European energy storage deployment is set to shrink compared to other global markets, even as the need for flexibility on the grid increases, according to new research from Wood Mackenzie.

Europe is still plotting the course toward being net-zero carbon by 2050, but no matter the shape it takes, it will surely involve hundreds of gigawatts of new renewable power capacity.

The European Commission, the executive branch of the EU, forecasts that between 230 and 450 gigawatts of offshore wind power will be needed by 2050 in order to hit that net-zero target. By the end of 2019, the total tally (plus the U.K.) was 22 GW, with 3.6 GW installed during 2019, indicating the ramp-up required to meet that goal. 

While the political will appears to be well aligned on meeting those massive renewables targets, the same can not be said unequivocally of energy storage and other flexibility investments, such as interconnectors.

In 2014, the EMEA region comprising Europe, the Middle East and Africa (but dominated by Europe) represented 44 percent of global energy storage deployment. But the region's share of energy storage deployments fell to 30 percent of the world's total in 2019, and Wood Mackenzie expects it to fall to 13 percent by 2030.

“Europe’s energy storage outlook is beginning to pale in comparison to its global counterparts,” Rory McCarthy, Wood Mackenzie principal analyst, said in a statement. “As deployments are ramping up in major markets, particularly the U.S. and China, it is almost impossible to perceive similar developments in Europe."

In the U.S., where the same utility company can be a retailer, network operator and generator, tenders can be designed to find the lowest whole-system cost, McCarthy said. The result is that renewables-plus-storage frequently outcompete gas peaker plants in what McCarthy dubs “Goldilocks territory.”

Hybrid projects look for a place in auction systems

In Europe, energy regulatory regimes require a different path.

“The primary route to market for [renewables] 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,” said McCarthy.

“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 incentivize optimal hybrid system configurations while leaving enough exposure to market forces to allow the evolution of other services and revenues around them,” he added.

That possibility would appear to have some appeal for the market.

In the U.K., the design of the fourth round of its contracts-for-difference auction is under review. The plans suggested so far include reopening the auctions to solar and wind, after a politically induced pause, as well as creating a dedicated space for floating offshore wind projects to compete. The consultation process is open to any interested party.

EnergyUK is the broader energy sector’s trade body. In its consultation response, the group urged the U.K. government to find space for energy storage as part of hybrid projects rather than as standalone assets with the additional costs that would bring.

Solar developer Solarcentury told GTM in an interview that it would not commit to participating in the next auction round until it had seen all the details. While the company, recently acquired by Norwegian hydropower giant Statkraft, won’t rule out participating in a solar-only auction, it is very interested in the potential for hybrid projects getting their own carve-out as part of the next auction.

“With the historical decline in system inertia and the rise of renewables, the case for getting more energy storage capacity on to the network has never been greater,” Solarcentury said in its own consultation response, “and is critical to [reducing] the effects of cannibalization and...the risks of escalating negative pricing periods on both solar PV and wind projects.”

One detail Solarcentury acknowledged it is looking for is the provision for solar-plus-storage projects. These have become an important part of U.S. solar developments in recent years, driven by favorable federal tax credit treatment for solar-linked batteries and by the need for storage to shift solar output to times when it's more valuable for the grid. 

Regulatory issues for solar-storage systems in Europe need to be ironed out. Can a battery charge up with “brown power,” then discharge at the price guaranteed in an auction? If renewable power is generated at the auction price and the generator is paid, should they be paid again when the battery discharges? Answering these questions largely comes down to the metering arrangements involved. Solarcentury warns this metering solution needs to be kept simple.

McCarthy pointed out that the low demand during coronavirus lockdown offered a preview of how rising levels of renewables, combined with a lack of the grid flexibility that could be provided by increasing amounts of energy storage capacity, could begin to cause market distortions. 

“While delivering low-cost, low-carbon power in abundance, the nondispatchable nature of [renewable energy] presents a flexibility challenge for power systems,” he said. “Particularly over the 2020 coronavirus lockdown months, we witnessed the impact of high [renewables penetration] on the system, resulting in low and negative power prices. This points to a lack of system flexibility.”


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