Lack of incentives to hinder German battery storage sector

• Increasing share of intermittent renewables could lead to more price volatility
• The grid will likely require more flexible assets as it decarbonises
• The regulation and incentives for battery storage lag behind other markets

LONDON (ICIS)–Germany’s lack of regulation or targets for new large-scale battery storage could result in more power price volatility as the country increases its reliance on intermittent renewable generation, according to ICIS analysts.

Germany has the second-largest installed battery storage capacity in Europe with 0.55GW, around half of the UK’s 1.2GW.

However, battery storage capacity growth rates in Germany could stall unless regulation becomes clearer and more incentives are offered, an industry expert told ICIS.

POWER PRICE VOLATILITY

Germany’s four power transmission system operators have had to contend with multiple occasions of wide price volatility brought on by supply fluctuations during the winter of 2020-2021.

Between 3-8 January 2021, the Day-ahead power price on exchange EPEX SPOT rose from €46.74/MWh to €82.17/MWh.

The surge came as a result of plummeting wind generation alongside below-average temperatures. Wind generation during that week dropped from 18GW to 5GW, while the 2018-2020 January average was 20.6GW.

With Germany in the process of decarbonising its power mix by increasing the share of intermittent renewable sources and shutting down over half of its coal fleet by 2030, events like the cold snap of early January 2021 are likely to become more frequent. One potential to balance such issues could be via the flexibility provided from battery storage.

ICIS long-term power forecasts show Germany’s renewable capacity will expand at a faster rate than the European average.

ICIS analyst Roy Manuell explained that the German power grid will experience a rising share of wind and solar in the mix, high imports and high power prices relative to neighbouring markets. As a result, there is a need for strong investment incentives for batteries in order to provide the necessary flexibility and strengthen security of supply following thermal capacity closures.

THE NEED FOR BATTERY REFORM

“A sluggish and uncertain regulatory environment remains in place and will keep a brake on development that would otherwise lead the battery storage sector to experience higher growth rates and capacity additions similar to those seen in the UK,” Manuell said.

The main market open to storage operators in Germany is the ancillary service frequency containment reserve (FCR), meant to address shifts in electricity supply with sub-second reaction times. Upon launching in 2016, FCR attracted significant interest and was behind much of the battery sector’s initial growth.

However, as seen with the UK’s own initial frequency auctions, the German FCR service has become over-subscribed, pressuring the service’s prices to fall from around €9/MW/h in 2019 to €6/MW/h at the start of 2020. The fall in prices could make the German market increasingly unattractive to new participants, hindering capacity growth.

According to Matthias Simolka from German energy market consultancy Team Consult, decreasing FCR prices have led the battery business case to centre itself around a combination of applications, including power price arbitrage and peak shaving to reduce grid costs for the operators.

Combining two or more utilisations increases the complexity of the battery storage operation in comparison with a single-use application, but has effectively become the standard for the economic operation of batteries.

In addition, battery storage facilities are technically subject to several levies and taxes that affect both consumers and generators in the German market. The fact that operators receive a collection of exemptions from most of these charges adds further complexity to the system and the service is unlikely to attract further growth unless a wide reform process is undertaken, as seen with the UK’s new dynamic containment, according to Manuell.

In particular, two areas with high growth potential have been highlighted by market actors, namely the recent success of solar and storage co-location in German innovation tenders as well as the approval of storage as a replacement for grid upgrades through the grid booster project. However, the small size of the tenders and both projects’ uncertain future makes them unlikely to drive the kind of capacity investments needed ahead of Germany’s fast-paced decarbonisation.