Australia’s batteries surf revenue wave on back of volatile power prices

Australia’s massive pipeline of battery energy storage projects is looking at improved profitability after years of uncertainty, with four-hour battery energy storage systems in some part of the National Electricity Market (NEM) boasting a projected internal rate of return of up to 15%.

These are the findings of Wood Mackenzie’s latest report, which focuses on modelling the profitability of new battery investments in the NEM based on revenues from energy and frequency control and ancillary services (FCAS) markets.

The report shows a growing market for batteries in the NEM, with a massive pipeline of 60 GW of projects under development representing over AU$80 billion (US$50 billion) of potential investment. 

“Our analysis of both the base case and scenarios with increased price volatility indicates that investment returns for 4-hour battery systems will exceed 10% in the top three National Electricity Market (NEM) regions: Queensland (QLD), Victoria (VIC), and New South Wales (NSW). This underscores the profitability of battery storage across various market conditions,” said Max Whiteman, Research Associate, Asia Pacific Power & Renewables at Wood Mackenzie.

Results show that going forward four-hour duration battery systems have higher profitability compared to the typical 1.6 hour duration of projects operating today.   

Projected internal rates of return (IRRs) for four-hour battery systems range from 13% to 15%, highlighting their viability in a volatile energy market. “Our 30-minute price forecasts show daily price spreads consistently over AU$100 per megawatt-hour, with an increasing number of spikes up to AU$400 or more. By 2030 over 80% of battery project revenues will come from energy arbitrage, as FCAS markets saturate” said Whiteman. 

The rapidly falling battery prices further improve the economics of the investment. With the capital expenditure (CAPEX) for four-hour batteries projected to decrease by 20% by 2030, Wood Mackenzie calculates that a four-hour battery that begins operations in 2026 is expected to generate an average of AU$263,000/MW annually over its lifetime, with Queensland leading the way at AU$281,000/MW.  

“Wood Mackenzie forecasts a significant shift in the energy landscape, with 21 GW of coal retirements in the NEM by 2045. This will contribute to higher price volatility and drive demand for flexible technologies like batteries to address capacity gaps and stabilise the grid” said Sooraj Narayan, Principal Analyst, Asia Pacific Power & Renewables at Wood Mackenzie. “As renewable generation share is expected to exceed 60% by 2030, volatility and sharp daily price swings will create ideal conditions for batteries.” 

While government support policies, such as the Capacity Investment Scheme, provide financial certainty that can help secure funding for battery storage projects, the report finds that high daily price volatility in power markets makes battery investments appealing even without government guarantees.  

“Battery storage will be crucial in Australia’s energy transition, influenced by the growth of renewable energy and market volatility. Investors can anticipate strong returns across different scenarios, making this an opportunity to capitalise on the changing dynamics of the NEM,” concluded Narayan.