What Are Ancillary Services in Energy Storage? A Plain-English Guide to How Energy Storage Actually Makes Money

If you've been following the European energy storage boom, you've probably seen the term "ancillary services" featured prominently in investor decks and market reports.

According to McKinsey's 2025 analysis of energy storage revenue potential, ancillary services currently account for 50–80% of the total revenue stack for deployed storage assets across major markets.

But what does it actually mean, and why should anyone building, financing, or operating a battery storage project care? This guide breaks it down: what ancillary services are, how they generate revenue for battery energy storage systems (BESS), why that revenue is currently experiencing a rapid decline, and what the industry can expect next.

What Are Ancillary Services?

Ancillary services are the essential support functions that keep an electricity grid stable, safe, and reliable. They do not generate power themselves. Instead, they ensure that the power generated is delivered consistently without causing grid failures.

Think of the grid as a live concert. The power generators like coal, gas, wind, and solar act as the band, while the consumers are the audience. Ancillary services serve as the sound engineers, security personnel, and backup systems working behind the scenes to ensure the show runs flawlessly.

In practical terms, ancillary services include frequency regulation, voltage control, operating reserves, and black start capability. Transmission System Operators (TSOs) procure these services from qualified providers. Historically, frequency regulation has been the single most lucrative service for battery storage.

Why Does Grid Frequency Matter?

Europe's synchronous grid operates at precisely 50 Hz. This frequency reflects the real-time balance between electricity supply and demand. When a power plant unexpectedly goes offline, the frequency drops. Conversely, when demand suddenly falls, the frequency rises.

Deviations beyond ±0.2 Hz can trigger protective load shedding and, in extreme cases, blackouts. Traditionally, the massive spinning turbines inside coal and nuclear plants acted as a natural shock absorber. Their physical rotational inertia resisted sudden frequency changes, buying the grid precious seconds to react.

However, Europe is rapidly phasing out nuclear and retiring 29 GW of coal capacity by 2030. Modern wind turbines and solar panels connect to the grid through power electronics, meaning they lack this spinning mass and natural inertia. As the grid loses its traditional shock absorbers, battery storage systems are stepping in to fill the gap.

How Do Batteries Provide Frequency Regulation?

Battery storage systems can respond to frequency deviations in milliseconds, making them orders of magnitude faster than any conventional gas turbine. In Europe, frequency regulation is organized into a layered defense system. Each layer activates in a specific sequence, functioning much like tiers of emergency response.

• FCR (Frequency Containment Reserve): This is the first responder. The moment the frequency drifts from 50 Hz, FCR kicks in automatically within 30 seconds to arrest the deviation before it escalates. No human dispatcher is involved; generators sense the local frequency shift and adjust output on their own. Think of it as an airbag deploying on impact to provide immediate damage control. The total FCR requirement across the Continental Europe synchronous area is roughly ±3,000 MW, shared among member countries.
• aFRR (Automatic Frequency Restoration Reserve): Acting as the second line of defense, aFRR activates within 5 minutes to restore frequency back to 50 Hz and release FCR capacity for the next potential event. It's triggered semi-automatically by grid control centers via Automatic Generation Control (AGC) signals, and coordinated across borders through the PICASSO platform, which has been operational since 2022.
• mFRR (Manual Frequency Restoration Reserve): This is the third layer, activated within 12.5 minutes. When an imbalance is significant or expected to last, dispatchers manually call on mFRR to take over from aFRR, deploying more economical resources to handle prolonged deviations. It's coordinated across Europe via the MARI platform.

How Did Batteries Get Rich on Ancillary Services?

The early economics were almost too good to be true.FCR pays for standby power capacity (MW) rather than delivered stored energy (MWh). Consequently, a small one-hour battery, such as a 10 MW / 10 MWh system, could offer the same instant response as a much larger four-hour system while requiring a fraction of the capital expenditure.

Developers deployed cheap, short-duration batteries and collected premium standby fees from grid operators desperate for millisecond-fast frequency response.

In the UK, a frequency service called Dynamic Containment was paying over £20/MWh in 2022, with peaks near £80/MWh. At the time, 84% of British BESS revenues came from frequency response. Similarly, in Germany, FCR capacity prices reached impressive heights around €8,500/MW/month in early 2024.

It functioned effectively as a gold rush for early movers.

Why Are Ancillary Service Revenues Collapsing?

Because the pool is shallow and the swimmers are many.

Frequency regulation markets are characterized by analysts as shallow revenue pools because the total capacity demand is very small relative to the overall power system. Wood Mackenzie's research describes FCR as "typically well below 1% of system peak demand in GW terms." Once battery capacity exceeds this niche demand, prices inevitably plummet.

A 2MW/2MWh Frequency Regulation Project in U.S.

This exact scenario is playing out across Europe:

In Germany, prequalified battery capacity for FCR exceeded the total market need (570 MW) as early as 2023. FCR prices subsequently dropped from ~€8,500 to ~€3,200/MW/month by mid-2025. Analysts at Capstone DC project that relying on ancillary services for 67％ of a typical German two-hour battery's income is an unsustainable share, as prequalified capacity fully exceeds demand.

In Great Britain, Dynamic Containment prices plummeted from £20+/MWh to average less than £1.50 per MWh by early 2024, with lows below 50p/MWh. Frequency response's share of total BESS revenue dropped from 84% in 2022 to roughly 20% by 2024. The UK market has since pivoted hard toward wholesale arbitrage and the Balancing Mechanism.

In France, batteries already supply 40–50% of primary reserve capacity despite only ~1 GW of installed BESS, leaving minimal room for newcomers.

The lesson is clear: any single ancillary service market will saturate quickly once BESS deployment scales up. Developers who build their business cases around a single product are exposing themselves to immense risk.

What Comes Next? Revenue Stacking and the Grid-Forming Frontier

The collapse of standalone ancillary service revenues has forced two structural shifts:

1. Revenue stacking is now the baseline. Modern BESS assets can no longer rely on a single market. They simultaneously compete across FCR, aFRR, day-ahead arbitrage, intraday trading, and capacity markets. They utilize AI-driven optimization software to switch between these services in real time. European BESS Index data suggests that sophisticated multi-market stacking can boost achievable revenue by 30–50% compared to single-market strategies. This dynamic is also driving the industry's rapid transition from 1-hour to 2-hour and 4-hour battery systems, as longer durations unlock deeper participation in wholesale energy markets.
2. Grid-forming technology is creating entirely new ancillary services. As Europe loses the physical inertia from retiring thermal plants, a new class of services is emerging: synthetic inertia, system strength, and black start capability. These features require a fundamentally different type of inverter, moving away from conventional grid-following designs to advanced grid-forming architectures.

For developers and EPCs, this isn't a nice-to-have — it's a compliance requirement and a revenue opportunity. Grid-forming batteries will be first in line for new paid inertia services as they emerge across European markets.

Key Takeaways

• Essential Function: Ancillary services are the behind-the-scenes functions that keep the electricity grid running at 50 Hz, including frequency regulation, voltage control, operating reserves, and black start capability.
• Market Saturation: For battery storage, frequency regulation (FCR, aFRR) was the original cash cow, but market saturation has caused revenues to fall dramatically across Europe's major markets.
• Strategic Evolution: The future belongs to operators who can stack revenues across multiple markets simultaneously and to hardware (particularly PCS inverters) that can meet the grid-forming requirements now being codified into European regulation.
• Adaptability: Single-market strategies are obsolete. The winners will be systems fast enough to qualify for the highest-value markets, efficient enough to profit from thin spreads, and smart enough to switch between them in real time.

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Sources

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https://en.wikipedia.org/wiki/Ancillary_services