Europe has been slow in recognizing the role of energy storage assets in the power markets. The current market conditions, in terms of frequent oversupply, increasing number of zero and low power prices, have all highlighted the limits of flexibility in the region.
This limitation has now been acknowledged by the European government. More governments and Transmission System Operators (TSOs) are recognizing the crucial role of energy storage by incorporating energy storage targets in their National Energy and Climate Plan (NECPs) and national energy plans.
As a result of current market conditions, the industry is seeing a more diversified European energy storage market emerging. Developers are shifting interest from the UK to other European countries, where the urgent need for flexible resources is clear.
However, which market next to target always comes down to the accessibility of available revenue streams – both merchant and contracted. While in some markets the merchant revenues remain assuring and healthy, in others all eyes are on the next available storage-friendly auctions – in other words, contracted revenue.
Take Germany for example, which has recently been referred to as the new UK in the grid-scale storage segment. Here the energy storage market will pass in total 15 GW by 2033 from 1.4 GW today. The increasing demand in this country is driven by existing energy trading opportunities, topped up with revenues from ancillary markets and upcoming balancing services. In other words, Germany promises a healthy lifelong merchant revenue.
It’s a different story in Italy, where all players are awaiting the MACSE tender or the upcoming capacity market auction. Italy has set the highest energy storage target in terms of energy in Europe, which is to install 71 GWh by 2030. To help meet this target, Terna has decided to take the regulated approach to provide developers with fixed remuneration contracts for 12 to 14 years for lithium-ion batteries, and up to 30 years for pumped hydro. MACSE terms will be detrimental to the competition among technologies, players, as well as market prices.
Meanwhile, in Greece the government held two energy storage tenders in October 2023 and February 2024. Oversubscribed storage tenders show a rush for contracted revenue among active players in this country. Interestingly, the tender results show that the awarded capacity with lowest bid prices might have earned in fact more from the market going purely merchant.
So, the shift in Europe’s grid-scale storage market is clear, with new opportunities opening up. Different European countries offer different types of support mechanisms in terms of contracted revenues, in the form of capacity markets, storage tenders or PPA contracts, depending on existing regulations and available funding. The European Commission has called the existing mechanisms insufficient and has proposed the introduction of a Europe-wide flexibility support scheme.
(Graphics 1 and 2 show the dominant type of available support schemes in Europe and awarded capacity per country and auction type).
Only since 2020, 16 GW of derated battery capacity has been awarded in different European auctions, which are due to come online in the next three to five years. But this is just a beginning, with more than EUR 2,5 billion expected to be invested in different types of storage auctions and tenders highlighting the role of energy storage as a flexible resource.
Storage contracted revenue and route to the market for both hybrid and standalone systems will not remain for long as they are dependent on government-led auctions and decisions.
In the coming years, an emerging route to the market will see PPA and tolling contracts incorporating storage assets. According to Wood Mackenzie’s database, so far, hybrid PPAs remain extremely limited with only seven contracts signed across four markets. But this will change as higher curtailment and cannibalization risk will create a demand uplift. Besides, industrial players and manufacturers are becoming increasingly exposed to volatile power prices and pressured by decarbonisation targets. Energy storage offtake contracts could empower these players to hedge against power price volatility, assure 24/7 demand matching, and meet their climate goals.
For tolling contracts, in June 2024, the first tolling contract was signed in the UK between Gresham House and Octopus Energy, covering nearly half of Gresham House’s battery portfolio.
Storage tolling contracts will remain dependent on use cases as well as the risk appetite of a battery’s owner and offtaker.
While the storage tolling contracts could have different types, here we focus on physical and virtual tolling:
Physical tolling is more commonly signed among a battery owner and a utility or power producer as an offtaker. This model is similar to renting out a battery to an offtaker, where the offtaker has full rights to the storage and controls the battery dispatch. In return, the owner receives payment, according to the contract term.
Whereas virtual tolling contracts are more complicated and have various types. But generally speaking, for virtual tolling contracts, the owner retains operational control of the battery, while the offtaker sets the virtual charge and discharge schedule of the battery. The extent of the offtaker’s involvement in the battery’s operation comes at a different premium cost. This type of contract has the potential to be the most common type of battery contracting across Europe, as it could satisfy the demand of different offtaker types, from utility and energy companies to industry and manufacturers.
Anna Darmani is lead analyst on Wood Mackenzie Power & Renewables’ global energy storage team and focuses on storage in Europe, the Middle East and Africa. She previously worked at EiT InnoEnergy, developing innovation and technology roadmaps and contributing to EU research and advisory projects. She was a founding member of the European Battery Alliance.