Batteries could save Europe millions in energy system costs with the right market reforms

Without sufficient energy storage, the European Union (EU) will fall well short of renewable energy targets, and it is up to the industry to be proactive in highlighting both long and short-term benefits of energy storage, Fluence policy and market development manager for the EMEA region Lars Stephan told Energy-Storage.news.

Global energy storage system integrator and technology and services provider Fluence has led an initiative to urge policy makers to make energy storage an integral part of the REPowerEU plan, which aims to end the EU’s Russian gas import dependence, largely through increased renewables targets.

As reported earlier this week, Stephan believes that in fact, Europe’s policymakers do recognise the importance of energy storage. However, as a new and relatively complex technology, more needs to be done to help politicians, regulators understand how to support it through market reforms.

Stephan and his colleague Julian Jansen, Fluence’s EMEA growth and market development manager, co-authored a white paper for the company’s corporate blog recently, which set out their recommendations for two key policy and market design reforms.

“There is a clear need for storage to help solve the challenges we are facing in the current energy crisis, and it is pivotal if we want to achieve our newly aligned strategic energy objectives in Europe,” Lars Stephan said.

Stephan said that it is clear from recent conversations he’s had and from attending the recent Energy Storage Global Conference in Belgium – at which European Commission vice president Maroš Šefčovič gave a keynote address – that “all stakeholders, including major political decisions makers, agree that storage is important”.

Although this is a great first step, Stephan said, many stakeholders still lack an understanding of the technology, its benefits or how best to integrate it into energy market design and reforms.

“As an industry, we have a unique role, that is both a humbling and exciting, to work together with major stakeholders to enact real change for a more sustainable, secure and economical European energy future.”

Calculating value

Along with the long-term benefits of increased renewable energy and storage on the network and decreased fossil fuels being both imported and burned, adding more energy storage today would already save European citizens money and spare European grid operators some headaches.

“There have been a couple of examples in energy markets over the last six months where scarcity in the energy system resulted in unprecedented clearing prices in European Wholesale Markets, and in each of those cases we can well define the positive impact energy storage could have had,” Stephan said.

For instance, on 4 April this year, the Day Ahead wholesale market in France cleared at €2,712/MWh (US$2,976/MWh) at 7am and €2,987/MWh an hour later. More than 15GWh of electricity was transacted at those prices under the clearing system of wholesale markets.

With very expensive generators of last resort called upon to sell energy, even a relatively small amount of dispatchable energy storage capacity “would have made a huge difference,” Stephan said.

“Based on my calculation a rather small storage capacity of around 350MW/700MWh would have reduced clearing prices to a level below €450/MWh. Due to the huge leveraging effect of 700MWh additional energy on a volume of around 30GWh of transacted energy, the operating of a 350MW battery asset would have saved French consumers about €75m.”

In this way, energy storage can act as a kind of “price cap” without interfering in the way energy markets function, at a time when a lot of conversation around energy cost focuses on caps, and windfall profits for generators.

“We as an industry need to transport this kind of knowledge around the benefits of energy storage more broadly to policy makers and make sure our energy system has sufficient flexibility to achieve efficient energy market design based on market mechanisms,” Stephan said.

Policy proposals: low-carbon Capacity Mechanism, CfDs for energy shifting

With REPowerEU’s target of sourcing 45% of the EU’s energy generation from renewable sources by 2030, Europe would arrive at 1,236GW of renewable energy generation by that time. That would include 320GW of new solar PV by 2025.

Integrating that renewable energy capacity will be a major challenge that energy storage is equipped to help solve, but Europe lacks what Fluence described as “adequate targets and policy frameworks” to deploy energy storage and other flexibility technologies.

Fluence has proposed reforms to capacity mechanisms, and incentivising low-carbon and flexible peaking capacity.

Capacity Mechanism

The European Electricity Market’s Capacity Mechanism (CM) already has carbon emissions limits, which help disincentivise fossil fuels other than as standby backup generators, but Stephan and Jansen’s paper recommends the carbon cap should be decreased over time and payments phased down.

Other suggestions include market-based incentives for low-carbon assets to enter the CM and high-carbon assets to exit, such as paying higher percentages of clearing price to low-carbon resources. Low-carbon CM units should also get longer-term contracts, they suggest.

Peaking capacity

To replace peaking capacity on the grid – the most carbon and cost-intensive segment of the generation fleet – there should be mandatory auctions for renewable energy and energy storage, as well as contracts for difference (CFDs) to trade flexibility and prevent curtailment of renewable energy from the grid.

Holding tenders for co-located renewables and storage projects would result in higher utilisation of grid connections, reduce exposure to negative pricing events and reduce curtailment and add increased revenue opportunities for renewables operators and investors.

The pair’s proposal of a CfD structure for energy shifting meanwhile is intended to accelerate investments into flexible capacity.

Energy shifting, also known as energy arbitrage, takes energy stored off-peak and injects it to the grid during peak times. This role is already widely played effectively by pumped hydro energy storage (PHES), for example.

However, while the differential between price periods in wholesale markets means returns on arbitrage can be high – especially as Europe’s energy market continues to see higher prices and high intraday volatility – the business case for arbitrage is entirely merchant.

This lack of long-term revenue certainty is preventing investors from getting on board despite the positive outlook financially. Fluence’s proposed reforms would see flexibility assets competing in CfDs with an obligation to discharge during pre-defined price peak periods, such as evening peak times.

Energy-Storage.news’ publisher Solar Media will host the eighth annual Energy Storage Summit EU in London, 22-23 February 2023. This year it is moving to a larger venue, bringing together Europe’s leading investors, policymakers, developers, utilities, energy buyers and service providers all in one place. Visit the official site for more info.