Europe losing global energy storage battle as US and China race ahead

“Europe’s energy storage outlook is beginning to pale in comparison to its global counterparts. As deployments are ramping up in major markets, particularly the US and China, it is almost impossible to perceive similar developments in Europe.

“However, despite this, Europe will continue to possess proportionally more variable renewable energy (VRE; wind and solar) than any other region on the planet. While delivering low-cost, low-carbon power in abundance, the non-dispatchable nature of VRE presents a flexibility challenge for power systems. Particularly over the 2020 coronavirus lockdown months, we witnessed the impact of high VRE on the system, resulting in low and negative power prices. This points to a lack of system flexibility.

Wind and solar supply and hourly average day-ahead wholesale prices, 2020 to date

“Energy storage will be at the forefront of meeting this challenge, as the technology can provide much-needed flexibility with zero carbon emissions, while keeping power prices more stable and affordable for the end consumer,” said Rory McCarthy, Wood Mackenzie Principal Analyst.

So, why does Europe’s energy storage ambition not match its aspiration for renewables? Wood Mackenzie says that policy makers are underestimating the flexibility challenge ahead.

According to Wood Mackenzie figures, EMEA – the majority of which consists of Europe deployments – made up 44% of the global market in 2014. This declined to 30% last year and is expected to further decline to 20% by 2025 and 13% by 2030.

The front-of-the-meter (FTM) hybrid storage market, which is key to energy storage success, has seen a similar trend over the last three years.

“The global FTM hybrid storage market is taking off as hybridisation offers benefits including giving a weather dependent generator the ability to dispatch on demand. However, despite this, there have only been a small number of deployments in Europe.

“If we look at the US, which is the largest storage growth market, the pipeline in this region has the potential to make up 49% of global cumulative GWh capacity by 2030.

“Why does this market have such a healthy pipeline? Today it is driven by utility procurement programmes and a generous ITC tax credit. Perhaps less obvious is its regulatory structure. Vertically integrated utilities - those who can be a retailer, network operator and generator under the same organisation - serve a large swathe of US consumers.

“These utilities can assess their whole system portfolio, operational and delivery requirements and run a tender on that basis. Ultimately, they can contract with the lowest cost combination of technologies to deliver a whole system solution, therefore giving the best investor return while ensuring high quality power is delivered.

“As a result, we are seeing renewables and energy storage outcompete alternative flexibility service providers, such as gas peakers, in an increasing number of procurements. This appears to be Goldilocks territory for energy storage development,” added McCarthy.

In Europe, the picture is different. Its standalone or hybrid project pipeline is small compared to the rest of the world, according to Wood Mackenzie. In contrast to the US regulatory structure, market liberalisation has brought about decoupling within the power sector.

“So, the case for storage in Europe is defined by the wider market players. Not – as in the US comparison – a top down utility assessing the best whole system solution. The proposition is on a merchant basis with higher risks and financing barriers,” said McCarthy.

Although Wood Mackenzie points to a lack of storage development, there is a slowly increasing recognition of the need for flexibility and storage in Europe.

“The European Commission now requires fair energy storage participation in capacity and ancillary markets through its Clean Energy Package, which is progress. However, unlike merchant opportunities that can bolster a utility PPA value in the US, these will continue to be part of the core storage value proposition, either as small markets that rapidly saturate, as we have seen in the UK and German frequency auctions, or designed for assets that primarily sell energy, not power or capacity services,” added McCarthy.

It has become widely accepted that the only way to build a pipeline fit for the net zero challenge is through low risk, low return government-controlled auctions.

“The primary route to market for VRE is through government auctions. Current renewable auctions offer little or no value for flexibility, hence the lack of credible hybrid project pipeline development compared to global counterparts.

“For the market to develop an initial pipeline of projects, separate auction pots should be opened for hybrid renewables projects. These auctions should be designed to incentivise optimal hybrid system configurations, while leaving enough exposure to market forces to allow the evolution of other services and revenues around them. This would incentivise the use of flexible solutions and energy storage by delivering power when it is needed most, not just when the sun shines or the wind blows.

“There will be a proportion that take a fully merchant route to market but it’s likely that the primary route to net zero will be auction, so these should be increasingly exposed to market forces to help the market sustain itself.

“This ensures there is enough flexibility to keep the system stable and power prices affordable, ultimately for the benefit of the end consumer.

“Hybrid PPA projects will also likely evolve in this story as corporates begin to materially value the importance of true net zero power. For instance, not just ‘claiming’ 100% renewables through PPAs and renewables credits but matching in real-time, 24/7, consumption of power with renewable generation. We saw this a couple of months ago, with Google committing to being powered exclusively by renewable energy by 2030,” said McCarthy.

Europe is beginning to dip its toe in hybrid renewables auctions, and this should begin tipping the scales into energy storage investment trigger territory. But more needs to happen, and soon.

Europe risks missing out on developing and capturing global energy storage market share. If European policy makers do not begin to recognise the growing flexibility gap and develop frameworks to address it, the market will likely be underprepared. This could result in system and market prices becoming more volatile and unstable than is necessary.