Arbitrage Feedback Loop

Every battery deployed to exploit arbitrage spreads makes the spread narrower. Batteries charge at midday (raising low prices) and discharge at evening peak (lowering high prices). As spreads narrow, new battery investment becomes less attractive. This is a negative feedback loop that converges toward an equilibrium: the spread where the marginal battery just barely covers its costs.

The feedback is measurable. CAISO's market monitor put average battery net market revenue near $78/kW-year in 2023; by 2025, with the fleet roughly doubled, merchant revenue had fallen to about $38/kW-year. Each new gigawatt of batteries earns less than the one before it, because every added battery competes for the same daily spread.

The equilibrium condition. When the arbitrage spread equals the all-in cost of a new battery (capital, operations, degradation, financing), investment stops. Existing batteries earn just enough to cover costs. No new batteries are justified. The spread stabilizes.

What happens to the equilibrium as battery costs fall?

The equilibrium shifts: more batteries, lower spreads. If battery costs fall 30%, the breakeven spread drops, and more batteries are economic. This drives spreads lower, which adds more solar absorption capacity (flattening the duck curve further) and more evening capacity (reducing peak prices further). Falling battery costs do not just make batteries cheaper; they reshape the entire price structure of the electricity market.

---