Merchant batteries poised for attractive returns in India

Battery storage in India has moved from a promising technology to a fully bankable grid asset. A significant drop in battery costs and widening wholesale-price spreads mean a well-operated system can cover its expenses and still deliver attractive profits. DAM volatility offers reliable arbitrage income, while ancillary markets also create opportunities to earn additional revenue. Even under conservative assumptions, batteries show attractive returns across varying cost and efficiency levels, with shorter-duration BESS showing better revenue prospects.

3.1 Battery storage economics in power markets

Merchant BESS earns through two market streams: DAM and Ancillary Services Market. In the DAM, they act as price-responsive traders, charging when prices are low and discharging when prices are high. Arbitrage is profitable when revenues exceed charging costs and the battery’s levelised cost of storage (LCOS). Participation in the ancillary services market can also provide additional revenue opportunities.

Levelised Cost of Storage (LCOS) refers to the average cost of storing and delivering one unit of electricity over the battery’s lifetime. It includes capital and financing costs, operating and maintenance costs and degradation effects, but does not include the cost of charging the battery.

3.1.1 How the arbitrage play works in the wholesale electricity market

BESS can buy power while charging and sell while discharging, enabling revenue through price arbitrage. However, for this to be economically viable, revenue from selling has to be greater than the costs (cost of buying electricity + cost of losses + LCOS).

The chart below illustrates how a 2-hour battery can capture DAM price spreads over three days in June, using 2024 IEX-DAM prices. For example, during solar hours, the market clears at roughly INR 2.6/kWh, where the battery charges (blue bar). 

Since a battery typically has a round-trip efficiency of 85%, it loses some energy during the charge-discharge cycle. Therefore, if it buys electricity at INR 2.6/kWh, the actual cost per kWh of electricity stored is INR 3.06/kWh (INR 2.6 per kWh/85%). But the effective cost of the electricity delivered should also include the BESS LCOS, which we estimate to be around INR 4.5/kWh. Therefore, the effective cost of delivered electricity for this instance is INR 3.06/kWh + INR 4.5/kWh = INR 7.56/kWh. Therefore, the battery makes a profit when it can sell above this price, i.e., INR 7.56/kWh.

For example, on selling at INR 10/kWh, the selling price of electricity (INR/kWh) would provide a net profit of nearly INR 2.5/kWh for the battery asset for this particular cycle. 

3.1.2 The potential revenue from ancillary market participation

Batteries in ancillary service markets can end up getting paid to charge, converting charging from an expense into a source of income.

BESS can potentially get paid to charge in the SRAS-Down market

In the SRAS-Down (where an online reserve is instructed to back down or absorb excess power present in the system) market, a merchant BESS can charge without paying for the electricity and can even earn a bonus of up to INR 0.50/kWh if it closely follows the dispatch instructions issued. Specifically, if it maintains an accuracy of over 95% in tracking the instructed charge profile throughout the day, it qualifies for the full bonus.

BESS can get paid to charge in the emergency TRAS-Down market in future

In the emergency TRAS-Down market, BESS can become a cost-saving substitute to curtailing variable renewable generation. When there is not enough tertiary reserve available through the TRAS-down market, the grid operator can force generators (mostly renewable energy generators) to curtail their generation during oversupply conditions. This curtailment is settled at the declared cost of generation. These generators are therefore paid their full energy charge (often INR 2–3 /kWh) for every unit they are forced to back down from. 

If, instead, the grid operator directs BESS to absorb that surplus, the same unit of electricity can potentially be settled at rates far lower than what the operator may pay the renewable generator to compensate for curtailment.

3.2 Merchant BESS is financially viable 2024 onwards

3.2.1. Higher potential revenues and falling battery costs have made merchant BESS commercially viable

Merchant battery storage in India has reached a critical juncture. Starting in 2024, expected annual revenues exceeded annualised costs for the first time. In the graph below, the cost reflects the yearly expense of installing and operating a battery in a particular year, while the revenue represents what a merchant battery could have earned from energy market participation.

80% reduction in BESS costs and a fivefold increase in merchant BESS revenue in the last decade

Over the past decade, battery costs have declined significantly from around INR 7.9 million/megawatt-hour (MWh) in 2015 to INR 1.7 million/MWh in 2025 (an average year-on-year decline of 14%). In parallel, revenues from market participation have increased fivefold, from INR 0.5 million/MWh in 2015 to INR 2.4 million/MWh in 2025. In 2024, estimated revenues surpassed costs for the first time, marking a fundamental shift in the business case for Merchant BESS. Merchant BESS is no longer just a technical asset; it has become a commercially viable investment opportunity.

A sharp rise in revenue opportunities in the DAM has largely enabled the shift to profitability. Growing price spreads now allow storage assets to consistently buy low and sell high. 

Since early 2024, the average daily price spread in the IEX-DAM has exceeded the LCOS, driving the commercial viability of new merchant BESS projects towards the cusp of transformation.

The figure shows the daily hourly gap between the highest and lowest DAM prices across each 24-hour cycle, the average spread across each month and the LCOS. When price spreads in the DAM consistently surpass LCOS, it signals that batteries can earn enough from pure arbitrage to recover their full lifecycle costs.

From 2022 through much of 2023, the average price spread remained below LCOS, meaning batteries deployed without other revenue stacking were unlikely to be financially viable. Since early 2024, however, the widening price spreads driven by increased renewable penetration have flipped that equation, making merchant battery storage a viable standalone business model, even without ancillary service revenues or contracted offtake.

3.3 BESS investments are an attractive asset class today

Returns of up to 24% are achievable from an investment made in merchant BESS in 2025

Merchant BESS commissioned at 2024 costs will be profitable assets and can deliver strong returns through a combination of DAM arbitrage and ancillary market revenues, according to our projections. Since the majority of BESS revenues come from price spreads in the IEX DAM, understanding how these price profiles may evolve is critical. Key factors such as seasonal demand patterns, the changing generation mix and regulatory shifts will influence future price formation. Any outlook must therefore be grounded in price forecasts with associated confidence intervals. Optimistic and conservative arbitrage estimates depend on the ability to assess both upside and downside scenarios within this price range.

Arbitrage in the Day Ahead Market contributes nearly 80-85% of total earnings, while ancillary services account for the remaining 15-20%. Under optimistic assumptions, annual revenues reach INR 3.3 million/MWh, pushing project internal rates of returns (IRRs) to ~24%. 

Even under conservative price spreads, returns remain strong at 21%, but with a larger share of earnings coming from incentives linked to ancillary market participation.

Even under the more conservative price-spread assumptions, the battery generates INR 3.2 million/MWh per year, nearly double the annualised cost of owning and operating a 2024-vintage system (~INR 1.7 million/MWh). That differential pushes the IRR well above typical debt costs, yielding a decent equity-level return.

3.4 The parameters that affect returns

The next question is what determines how much a merchant BESS can actually earn under uncertainty? Two key sets of factors shape this outcome. The first relates to cost and technical performance, like round-trip efficiency and depth of discharge, which may vary during real-world operation. The second is design choices, particularly storage duration, which impacts how much of the daily price spread a battery can capture. The following analysis explores these critical levers through a series of sensitivity tests on IRR for a merchant BESS project.

Round-trip efficiency (RTE), measured as a percentage, is a ratio of the energy charged to the battery to the energy discharged from the battery.

Depth of Discharge (DoD) refers to the percentage of a battery’s total capacity that has been used or discharged relative to its full capacity.

A detailed explanation of variations in capital costs and technical parameters such as depth of discharge (DoD) and round-trip efficiency (RTE), as well as the relationship between storage duration, associated costs and operational capabilities, are available here.

3.4.1 BESS delivers attractive returns even under conditions of cost uncertainty and technical variability

Different variables, both financial and technical, can significantly affect the returns of a BESS project. These include upfront capital costs, system efficiency (RTE) and operational parameters, such as DoD. While these factors are typically estimated during the design stage, real-world performance often diverges once the project is implemented. 

The following analysis explores the impact of variation in system cost, DoD and RTE on the IRR of a merchant BESS (2-hour) project that earns revenue solely from price arbitrage in the DAM, without stacking additional income streams from ancillary markets. We focus only on DAM revenues, excluding ancillary services or other income streams, to isolate the impact of these technical and cost parameters on project returns.

The analysis tests the following variations:

• Capital cost: INR 10 million/MWh (2 hours) ±5%
• DoD: Base value (90%) ±5%
• RTE: Base value (85%) ±5%

A ±5 % shift in any of the tested parameters moves the IRR by only about ±1 percentage point from the base case IRR of 17% (i.e., only considering DAM participation). 

While not a strictly equivalent comparison, applying a 5% variation to each parameter (system cost, DoD and RTE) results in a similar impact on IRR. Yet, the overall uncertainty introduced remains limited, with IRR fluctuating by only ±2%. This indicates that BESS projects can maintain attractive returns despite variability across cost and technical parameters.

3.4.2 Shorter-duration merchant BESS shows slightly higher returns

Merchant battery returns vary by duration, but shorter-duration merchant BESS will likely deliver a higher upside by combining the DAM and ancillary market revenue. This is largely due to their ability to precisely target the most extreme price differentials within a given day. Shorter-duration BESS can deliver higher returns in markets with sharp, short-lived price peaks and troughs, as they use the same power capacity over less energy to target the steepest price spreads—without needing to operate during flatter periods.

While the difference in IRR between 1-hour and 2-hour systems is not substantial, the IRR for 4-hour systems can be notably lower.

Whether shorter or longer-duration BESS is better depends on the shape of the price curve, specifically, the difference between the set of highest and lowest price hours, the duration of those price signals and capital cost per MWh of storage.

Several markets, including Germany, the UK, Spain, and California, are seeing a shift toward longer-duration battery storage as sustained periods of high and low prices enhance the value of systems capable of operating across extended intervals.