There has been much discussion around the impact of increased battery connections on NEM battery revenue. AEMO’s Q2 2026 QED noted that operating and commissioning grid-scale battery capacity in the NEM has now reached more than 9 GW with nearly 1 GW coming online in Q2 2026.
AEMO’s QED reported significant increases in battery discharge volumes during Q2 corresponding with significant declines in energy arbitrage revenue driven by falling intraday spreads. NSW spreads were down 90% to $41/MWh and Victoria was down 88% to $50/MWh.
Source: AEMO Q2 2026 QED – NEM-wide battery price spread
A key contributor to falling spreads was an absence of price volatility which saw the NEM average cap return (for prices above $300/MWh) fall 92% to just $3/MWh. Battery FCAS revenues were also impacted falling 51% to a total of just $4.8m despite an increase in the size of the battery fleet. In a recent article on this site Franz Schaffer asked if the NEM’s battery fleet was starting to compete with itself. He found that intraday two-hour price spreads have halved since 2024 due to declines in evening peak prices and increases in midday prices.
Grid-scale batteries earn their revenue from four main sources:
- Intraday spread trading – cycling of storage capacity to capture intraday spreads.
- Provision of FCAS – regulation and contingency FCAS and FPP payments.
- Provision of grid services – network support, SIPS etc.
- Revenue support contracts from incentive schemes e.g. LTESA, CISA and FERM contracts.
This article discusses how batteries could reduce their exposure to uncertain future electricity price outcomes by hedging their intraday spread revenue using time block derivative contracts.
Derivatives contracts
Derivatives contracts are an integral part of the NEM and allow participants to manage their exposure to volatile spot prices. In the NEM a retailer is exposed to high spot prices whilst a generator is exposed to low spot prices and so both parties have an incentive to swap their variable spot exposure for a fixed exposure.
The two simplest forms of electricity derivative are:
- Swap contract – two-way contract for difference. The buyer (e.g. a retailer) agrees to pay a fixed price to the seller (e.g. a generator) and the seller agrees to pay the buyer the spot price for a specified quantity of energy.
- Cap contract – one-way contract for difference. The buyer agrees to pay the seller a fixed premium and receives the spot price whenever the price exceeds the strike price (e.g. $300/MWh) for a specified quantity of energy. Generators that can ramp up quickly to capture volatility are a natural seller of this type of contract.
Derivative contracts can be agreed bilaterally between two parties (OTC or “over the counter”) or can be traded on a futures exchange such as that operated by ASX Energy.
Time block derivatives
Standardised time block derivatives are a relatively new swap contract that have evolved to meet market demand with two main providers offering the following time blocks:
TOD Markets Products
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- Overnight (ON) –12am-6am.
- Morning Peak (MP) – 6am-10am.
- Midday (MD) – 10am-4pm.
- Evening Peak (EP) – 4pm-8pm.
- Late Evening (LE) – 8pm-12am.
ASX Energy Products
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- Morning Peak Load Futures – 6am-9am.
- Evening Peak Load Futures – 4pm-9pm.
Both providers’ time blocks apply to all days within a quarter and are denoted in AEST. ASX Energy products are exchange-traded whilst TOD Markets operates an OTC marketplace through which matched wholesale participants enter an OTC derivative.
The TOD Markets products cover the full trading day and so can be used to derive an intraday spread. For a battery that charges in the middle of the day and discharges in the evening the most relevant intraday spread product is the Evening Peak less Midday (EP-MD) spread.
Historical trends for TOD time block products
TOD Markets have kindly provided historical data to allow consideration of the intraday EP-MD spread in QLD for the calendar 2027 period.
The following charts show how the closing prices for the QLD Cal27 EP and MD products have trended over the last 16 months compared to the rolling average 365 day spot prices for those same time blocks. The EP product has traded throughout that period whilst trading for the MD product has only really taken off during 2026.
The charts show that the contract prices have generally followed the decline in the rolling 365 day spot prices with a difference reflecting a contract premium. This implies that both buyers and sellers of time block contracts have responded to changes in spot prices but that sellers can command a premium for providing increased price certainty to buyers.
Source: Analysis of TOD Markets and NEM spot data
The following chart shows the trend in intraday spreads for the EP-MD time blocks with the wider contract premium during 2025 reflecting some illiquidity in the MD contract.
Hedging battery revenue with intraday spreads
The aim of hedging is to minimise the variability of future cashflows. Using time block derivatives allows a battery to execute the following simple hedging strategy:
- Sell EP and buy MD contracts.
- Charge evenly during the MD period (pay the actual spot price).
- Discharge evenly during the EP period (receive the actual spot price).
Ignoring round trip losses and MLFs the net result from this strategy is to lock in the intraday EP-MD spread and reduce the battery’s exposure to volatile spot prices. The hedge does not require the battery to abandon physical optimisation and it may continue to respond to five-minute spot prices, FCAS opportunities and operational constraints.
Whilst batteries could be expected to outperform this rather simple hedging strategy they face the problem that over time their collective actions are impacting the resultant spot price. Therefore, a neutral hedging strategy of this form can provide a useful baseline for budgeting, developing an investment case and for bidding into a revenue support scheme such as the NSW Roadmap, FERM and CIS.
About our Guest Authors
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Paul Austin is an independent energy market consultant with more than 30 years of experience in Australia’s electricity and gas markets. For the last 10 years he worked at AEMO on major NEM reforms including the Nelson Review, the ESB’s Capacity Mechanism and assisting ASL with the NSW Roadmap and CIS. Before joining AEMO Paul held various senior positions over 20 years at AGL and EnergyAustralia covering portfolio optimisation, derivative risk management, forecasting and finance.
You can find Paul on LinkedIn here.
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I would suggest that grid batteries are already earning revenue from a fifth source, being the contracts they have often sold to counterparties such as physical/virtual tolls, revenue shares etc. This should include your block contracts.
Shouldn’t the two key derivatives just be a cap (call option) and a floor (put option)? This is because a swap is simply the combination of a cap and floor at the same strike, with the premia netting each other off…
Hi Warwick, yes selling those types of contracts is another way for a battery to hedge its revenue but the use of time block products is relatively new and has some advantages in terms of liquidity and standardisation. A cap is different to a call option in that it is automatically triggered every trading interval depending on the spot price. Options are certainly used in electricity markets e.g. a swaption is an option to enter a swap at a fixed price at a future time. The listed time block products on the ASX and TOD Markets have a swap structure at present.