Europe’s governments have ‘finally recognised the importance of battery storage’

You may already have seen our writeup of that session, featuring speakers from system integrators Fluence, Wartsila and Trina Storage, plus investor JLL and technology provider Merus Power.

In short, the obvious answers were ‘the UK and Germany,’ but speakers also mentioned near-term opportunities in the Nordic ancillary services market and capacity markets in Italy and Poland.

Spain and the Benelux countries of Belgium and the Netherlands also got some airtime for their market potential, but it’s worth noting that for all of the countries mentioned, there are, along with the market drivers, challenges that investors, developers and other stakeholders should be aware of.

While hottest market debates are indeed fascinating and make for good talking points, as Markus Ovaskainen of Merus Power pointed out, “a good market is one in which you can get something done.”

So perhaps it doesn’t matter in absolute terms which markets will be the biggest or offer the highest revenues. Each offers a different profile and may be attractive to investors depending on their individual appetite for risk, while many companies prefer to spread their portfolio risk across different markets.

However, as Anna Darmani says, it’s interesting to think about what makes a ‘hot’ market. It offers clues to what is needed for energy storage projects to be successful and helps investors or developers make their decisions, whether that’s to go into Germany’s more merchant-led opportunities, or Italy’s long-term contracts for capacity, for example.

Another common theme that emerged was that where possible, investors will seek a combination of contracted and merchant revenues, which may be a case of stacking revenues within one market or even one asset, or balancing cross-portfolio between the different markets.

Three key factors that make a ‘hot’ market

“Essentially, what makes a hot market? In summary, you need the right regulations and the right legislation so that batteries can access the grid and participate in the market. Another thing is the depth and volume of the market,” Darmani says.

“Then, finally, the market fundamentals. What is the share of renewable energy there? What is going to happen next? What is the liquidity in the market?”

Depth and volume are respectively why Germany and the UK lead most conversations right now. The UK has Europe’s biggest installed base of grid-scale battery energy storage system (BESS) assets with 6GW/8GWh as of the end of January, according to our colleagues at Solar Media Market Research. Meanwhile, Germany’s development pipeline stands at more than 230GWh of grid connection applications and the country has Europe’s biggest power market.

The UK raced ahead of the curve from 2016’s first enhanced frequency response (EFR) tender for ancillary services, and the conventional wisdom at that time was that the Great Britain (GB) grid, as an island territory, had an acute need for grid-balancing services to handle increased volatility as shares of renewable energy rose.

Conversely, Germany quickly saw its ancillary services markets saturate in the early 2020s—as the UK’s eventually did a couple of years later. However, Germany’s power market, interconnected with nine neighbouring countries, offers more depth and liquidity for energy traders than the UK’s.

“When I started with Wood Mac back in 2021, it was exactly the opposite discussion. People were saying the UK is the market for energy storage because it doesn’t have interconnection.”

The conventional wisdom back then was that “interconnection would kill the business of batteries” in Germany because the volatility would always be manageable through power imports and exports.

Nonetheless, both share the three criteria Darmani and the assembled panellists identified: a favourable regulatory space, depth and market fundamentals.

“We can discuss which is better, but both have strong points. The UK can benefit from being an island. Germany can benefit from liquidity,” Darmani tells us.

Whereas, if you look at some of the other upcoming markets, some but not all of the criteria are in place, such as the Netherlands.

Both Belgium and its Benelux neighbour have the market fundamentals in place. Belgium has a capacity market while the Netherlands sees high periods of negative power pricing and severe grid congestion.

However, in the Netherlands, the regulatory and legislative piece is “quite difficult” to negotiate.

Darmani says the grid fee for batteries “currently kills the business case” for storage in the Netherlands. This is the levy for the use of the grid for both charging from and discharging to the grid. In Germany, where it had been a similar situation until recently, an exemption is in place until 2029.

While there are plans for the Dutch government to cut the grid fee by as much as 60%, Darmani says that would still keep it among Europe’s highest levels. With the right regulations in place, the country could have “quite an attractive business case,” for battery storage to help manage electricity price volatility, Darmani says.   

Big changes since Russia’s invasion of Ukraine

We are speaking with Anna Darmani exactly a year after a previous interview at the Energy Storage Summit EU in early 2024. At that time, the analyst said that while a couple of years prior, nearly all eyes were on the UK, other regions, particularly Germany, were starting to gather interest.

A year later, Darmani says factors like the rolling impacts of the 2022 energy crisis sparked by Russia’s invasion of Ukraine, mean Europe’s governments “have finally recognised the role of batteries”.

“The power market, after the Russian invasion of Ukraine and the energy crisis, really changed. Everybody realised that we want to be more ambitious in renewables, because we want to be a bit more independent, and the energy cost is often higher now and then, with that, you need storage.”

Europe’s energy dependence on Russia was somewhat taken for granted, and while the European Union (EU) has long been ambitious in its renewable energy and decarbonisation targets, recognition of a need for energy independence has been among the consequences of the war.

“Things changed. Now they [the EU] realise that they should have different sources for their energy, but at the same time, renewable energy is the only source that Europe actually has that is abundant to make them independent,” Darmani says.

As attendees at the 2025 edition of the Energy Storage Summit EU heard from keynote speaker Brent Wanner of the International Energy Agency (IEA), solar-plus-storage is now one of the cheapest sources of electricity.

Tolling on the horizon for 2026

For Europe to succeed in those goals, it needs more than a handful of hot markets. It needs deployment across the continent and for countries besides the UK and Germany to get up to speed, whether EU Member States or not.

Darmani notes that in several countries she has looked at, which include Eastern Europe’s various country markets and Spain, investors are still seeking contracted revenues and do not have the same level of comfort investing in merchant opportunities as they might do in Germany.

“Contracted revenue is a must for them to make the final investment decision. Even though you see the market fundamentals are good, they want to wait to see what is in the next tender before making the investment.”

Government or transmission system operator (TSO) tenders are a game changer in this respect, as seen in Italy or Poland, and along with other developments such as EU Member States’ targets for energy storage included in National Energy and Climate Plans (NECPs), are “kick-starting the markets across Europe,” Darmani says.

Another panel discussion at the 2025 EU Summit this month focused on the attractiveness of tolling agreements as an energy storage-specific proxy for power purchase agreement (PPA) contracts commonly seen for generation offtake.

Panellists had said that tolls, where an offtaker essentially pays the project owner a rental fee for the right to operate the project in-market, helps to lower the cost of capital. Tolls could also make a storage deal look more like a conventional PPA that could more readily attract project finance, the audience heard (Premium access).  

Wood Mac’s Anna Darmani says that it’s very likely that next year’s Energy Storage Summit EU will hear a lot more about tolls. However, while tolling agreements are commonplace in California, the US’ biggest energy storage market by state, Wood Mac has just 12 European tolling deals and hybrid PPAs (comprising nine tolling deals and three PPA contracts) logged in its database.

“The number is very, very limited. We are talking about 12 in Europe which is less than 1% of the total contracted PPA capacity, versus hundreds in the US, particularly California. I think we’re going to see a shift in that in Europe.”  

This article has been amended from its original form to reflect more details of the tolling agreements and PPA deals in Wood Mackenzie’s database, and to accurately reflect Anna Darmani’s quote that the German FCR market saturated in the early 2020s, and not the mid-2010s as was previously stated.