Degradation Economics
Prerequisites
The same cycling that earns a grid battery its revenue is slowly shrinking the asset doing the earning. Developers do not hope this away; they price it in. How fast a battery degrades determines its revenue trajectory, warranty terms, and whether the project's economics close.
Battery capacity fades with every cycle and with calendar time. Lithium-ion systems typically warrant 70-80% of original capacity after 10-15 years or 3,000-5,000 full cycles. Degradation is not linear: the first 10% of capacity loss comes faster, then the rate slows. Revenue declines in proportion to capacity because a smaller battery can provide less energy arbitrage and fewer grid services per cycle.
Trace the revenue impact. A 100 MWh battery earning $15/MWh in energy arbitrage generates $1.5M per full cycle. At 80 MWh (after degradation), the same price yields $1.2M per cycle. Over thousands of cycles, this cumulative revenue loss shapes the project's internal rate of return.
Can you offset degradation instead of accepting the revenue decline?
Augmentation strategies. Operators can add new cells mid-life to restore the original capacity ("augmentation"), extending revenue but at additional capital cost. The alternative is to oversize the initial installation, starting with 110-120% of the target capacity so that end-of-life capacity still meets contract requirements. Both strategies increase upfront cost but protect long-term revenue.
Degradation is not a failure mode. It is a known cost that developers must model accurately to price their projects.
A battery storage project is warranted to retain 80% capacity after 10 years. This degradation affects project economics because:
Less capacity means less energy per cycle and reduced ability to provide grid services. Revenue from arbitrage, peak shaving, and frequency regulation all scale with usable capacity, so degradation directly reduces annual income.
The answer is ALesson complete
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