As price volatility and ancillary reserve gaps grow, so does the need for batteries

2.1 The challenge of price volatility

The ability of BESS to charge during low-price surplus periods and discharge during high-price peaks makes it well-suited to manage price volatility. However, the core principle remains: the revenue opportunity of merchant BESS is proportional to the magnitude of the problem it addresses – in this case, the extent of price volatility.

Therefore, before committing to large-scale investments, two questions become critical from an investment perspective: What does price volatility look like today, and how is it likely to evolve? And what specific, persistent market problem is the battery solving? Gaining clarity on these questions is essential for making informed decisions.

2.1.1 Understanding the short-term power market size in India

Short-term power markets give utilities and large consumers the flexibility to meet peak demand and adjust for load variability without overcommitting to long-term power purchase agreements (PPAs). They also serve as a crucial backstop for last-minute power procurement and help manage real-time demand-supply mismatches. With variable renewable energy now contributing over 12% of India’s annual generation, short-term markets are also becoming vital for managing weather-driven fluctuations. 

Short-term markets are essential for enabling a more flexible and responsive grid. They provide real-time price signals that reflect the system’s needs, guiding optimal resource addition. 

In India, the electricity market is considered short-term when power is traded under contracts for less than one year. Short-term transactions currently account for approximately 12.5% of the total electricity traded, with the remaining tied up in longer-term contracts, such as multi-year PPAs. 

The short-term power market in India primarily comprises bilateral trades (often through trading licensees), power exchange transactions (multiple buyers and sellers place competitive bids) and ex-post deviation settlements under the Deviation Settlement Mechanism (DSM). The Central Electricity Regulatory Commission (CERC) introduced the ancillary or grid balancing services markets in 2023, but traded volumes remain limited. 

The volume of electricity traded on Indian power exchanges has more than doubled between 2019 and 2024, now accounting for around 6% of total electricity transactions in India. While this may seem small in percentage terms, it translates to a volume of approximately 121 TWh, equivalent to the entire annual electricity generation of the Netherlands. 

The Indian Energy Exchange (IEX) accounts for around 84% of total energy traded on power exchanges and nearly 100% share in the Day Ahead Market (DAM) segment. While the DAM remains the most widely used segment, power exchanges have introduced several new segments, such as the Real-Time Market (RTM) and the Term Ahead Market (TAM), since 2022.

2.1.2 Growing troughs and peaks: Understanding past trends

In 2025, there have been several mid-day price crashes across market segments. Unexpectedly low demand due to unseasonal rains, combined with surplus mid-day generation, particularly from solar, were the key drivers of the crashes. Interestingly, on many of the same days, prices surged in the evening, often touching the market price cap.

For instance, in the IEX-DAM, on 25th–26th May and 1st–2nd June 2025 (coinciding with Sunday–Monday), mid-day prices hovered between INR 0 and INR 0.30 per kilowatt-hours (kWh). Several similar instances occurred throughout May and June. By comparison, INR 0.30 per kWh was the lowest price recorded in DAM during August 2024, and that was a one-off event. Also, sustained solar curtailment in the summer of 2025, combined with full compensation to generators, would technically imply the presence of negative pricing during mid-day. The sharper and more frequent dips in 2025 have heightened concerns over growing market volatility.

While some price events in 2025 have made headlines, the underlying trend has been building for some time. A few clear patterns have emerged in DAM prices over the years: the daily price spread is increasing, with both troughs and peaks becoming more pronounced. This trend holds true on average across most months, cutting across seasonal variations. 

In a power exchange, price spread is the gap between the lowest and highest hourly clearing prices over a given day.

In January, the gap between the average mid-day and late evening prices rose from INR 1.5/kWh in 2019 to INR 5.5/kWh in 2025, a 24% annual increase. In June, this gap jumped from INR 2.5/kWh to INR 7.5/kWh, reflecting a 17% rise.

A closer look at price extremes further highlights this trend. Since 2022, peak prices above INR 9/kWh have occurred around 6,500 times annually, nearly 18% of all time blocks. Meanwhile, ultra-low prices below INR 1/kWh are rising quickly, from 375 instances in 2024 to 514 in just the first half of 2025.

One thing is clear: such market swings are no longer isolated events; they are becoming a regular feature on India’s power exchanges.

2.1.3 The outlook on price volatility: Decoding the future

The outlook for price volatility is a key factor in guiding investments in merchant BESS, whose revenues rely on sustained price arbitrage. It is not just the current price arbitrage that matters, but also the underlying drivers. The future will depend on how these drivers shape up with shifts in the electricity mix, market dynamics and the regulatory environment.

1. Rising solar penetration during mid-day:

Increasing solar generation is leading to surplus, zero marginal cost generation during mid-day hours. Also, thermal generators under fixed contracts are often forced to back down and operate near their minimum technical load (MTL). To avoid a complete shutdown, many shift to the short-term power markets, offering power at very low prices simply to stay operational. This tends to further push down mid-day prices. 

As more solar capacity comes online, such price crashes are likely to become routine, mirroring trends observed in other high-solar markets like Spain. Changing regulations around the MTL of thermal power plants and emerging mandates for two-part operations will also be key in shaping future mid-day price profiles.

2. High evening demand and rigidity of the thermal fleet:

Several factors drive elevated evening prices. Demand typically peaks during this period, especially in summer, pushing higher-cost generators to set the market clearing price. More importantly, as aforementioned, with rising solar penetration, many thermal generators operate at or near their MTL during the day. To avoid uneconomic operation, some may shut down entirely for the day. 

As a result, two effects emerge by evening that lead to price spikes:. 

• First, generators that were offline during the day are not immediately available to supply power during the evening.
• Second, those that continued operating at low output may offer power at higher prices to recoup their costs.

Looking ahead, understanding how power exchange prices evolve will depend on factors such as the mix and capacity of generators operating across different times of day, the profile of buy and sell bids and seasonal demand variations. On average, price peaks and troughs are likely to grow more pronounced. However, India’s price caps and floors may dampen extreme volatility compared to more liberalised markets like Australia.

While price volatility is likely to increase due to the reasons explained, its exact trajectory remains uncertain. Though forecasting future prices with accuracy is inherently challenging, certain variables like demand patterns, the evolving generation mix and system flexibility will shape overall trends. Therefore, considering a range of price scenarios is necessary when building a robust outlook for battery revenues.

2.1.4 Why taming price volatility will be important for renewable growth 

Large fluctuations or volatility in prices can disrupt any market. Buyers and sellers depend on a certain level of price predictability to plan their procurement and operations.

The following are some of the challenges linked to high market volatility that could hold back India’s power sector transition:

1. Uncertainty for sellers: Growing disconnect between the cost of generation and the revenue realised

Frequent price crashes can severely impact the cash flows of existing merchant generators and discourage new capacity from entering the power markets. This affects all types of merchant generators — solar, hydro and thermal. The impact is often more pronounced for solar. This is because price crashes typically occur during mid-day hours, when solar output is at its peak. To understand this phenomenon more clearly, the capture rate metric is often used in electricity markets.

Capture rate is the average price an electricity generator actually earns compared to the average market price during the same period. In other words, it shows how well a generator is capturing the value of electricity in the market. A low capture rate means the generator is producing most of its power when prices are low. This isn’t a good thing for its financial viability.

In India, solar’s share in total generation rose from 3.3% in 2019 to 7.4% in 2024, while the estimated average annual capture rate on the IEX Day Ahead Market dropped from 93% to 70% in the same interval. This reflects reduced price value during peak solar hours. This trend will likely exacerbate as mid-day surplus generation increases. 

Solar capture rate declines have been a common phenomenon across high solar geographies. For example, in Spain, the capture rate fell from nearly 100% in 2021 to 40% in April 2024, marked by a threefold rise in installed solar capacity.

Clearly, falling capture rates affect the profitability of merchant solar, which is primarily designed to operate in power exchanges. However, a more pressing concern is the impact on the tariffs and financial viability of India’s emerging firm and dispatchable renewable energy (FDRE) capacity, a class of projects aiming to deliver round-the-clock clean power.

FDRE projects are typically oversized in renewable capacity to meet firm supply obligations under long-term PPAs. As a design principle, surplus generation (~ 25 to 45% of total generation) is intended to be sold on short-term power markets. 

Falling capture rates and declining revenue realisation from these markets may force developers to raise PPA tariffs to ensure project viability. This could meet regulatory pushback and raise broader concerns about the cost-competitiveness of India’s FDRE experiment.

2. Uncertainty for buyers: Dealing with the unpredictability of power markets

In the IEX DAM, the major buyers of electricity are state-owned distribution companies (74%), private distribution licensees (13.4%) and the remaining from commercial and industrial (C&I) open access consumers. 

There are broadly two key concerns arising from sharper price volatility in the power exchanges:

• Hesitation in long-term renewable contracts:
  
  Distribution utilities may hesitate to sign long-term PPAs for solar power (or projects with a significant solar component) if they expect to consistently procure the same power from exchanges at lower prices. This could undermine the traditional PPA-based renewable model.

• Stress buying during peak demand:
  
  Electricity distribution companies (DISCOMs) often turn to power exchanges to manage peak demand or cover inadvertent shortfalls. When this becomes reactive stress buying rather than part of a planned procurement, it pushes up the average cost of power for DISCOMs. 

Given the ability of batteries to perform price arbitrage, batteries can not only generate revenue from the market inefficiency, but also help reduce price volatility over time. This is not just a commercial advantage anymore; it’s a system-level solution they offer.

But that’s only part of their value stack. Their ability to store energy and ramp quickly can fundamentally reshape how grid balancing reserves have worked in India. The next section provides a closer look.

2.2 The challenge of grid frequency fluctuations

Grid frequency is a critical indicator of the health of the power system. Frequency reflects the balance between supply and demand. Deviations beyond acceptable limits can compromise reliability.

As per the Indian Electricity Grid Code, the acceptable frequency range is 49.90 Hz to 50.05 Hz, with 50 Hz as the national reference frequency. A sustained mismatch between electricity demand and supply can lead to prolonged frequency excursions beyond the permissible range. Such imbalances typically stem from unplanned outages or errors in load (or generation) forecasting.  

There have been growing concerns around frequency excursions in India for some of these reasons. Ideally, grid frequency should stay within the permissible range even when supply-demand mismatches occur. When it does not, the root cause is often a lack of adequate grid balancing resources, also known as ancillary services.

Ancillary services include primary response (typically built into generators as per the grid code and serve as the first line of defence), secondary reserve (responds within 30 seconds using standby generators, BESS or demand response to restore frequency) and tertiary reserve (engaged within 15 minutes for sustained support, generally coal or hydro generators).

These ancillary services can be UP (to increase supply during shortfalls) or DOWN (to reduce supply during surpluses), helping maintain balance between demand and supply in real time. This ensures the stability and reliability of the grid.

Rising variable renewable energy is also reshaping grid dynamics. During summer mid-days, solar peaks often force coal plants to ramp down power generation to or below their technical minimum. During these periods, the grid lacks sufficient downward ancillary reserves, since most thermal units are already operating near their minimum or are shut down.

Conversely, in the evening and night hours, when demand surges, these same coal plants are pushed to full output, while the plants that were down cannot start in time to generate. This leaves little headroom to provide upward reserves to meet any additional demand or unexpected events.

This limited ability to ramp down at noon and ramp up at night highlights a key structural gap in India’s ancillary services mechanism, which remains dominated by conventional generators, primarily coal-based. 

For instance, on 26 May 2025, both upward and downward spinning reserves were inadequate. Downward reserves were near zero for five mid-day hours, while upward reserves were zero for three hours late at night. Such conditions expose the grid to unexpected outages, with limited capacity to restore balance quickly. Such instances have become more frequent and now represent systemic issues.

2.2.1 Concerns over reserve adequacy and response speed point towards a greater role for batteries 

Coal and hydro generators primarily serve India’s ancillary reserves, with some contribution from gas. This pattern has persisted due to the regulatory framework that historically allowed only certain types of generators to participate.

India has managed the provision of ancillary services through an administrative mechanism known as RRAS (Reserves Regulation Ancillary Services). The system operator primarily relied on conventional generators, typically those whose tariffs were regulated by the government, to provide for slow tertiary reserves.

While RRAS improved India’s frequency profile to some extent, it faced key limitations:

• Limited availability during peak demand, as it relied on surplus generator capacity, which was often unavailable when most needed.

• Used for routine balancing rather than true contingencies, diluting its intended role.

• Lack of fast response, since conventional generators were often too slow to address real-time frequency deviations effectively.

The limitations of RRAS highlighted the need for faster, more flexible reserves and stronger incentives for participation. A shift towards more market-based ancillary services was needed to allow resources to compete based on cost and performance.

Grid Controller of India (GRID India) introduced two key mechanisms in 2023 to change under India’s ancillary services framework:

• SRAS (Secondary Reserve Ancillary Services): Designed for fast response to contingencies, with dispatch based on ramping speed and cost. This prioritised the fastest and most cost-effective resource. SRAS allows participation from batteries, pumped hydro and demand response.

• TRAS (Tertiary Reserve Ancillary Services): Envisioned as a day-ahead market where grid operators procure reserves for shortfall through competitive bidding. 

These early discussions have opened the door for fast-acting reserves like BESS to help fill the growing gap in grid stability. It is now up to the market to determine whether existing mechanisms, such as those under SRAS, are sufficient to support full participation in the ancillary services market. 

Current incentive structures without any capacity payment for BESS may not yet be well-aligned for it to participate exclusively in ancillary services. However, solutions exist, and this is where effective marketcraft becomes essential.

As discussed earlier, mid-day oversupply on the grid is a condition that will likely intensify in the future. In such scenarios, a BESS can absorb excess electricity at little to no cost, essentially charging for free. It can then sell the stored energy into other market segments, such as the DAM. This ability to buy and sell across different market segments forms the foundation of value stacking of BESS, which is key to managing its economics.