German battery storage developer Kyon Energy: grid frequency service prices to drop but ‘remain elevated’

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Battery energy storage developer Kyon Energy discusses opportunities in the German energy storage sector, the frequency response service market and recent regulatory changes.

Energy-Storage.news has written extensively about the German energy storage market, which looks set to see a multitude more utility-scale deployments this year than in 2021.

Munich-based Kyon Energy is one of a handful of medium-sized battery energy storage system (BESS) project developers looking to capitalise on a growing business case for large-scale systems. Along with a couple of dozen other companies and trade groups, it was also a co-signee to a recent open letter from Fluence, the world’s largest battery storage system integrator, to European policymakers calling for a rapid deployment of energy storage.

Kyon’s head of business development & regulatory affairs Benedikt Deuchert here discusses the company’s activity, current opportunities for battery system projects in Germany, the significance of the recent regulatory definition for energy storage and what the future holds.

Energy-Storage.news: What are the main opportunities in the German energy storage market? 

Benedikt Deuchert: The German energy storage market has recently entered a phase of substantial growth, but the general mechanisms of how storage is supposed to be integrated in the grid are largely still undefined. This opens up the possibility to actively shape the role of storage in the energy system of the future and provides for various opportunities.

As of now, for grid-connected storage systems the core value drivers are frequency containment reserve (FCR) and wholesale arbitrage. We expect a further shift towards wholesale arbitrage as the FCR market is limited in size and as we expect elevated levels of market price volatility on the wholesale market in the next few years.

Looking ahead, we are monitoring the regulatory environment very closely and expect that further revenue streams, especially on the local level (e.g. reactive power and local congestion management), will be unlocked by regulatory changes.

What is Kyon’s value proposition, area of focus and project pipeline? 

Kyon Energy is a German project and business development company focusing on large-scale battery storage systems. We cover the entire value chain from project development (land, grid access, building permit etc.), project management to commissioning of the BESS.

In that, we have a special focus on developing and optimising multi-use strategies and layouts. With a broad network of investors we also handle the transaction process of those BESS, optimising the commercialisation options and ensuring that the systems are applied in markets where the value of their flexibility is highest. In a nutshell, we don’t sell BESS projects, but we sell business cases based on BESS.

With 121 MW of battery storage systems successfully developed, sold with partners and commissioned by the end of the year 2022 and a current project pipeline of >1 GW, Kyon Energy is one of the market leaders in Germany.

How much does energy trading make up of a typical battery storage project now in Germany, and how has that changed from 1/2 years ago? 

We do see a trend towards systems with higher capacity / lower C-rate and this higher potential for energy trading which is also used a lot.

Since the market shock due to the war in Ukraine, we observe that it is often more attractive to place the flexibility on the wholesale market instead of the FCR market, which is a new development. All in all, the share of revenues from a typical BESS project in wholesale markets compared to FCR has significantly increased over the last half-year.

How do you see the market for grid frequency services (in which battery storage can participate) in evolving in the coming years? 

Although we expect that the massive build-up of BESS capacity will soon over-saturate the market for grid frequency services, we don’t expect price drops. This is because BESS operators already now are pricing their grid frequency service bids based on the opportunity in the wholesale market. Alongside with high market price volatility, we expect to see high price levels for grid frequency services, too.

That said, the price levels we currently observe are probably not sustainable and will likely drop to a lower – yet elevated – level once the current energy crisis is passed.

What is the more appropriate chemistry for the German battery storage market – LFP or NMC? 

We watch the technological development of battery chemistries very closely and currently observe a tendency that BESS are more and more equipped with LFP. This may be due to the fact that the technology has advanced in terms of SoC management. NMC technology has advanced, too, and in the end, we currently don’t see a clear picture as to which technology is more suitable. Differences across individual manufacturers are sometimes higher than differences across NMC/LFP technologies.

What will be the impact of the recent/upcoming recognition of energy storage in German law?

The definition of storage as assets which shift the final consumption of energy, instead of generating and/or consuming it, has been adopted in the German Energy Industry Act (EnWG). This is a major achievement, but essentially the entire rest of the legal and regulatory framework is still tailored around generators and loads.

This still leads to massive uncertainty when it comes to the regulatory treatment of storage.

We do hope though that the new storage definition has created a momentum towards an in-depth revision of the relevant regulatory framework so that the uncertainty how storage is treated in detail will be removed.

Kyon Energy is actively supporting the process towards a reform of the regulatory framework. As a first step, we want to reach clarity that storage is not obliged to pay the so-called grid connection surcharge (“Baukostenzuschuss”), as the law currently leaves room for interpretation that storage is not freed of this surcharge. This currently hinders the investment in BESS for large parts of Germany, most notably the entire South of Germany.

But changes are needed throughout the entire regulatory framework, including the German Energy Industry Act and the individual regulations derived from this act.

What can Europe and the EU do to deploy more battery storage, particularly in terms of getting around bottlenecks in supply chains and grid congestion?

European legislation is required to guarantee sufficient investment security for the investment in BESS. We are currently observing a great deal of interest from investors and therefore point out that a comprehensive reform of the electricity market, as is currently being discussed in Europe, must always keep investment security for BESS in mind.

Otherwise, well-intentioned reforms such as the widely discussed introduction of capacity markets with the inclusion of storage facilities could do more harm than good.

This being said, numerous very positive stimuli for improving the framework conditions for battery storage have already been set at the European level in the recent past.

Most notably, the Clean Energy Package already contains a lot of very good concepts for the grid integration of flexibility in general and of storage in particular, including the request to allow the operation of flexibility markets for congestion management in national regulation.

This process, which would be a very important value driver for BESS in Germany, has been massively obstructed nationally especially by the regulator (the Federal Grid Agency) and also by the Ministry of Economics and Energy.

More important than any additions to the European legislation would therefore be to enforce the appropriate reflection of the European law in the German national legislation and regulation.

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