Evaluating storage profitability: A market-based comparison of hydro and battery options in India

Energy storage provides firm peaking capacity and ancillary services to support the integration of variable renewable energy (VRE) sources, which form a critical part of the energy transition in most countries, including India. Several storage options are being pursued in India, including battery energy storage systems (BESS), pumped storage hydro plants (PSP), and conventional hydro (mostly run-of-river, ROR, with or without pondage). However, the financial viability of these options, including a market-price-based assessment, has not been explored to understand the relative merits of these competing options. This paper proposes an optimization model to undertake a market-based assessment of BESS, PSP, and ROR. The model assesses energy arbitrage opportunities, revenue from ancillary services, and risk hedging strategies, considering critical drivers such as price variability and hydrological risks. The analysis compares a notional 1 MW unit for each option using historical Indian Energy Exchange (IEX) spot prices and other publicly available data across all states in India that have potential for pumped storage and/or hydro options. The findings suggest that energy arbitrage in the incumbent IEX would have generally fallen short of a typical hurdle rate of return of 10% for all storage options in the majority of historical years. If the revenue from ancillary services is included and part of the output could be hedged through contracts, the business case improves, especially for BESS and PSP. The model provides a rigorous and transparent framework for policymakers to evaluate storage alternatives that support the energy transition. • It is one of India’s first market-based profitability assessments for energy storage. • Energy arbitrage alone is insufficient for adequate investment returns. • Ancillary services and contracts offer increased revenue potential. • Run-of-river stands out as a considerably robust option with the best returns.