Risk management as a core capability for monetising BESS flexibility

Battery energy storage systems (BESS) are increasingly seen as a cornerstone of the energy transition. Their ability to smooth imbalance positions and provide fast reacting flexibility makes them an attractive addition to generation and trading portfolios. In many investment cases, batteries are positioned almost exclusively as a source of upside: reducing imbalance costs, mitigating price cannibalisation and unlocking new revenue streams.

However, our experience across due diligences, portfolio integrations and trading operating model reviews tells a more nuanced story. Batteries do not remove risk - they change its nature. And unless these new risks are clearly understood and actively managed, the value case for BESS can quickly weaken.

The organisations that consistently extract value from storage are those that treat BESS not as a passive hedge, but as an active market facing asset.

Batteries as market facing assets 

At their core, batteries are exposed to short-term power market dynamics. Revenues depend less on producing volume and more on capturing spreads across timeframes and value pools – charging when prices are low, discharging when prices are high, and allocating capacity between wholesale, balancing and ancillary service markets. This makes BESS particularly sensitive to:

•    Short-term spread risk, where realised value depends on the spread between charging and discharging opportunities across day-ahead, intraday, balancing and ancillary markets
•    (Algo/Auto) Execution risk, where the asset is committed to the wrong market, at the wrong time, or without sufficient state of charge or availability
•    Saturation/ Structural long-term risk, where increasing battery penetration or changing market behaviour reduces arbitrage and flexibility value over time
•    Technical and operational risk where asset failures, degradation, availability constraints, telemetry issues or weak operational processes can directly reduce dispatchability, revenue capture and contractual performance
•    Credit risk in the case of third-party agreements and termination rights which might be linked to underperformance can turn operational or trading issues into direct financial exposure
•    Regulatory risk where changes in market design, network tariffs, REMIT requirements or battery-specific rules can materially alter revenue pools, operating obligations and the overall economics of the BESS business case

Unlike traditional generation, much of this risk materialises through day-to-day trading and operational decisions. The key question is not simply how much energy is dispatched, but whether the battery captures the right spread at the right time, after accounting for efficiency losses, degradation, imbalance costs and opportunity cost.

Technical constraints create commercial risk

BESS are often modelled as highly flexible assets. In practice, technical limits play a significant role in shaping outcomes. State-of-charge boundaries, efficiency losses, degradation and cycling limits all restrict how and when a battery can operate. Baringa supports clients in assessing these technical and commercial constraints in new projects, strategies and energy-infrastructure transactions, including battery energy storage systems. Read more about Baringa’s Technical Advisory work.

A common issue we observe is a gap between how batteries are valued on paper and how they can actually be run. This creates risks such as:

•    Overstated flexibility due to simplified asset assumptions
•    Unrealistic availability expectations during periods of sustained stress
•    Long term value erosion where cycling decisions accelerate degradation

When technical limits are not fully reflected in trading and risk processes, both upside and downside are consistently mis estimated.

Regulatory and market design risk: a moving environment

Battery revenues are closely linked to market design. Changes to balancing rules, gate closures, ancillary service products or capacity mechanisms can materially alter revenue streams.

This is particularly relevant in markets adapting to high renewable penetration. Batteries often benefit early from increased volatility, but their revenue pools evolve quickly as market rules adjust.

This introduces structural risk: strategies that perform well today may not hold under future market designs. Successful BESS operators therefore embed regulatory insight, scenario analysis and market design understanding directly into commercial decision making.

Algorithmic trading: scaling both value and risk

Given the speed and complexity of battery optimisation, algorithmic trading is central to capturing value. When implemented well, algorithms improve speed, discipline and consistency. But they also introduce new risks:

•    Models may not perform as expected outside normal market conditions
•    Similar strategies across participants can reinforce market moves
•    Limited transparency makes it harder to intervene when behaviour changes

Without strong oversight, testing and controls, automation can amplify losses as quickly as it captures gains.

Algorithmic strategies should therefore be governed carefully: with version control, pre-deployment testing, backtesting against achievable benchmarks, and daily P&L attribution against expected value. 

From risk awareness to operating control

The real differentiator in BESS is not simply identifying risks, but embedding them into daily operating controls. The main risk in BESS is not that markets move - it is that the asset, data, algorithms and operating model are not mature enough to respond in time.

Mature operators define clear risk ownership, limits and escalation paths across trading, optimisation, asset operations, back office, risk managers and compliance.
For third-party optimisation models, this becomes even more important.

Underperformance, missing data, operational incidents or unclear responsibilities can quickly become customer disputes, collateral issues or termination risks. Risk management therefore needs to monitor not only trading performance, but also customer-facing obligations and the credibility of the operating model.

A new risk profile – and a real opportunity

Battery storage introduces a different kind of risk to the energy business: faster moving, more operational and closely linked to market design and technology. But this is not a drawback. It favours organisations that bring strong risk frameworks, clear data and disciplined decision making. In BESS, risk management is not a control function at the end of the value chain; it is a core capability for monetising flexibility.

Baringa’s PowerFlex team supports clients across the full BESS value chain: from revenue modelling and route-to-market design to optimisation strategy, governance, risk controls and performance monitoring, helping ensure that flexibility value is not only modelled, but captured and managed in practice.