Merus Power: Electricity storage market undergoing rapid development

Translation: Original published in Finnish on 6/4/2025 at 7:04 am EEST.

The electricity storage market has grown rapidly in recent years, and Merus Power has succeeded in achieving a significant market position in Finland in electricity storage for frequency regulation. We expect returns on the currently most attractive fast frequency regulation segments of the frequency regulation market to average out in the coming years, which may negatively affect the continuity of growth in the electricity storage market. The focus of investments in Finland is shifting towards electricity storage with a lower power/capacity ratio, which can be used for slower adjustment or arbitrage in the wholesale electricity markets. Merus Power's electricity storage business has so far focused only on Finland, but expanding operations to international markets could diversify the risks of demand fluctuations related to the local operating environment and thus strengthen the stock's investment case. Supported by revenue growth prospects, the company has good prerequisites for a turnaround in profitability during the current year as scale and efficiency improve.

Frequency regulation market behind Merus' strong growth

The frequency regulation market maintained by Fingrid has so far been the most important demand driver for Merus Power's electricity storage business, the revenue of which has multiplied in recent years. The returns on the frequency regulation market in fast regulation segments have been very high in recent years, e.g. due to the rapid growth of wind power production, which has attracted customers, such as private equity funds, to invest in new storage facilities. The purpose of the frequency regulation market is to maintain the stability of the electricity grid and prevent disturbances such as the power grid collapse seen in Spain and Portugal on April 28 (the exact cause of the event is unknown).

Demand is increasing, but rapid capacity growth may saturate the market in the coming years

Battery storages are technically particularly well suited for rapid frequency regulation. According to Fingrid's forecast, demand in the fast sub-segments of the frequency regulation market will grow by a total of around 45% between 2023 and 2030. This translates into a total additional demand of around 300 MW (graph below), which, when converted to an annual level, would mean a growth rate of 43 MW/year. The demand for electricity storage is affected not only by market growth, but also by the development of competing control technologies. Hydropower has a significant share of the fast frequency control markets (~40% in the FCR-D and FCR-N segments), but the amount of hydropower capacity used for frequency control is unlikely to increase and may even decrease, due to factors such as Fingrid's tightening response time requirements and other attractive applications for hydropower. On the other hand, demand response capacity is growing, which partly competes with electricity storage, although it is a relatively smaller segment.

Source: Fingrid and Inderes' estimate

In our estimation, the supply of electricity storage capacity seems to be growing even faster than the demand in the frequency regulation market, which has been influenced by the very attractive returns offered by fast regulation segments in recent years. As late as fall 2024 (October 8), the electricity storage capacity certified for the frequency regulation market was only 84 MW, but by spring 2025 (April 29), the amount had already increased to 200-255 MW, depending on the segment. The amount of capacity will continue to increase in the near future due to already known projects, and the current annual capacity increase will clearly exceed the growth in demand, which will lead to the averaging of returns.

Some electricity storage projects in Finland 2025-2026

Source: Company releases and Inderes’ estimate. The list is not exhaustive, but rather a sample of high-profile projects.

Our conclusion regarding the situation in the fast frequency reserve market is that the growth of capacity being built for the market is likely to slow down in the coming years, as the annual additional construction of hundreds of megawatts for fast frequency reserve is not sustainable in relation to demand development. After a phase of rapid growth, demand may fluctuate up or down from time to time as the market seeks balance or, for example, as financial conditions vary.

Electricity storages have other uses besides fast frequency control

However, the gradual saturation of the fast frequency regulation market is unlikely to stop the growth of the entire Finnish electricity storage market. Electricity storage can also be used in slower adjustment segments (e.g. mFRR up and down regulation), which Fingrid forecasts to grow by around 1,000 MW between 2024-2030, which is clearly more than rapid frequency regulation. However, the returns offered by these segments for electricity storage facilities are lower than what has been seen in the fast frequency regulation segments in recent years. The interest of electricity storage investors is currently clearly shifting towards slower regulation segments, which is reflected, among other things, in the decrease in the power/capacity ratio of the most recent electricity storage projects. In addition, electricity storages can be utilized in price arbitrage in the wholesale electricity markets.

In the fast frequency control segments, electricity storages have mainly been built with a discharge ratio of 1:1 MW/MWh (discharge time of 1 hour), but the list above also shows a few large projects with a discharge time of 2 hours, and in our understanding, such projects will become even more emphasized in the future. This means that future projects will have larger batteries. As batteries are sourced through subcontracting, the relative share of Merus Power's own power electronics components in projects may decrease, although the overall size of the projects may still increase in absolute terms. The larger size of the projects may pose a challenge for Merus Power in terms of working capital financing.

Growth and diversification are also being sought internationally

Merus Power's revenue from electricity storage has so far focused on Finland, although the company has a broad global customer base for its power quality solutions. The company aims to expand its electricity storage business outside of Finland to pursue broader growth opportunities and, on the other hand, to diversify demand. We consider it likely that the company will succeed in securing an electricity storage order from outside Finland as early as 2025-2026. At the same time, we would like to point out that the profitable delivery of projects to new markets is not a given, considering that achieving profitability has taken longer than expected even in the domestic market in Finland. International expansion would likely be carried out with the help of a local partner, allowing Merus Power to focus on the technological aspect of the delivery.

We forecast a profitability turnaround for 2025

Our forecast for Merus Power's revenue in 2025 is 45 MEUR (growth of 25%), of which the estimated share of electricity storage is 30 MEUR. Revenue from electricity storage deliveries has grown rapidly, as the annual revenue from electricity storage was estimated at 0-3 MEUR/year between 2018 and 2022. Energy storages are a low-margin business, as a significant part of the whole consists of subcontracted batteries. We estimate the material margin of electricity storage units to be around 20% compared to the 45% level for power quality solutions. Although its share of the group's revenue is probably already more than half, we estimate that its share of the group's gross profit is only just over a third. In recent years, the company has invested significantly in the development of its own trading services, which enable customers to make optimal use of the electricity storage in various markets, both in terms of returns and battery life. The introduction of the services from 2025 onwards could gradually start to generate a revenue stream for the company that compensates for expenses, which supports the pursuit of a turnaround in profitability. We forecast EBITDA for 2025 to improve to 2.0 MEUR (2024: -0.8 MEUR) and EBIT to increase to 0.5 MEUR (2024: -2.1 MEUR).

Source: Inderes' estimate (the company does not report a breakdown of revenue by segment)