Global | Publication | April 2018
This article first appeared in the March 2018 issue of Project Finance International magazine
The German conservative party and the social democrats will form a new government – finally. The forming of political alliances coincides with several current regulatory developments for battery storage systems. The following article takes a look at the current developments in Germany and considers how the political landscape will affect these.
In Germany in recent years there has been a notable and increasing interest by both project developers and investors in battery storage projects. Following substantial technical developments and cost reductions, especially in battery storage systems, both national and international investors, and financing banks are investigating this emerging market. However, after more in depth research into the German battery storage market, most of the financial investors have to date refrained from investing in specific projects due to uncertainty regarding a stable business case for the duration of their investment, combined with a difficult regulatory background.
Historically, the primary business case for large scale battery storage projects was built upon provision of reserve control (i.e. to provide short term grid stability); with less than 1GW the primary reserve control in Germany is small and the prices have been very volatile in recent past. The continued drop in battery prices is likely to lead to further uncertainty as to whether to invest in battery storage projects or postpone such investment.
The German Federal Grid Authority Bundesnetzagentur (BNetzA) has persistently expressed scepticism towards battery storage solutions, and has historically preferred the extension of the transmission and distribution grids, rather than using storage solutions to support local grid stability. BNetzA was concerned that implementation of battery storage systems might lead to stranded storage investments, once the national grid has been extended.
Finally, a complex system of different taxes and charges has also adversely impacted the economics of battery storage solutions. Broadly, the storage of electricity in battery storage systems is considered as consumption of electricity. Therefore the systems are treated as consumers of electricity and have to pay the taxes and charges like an end consumer (only a few narrow exceptions apply).
As a consequence, only a few large scale battery storage projects were commissioned in the last 24 months. By far the largest project was a multi battery project of STEAG AG, Germany’s fifth largest energy producer. Each individual battery stores 15MW, with a total installed capacity of 90MW and a nominal power of 120MWh. The project was fully commissioned in 2017 and built without public subsidies. WEMAG’s 10MW project in Schwerin is a more typical example of what is currently considered as a large-scale battery storage solution. In 2017 the WEMAG system was increased from 5MW, doubling the installed capacity up to 10MW, reaching a nominal power of 15MWh, again without using subsidies. Further, eins energy and Thüga realized a 10MW battery storage project in 2017 in Saxony.
Slowly but surely Germany is paving the way for both small and large scale battery storage systems. Whilst the first land mark projects have been commissioned in the last 24 months, there is still no significant volume of upcoming projects. The current project pipeline comprises the 22MW battery storage project under development by ENEL, Enertrag and Leclanche in Cremzow and a RES 10MW project in Schleswig Holstein.
The reason for the slow development of the market to date is a lack of diversified and stable business cases beyond a reserve control market strategy.
But there are reasons for optimism on the horizon. The new German government has declared its willingness to improve the regulatory environment for battery storage systems and to enable multiple-use business models. The announcement of the continuation and acceleration of the German Energiewende is expected to cause an increased demand for grid stabilizing battery storage systems.
In this context, new support schemes have been announced which could enlarge the storage market, especially for small and mid-scale projects.
Potential investors and stakeholders will therefore be monitoring the ongoing regulatory developments in Germany closely.
These political initiatives coincide with several regulatory developments in the existing legal framework for energy storage in Germany.
The marketing and provision of primary control reserve is probably the most important element of business cases for battery storage systems and other energy storage technologies in Europe. Primary control reserve secures the stability of the power grid by equalizing deviations in the grid frequency. Further possible tools to balance grid frequency deviations are the secondary control reserve and minute control reserve. The power facilities which provide such control reserve are called Frequency Containment Reservers (FCR). Due to their short response time, battery storage systems are eligible to participate in the provision of primary control reserve, whereas other storage technologies are more appropriate for the secondary and minute control reserve.
The four German transmission system operators (TSOs), TenneT, 50Hz, Transnet BW and Amprion, tender the required primary control reserve in regular time intervals via an online platform. To participate in the primary control reserve tender procedure, energy storage facilities and various other FCRs have to fulfil several technical requirements in a so called pre-qualification procedure. One important criterion is the minimum time interval for which an FCR, such as a battery storage system, must provide full power.
What’s happening at the moment?
At the moment, the German TSOs require a minimum time interval of 30 minutes from an FCR as a pre-qualification criterion (further applicable pre-qualification criteria can be found (in German) under www.regelleistung.net), whilst the new System Operations Guideline (EU regulation 2017/1485 which entered into force on 14 September 2017) suggests 15 minutes as a sufficient minimum time interval for an FCR.
However, based on this guideline the German TSOs filed a request to the German Federal Grid Agency (BNetzA) as the responsible regulatory authority to set the minimum time interval for FCRs to 30 minutes as a pre-qualification requirement.
Following the TSO’s request, several market players provided statements to BNetzA. Most of these statements pointed out that a 30 minute minimum interval could prevent the participation of battery storage systems, especially smaller systems. However, the TSOs are currently insisting on the 30 minutes criterion, and BNetzA is still considering the request.
Stakeholders should also note an additional consultation which was undertaken by the German TSOs in respect of the pre-qualification criteria for FCRs.
The first “pre-consultation” phase is not a formal procedure within the meaning of the EU regulation 2017/1485. Stakeholders were asked to propose changes and amendments using a blank form provided by the German TSOs by 28 February 2018. Phase 2 starts in April 2018 in the form of a legal procedure to implement the final pre-qualification criteria in the German legal framework regarding primary control reserve.
Energy storage operators which provide secondary and minute control reserve have to participate in a tendering system to be entitled to provide their services for the stability of the grid.
In June 2017, BNetzA changed several tendering rules for the reserve control auctions, which will come into effect in July 2018. In February 2018, BNetzA announced a further review of the tendering rules.
Currently, providers of secondary and minute control reserve only have to submit the performance price (Leistungspreis) in the tender procedure. The commodity price (Arbeitspreis) is currently not a relevant criterion in the tender award process. The successful bidder can charge the TSO the commodity price set out in its offer. As a consequence, bidders offering low performance prices, but having a high commodity price displaced other bidders with a cheaper compound solution. As a result of the October 2017 tenders, record commodity prices have been reached. The TSO’s are entitled to pass on the costs for the reserve control (meaning costs for performance price as well as commodity price) to the end consumers, resulting in an increased of the electricity prices for end consumers.
In order to prevent this, the Federal Grid Agency started a formal assessment and determination procedure (Festlegungsverfahren), and is currently considering the introduction of revised tendering rules for the auctions for secondary and minute control reserve. Under the proposed tender rules, the performance price as well as the commodity price would be considered in the tender. Providers of secondary and minute control reserve would be required to include both prices in their bids and both prices would form part of the evaluation criteria (Zuschlagswert) for the individual bids. These new tendering models aim to create fair competition between market participants.
In the consultation procedure, all market participants had the opportunity to file a statement regarding the proposed new tendering system by 21 February. BNetzA is currently reviewing the statements received and will then decide whether to adapt the proposed tendering rules for the reserve control auctions.
The most recent development for support of new energy storage projects was in Saxony. On 4 January 2018 the “Guideline for energy storage” (GES) became effective, replacing the former subsidy guideline for energy and climate protection (Foerderrichtlinie Energie und Klimaschutz). Due to this change in the legal framework, there are now increased options for decentralised battery storage systems to receive federal subsidies for certain investments including the cost of the grid connection.
The GES distinguishes conventional energy storage systems from pilot projects. Conventional energy storage systems rely on batteries using a lead based chemical process to store energy. Energy storage systems running on lithium-ion based batteries are also considered to be conventional energy storage systems. Energy storage systems relying on other technologies such as Redox-flow are classified as pilot projects.
In order to obtain subsidies pursuant to the GES, the energy storage plant has to be permanently connected to the public grid and the usable capacity has to be at least 2kWh. Furthermore, subsidies are only granted if there is no other energy storage system on the same property or sharing the same grid access point which has received subsidies within the last twelve months, encouraging new developments.
Moreover, the applicant has to ensure that the energy storage system will be operational in the five years after the period for which the subsidy was granted. Subsidies will be in the form of grants and are stipulated as de-minimis aid. The maximum amount depends on the technology-type used. Conventional energy storage systems are entitled to a maximum grant of EUR 40,000. This consists of a basic amount of EUR 1,000 and an additional amount of EUR 200 per kWh. Pilot projects may receive up to 50% of eligible expenditure, with a cap of EUR 50,000. Furthermore, engineering and planning service costs can be claimed up to a value equal to 10 per cent of eligible expenditure.
The new GES shows that battery storage in Germany is, in most areas, still a small scale market. However, the state of Brandenburg is notifying to the European Commission a similar support scheme which probably will apply for larger battery storage systems as well. Again, these are small but promising indications for the further development of the German storage market.
Slowly but surely Germany is paving the way for both small and large scale battery storage systems. Whilst the first land mark projects have been commissioned in the last 24 months, there is still no significant volume of upcoming projects. The current project pipeline comprises the 22MW battery storage project under development by ENEL, Enertrag and Leclanche in Cremzow and a RES 10MW project in Schleswig Holstein.
The reason for the slow development of the market to date is a lack of diversified and stable business cases beyond a reserve control market strategy.
But there are reasons for optimism on the horizon. The new German government has declared its willingness to improve the regulatory environment for battery storage systems and to enable multiple-use business models. The announcement of the continuation and acceleration of the German Energiewende is expected to cause an increased demand for grid stabilizing battery storage systems.
In this context, new support schemes have been announced which could enlarge the storage market, especially for small and mid-scale projects.
Potential investors and stakeholders will therefore be monitoring the ongoing regulatory developments in Germany closely.
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