Research
The Erasmus socket: A moving target for batteries across Europe
Battery Energy Storage Systems (BESS) have a key role to play. A huge BESS capacity has to come online to provide flexibility in the system. The value of any project is the result of technical, economic, regulatory and market factors and varies per year. In this article we map the key shaping dynamics for the sector across the EU.
Battery Energy Storage Systems (BESS) have a role to play as enablers of the energy transition. They are essential to accommodate the increasing variability introduced by weather-dependent, renewable energy sources (RES) in the European power generation mix. A significant BESS capacity has to come online if Europe is to reach its climate targets, with a central role for wind and solar in the power generation.
This expected pivotal role for BESS has attracted a wave of significant investment appetite. A wave that, so far, has spread unevenly across Europe, not just because of the differences in weather.
A BESS-related business case is based on the acknowledged economic value of accommodating weather-dependent generation. This valuation is the complex outcome of technical, economic, regulatory and market factors. And it greatly differs across Europe. To make it even more complex, it also changes as the energy transition progresses.
This article maps the shaping dynamics for the sector across the EU and attempts to identify the key factors for a timely deployment that will allow the EU to reach its climate targets.
Plug & bill batteries?
It is well known that a carbon-free power system, relying on weather-driven RES, will require significantly more flexibility. While batteries can provide a significant share of this flexibility, the supporting regulation framework to enable this is not there yet on a European scale.
The EU is setting ambitious renewable targets, with wind and solar power the new norm. How much additional flexibility will the European grid need as a result? And how much of that flexibility can, or has, to be provided by batteries?
The answer is so complex and dynamic that, whoever is giving you one single figure, is either oversimplifying, ignoring, or, in the best case scenario, leaving aside many crucial factors. As a result, the analysis of the business case behind a BESS investment is far from straight forward.
The complexity, besides that inherent to the energy system and to its market structure, stems from several sources. To begin with, the current transitioning phase of the energy system. Every year the system changes so much that the previous year’s data won’t tell the full (or much) story for the next two years. Furthermore, geographically, despite the anchor point provided by the EU regulation on the internal energy market, every national power market shows critical differences regarding the BESS operation. Considering a project in one EU country or another can very well resemble the experience of the Erasmus grant’s program: your degree may have the same name, but everything else will be different. Finally: methodologically, as introduced before, understanding the economic value of the flexibility needs of the energy system is, in itself, a complex task requiring a portfolio of assessment capacities.
Flexibility for the energy transition: a moving target.
When analyzing future flexibility needs, weather variability may be one of the easier factors to deal with. Weather dynamics are followed by an extensive list of techno-economic factors: evolution of the generation mix and demand, power transport and distribution infrastructure deployment, or markets behaviour and all of the related regulation, to list a few.
What is more, most of them are a moving target, as represented in Figure 1. Climate targets triggered the deployment of wind and solar-based renewable electricity generation, introducing non-dispatchable generation into the energy mix. The increasing cost competitiveness of solar and wind generation is now pushing massive volumes of variable generation into the system. This can even result in a negative power price during the hours with oversupply of non-dispatchable generation, questioning the future return of investments under existing markets formulas. To make it more complex, residential rooftop PV panels are increasingly becoming generators , something the distribution grids were not originally designed for.
These trends result in a power supply with lower CO2 emissions. They also enhance the security of supply by reducing its exposure to external fossil fuel suppliers. But it comes at the expense of an increased need for flexibility or dispatchability.
In the view of these dynamics, European regulators, who are also influenced by a fragmenting global order, develop and update supporting frameworks to accommodate the increasing weather dependence of the power supply. They aim to develop frameworks that are as predictable as possible, to enable the return of the massive investments required.
As already well known, batteries devoted to providing flexibility in the grid have different revenue stacking opportunities. Such revenues can also be location dependent, since they may differ following the conditions of the grid and the bidding zone where the battery is installed).
As a result of this transitioning cycle, the market conditions will vary greatly every year. With such moving market fundamentals on all structural fronts, historic market data provides insufficient information to fully understand the future prospects. Attempting to assess how such dynamics will develop in the middle or in the long term requires considering the changing fundamentals through the coupling of macro, techno-economic, grid, user-reactions and weather models. A complex academic attempt, not yet finalized for use in an operational manner in the investment world.
A transitioning energy system: the flexible sudoku
Many studies are looking at the future market prospects for utility-scale batteries, trying to address this complexity. They range from short-term solutions for specific geographic areas, based mostly on markets data, to very complex arrangements of connected models aiming to capture the interaction of some of the multiple factors referred to before.
So, what are the future flexibility needs?
On the most complex end of these studies, lies the research conducted by the Joint Research Centre (JRC) . This work relies on the Green Deal’s MIX-H2 scenario to provide the expected evolution of the energy system, and its aggregated flexibility needs. Like any other model, it includes an extensive set of assumptions, such as on energy and climate policies, cost evolutions and underlying economic development, aiming to capture the already simplified dynamics depicted in Figure 1. Therefore, the resulting conclusions must be understood in such context. MIX-H2’s climate targets include a 55% GHG reduction and a 40% renewable energy share by 2030.
The above scenario sees the flexibility needs of the EU more than doubling from the 11% electricity demand registered in 2021, up to 24% in 2030, with a peak of 30% of the electricity demand by 2050. Taking into account the foreseen electrification of end-uses in the underlying scenario, such future flexibility needs can be translated to a remarkable equivalent to 80% of today’s total EU power demand. The research from the JRC adds another modelling with hourly resolution, able to verify if such storage capacity will fulfil the detailed flexibility needs.
In short: we would need the equivalent of almost a full current EU power system of flexibility by 2050 if we want the energy system to be fully carbon neutral.
As illustrated in Figure 2, the following logical question is how much of this future flexible system is expected to be provided by batteries? Flexibility also needs a temporal component – it can be a matter of hours (or seconds), weeks or seasons. Batteries can (mostly) bill when discharged. To discharge, they first need to be charged. But since they are also limited by their power-to-energy ratios, their contribution is mostly centred on the hourly and daily flexibility needs, although it may also reach the week time span.
According to the MIX-H2 scenario, the EU power system will need almost 49 GW of batteries by 2030 and more than 207 GW by 2050. The time-detailed operational research conducted by the JRC shows that such capacities would suffice to meet the hourly dynamic requirements of accommodating the required flexibility, but its granularity is not suitable for the below-hour threshold in which most of the ancillary services occur.
Complex enough? Yes, indeed. But even then, it can get messier.
For example, the study does not cover another essential factor: the transport and distribution grid. Including this would provide insight into the detailed flexibility that the transport and distribution grids require, in the corresponding bidding zone. This can also be essential for certain revenue expectations in real-life projects.
So, what can be done about it? A time and geographically-layered analysis is in order.
To address these concerns, the European Agency for the Cooperation of Energy Regulators (ACER) has recently published the European Resource Adequacy Assessment, as proposed by ENTSO-e, the aggrupation of European transport grids operators. The ERAA method aims to “identify adequacy risks up to 10 years ahead and thus assists stakeholders in making well-informed investment decisions”. The assessment includes hourly resolutions and geographical split in main bidding zones, and covers the UK as well as the EU. The resolution of the ERAA aims to inform the time span between 2 and 10 years. It sits between the very short-term focused seasonal outlooks and the longer term focus of ten-year network development plans (TYNDP) of ENTSO-e. On a national note, the ERAA is complemented by national resource adequacy assessments (NRAA) (Check for example those for NL or ES). Furthermore, acknowledging this evolving nature of the flexibility needs, the EU’s electricity market reform includes the requirement for a bi-annual assessment of the foreseen flexibility needs for at least the next five years.
These cases illustrate how the standard “market prospects” questions become far from standard in the case of utility-scale BESS and the multiple avenues for revenue stacking.
So, at this point, do we have something clear?
Well, there is, at least, the physical certainty that the massive pipeline of solar and wind waiting for connection points across Europe and towards 2050 requires flexibility in a magnitude equivalent to today’s EU power system.
But, as illustrated, the assessment of each specific MW project requires a deep understanding of the structural moving factors. And it requires an exploratory look both in terms of time (from the short-term hourly markets to yearly infrastructure investments) and in terms of the geographical (European, national and local level) domains, to get a fair idea about a constantly moving target.
Distributed energy resources: the European patchwork.
So, facing an urgent need for more flexibility, and being a complex moving target, is there at least a clear regulatory framework to help investors and asset owners to assess such uncertain revenue prospects?
Well, not really,… yet.
But the good news is that there is a significant effort in the regulatory pipeline.
ACER also recently analyzed the key barriers to the participation of distributed energy resources (meaning energy storage plus demand response and distributed generation) in the EU’s electricity markets and in the system operation services. ACER highlights how, although there may be a dispersion of low entry barriers for the demand response, when piled up, they can result in a remarkable burden.
The summary of ACER conclusions paints a portrait of strong European diversity and is an alarming sign of the EU’s persistent market fragmentation despite all the progress made, see Figure 3. From the market design point of view, ACER points to the key elements required to establish a supportive framework enabling the market uptake of utility-scale batteries:
There is consensus among stakeholders including consultancy firms, the European Association for Storage of Energy, and the European Commission, on that the most critical market enabler is the availability of Capacity Remuneration Mechanisms (CRMs) and their related capacity markets.
According to ACER, only France, Italy and Sweden do not have significant barriers for BESS-friendly CRMs, see Figure 3. Given the multiple and moving sources of uncertainty affecting all the revenue streams for BESS, it is crucial for any project to secure at least one significant revenue stream to be able to secure the required financing and reach the Final Investment Decision (FID).
CRMs adapted for BESS can work in the same way as PPAs and CfDs do for wind and solar generation projects. While the CRMs would ensure some level of guaranteed revenue, BESS owners would also need to pursue multiple other revenue streams to ensure a proper return on their investment.
Beside ensuring the availability of CRMs, other market corrections are needed concerning the operational phase, to enable the fast deployment of BESS. The most essential correction is preventing charging double grid fees (when charging and when discharging) for the BESS-related used energy.
Enabling the enablers
There is physical and technological certainty that batteries will need to play an essential role to be able to integrate all the weather-dependent electricity introduced by the RES in the European power system. And this is where all certainties end. It is crucial for an interconnected Europe to provide further clarity regarding renewable energy targets, regulatory frameworks and key business drivers, to enable the enabling technologies for a carbon free power system.
Adding to the current complexity, there are significant developments underway that will make the picture even more dynamic, and they will require an additional effort to grasp all of the underlying market fundamentals. In this context, how can investors gain more certainty about and therefore be attracted to invest in BESS? This requires investors to:
o Short-term perspective can be based on current market data, but it should also include sensitivities on the underlying change dynamics in the middle term.
o Middle term should also incorporate regulatory pipeline, geographical factors (such as new transport infrastructure) and expected generation and demand evolution.
o Plan for a balanced and diversified mix of revenues; from state-guaranteed to more uncertain markets, and prepare evolving strategies for the ancillary services.
o Develop or source optimized operation capacity, able to balance the additional variable and market-based revenues, and complement those based on CRM.
While the challenge is significant, so is the opportunity and the need we face. Those who properly invest in understanding the dynamics, will likely get a first row seat in the transformation.