Europe’s energy storage sector is on the cusp of big new opportunities, but first, it will need to get comfortable with merchant risk.
Large-scale systems are seeing new potential revenue streams at the EU level and in some markets at the national level as well. But exploiting such opportunities will require navigating increased risks, said Rory McCarthy, senior storage analyst at Wood Mackenzie.
WoodMac's latest Global Energy Storage Outlook forecasts 4 gigawatts of worldwide storage installations in 2019. Germany and the U.K. will be responsible for a combined 600 megawatts. That's just short of the total additions made in the U.S.
Risk and reward
In Europe's front-of-meter, large-scale storage market, there's a shift away from contracted revenue, such as from frequency regulation tenders, toward more merchant opportunities.
“There are not many [contracted] revenue streams available in the European market,” McCarthy said. Unlike in U.S. states such as California, there are no mandated installation targets for storage either.
“The reason we look at Germany and the U.K. in our research is that they are traditionally the only markets where the [transmission system operators] have embraced storage and opened up their doors. But because of that, there was a rush to the U.K. and Germany, and those frequency markets have rapidly saturated.”
The U.K. announced a new inertia tender this month with full details due out later in the year. But McCarthy considers this another source to add to the fabled revenue stack rather than a game-changing silver bullet.
Not every project can win a tender and the secure income that comes with that. But Europe's growing pipeline of unbuilt storage plants will need to find ways to bring in revenue.
The U.K. balancing market is worth £1.1 billion ($1.4 billion), compared to the £170 million frequency response process. But tapping into the balancing market means embracing merchant risk.
In Europe, the central frequency response mechanism, which covers 1,470 megawatts of capacity, lowered its maximum contract duration from a week to one day. In effect, this means it is becoming “more merchant,” as McCarthy puts it.
“There are big volumes in the day-ahead, intraday and balancing mechanism [markets], and it’s the latter that is being touted as the ‘true flexibility market.’ That's where a storage asset could be operationally and technically able to provide those rapid-response and shorter-duration services,” McCarthy said.
The challenge is in changing that mindset. Developers have to be confident they can find revenue in the markets or the various contracted tenders that are still open and then pull in the necessary investment.
“We're suffering from the subsidy hangover," McCarthy said. On the renewables side, "We have gotten comfortable with getting fully contractually backed power projects, and now we've gotten to the point where we have auctions," he said.
"But storage isn't getting that kind of treatment. It needs to stand on its own two feet."
Projects under construction or completed this year are commonly being developed by dedicated flexibility providers like U.K. Power Reserve or paired with storage assets, such as Gridserve's 37.4-megawatt solar farm and 27-megawatt battery in the north of England.
Making it work
Reputation, a proven track record and access to an aggregator will be the key factors for those companies that eventually make it work.
McCarthy points out that big firms’ energy trading has previously been carried out in huge volumes, and they’ve lacked the technology and the agility to trade small volumes from distributed assets. Without an aggregator, there is no route to market, and as McCarthy points out, merely partnering with one means divvying up the revenue.
Cue aggregator M&A activity: Shell bought Limejump, EDF bought e2m, and Engie took a majority stake in KiWi Power.
Behind the meter, the residential energy storage market is set to spread across Europe, with Italy cementing its position as the second-largest market after Germany and Spain well positioned to develop its own sizable market. The U.K. and France continue to sputter, with a few glimmers of promise beginning to emerge in the latter.
The residential storage market is finding more success in Europe. Germany continues to dominate, but Italy is grabbing an increasingly significant installation base.
The same economic case applies in Spain, where the government has a draft target to install 2.5 gigawatts by 2030, although there are no details on how it will encourage that deployment.
The U.K. was expected to rival Germany on residential installations but as the country’s solar policy slowed uptake to a trickle, the potential for solar-plus-storage dried up too.
At the global level, WoodMac sees a near-term slowdown in the storage market's momentum followed by rapid growth through the 2019-2024 period.
Some of the capacity that was expected to be built this year is likely to be pushed into 2020 and beyond amid policy shifts and fire incidents in markets including South Korea and China.
Wood Mackenzie expects 4 gigawatts/8 gigawatt-hours of energy storage to be deployed globally in 2019, increasing to 15 gigawatts/44 gigawatt-hours in 2024.
“In the U.S. market, hidden beyond the overall surge in forecasted five-year deployments is an industry hitting growing pains, as the reality of supply-chain constraints, regulatory hurdles, and performance and safety concerns are set to push back some 2019 and 2020 projects," McCarthy said.
"The market is expected to bounce back quickly from this near-term slowdown by accelerating in 2021, driven by large-scale utility procurements targeting gigawatts' worth of storage — often paired with renewables — over the next three to five years."
Learn more about the global storage market with a spotlight on Europe, Asia and the U.S. by downloading the report brochure for 'Global Energy Storage Outlook: Q3 2019'
In Paris for EU Utility Week? Register to join Wood Mackenzie on November 13 for a breakfast presentation on new power markets research, right down the street from the convention center.