With skip rates averaging 80-90% over recent years, batteries have been systematically overlooked in favour of more expensive thermal generation, despite offering lower-cost, cleaner alternatives. Ofgem’s latest determination sets the expectation on NESO to achieve technological parity by the end of this financial year, and represents a fundamental shift that could significantly enhance battery operator revenues.

Quantifying the revenue opportunity

The financial implications are substantial. Historical data demonstrates a clear correlation between skip rate improvements and revenue enhancement. When skip rates decreased from 90% to 76% in 2024, Balancing Mechanism revenues for batteries reached record levels, with some operators achieving daily revenues of £145/MW. The mechanism has evolved to become the second-largest revenue stream for many battery operators after wholesale arbitrage.

The introduction of NESO’s Quick Reserve service in late 2024 has already delivered a significant uplift in battery energy storage system (BESS) revenues. Average BESS revenues quadrupled over the past year, with half of this increase attributed to the launch of Quick Reserve. Modo Energy reports that some early participants in Quick Reserve earned up to £94,000 per MW annually, suggesting that a 100 MW system could generate approximately £9.4 million each year through this service alone.

As NESO continues to reform market access and dispatch processes, improving battery participation in balancing services traditionally dominated by thermal generation, the opportunity for further revenue growth strengthens. Enhanced dispatch rates and access to new services are expected to materially improve project economics and make battery storage assets more attractive to investors.

Perhaps most significantly, Ofgem’s requirement for NESO to develop methodology for measuring skip rates behind system constraints addresses a critical blind spot. In constraint-dominated regions like Scotland, batteries currently face higher skip rates, effectively excluding them from participating when system need is highest.

Implications for project finance

With 24GW of storage capacity needed by 2030, investor confidence has been undermined by revenue uncertainty. Ofgem’s determination offers an encouraging sign that could continue to unlock project finance at scale. The establishment of absolute numerical targets, as required by the determination, will enable more accurate revenue forecasting, facilitate debt sizing, and reduce risk premiums.

Implementation challenges and opportunities

NESO faces considerable technical and operational challenges in implementing these changes. Developing robust absolute targets requires sophisticated analysis of system needs, technical capabilities, and economic efficiency. The parallel requirement to achieve transparency in constraint management adds another layer of complexity.

However, NESO’s recent progress provides grounds for optimism. The implementation of bulk dispatch functionality and the Open Balancing Platform has already improved dispatch rates. With clear regulatory direction and industry pressure, achieving technological parity within the BP3 period appears feasible.

Strategic considerations for operators

Battery operators should prepare for a materially different revenue environment. As skip rates normalise, we expect to see:

• Increased competition in the Balancing Mechanism as more batteries achieve consistent dispatch
• Evolution of trading strategies to optimize across multiple revenue streams
• Geographic differentiation in project returns based on local system needs
• Potential for longer-duration storage to capture additional value in extended balancing actions

Operators with existing assets should review their commercial strategies and ensure systems are optimised for increased Balancing Mechanism participation. For development-stage projects, incorporating improved skip rate assumptions into investment cases could unlock previously marginal opportunities.

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