The US power grid is increasingly under strain. On the one hand, it must incorporate unpredictable supply from renewable energy sources. On the other, it must meet surging power demand, due largely to the boom in data centers. This combination of fluctuating generation and soaring consumption is making it increasingly difficult for operators to forecast loads, maintain system stability, and ensure resource adequacy—particularly as a renewable-heavy grid still requires firm, reliable capacity.1
As operators attempt to stabilize the grid, supply chain disruptions are delaying essential upgrades and hindering the rollout of critical technologies. In Texas, for example, 35 percent of dispatchable assets have been withdrawn from the Texas Energy Fund—an initiative designed to strengthen grid reliability and capacity—due in part to rising construction costs and equipment shortages, including turbines needed for new generation projects.2 Regulatory uncertainty further complicates the situation, with evolving policies and inconsistent frameworks making long-term planning difficult.3
In this context, battery energy storage systems (BESS) have proved vital for maintaining grid stability and have provided BESS operators with important revenue streams through ancillary services and energy arbitrage strategies. This growth has been supported by policy measures such as the Inflation Reduction Act (IRA), which introduced the long-anticipated investment tax credit (ITC) under Sections 48 and 48E of the Internal Revenue Code for stand-alone storage facilities.4
But, since 2023, BESS revenues have declined significantly in major US markets. The California Independent System Operator (CAISO) has seen a 32 percent revenue drop over this time frame, while the Electric Reliability Council of Texas (ERCOT) experienced an even steeper 71 percent decrease.5
This downward trend has raised alarm throughout the energy storage industry, signaling possible changes in market dynamics that may have lasting effects on battery operators and investors alike. As McKinsey has highlighted in its analysis of the revenue potential of energy storage technologies, market participants will need to adapt to increasingly competitive dynamics and the effects of battery cannibalization on peak pricing.6
A new dynamic for battery operators
ERCOT is a helpful example of how quickly changing market dynamics can lead energy providers to shift their business strategies. Ancillary service prices—a key revenue stream for certain market participants—fell from $21 per megawatt-hour (/MWh) in 2023 to $5/MWh in 2024 and is currently at $3/MWh.7 This dramatic price decline has forced many market players to reconsider their positions, leading to a marked switch to energy arbitrage strategies instead (Exhibit 1).
But what lies behind this sharp drop in prices? Milder weather and less market tightness have certainly played a role, though our analysis points to another major, often overlooked factor: battery cannibalization. As BESS capacity grows, and more batteries can discharge energy during times of high demand, peak hour prices come down. In fact, we estimate that cannibalization is responsible for at least 30 percent of the observed revenue decline seen over the past year (Exhibit 2).
How to drive value and succeed in this environment
Despite recent revenue headwinds, several positive trends are emerging. In ERCOT, for example, the average battery earned $182 per kilowatt-year in 2023, while the top performer reached nearly $300 per kilowatt-year—a 60 percent uplift. Even in 2024, when average revenues fell to $52 per kilowatt-year, the leading asset delivered more than double that at $108 per kilowatt-year.
Operators that embrace more dynamic and adaptable revenue strategies consistently outperform, although results vary based on factors such as nodal pricing dynamics. As the market matures, success will depend on the ability to understand and navigate these complexities.
Advanced analytics and digital tools are a major differentiator between top-performing operators and the rest. Yet capturing this potential requires significant investment and introduces operational complexity, making capability building and change management critical.
Building core capabilities for outperformance
Transitioning from traditional, static trading strategies (for example, a constant volume allocated to ancillary service markets that rarely changes) to dynamic, data-driven approaches could unlock substantial profit uplift. Techniques such as stochastic models allow operators to make real-time, probability-based decisions, and could result in profit gains of over 20 percent.8 Incorporating AI-enabled techniques on top of that could improve profits by an additional 35 percent by enabling operators to continually refine their strategies in response to constantly evolving market conditions.9
Navigating nodal dynamics and congestion
For battery origination, understanding nodal price differences and grid congestion patterns has become crucial. Batteries can be deployed rapidly when demand increases, making them uniquely positioned to capture an additional 20 to 30 percent from nodal price differentials, according to our analysis. Even under the milder market and weather conditions seen so far in 2024 and 2025, congestion spreads (the difference between prices in a specific node and the overall system price) may be as high as 50 percent across the system, presenting a significant opportunity for operators that can strategically navigate these patterns.
But modeling congestion is not easy. It involves vast amounts of data points and requires a deep understanding of the intricate interplay of grid constraints, generation patterns, and demand fluctuations. Developers could embrace advanced analytical tools that can account for market uncertainties and support informed investment decisions. Although this demands substantial data processing power and analytical expertise, it could help operators uncover opportunities, manage risks, and maximize the value of BESS assets in a dynamic and complex market.
Strategic diversification to manage shape costs and risk
As well as data and analytics capabilities, diversification will be crucial for optimizing the risk and return trade-off across energy portfolios.
This is particularly the case for navigating shape costs—the difference between the average energy price and the asset generating price. By examining how different assets interact under varying market conditions, developers can more effectively manage exposure to price volatility and congestion risks. However, this process requires careful evaluation of shape costs, which are influenced by the timing and variability of energy generation and consumption.
Diversification is not just about balancing risk; it’s also about building a resilient and profitable portfolio. Those portfolios that are diversified across BESS, solar, and wind demonstrate a balance of expected risk and returns that outperforms nondiversified alternatives (Exhibit 3). For example, single-asset portfolios (battery, solar, or wind) offer higher expected returns, but all come with greater risk. A diversified portfolio can lower risk while maintaining competitive expected returns.
The evolving US power grid landscape presents formidable challenges for market participants, driven by unpredictable demand, supply chain disruptions, and shifting regulation.
To counter the energy storage revenue decline, BESS operators can adopt more dynamic, data-driven approaches to improve forecasting and real-time response. Those that invest in core analytics capabilities and embrace diversified portfolios may boost profits and reduce risks in a grid environment where flexibility and agility are essential.
Christian Staudt is a partner in McKinsey’s Washington, DC, office, Jesse Noffsinger is a partner in the Seattle office, and Riccardo Pizzi is an associate partner the Boston office.
1 Alexander Weiss, Diego Hernanez Diaz, Tamara Grüenewald, and Muthu Subbu, “Electricity demand in Europe: Growing or going?,” McKinsey, October 24, 2024; “Evaluating the revenue potential of energy storage technologies,” McKinsey, February 11, 2025.
2 Doug Lewin, “More gas plants withdraw from Texas Energy Fund: Grid roundup #48,” Texas Energy and Power Newsletter, March 31, 2025.
3 Arcelia Martin, “What risks Texas’ grid faces,” Inside Climate News, July 11, 2025; Claire Hao, “These charts reveal the daunting challenge facing the ERCOT power grid in the next five years,” Houston Chronicle, April 11, 2025.
4 “Summary of Inflation Reduction Act provisions related to renewable energy,” United States Environmental Protection Agency, July 29, 2025.
5 David Krause, “Battery storage revenue average trending down in California,” RTO Insider, July 23, 2025; McKinsey analysis.
6 “Evaluating the revenue potential of energy storage technologies,” McKinsey, February 11, 2025; Battery cannibalization is a market phenomenon in electricity where increasing amounts of battery storage systems decrease the wholesale electricity prices during periods of high discharge or availability and increase it during periods of high charge or low availability, thus reducing the value and profit of their own assets.
7 “60-day data,” Electricity Reliability Council of Texas, accessed June 2025.
8 “Evaluating the revenue potential of energy storage technologies,” McKinsey, February 11, 2025; McKinsey analysis.
9 QuantumBlack, AI by McKinsey analysis; McKinsey analysis.