Energy Arbitrage Basics

Buy low, sell high. In electricity markets, "low" means midday (when solar floods the grid and prices drop to zero or below) and "high" means evening peak (when solar fades and prices spike). A battery that charges at $0/MWh and discharges at $80/MWh earns $80/MWh in gross margin. This is energy arbitrage, and it is the primary revenue stream for grid-scale batteries.

The arbitrage spread (the difference between charge and discharge prices) determines whether a battery project is financially viable. A 4-hour battery needs roughly $40-60/MWh average spread to cover its capital cost over a 15-year life. California has been the most lucrative US battery market: CAISO's market monitor put average battery net market revenue near $78/kW-year in 2023. In regions with flatter daily price shapes, like much of MISO, spreads are often insufficient for standalone arbitrage.

Calculate a battery's daily revenue. A 100 MW / 400 MWh battery charges for 4 hours at an average price of -$5/MWh (paid to charge) and discharges for 4 hours at $75/MWh. Charge cost: 400 MWh x (-$5) = -$2,000 (the battery is paid to absorb power). Discharge revenue: 400 MWh x $75 = $30,000. Daily gross margin: $32,000.

Why don't arbitrage profits attract enough batteries to eliminate the spread?

They are, slowly. As battery capacity grows, it absorbs midday oversupply (raising low prices) and serves evening peak (lowering high prices). CAISO's evening peak prices have already moderated as battery deployment passed 10 GW. Eventually, arbitrage profits will shrink to the point where they just barely cover the cost of new batteries. That equilibrium is the market working correctly.

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