by Julian Spector
November 13, 2018

Author’s note: This is the second installment in a globetrotting series analyzing the world’s top energy storage markets. Look here for the first installment’s analysis of how storage can play in the tumultuous U.K. grid.

Few nations can take more credit for the rise of renewables than Germany, and where renewables grow, storage is usually sure to follow.

But Germany's situation differs from the U.S. and U.K. in that it maintains significant coal usage instead of shutting it down. And its highly interconnected grid has many outlets for surplus renewable production, reducing the need to store power locally.

Those factors, plus certain market rules, have made it harder to launch a grid-scale storage industry than it might appear, given Germany's solar and wind adoption.

In fact, the only place where storage business is booming is in the residential space — the market that remains most marginal in other countries.

In this week's Storage Plus, we'll unpack the prevailing trends on the German grid, the challenges facing utility- and commercial-scale development, and what makes home batteries so hot.

Electricity landscape essentials

Germany embarked on a world-leading transformation to a cleaner electrical system, but the famous Energiewende has fallen on hard times.

In fairness, it did succeed in launching more wind and solar capacity than any other country in Europe. Germany now gets 33 percent of its power from renewables.

The country’s willingness to subsidize this energy paid dividends for all the other countries that now buy cheaper wind and solar. It did, however, saddle the German public with a hefty bill.

That’s all worth it for the sake of reducing greenhouse gas emissions, one might argue. But that’s the real problem here. In the wake of the nuclear meltdown, Germany ran away from its considerable base of nuclear power. The country filled its self-imposed gap with coal, which supplies even more power than renewables. Most of that is lignite coal, which burns dirtier than other types. As such, after all the Energiewende investment, and the higher utility bills, Germany is on track to miss its 2020 climate goals.

This matters for the storage industry there, because coal plants provide dispatchable capacity amid renewables’ fluctuations. They already deliver the sort of ancillary services that battery plants could provide, making this market different than others where thermal is shutting down as renewables rush in.

Baseload coal is not a natural fit for an increasingly renewable and volatile grid. But German coal plants have a big advantage over their brethren in, say, Great Britain, because Germany has a highly interconnected grid.

Nine nations directly border Germany, and these neighbors serve as a dumping zone for excess power. Power plants can keep cranking amid surges in solar and wind production, because the excess just goes across the wires to Poland or France or Scandinavia. 

All else held constant, increasing renewables should create better market conditions for energy storage as a tool to instantly respond to volatility on the wires, be it capacity, voltage, inertia or frequency.

Germany’s grid counteracts that tendency by keeping thermal plants online that can help solve those issues, and by giving surplus generation plenty of places to go. As we shall see, it’s not a great time to be in the large-scale storage business there, but home storage has ascended with startling speed.

Utility-scale: Good luck making money on frequency regulation

In the U.S., utility-scale storage can readily access 10- or 15-year contracts to cement its business case. In the U.K., developers make do with two-year frequency regulation contracts. Germany requires even more merchant risk: Its frequency regulation market, the beachhead for most megawatt-scale projects, offers week-long contracts, and is moving toward 24-hour contracts.

Shifting closer to real time bodes well for the efficiency of grid operations: Shorter contracts make it easier for the system to dispatch exactly as needed, instead of locking in resources that may not be fully necessary a few years later. But it makes for a devilishly hard business proposition for storage market entrants.

“A bank is not going to be willing to put cash down on a one-week contract,” said Rory McCarthy, a senior analyst covering European storage markets at Wood Mackenzie.

As such, the first movers in large-scale storage have been the companies with big enough balance sheets that they don’t need a bank to sign off on the investment. That typically means the generation arm of European utilities. In Germany, early entrants include Steag, EDF, RWE, Enel, Engie, Eneco and Eon.

One thing that’s still not a possibility is storage as a transmission and distribution asset.

Across Europe, network operators are barred from owning and operating generation. Though storage does not generate its own electricity, its market participation resembles what generation does. That puts it off-limits for a grid infrastructure role, unless the network operator can justify an exception to the rule.

C&I: Also tricky

Big potential returns await the developers that crack Germany’s industrial storage code, but it won’t be easy.

The StromNEV 19 protocol outlines what McCarthy described as “a complicated mechanism of demand management and peak shifting.” Most of the customers that could use storage for benefit here already have diesel gensets working for them. So the key for C&I developers would be efficient customer selection, sorting out which of the many large industrials could be bothered to use batteries instead.

As such, a dozen or so projects of this nature are moving ahead across Germany, but it will be some years before a thriving market arrives, McCarthy noted.

Residential leads the world

Here’s where it gets fun. Germany’s residential storage market outguns its large-scale segments by a healthy margin, and it exceeds any other national home storage market too.

Abetted by healthy subsidies, German installers have delivered more than 600 megawatt-hours of home storage capacity. Crucially, that investment has established an actual market. The subsidy program already dropped its compensation from 30 percent to 10 percent and is set to end this year, but some already are buying without it.

“People are not bothering with the subsidy because they couldn’t be bothered waiting for it,” McCarthy said.

That’s somewhat surprising given that batteries still add a substantial cost premium over standalone solar, and that the major drivers of U.S. residential storage investment are absent entirely.

Germany lacks widespread time-of-use rates, which incentivize storage as a tool to avoid higher-priced electricity in peak hours. And the backup power use case, increasingly popular in storm-prone parts of the U.S., doesn’t attract German customers because the grid itself is so reliable.

A savvy purveyor of storage must never let mere economics get in the way of a sale. If customers want it, that’s all that really matters. And coal-heavy national energy policy notwithstanding, the German people like the whole self-supplied clean energy thing.

It helps that the feed-in tariffs (FIT) that launched the German rooftop solar market are dropping as well; they pay about 12 euro cents per kilowatt-hour for grid exports. Grid power is still really expensive, at around 30 euro cents per kilowatt-hour (makes California look like a bargain, and that’s hard to do).

Those two factors burnish the case for solar customers to store their generation to offset grid consumption later on, rather than selling it to the grid for cheap and buying back more expensive power later.

From many, one new business model

No company has made better use of these market dynamics than sonnen, a homegrown German startup.

The residential market leader has assembled 30,000 German customers. With an average of 8 kilowatt-hours per system (smaller than the typical American system), this fleet adds up to a staggering 240 megawatt-hours, said Director of Public Relations Mathias Bloch. In his view, the market is still revving up.

“‘The age' of storage in Germany will ramp up greatly in 2020 when the first PV systems — that were installed in 2000 — will no longer be in the FIT program,” he wrote in an email.

The modules themselves will have plenty of life left, but the grid exports will earn next to nothing, so the case for time-shifting with a battery will grow even clearer.

Bloch isn’t worried about the demise of storage subsidies, because solar and storage already pay off on their own, he said. In fact, the end of solar and storage subsidies is good policy at this point.

“Lower subsidies mean that the society as a whole is paying less and less for the energy transition, because the FIT is financed by the taxpayer,” he noted.

Sonnen has devised other ways to drive revenue as well. It uses its vast fleet of installed batteries, dubbed the sonnenCommunity, to aggregate grid services including frequency stabilization, load-shifting and energy redispatch to the grid operators. U.S. companies talk about this sort of thing in the context of pilot projects or distant strategic opportunities, but sonnen is doing it with tens of thousands of systems.

Customers who sign up for the sonnenFlat allow the company to use some of their capacity for grid services, in exchange for free electricity. The battery company has stepped into the role of utility.

“Still the biggest part [of the business] comes from the storage sales, however, given that the sonnenCommunity services are recurring revenues, their respective share is growing continuously,” Bloch noted.

The residential market has strong prospects going forward, even if utility-scale and commercial aren’t exactly thriving. That success opens up the possibility that Germany won’t need to rely as heavily on large central grid batteries as other countries, precisely because it can leverage hundreds of megawatt-hours of small ones.

The coal fleet isn't going away any time soon. By the time it does, the cumulative residential battery fleet will be considerably more substantial.