Readers, this isn’t a traditional post for me but as I have been running behind on life the past couple weeks, I repurposed an old essay since it reveals a lot about a system we don’t typically think about: the wholesale power market. That’s right, every moment you turn on a lightbulb, an auction occurs for that power in one of the most fascinating and invisible markets, running every moment to keep the economy running. Enjoy!
The CAISO (California Independent System Operator) market operates under a structural mismatch: peak solar production occurs midday, while peak electricity demand hits in the late afternoon and evening. Utility-scale batteries make money by solving this mismatch.
Their core business model is built on energy arbitrage.
Energy Arbitrage: Buying Low, Selling High
Batteries purchase and store electricity from the grid during off-peak hours—typically midday, when solar generation is high and most consumers are away from home. They then sell that stored energy back into the grid during peak hours, when solar drops off and evening demand ramps up: lights come on, air conditioners kick in, appliances start running.
This intraday buy-low, sell-high strategy creates a direct revenue stream that reflects the spread between low daytime prices and high evening prices.
But energy arbitrage isn’t the only way utility-scale batteries earn revenue.
Ancillary Services: Grid Stability for a Fee
Beyond arbitrage, batteries in CAISO also provide ancillary services, including:
Spinning reserves: These reserves stay synchronized with the grid, ready to respond in real-time to sudden short-term fluctuations in supply and demand.
Non-spinning reserves: These aren’t synchronized but can be brought online within minutes to handle longer-term imbalances.
Frequency regulation: This service helps maintain grid frequency at 60 Hz by injecting or absorbing small amounts of power in response to deviations.
Each of these services helps the grid stay stable and resilient—and each comes with a revenue stream for batteries that can deliver them.
Evolving Revenue Streams: The Inevitable Compression
However, the economics of ancillary services shift as the battery fleet grows.
Because the volume of these services is limited, new entrants dilute the available margin. Frequency regulation, in particular, is a fringe service—its pricing and revenue potential decline as more batteries compete to provide it.
As storage capacity saturates ancillary markets, revenue will increasingly come from energy arbitrage, especially as more renewable generation comes online.
But here’s the catch: arbitrage spreads compress, too. Especially when solar margins collapse.
Why Solar Margins Are At Risk
In a grid saturated with solar, most solar panels generate at the same time. This creates a midday energy glut, a rightward shift in the supply curve, without a matching increase in demand. Prices fall. Because demand at a specific moment is relatively inelastic, the surplus power results in lower prices for producers and thinner margins across the board.
More solar = more supply at the same time = lower prices. The market clears, but producers suffer.
Batteries as Margin Protectors
Storage changes this equation by smoothing the temporal profile of supply and demand.
When batteries buy cheap solar power and sell it later in the day, they:
Increase mid-day demand (by acting as flexible buyers)
Shift power to evening hours, raising effective supply when prices are higher
Make demand more elastic, counteracting the inelasticity of end users
This has two systemic effects:
Arbitrage monetizes time, not energy. Value shifts from generation to coordination.
Intraday prices smooth out, making renewables more financially viable in the long term.
Put differently: batteries restructure the market from a series of point-in-time supply gluts into a balanced, continuous day-long pricing curve.
Why This Matters
Without storage, solar becomes a victim of its own success. As production scales, prices crash.
With storage, solar becomes a viable baseload alternative, dispatchable, stable, and margin-preserving.
Utility-scale batteries don’t just stabilize the grid. They stabilize the economics of decarbonization.
