German frequency response service revenues have dropped by almost two-thirds in two years as utilities have rushed to deploy energy storage, research shows.

Wood Mackenzie Power & Renewables this month said prices in a June 2016 German frequency market auction cleared €23 ($26) per megawatt-hour, but were down to €8 ($9) per megawatt-hour in July 2018, a 65 percent reduction.

The reduction followed big investments in utility-scale front-of-meter energy storage systems for frequency markets.

“As these markets become increasingly crowded, we have seen prices plummet to levels which will make for lower-than-anticipated project returns,” said Wood Mackenzie in a press release.

Germany and the U.K. have led utility investments in energy storage over the last two years, according to Wood Mackenzie’s Europe Energy Storage Landscape 2018 report. 

"By investing in energy storage, these companies are able to diversify their portfolio and improve their customer offering by including a clever piece of technology alongside a necessary service,” said report author Rory McCarthy, a senior research analyst. 

Although there are gaps across Europe as policymakers struggle to keep pace with new technology, energy storage deployments continue to ramp up, he said. “Europe is now a very real contender for that global top spot in terms of total deployments,” he commented. 

The continent is witnessing a glut of developers entering the market across the utility, commercial and industrial (C&I) and residential segments, he said. 

Europe’s energy storage markets have received added impetus in the last couple of years from solar developers, which see batteries as a complementary revenue stream to traditional PV system sales that have been hit by a reduction in state subsidies across the continent.

Yet despite hearty installation rates in the U.K. and Germany particularly, there are still areas where Europe’s energy storage markets could do better. C&I, for example, "is not exactly a booming marketplace,” McCarthy said. “The value proposition is not there yet.” 

Unless a C&I customer has a high onsite value for power resilience or quality, projects in this segment would likely have to rely on the declining value of frequency markets in order to achieve financial close, he said.

And even though Germany boasts the world’s largest residential market for energy storage, thanks to a subsidy scheme from the German government-owned development bank KfW, the value proposition for this market is also a challenging one. 

The KfW subsidy program is coming to an end. And according to McCarthy, battery costs are still too high to make a convincing business case for residential energy storage. 

This is in spite of an impressive 54 percent reduction in the levelized cost of residential solar-plus-storage systems in Germany since 2013.

One thing that could keep Germany’s residential energy storage market going is that economics may not be the deciding factor for early adopters.

Many German homeowners may be willing to accept a high cost premium for a piece of technology that can simultaneously de-risk future bill increases and help drive Europe’s energy transition, McCarthy conceded.

Nevertheless, with the outlook still uncertain for residential and C&I-based energy storage, for now it is mainly up to utilities to keep European battery installation rates chugging along. 

Utilities see a strategic value in energy storage assets and have the balance sheets to enter into ultra-low-bid auctions, even if the returns may not be attractive, said McCarthy. And utilities are also going after the C&I segment, albeit with limited success to date. 

However, Europe’s biggest utility-scale energy storage market, the U.K., faces considerable uncertainty because of its disengagement from the European Union next year. “Brexit has...[created uncertainty] around the pipeline of interconnectors to mainland Europe,” McCarthy said.

This could be good news for the U.K. storage market, as interconnectors are direct competitors in the flexibility marketplace.

However, Wood Mackenzie has seen the price of energy storage systems increase in the U.K. as Brexit concerns cause the pound to wobble against the euro and the dollar.

“Ultimately, there will be winners and losers in the energy storage space as details of Brexit negotiations are revealed," said McCarthy.

For a deeper dive into the British and German energy storage markets, read Julian Spector's analysis at GTM Squared


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