Backup power for Europe - part 1: Country attractiveness for battery energy storage systems

BESS are expected to play an instrumental role in integrating the increasing share of intermittent renewable energy sources, such as wind and solar, into the European electricity system. In countries like the Netherlands, Germany, and the UK, the share of intermittent renewable electricity sources in the installed capacity mix has increased from 25% to 40% in 2015 to 50% to 60% in 2024, and is expected to reach up to 80% by 2030. Such high shares of intermittent sources will require significant flexibility in the electricity system, which BESS can provide. This can be done both with standalone grid-scale BESS projects, battery storage co-located with wind or solar farms, or residential batteries.

Although battery prices have dropped sharply and consistently since 2015 and are expected to continue the trend until 2035 (see figure 1), we have concluded earlier that stackable revenue streams can help to achieve a return on investments for BESS projects.

Analyzing the market potential of a BESS project goes beyond merely understanding the prices and traded volumes in the markets they may operate in. There are numerous other key enabling factors related to geography, technology, and politics.

Bearing in mind the complexity of the BESS business case, we present an overview of the attractiveness of six European markets: Germany, the UK, France, Spain, Italy, and the Netherlands.

With many factors at play and each market having its unique features, quantifying the attractiveness of the markets is far from straightforward. Similar to a beauty pageant, the winner may not be quantifiably the most attractive, and the contestant that comes in last may still be very appealing to some investors due to specific circumstances. To complicate matters even more, apparent weaknesses may be turned into strengths. For instance, while grid congestion can hinder BESS deployment, it may also indicate a greater need for batteries to provide flexibility and grid investment deferral.

Generation mix

The composition of the electricity system sets the foundation for current and future electricity storage needs and business opportunities. A crucial factor to consider is the share of wind and solar in the electricity generation mix. These sources are intermittent due to their dependence on weather conditions. Therefore, the higher their share in the generation mix, the greater the flexibility needs of the electricity system.

Wind and solar generation also increase arbitrage opportunities in the wholesale market. This involves buying electricity at low prices and selling it at higher prices later. When these renewable sources are abundant, they can lower electricity prices, sometimes even to negative price levels. However, during periods when these sources are not available, more expensive sources must supply electricity, leading to higher prices. The resulting price spread offers arbitrage opportunities for BESS. Price spreads can be particularly large in markets with a high share of cheap solar generation during the day and expensive gas-fired generators supplying electricity during evening peak hours.

Figure 2 shows that the share of intermittent sources is high across all countries in scope, except for France and Italy. In Italy, this is mainly due to a low share of wind energy due to geographical limitations. However, Italy’s share of solar energy is comparable to that of Spain, Germany, and the Netherlands, offering price variability between daytime and evening peaks. In the UK, the share of intermittent sources is mainly driven by wind energy, resulting in less pronounced price differences between daytime and peak hours, as wind turbines can generate electricity both day and night.

Looking forward to 2030, all future electricity scenarios expect the share of intermittent sources to further increase. Among the analyzed countries, France is the only one likely not to see a substantial increase in solar and wind energy generation, as it will primarily rely on nuclear as its main source of low-carbon energy. In all other countries, the generation mix scenarios clearly indicate a further growing need for storage or other flexibility solutions, as shown by the higher projected shares of wind and solar in the generation mixes (see figure 3).

Electricity grids

Another crucial factor of the energy infrastructure is the electricity grids. Grids can affect the business potential of a BESS project in several ways. For new BESS projects, grid congestion indicates a need for flexibility within the system but also poses a risk of delays and/or smaller grid connection capacity. For operational BESS projects, limited grid capacity can reduce revenues due to restricted electricity transport or curtailed renewable generation. Therefore, we should also look at the grid investment plans of each country.

Figure 2 shows the size of the grid queues, which represent the total capacity of energy projects pending connection to the electricity grid, including storage, wind and solar connection requests for all six countries. In addition to around 250 GW of wind and solar and other power generation, the UK’s grid queue includes 200 GW of standalone BESS projects, 160 GW of combined solar and storage projects, and 10 GW of combined wind and storage projects. The listed capacities in the queues of the other countries only involve wind and solar and are therefore likely higher than reported. For Germany, we estimate a grid queue of 110 GW based on the 70 GW of wind projects reported by WindEurope and an additional of 40 GW of utility-scale solar, estimated based on the country’s national targets.

The annual grid investment plans for each country toward 2030, as analyzed by Ember, are depicted in the projected electricity system in figure 3. In Germany, the planned investments are particularly high, partly due to four underground high-voltage direct current (HVDC) projects to connect wind generation in the north of the country to the industry in the south. The total costs of each of these projects ranges from EUR 5bn to EUR 11bn. Ember’s report also checked the consistency between the transmission system operator’s (TSO) grid plans and the national policy targets for wind and solar, concluding that they align in the UK, Spain, and Italy. In France the grid plans are slightly falling behind the targeted solar capacity, while in the Netherlands, the grid plans are more ambitious than the wind and solar targets.

Interconnections

Another grid-related aspect considered in our analysis is the level of interconnectivity of each country. This is measured by comparing the capacity to import electricity with the installed generation capacity within a country. Interconnections between national grids allow countries to trade electricity, offering flexibility to deal with periods of excess demand or supply.

Figures 2 and 3 show the current and projected levels of interconnectivity in different electricity systems. The interconnection level of a market can positively and negatively influence the attractiveness for BESS projects. On the one hand, as batteries compete with interconnections to offer grid flexibility, the lower the level of interconnectivity, the better. On the other hand, in countries with low price spreads due to low penetration of wind and solar energy, interconnectors can aid arbitrage opportunities by enabling the import of cheap electricity. The influence of the interconnection level must therefore be evaluated within the broader context of the electricity system.

In that sense the UK, Spain, and Italy have favorable conditions with high renewable penetration and low flexibility capacity from interconnections, both in the current and the future electricity systems. In Germany, the prospects for BESS projects will also improve as the growth in (renewable) generation capacity will outpace the increase in import capacity. In France, on the other hand, the relatively high level of interconnection is beneficial because it allows wholesale prices to align with the variability of its neighboring countries.

Installed battery capacity

Perhaps the most straightforward indicator of a market’s attractiveness is the already installed battery capacity. An electricity system with significant BESS capacity signals both market demand and a supportive framework.

Currently, the leading markets in terms of installed capacity (in absolute numbers) are Germany, Italy, and the UK. In Germany and Italy, most of the installed BESS capacity consists of residential batteries, which have been attractively subsidized by their governments. In contrast, the UK has the largest grid-scale battery capacity, with residential batteries making up only a small part of the installed 5.3 GW of capacity.

Looking ahead, the battery capacity outlook provides crucial insights into market attractiveness. BESS capacity is expected to grow significantly in each country. This growth is partly due to the increasing share of intermittent electricity sources, but market and regulatory conditions also play a critical role. In the following sections we will discuss the influence of these conditions and how they are expected to shape battery capacity by 2030.

In addition to evaluating key conditions in the electricity system, BESS investors must understand the underlying market dynamics to determine how well an investment in a BESS project may generate the expected revenue streams. It’s important to note that BESS projects can –and often should– derive income from multiple markets. As these markets are undergoing structural changes, their forecasts will become uncertain much faster than those of established markets. For an overview of the different electricity market volumes and price levels, we refer to our previous publication on the Dutch electricity markets.

In general, BESS investors must position themselves by assessing the potential revenues from wholesale markets, balancing markets, and, when available, capacity markets.

Wholesale markets

In the wholesale markets, the key indicator for BESS revenue potential is the price spread on the day-ahead market, where electricity is bought and sold one day before delivery. The larger the spread, the greater the arbitrage opportunity. In wholesale markets, BESS projects can generate a revenue by extracting electricity from the grid when it is abundant, and therefore cheap, such as midday on sunny days, and selling it back to the grid during periods of high demand.

The price spread is largely influenced by the electricity system. The lower end of the spread is typically determined by the amount of wind and solar in the mix. In contrast, the higher end is shaped by the profile of dispatchable generation. Dispatchable resources, which include most conventional power sources, can be turned on or off, or have their output adjusted on demand by grid operators.

Price spreads are highest in the Netherlands and Germany, where wind and, in particular solar power, result in low and even negative daytime prices. On the other hand, gas generators in these two countries, which are required to adjust their operation to balance the system, cause very high price peaks when demand is high and renewable sources are not sufficient. In contrast, in Spain and Italy, despite a comparable share of solar power in their electricity mix, hydro generation enables system balancing through much lower price peaks, and hence lower price spreads.

In the UK, price spreads are narrower. Daytime prices do not drop as low as in Germany due to a lower share of cheap solar generation in the electricity mix. Meanwhile, peak prices have remained low due to a high share of wind power combined with lower gas prices over the past two years. In France, daytime prices are low, and the number of hours of negative prices is comparable to that of Germany. Price peaks are also low due to the high share of nuclear power, which provides a very stable electricity supply.

These price spreads result from the current electricity systems, as well as bidding and other commercial strategies. By examining how electricity systems might evolve in the future, we can – at least to some extent – make some predictions about how price spreads could change. Given that the share of solar and wind supply is expected to increase in most countries, while gas prices remain similar to today’s levels, it is likely that price spreads will increase.

For BESS this will be an interesting development. With decreasing battery prices, some markets may reach a point where revenues from energy arbitrage alone are sufficient. BloombergNEF estimates that the necessary average price spread for a two-hour battery would be EUR 114/MWh at the current battery price. If price spreads continue to increase and battery prices continue to decrease, it is conceivable that in the near future energy arbitrage could play a pivotal role in the payback path for BESS projects in markets like the Netherlands and Germany.

Balancing Markets

For many BESS projects, balancing markets are an essential part of the revenue stack. These markets match electricity supply with demand in real-time, ensuring the stability of the grid. The availability and profitability of these markets can vary between countries, so BESS investors should carefully evaluate them.

Due to their technical requirements, primary and secondary reserves (known in most countries as frequency containment reserve (FCR) and automatic frequency restoration reserve (aFRR), respectively) are the most suitable markets for batteries. BESS investors should therefore examine the availability of these services for batteries, as well as the traded volumes and prices.

The UK, France, Germany, and the Netherlands have comparable balancing markets where BESS can participate in daily auctions for both primary and secondary response services. Among these countries, Germany and the Netherlands offer the most attractive prices, as a result of their high share of solar and wind supply combined with gas generators. In contrast, France’s generation mix results in much lower prices, and BESS play only a small role in these markets.

An important trend to note is the saturation of balancing markets. While the demand from TSOs for balancing services remains constant, the entry of new BESS projects will drive revenues down. This has already occurred in the UK.

Currently, Italian BESS projects cannot enter daily balancing market auctions but can participate in the fast reserve market, where frequency service contracts are auctioned in multi-year tenders. In Spain, batteries currently cannot participate in balancing markets. However, regulations to enable BESS participation are under preparation.

Capacity Markets

Capacity markets are designed to ensure there is enough reliable and immediately available generation capacity within an electricity system. These mechanisms remunerate capacity providers for being available, regardless of whether they actually supply power. Available capacity is typically procured through auctions, often years in advance. For BESS projects, capacity markets can offer guaranteed revenue streams, enhancing their bankability.

Currently, capacity markets are available in the UK, France, and Italy. They are expected to be introduced in Spain and Germany. There are no current plans for a capacity market in the Netherlands. Each existing capacity market operates with its own set of rules and mechanisms. Considering these factors helps ensure that a BESS project is aligned with the specific capacity market it is entering.

Beyond the physical infrastructure and market conditions, regulatory frameworks and policy-making are crucial factors that can make or break the BESS business case. This section highlights key trends affecting market attractiveness in the six European countries. More detailed assessments of the regulatory frameworks and supportive policies will be provided in a series of country-specific articles.

Among the six countries, the UK, Germany, and Italy have the most attractive regulations and policies for BESS projects. In the UK, BESS are considered an integral part of the energy transition. BESS projects have access to multiple ancillary services and are not subjected to double charging, which involves paying fees both to draw power from the grid and to inject stored energy back into the grid.

Germany has recently extended the deadline for large-scale batteries to be exempt from grid fees until August 2029. Germany is part of the European platforms for the earlier mentioned reserves, offers innovation auctions for solar-plus storage, and is expected to introduce a capacity market.

The recently introduced MACSE capacity market has boosted Italy’s attractiveness for BESS and is expected to attract a lot of additional BESS over the coming years. The Italian fast reserve market, which requires very fast response times (less than 200 milliseconds), and the country’s renewable energy targets offer additional income streams for BESS.

Spain has favorable conditions, such as a dedicated storage strategy, the absence of grid tariffs for batteries, and the likely introduction of a capacity market, but the current lack of revenue stacking opportunities poses a challenge for BESS projects.

In the Netherlands, the regulatory environment is also less attractive due to high transport tariffs and limited subsidies for batteries.

In France, the biggest regulatory drawback for BESS is the small role of solar and wind in the country’s energy plans, which impacts the available revenues from energy arbitrage and ancillary services.

Table 1 summarizes the market attractiveness of each assessed country. While the table highlights notable differences between the countries, caution is needed.

Like the energy transition itself, the development of the BESS market is full of uncertainties, and table 1 might look very different in a few years. Although batteries play a clear role in accommodating the increasing share of intermittent sources in electricity systems, we also conclude that there is no one-size-fits-all business model. Therefore, the business model and bankability of each BESS project must be assessed on its own merits.

That being said, we can conclude that Germany, the UK, and Italy are the most attractive markets for BESS. Spain and the Netherlands have some very attractive features, particularly their high share of intermittent renewable energy sources, but also factors that may weaken individual business cases.

Out of the six markets, France is the least attractive. The country does not stand out in any of the criteria, and it will continue to be mainly powered by nuclear energy, resulting in lower flexibility needs than the other markets.

However, like in a beauty pageant, the last place does not make a contestant unattractive. BESS capacity will increase in France, and individual projects may still have a very attractive business case.

Regardless of the overall level of market attractiveness, every project requires a careful assessment of the local and evolving market conditions.

BESS are becoming a key component of the European electricity system, providing much-needed flexibility by storing surplus renewable energy and supplying it during peak demand. However, market conditions for BESS projects vary across countries and continuously change with the progression of the energy transition. As a result, evaluating a BESS business case is far from straightforward and requires a holistic assessment.

This article is the first in a series on the market attractiveness for BESS projects in selected countries. In this part, we introduce the criteria by which we measure market attractiveness and summarize and compare the results for six countries. In the future parts, we will take a deep dive into the current and future market conditions that impact the BESS business case in each individual country.