As the use of renewable energy installations rises, there's an increasing need for flexible resources on the grid. The International Energy Agency (IEA) has assessed factors like national grid load curves and renewable energy generation, finding that European countries like Denmark, Germany, Ireland, Spain, the UK, and Italy now have over 15% of their energy generated from renewables. However, the impact of renewable energy on power system operation varies due to differences in each country's grid and flexibility resources.
Traditionally, thermal power, gas generation, and pumped storage plants have dominated power system flexibility resources. Yet, with the global push for decarbonization, battery storage, hydrogen energy, demand-side response, and grid transmission channels are emerging as crucial components of future flexibility resources. According to IEA predictions, battery storage is expected to contribute 30% of flexible power resources by 2050, while the share of fossil fuels will be reduced to less than 5%.
Currently, natural gas peaking power plants play a vital role in regulating flexibility in the European power market. Additionally, certain parts of Europe rely more on hydropower and nuclear power for flexibility support. However, in the last two years, factors such as increasing fuel and carbon prices, maintenance issues with nuclear power units, and insufficient hydropower water have strained flexibility resources in Europe, resulting in a sharp surge in electricity prices.
The electricity reform is poised to expedite the implementation of utility storage.
Faced with the most severe energy crisis in decades, the European Union (EU) has introduced a series of policies to fast-track the transition to clean energy since 2021, including Fit-for-55 and REPowerEU. However, the substantial surge in European electricity prices in 2022 compelled the EU to reassess the existing power market design, which relied on marginal cost pricing.
Moreover, the EU had to unveil a more adaptive power market reform program for renewable energy development at the beginning of 2023. This initiative is anticipated to hasten the deployment of European renewable energy, along with flexible resources such as energy storage and demand-side response.
On March 14, 2023, the European Commission unveiled a preliminary proposal for an electricity market overhaul, followed by the European Parliament formally endorsing the EMD on July 19.
The primary focus of this reform is geared towards enhancing the liquidity and dependability of the long-term electricity market. It aims to incentivize renewable energy producers to engage in long-term power purchase contracts (PPAs) and government-approved contracts for difference (CfDs), thereby mitigating short-term price fluctuations through adjustments to relevant EU electricity regulations. Additionally, the reform seeks to facilitate the integration of more non-fossil fuel-based flexibility resources into the grid, such as Energy Storage Systems (ESS) and demand-side response. Ultimately, the reform underscores the crucial role of new energy storage and endeavors to establish a reliable ESS infrastructure at the highest level.
Furthermore, on December 14, 2022, the European Parliament greenlit REPowerEU, a plan designed to expedite the approval and licensing processes for various renewable energy ventures, including battery energy storage. This move is anticipated to kickstart the deployment of utility energy storage projects across Europe.
The United Kingdom, serving as a key catalyst in the European energy storage market, has consistently surpassed an annual installation of over 1 GWh in recent years for energy storage power plants. The primary source of revenue for Energy Storage Systems (ESS) stems from ancillary services. With the European electricity reform initiatives aiming to fortify grid resilience and bolster the growth of energy storage power plants, it is foreseen that installations in the European ESS market will maintain a range of 3-5 GWh per year in the coming years.
The UK Leads in Installations, Italy Poised for a Surge
As per statistics from the European Association of Energy Storage (EASE), Europe witnessed a substantial increase in energy storage capacity in 2022, with a total addition of 4.5GW. The utility storage and residential storage sectors contributed 2GW and 2.5GW, respectively.
In the Fast-Track-to-Market (FTM) segment, the United Kingdom claimed the lion's share, representing 42% of Europe's utility storage market. Following closely were Ireland, Germany, and France, with respective shares of 16%, 12%, and 11% in total installations. Notably, the statistics suggest that Italy is on the cusp of a significant surge in installations.
Based on data from Bloomberg New Energy Finance (BNEF), the primary source of revenue for European utility storage projects is the provision of frequency response services. In 2022, over 80% of the revenue in the European energy storage market originated from the lucrative frequency response market in key countries, including the United Kingdom, Ireland, Germany, France, Belgium, and the Netherlands.
As the frequency response market approaches saturation in the future, European energy storage projects are expected to pivot towards tariff arbitrage and capacity markets. Currently, Spain and Italy's energy storage projects generate relatively high revenue through tariff arbitrage, but their investment costs remain unmet. To mitigate the risk associated with new projects, countries like the United Kingdom, Italy, Poland, Belgium, and others have instituted a capacity market mechanism for Energy Storage Systems (ESS). This ensures that ESS projects secure minimum gains through capacity contracts, reducing overall project risk.
According to the 2022 Italian capacity market auction plan, there's an anticipation of adding 1.1GW/6.6GWh of new battery storage systems in 2024. In June 2023, the Italian regulator approved updated auction rules for grid-scale energy storage, empowering Terna (the transmission system operator) to conduct large-scale auctions for battery storage systems. The initial auctions are slated for the end of 2023 or early 2024, coinciding with the approval of a 200MW/800MWh battery storage system project owned by Aura Power. Consequently, explosive growth in installations is expected in Italy over the next few years.
Greece, Germany, and Spain have also implemented policies supporting utility-scale energy storage tenders and other initiatives, anticipating a significant boost in local utility-scale storage installations in the coming years.
As per the European Energy Storage Association forecast, the United Kingdom's favorable market mechanisms will further drive installation growth. Italy and Greece are poised for explosive growth in utility-scale installations between 2023-2025, thanks to supportive policies. Meanwhile, short-term installation growth in Ireland may be hampered by grid bottlenecks and other factors, but there remains potential for future growth.