Energy storage - what you need to know

Energy storage is an indispensable part of an energy system where generation and consumption are increasingly variable and security of supply is a growing priority. The following recent developments in Europe are key for investors:

Regulation and legislation: Energy storage is a key priority

Electricity storage policies are on the agenda of the EU and various member states. In March 2023, the EU adopted a 10-point recommendation to improve regulatory and financial conditions for electricity storage projects, and to incentive member states to develop national strategies. Spain expects to boost its storage capacity from 8.3GW to 20GW by 2030 and 30GW by 2050. Germany predicts that storage capacity will increase to 15GW by 2030 and 60GW by 2050. Hungary developed a €300 million+ support scheme for large-scale battery storage projects.

At both, the European and the member state level, efforts are underway to expedite and de-risk the permitting process for large-scale electricity storage has been accelerated. The draft Net Zero Industry Act mandates a maximum 18-month timeline for the construction and operation permits. For co-located facilities, even tighter timelines apply. Exemptions from the environmental impact assessments are now possible under certain circumstances. Moreover, several member states, such as Germany, have prioritised these projects by adopting new legislation declaring electricity storage projects to be of paramount public interest, significantly raising the bar for third party challenges.

Delays in grid connection remain an obstacle for large-scale electricity storage projects. In many member states, there is a deficiency in regulations that would allow for a privileged and accelerated grid connection of stand-alone electricity storage systems. In certain member states, such as Portugal, grid connection rights are exclusively awarded by tender. It is essential to analyse the associated project risks on a case-by-case and country-by-country basis.

New case law suggests a potential decrease of grid connection costs for electricity storage located in Germany. The Düsseldorf Higher Regional Court ruled the current methodology of calculating grid connection costs as unlawful. Currently, the financial contribution that storage operators have to invest in order to connect to the grid (Baukostenzuschüsse) accounts for up to 20 per cent of a battery farm’s fixed costs in Germany, depending on the location and the grid operator. Following the judgement, we expect that any new methodology will lead to a significant reduction in costs, particularly in favour of system-enhancing storage systems.

Project development & Financing

While the contractual framework for an energy storage project is similar to renewable energy generation assets, the route-to-market is potentially more complex due to the diverse number of contracts that may govern the route-to-market strategy. While sponsors often lean to fully merchant market strategies, which allow for greater flexibility and revenue, lenders usually look for a revenue floor as part of their bankability assessment. In addition, lenders will focus on the warranties provided by the battery manufacturer as a pivotal aspect. 

Market developments and trends

We expect the upward trend of growth rates for residential battery storage to continue as the rollout of smart meters, the availability of spot-market-linked tariffs for residential customers, system-enhancing components in network charges, as well as an increasing environmental and efficiency awareness will further stimulate the expansion of residential batteries. As a result, manufacturers and service providers in this space could become attractive targets for private capital.

Currently, the best use of battery farms is for both, the balancing market like the Frequency Containment Reserve and the spot market arbitrage for arbitrage transactions. In the future, the automatic Frequency Restoration Reserve (aFFR) may play a more important role in the use of battery storage, requiring careful evaluation of the shift from pay-as-bid to pay-as-clear with the launch of the PICASSO platform.

There is a growing appetite for co-located battery storage systems, particularly in the solar sector. The expansion of solar capacity is leading to falling spot market prices when the sun is shining, making it essential for solar farm operators to store electricity in order to generate sufficient revenues. In parallel, battery storage is becoming a component of self-supply models and is starting to be marketed on a very selective basis through long-term hybrid PPAs. Some Member States have passed support schemes to accelerate the deployment of co-location projects through, for example Germany through innovation tenders under the Renewable Energy Act.

In focus

Natural gas storage

In most Member States, natural gas storage operators are returning to normal market conditions without minimum filling obligations. However, in Germany, the legislator is currently in the process of extending the minimum filling obligation until April 1, 2027, which will particularly affect the revenue potential of pore storage operators due to their relatively low withdrawal capacity.

Hydrogen storage

The EU and its member states still lacks a clear roadmap for building large-scale hydrogen storage facilities. The European Commission estimated that €6-11 billion would need to be invested in hydrogen storage infrastructure by 2030, but so far there is no sign of this materialising. In Germany, for example, experts expect demand for hydrogen storage capacity to reach 74 TWh by 2045, while only 2 TWh is forecast for 2030. As a result, there is a lack of funding and regulatory incentives to build large-scale hydrogen storage facilities in the near future.  However, we understand that the German government and the storage industry have started talks to discuss solutions for financing storage facilities.

Thermal storage

Thermal energy storage (TES) is experiencing a surge in development, driven by the need to enhance the efficiency of renewable energy systems and the global push for decarbonisation. Current trends indicate that the TES market could triple by 2030, with installed capacity growing to over 800 GWh within a decade. TES will allow for greater reliance on variable renewable sources like solar and wind power. Investments in TES applications for cooling and power are projected to reach between US$13 billion and US$28 billion by 2030.

Our teams would be more than happy to support you on your energy transition or regulatory journey and discuss any aspects with you. Please feel free to contact your usual Freshfields contact or one of the key contacts on the right if you have any questions.