Renewables and Batteries: The Paradox of the Energy Transition—More Capacity Can Mean Lower Profits

Europe needs much more renewable energy to achieve climate neutrality. But the very success of solar and wind power risks creating an unexpected economic problem: the more plants are built, the more the revenues from those same plants may decline. It is one of the paradoxes of the energy transition. When the sun shines or the wind blows simultaneously across vast areas, a large amount of low-cost electricity enters the market all at once. Wholesale prices drop, occasionally approaching zero. This benefits the power grid and, at least potentially, consumers. But it also means that renewable energy producers are selling their power precisely when electricity is least valuable.

This phenomenon is known as revenue cannibalization. And it will become increasingly significant as Europe installs new solar, wind, and storage capacity.

A new study published in The Energy Journal seeks to understand how serious the problem could become—and, above all, what happens when renewables and batteries interact with one another. The author is Iacopo Savelli, a postdoctoral researcher at the Center for Research on Geography, Resources, Environment, Energy & Networks (GREEN) at Bocconi University.

Over 10,000 simulations

Savelli builds a model of the European electricity market that includes 33 countries, cross-border interconnections, and thermal, nuclear, hydroelectric, solar, and wind power plants, as well as battery energy storage systems (BESS). The model simulates all 8,760 hours of the year and combines various climate scenarios, plant outages, and levels of renewable energy and battery deployment.

The central idea of the study is to distinguish between two phenomena. Self-cannibalization occurs when an increase in the capacity of a technology reduces the profits of that same technology. The more photovoltaic capacity is installed, for example, the more likely solar energy is to be concentrated during the same hours, thereby reducing its market value. Cross-cannibalization, on the other hand, concerns the way in which the growth of one technology affects the profitability of another.

This is a crucial distinction because the energy transition does not occur in separate compartments: solar, wind, and batteries share the same market and mutually influence the economic conditions in which they operate.

Later in the study, this interdependence is translated into a potential strategic choice for investors:

“Co-locating BESS might allow investors to mitigate RES value erosion.”

The point, therefore, is not merely to understand whether a single technology will remain profitable, but how the combination of different technologies can change the investment’s economic profile.

More renewables, lower prices. But lower profits as well

Iacopo Savelli clearly demonstrates just how severe the self-cannibalization of renewables can become. In 2030, a 10% increase in renewable capacity compared to the baseline scenario reduces market profits from renewables by an average of 19%. By 2040, the decline reaches 23%.

This mechanism is directly driven by electricity prices. With more solar and wind energy available, there are more frequent instances where supply at a very low marginal cost drives down the market price. In the baseline scenario, the average European price estimated by the model drops from 52.01 euros/MWh in 2030 to 30.34 euros/MWh in 2040. With a level of renewables 20% higher than the baseline scenario, the price would fall further to 20.66 euros/MWh in 2040. Overall, a 20% increase in renewable capacity reduces the average market price by 18% in 2030 and by as much as 32% in 2040.

From the perspective of the electric power system, this is a significant finding: more renewables mean, on average, cheaper energy. From an investor’s perspective, however, a problem arises: if the value of the electricity produced falls rapidly as the number of plants increases, continuing to finance new capacity becomes progressively more difficult.

Batteries can serve as insurance for renewables

Batteries also suffer from self-cannibalization: if BESS capacity increases by 10%, profits decrease by about 8%. This is because more batteries compete to capitalize on the same price differences between off-peak and peak hours. 

But when renewable energy capacity increases, the opposite happens. In 2030, a 10% increase in renewable capacity will boost battery profits by 15%. 

Savelli explains the mechanism as follows:

“RES allows BESS to charge more frequently at near-zero prices during periods of abundant solar and wind power.”

The economically interesting point is what happens next: as long as there are enough hours during which the price is determined by more expensive technologies, such as natural gas, batteries can take advantage of a favorable price differential. The growth of renewables, therefore, can create new arbitrage opportunities for storage.

This makes the relationship between the two technologies particularly attractive to investors. The decline in the value of solar and wind power can be partially offset by the higher profitability of energy storage.

A window that could close by 2040

However, this complementarity has an expiration date. By 2040, when solar and wind account for a much larger share of the electricity system, the positive effect of renewables on battery profits will tend to disappear. The reason is that a system with a much higher share of renewables does not merely create many hours with very low prices; it also reduces the frequency of very expensive hours during which batteries could discharge stored energy and achieve high margins.

The result therefore suggests a sort of time window: during the intermediate phase of the transition, batteries and renewables can be highly complementary from an economic standpoint; in a much more decarbonized system, that same relationship may become less favorable.

Not just average prices: batteries primarily reduce volatility

The study also highlights a fundamental difference in how renewables and batteries influence the electricity market: renewables have a strong impact on average prices, while batteries have a much smaller impact on the average because they act both as buyers—when they charge—and as sellers—when they feed energy back into the grid.

Their effect is most evident in terms of price volatility. A 20% increase in storage capacity reduces price volatility by about 4% in 2030 and 5% in 2040, while having very little effect on the average price. In terms of the system as a whole, therefore, the two technologies serve different functions: renewables drive down the average cost of electricity; batteries do a better job of smoothing out the swings between very cheap hours and more expensive hours.

The net zero challenge is not just technological

The study includes some important caveats. It analyzes the day-ahead market, does not include all potential revenue streams for batteries from ancillary services, and does not consider forecasting errors and balancing markets in detail. The findings on battery profits are therefore presented as a conservative estimate.

But the overall conclusion remains relevant. Installing more solar, wind, and batteries does not simply mean adding clean technologies to an existing system. It means transforming the economic rules of the system itself. The more renewables capture the market, the more they drive down prices —including those that determine their own revenues. The transition to net zero thus presents a problem that is less visible than the technological one: how can we ensure that it remains cost-effective to invest in the technologies the system will increasingly need, even as their widespread adoption reduces their market value?

Batteries may offer part of the answer, especially in the early stages of the transition. But the study suggests that simply installing capacity will not be enough. Market rules and policies capable of evolving alongside the electricity mix will also be needed.