What lies ahead for energy storage in Europe?
Tadgh Cullen, Energy Storage Manager, examines barriers, progress and opportunities
In Europe however, there has been little progress.
An EU report last year concluded that energy storage solutions were needed if Europe was to meet its energy targets and achieve its climate objectives. So why has there been far less storage built out in Europe, what is the status of the market and what will drive change?
We must consider three key areas: increasing energy market volatility, effective single-buyer market design (explained below), and a growth in investor confidence. Together, they highlight the largest barrier to mass storage deployment: generating a return that incentivises investment.
We know that as more renewables come onto the grid, wholesale merchant market volatility, meaning the gap between the price electricity is bought and sold at, will increase. This is because renewable sources of power are intermittent and not continuously available to meet the required demand (non-dispatchable).
Accordingly, we have seen volatility increase in markets where renewables are becoming more prominent, such as California, Queensland and especially South Australia, where they have experienced negative prices (when supply exceeds demand) for a record 8.4% of the time from July to September 2019.
Increasing volatility and negative pricing periods are both opportunities for energy storage, while being risks for renewable generators. During periods of high irradiance or high winds, the market will start to cannibalise; in other words the wholesale electricity price will reduce during periods of high renewable generation making returns for merchant wind and solar projects increasingly uncertain, and difficult to forecast.
Co-locating merchant renewable generators with energy storage would enable investors to capitalise on a volatile market, allowing a higher energy price to be captured, while reducing their market risk, and improving returns.
Markets tend to evolve to solve their own problems, but the timeline to this is difficult to predict and it is likely to not evolve quickly enough to increase renewable generation to the levels required to meet our emission reduction targets.
Single-buyer market design
There is hope, however. The process of developing energy storage solutions can be sped up by effective single-buyer market design. That means designing a market that incentivises investment into energy storage through short to medium-term bankable contracts. This would allow for a quicker ramp-up in renewable energy penetration while minimising the need to curtail renewable generation due to market or technical reasons. Encouragingly, green shoots of progress are emerging across several European markets…
Ireland has designed a market that incentivises investment into energy storage by giving investors confidence that their investment will make a guaranteed return in the first few years of operation. The market is designed to reward flexible and fast-responding assets to improve deviations in system frequency, meaning that during periods of either too little or too much generation on the electricity grid, batteries will respond quickly to either consume or export energy to help rebalance the system. The fast frequency market is technology-neutral; however, its technical requirements mean that few technologies other than energy storage can partake. The new market ensures embedded flexibility in the electricity system while reducing the reliance on fossil fuel inertia-producing generators, and allowing for a continued increase in renewable energy penetration.
In the UK, developers are submitting grid and planning applications for utility-scale co-located renewable energy projects. This is with the expectation that the market will evolve and will eventually demonstrate the required returns and certainty to make an investment possible. While the UK Government’s new Contract-for-Difference (CfD) consultation document, published March 2020, appears to focus on increasing renewable energy capacity, it does not incentivise flexibility which is going to become increasingly important in a cannibalising market. A market that incentivises flexible renewable energy generation is what is required, and it is yet to be seen if the CfD will achieve this. Without flexibility, the UK will not achieve its renewable energy targets.
With the current Stimulation of Sustainable Energy Production (SDE+) subsidy regime in the Netherlands, there is no incentive for solar power to be dispatchable. It is simply a subsidy and offers no value to flexibility. However, the Netherlands, along with Belgium, Austria, France, Switzerland, and some German regions take part in a common frequency market which dictates that up to 100% of their frequency power requirement can be sourced from the common market, with the remainder being sourced locally. This market is much larger, and less likely to saturate as quickly as other frequency markets have done, such as the UK. However, being a daily contracted market, there is great uncertainty in relation to the future clearing price, and therefore it is currently a high-risk investment. If this market evolves to offer longer term contracts, the uptake in investment could see a mass deployment of energy storage across central and western Europe.
The Spanish renewable energy market is incredibly compelling. Solarcentury is currently constructing 500MW and has a further 1GW solar pipeline under development. However, the picture is not so favourable when it comes to storage. There is not yet a proscribed process for connecting storage to the grid. This may not matter for the next few years as there is a clear demand for new renewable power with no shortage of PPA counterparties. However, looking at the impressive Spanish renewable energy pipeline, there will come a point where there is not enough embedded flexibility in the system. Further expansion of renewable generation will not be possible as inertia in the form of fossil fuel generators will be required to maintain system integrity.
Italy has plans to trial a new single-buyer market. A new “Fast Reserve” market will be piloted to operate alongside the existing Primary Regulation. This new service will target very quick responses to frequency deviation and will offer a 3-4 year contract. It will be a fluid market, with each energy storage project required to be available for 1,000 hours per year, with participation in other markets allowed. This effectively minimises contracted risk while putting a market in place that should offer enough guaranteed revenue to make energy storage an attractive investment.
What lies ahead for energy storage in Europe?
It is inevitable that energy storage will become an investable technology, and we have started to see the signs that both the single-buyer and merchant markets are evolving to allow for the mass roll out of energy storage and therefore, an increasing renewable energy penetration.
Governments and regulators need to move towards designing pro-renewable and pro-flexibility markets. The new CfD being proposed by the UK Government must be fit for purpose, and not simply reinvent an already out of date market similar to the UK Capacity Market that incentivises both current and new build fossil fuel generators.
COVID-19 has added great uncertainty in relation to wholesale market prices, and while it is difficult to look beyond the immediacy of the human tragedy that’s unfolding, there is a glimmer of hope, that the massive reductions in carbon emissions worldwide will prove to governments that a decarbonised grid is both possible and worth the cost.
We are already seeing early stages of this occurring.
The ‘Green Recovery Alliance’ launched by the European Parliament on April 14th 2020 places carbon neutrality at the centre of our economic recovery plan post COVID-19. It is a united global alliance, that is committed to offering the necessary investment solutions, aligned with climate commitments, to revive the economy once we see the end of this crisis