrogen, but long-duration storage remains a major economic challenge.

Treating storage as a source of energy

Storage does not create electricity; it only moves it through time, and it loses some along the way. Its value comes entirely from being able to deliver power when that power is worth more, or from helping keep the grid stable. A battery charged from coal power is still delivering coal power.

Key takeaways

Energy storage moves electricity from times of plenty to times of need.
Pumped hydro holds most storage capacity, while batteries are growing fastest.
Storage earns money through price arbitrage, grid services and being available at peaks.
Round-trip efficiency measures how much stored energy is recovered.
Storage narrows price gaps, which helps consumers but reduces profits for later projects.