Booming in US, battery storage no 'must-have' in Europe as growth outlook slows

A battery park in the U.K. Long-term ancillary service contracts used to make the business case attractive, but the business model has now moved to energy arbitrage. Source: Eelpower

With grid-scale battery storage deployment in the U.S. ramping up thanks to utility procurements and generous tax credits, Europe's limited routes to market mean its rollout of batteries is lagging some way behind.

The continent's outlook for storage technology "is beginning to pale in comparison to its global counterparts," consultancy Wood Mackenzie said in November 2020, adding that it is "almost impossible" for Europe to see the kind of growth in batteries experienced in the U.S. and China.

Much of Europe's battery investment to date has taken in place in the U.K., which has 1.1 GW of operational capacity and a further 15 GW at varying stages of development and planning, according to trade association RenewableUK.

The battery business model in the U.K. has typically relied on a range of ancillary services contracts that are put together into a revenue stack. "Any device needs to stack different services; one service will not generate enough income," said Patrick Clerens, secretary general of the European Association for Storage of Energy.

However, contracted revenue streams have become saturated and shorter term in recent times, forcing operators to rethink.

"If you built a battery in 2017, you could recover your [capital expenditure] in three to four years," said Weijie Mak, head of research for Northwest Europe at power market consultancy Aurora Energy Research. Contracts have since dropped in value and duration. "In [Great Britain] you used to be able to get four-year contracts. Now you're lucky to get one month," he added.

With contracted revenues hard to come by, money now increasingly needs to be made through arbitrage, profiting from power price volatility on a relatively short-term basis by charging and discharging the system regularly, although this business case is still struggling in many places, Weijie noted.

U.K. grid operator National Grid PLC recently introduced a service called dynamic containment, a form of frequency response that operators can stack on top of other sources of income. Its aim is to respond to sudden demand or generation losses on the grid.

London-listed battery operator Gore Street Energy Storage Fund PLC said the service will help unlock additional revenue for its batteries. "[T]his service ... reinforces the benefits of our revenue stacking model, enabling our assets to participate in multiple contracts to generate significant value," Alex O'Cinneide, CEO of Gore Street Capital, said on March 3.

A 'different' way of trading

Instead of utilities, battery storage momentum in Europe is driven by specialist operators such as Neoen SA, Eelpower Ltd. and Gresham House Energy Storage Fund PLC. "[T]he case for storage in Europe is defined by the wider market players. Not — as in the U.S. comparison — a top down utility assessing the best whole system solution," said Rory McCarthy, principal analyst at Wood Mackenzie.

Especially in California, utilities have taken up incentives to boost battery capacities, and with utilities often owning both the generation and grid assets, the battery business case squares up more easily.

The U.K. government has already helped incentivize further battery rollouts by scrapping permitting hurdles for batteries over 50 MW, and batteries can enter auctions for grid balancing services in the country. There are also plans to better enable the co-location of location of renewables and batteries. "This is quite a good idea; it improves the economics of renewables assets," said Weijie.

Spanish utility Iberdrola SA has started co-location of renewables and batteries, with its U.K. subsidiary Scottish Power Ltd. building onshore wind and solar capacity with adjacent batteries. Electricité de France SA has also stepped into the battery market, with the purchase of specialist Pivot Power Ltd. in 2019. But overall, the battery storage game has not yet stirred up much excitement on the utility stage. "You need some know-how. If you're used to operating a large asset, the way of trading [is] different," said Weijie.

'Complementary technology'

While deployment and commercialization of new battery storage technologies has already led to sharp cost reductions, it remains expensive compared to competing energy sources. Further cost reductions will change that this decade, with BloombergNEF projecting capex on a four-hour battery to decline 43% by 2030.

Batteries are not the only way to improve grid flexibility, although they are well-suited to short-term frequency response. Pumped hydro, interconnectors for export, as well as the emerging green hydrogen market, also contribute to longer-term storage, and the latter could compete with batteries to some extent. While battery storage prices are still on the descent, gas peaking plants remain essential.

"Renewable generation is not the same in winter and in summer. We need to make sure that these technologies will altogether manage to decarbonize by 2050. We will need complementary technology in order to achieve this," said Clerens.

Compared to the sky-high ambitions for comparably nascent green hydrogen, which has captured the imagination of European utilities, Aurora's projections for the battery market are more modest. The think-tank expects a total grid-scale lithium-ion battery capacity of around 5 GW in Great Britain, and 10 GW to 15 GW in the rest of Europe by 2030.

"Batteries come in where there's an economic case for them," said Weijie. "We shouldn't view batteries as a must-have."