The European Union (EU) energy system is undergoing a profound transformation characterised by an increasing share of renewable energy sources (RES), several more players and more decentralised, digitised and interconnected systems. These are aimed at achieving the European Climate Law objective of carbon neutrality by 2050, with an intermediate target of 55 per cent net reduction in greenhouse gas (GHG) emissions compared to 1990 levels by 2030. The European Green Deal laid down the strategy to achieve the long-term objective while the intermediate goals were reinforced in EU’s Fit-for-55 package. Meanwhile, in light of the ongoing geopolitical situation, the REPowerEU plan put in place measures to make Europe independent from Russian fossil fuels prior to 2030 through energy savings, energy supply diversification, and accelerated RES deployment.
In this backdrop, EU’s future energy system will need more flexibility to complement the massive and rapid deployment of variable RES generation and the phase-out of fossil fuel generators, while ensuring supply security at affordable prices. The European Commission (EC) estimates that the flexibility need in Europe’s power system could increase to up to 24 per cent (288 TWh) and 30 per cent (2,189 TWh) of total electricity demand by 2030 and 2050 respectively as the RES share reaches an estimated 69 per cent and 80 per cent in the two years respectively.
According to an Energy Transition Expertise Centre (ENTEC) study on energy storage (commissioned by the EC) conducted in 2022, several factors are expected to increase the appeal of energy storage as a flexibility option in the future – declining technology costs for different storage options; profitable business cases due to technological improvements like longer lifetimes or an increased maximum number of cycles; and favourable market conditions due to the phase-out of conventional flexibility options and simultaneously increasing demand due to larger RES shares. Additionally, multi-use concepts such as combining peak shaving with a market-driven use of storage can ensure that energy storage investments pay off, as savings from one use case and revenues from another are stacked.
Several developments have taken place recently as policymakers and industry acknowledge the potential role that energy storage is likely to play in future and the need to remove barriers to their deployment. Notably, on March 14, 2023, the EC adopted the ‘Recommendation on Energy Storage – Underpinning a decarbonised and secure EU energy system’, which contains 10 recommendations for European countries to help accelerate storage deployment. The EC recommendations were released almost parallel to two other EC proposals – Net Zero Industry Act (NZIA) and Electricity Market Design (EMD) reforms. The NZIA promotes strategic net-zero technologies including batteries and storage, which will unlock further regulatory and financial support for storage. The EMD reform obligates EU countries to assess their flexibility needs and establish indicative objectives for technologies, especially those not using fossil fuels such as energy storage. Alongside this, the reform introduces more ways to support storage through capacity mechanisms, which ensure revenue for backup power suppliers, and measures to tackle regulatory barriers faced by storage projects.
With the latest policy push, the European storage market is poised for an accelerated take off. According to previous forecasts by Wood Mackenzie, Europe’s grid-scale energy storage capacity is expected to expand 20-fold by 2031 to reach 45 GW/89 GWh. Of this, the top 10 markets are expected to contribute to 90 per cent of the new deployment at 73 GWh. These include the UK (25.68 GWh), Italy (12.23 GWh), Germany (8.81 GWh), Spain (8.09 GWh), France (5.14 GWh), Ireland (4.28 GWh), the Netherlands (4.25 GWh), Greece (3.45 GWh), Belgium (2.74 GWh) and Portugal (2.10 GWh). Particularly, the UK has the largest storage pipeline with 25 projects above 100 MW.
Energy storage – Key applications and challenges
In its recent publication, the EC has acknowledged that energy storage has multiple applications even beyond the electricity system. For instance, energy storage that complements renewable heating and cooling generators as part of individual and district heating systems allows a higher proportion of heating demand to be covered by variable and low-temperature RES. Their contribution to energy system integration and supply security is significant. Further, such technologies can facilitate the electrification of different sectors, notably buildings and transport.
Energy storage faces several challenges that can impact its deployment to the levels necessary to significantly support the energy transition. According to the ENTEC study, among the perceived barriers, regulation and market access have been rated as most important. This is followed by financial barriers and the absence of long-term policy signals in general, the issue of double taxation and grid charging, and the lack of a regulatory framework for local flexibility markets.
Some of these barriers have been addressed by recent EC proposals. The EU market design allows energy storage to participate in all electricity markets and hence allows revenue stacking (combining different revenue streams) to support business viability. The state aid guidelines for climate, environmental protection and energy encourage countries to introduce additional criteria in their supply security measures to promote the participation of greener technologies. TSOs are required to consider storage deployment potential in their 10-year network development plans. That said, there is scope to further exploit the typical operation pattern of energy storage when planning networks.
EC Recommendations on energy storage
The EC has made the following recommendations to encourage the uptake of energy storage on the continent.
- European member countries must avoid double taxation on and facilitate permit procedures for energy storage by recognising their double role (generator-consumer) among other things, particularly when implementing the EU law concerning the electricity market to remove existing barriers. National regulatory authorities (NRAs) must also consider such a role while setting network charges and tariff schemes.
- Member countries must identify the short-, medium- and long-term flexibility needs of their energy systems and strengthen the policies and measures to cost-effectively promote energy storage deployment (both utility-scale and BTM storage), demand response and flexibility in their updates of the national energy and climate plans (NECPs). It would be pertinent that countries also assess manufacturing capacity needs for the relevant storage technologies.
- NRAs must ensure that TSOs and DSOs further assess the energy system flexibility needs when planning transmission and distribution (T&D) networks, including the energy storage potential and whether storage could be a cheaper alternative to grid investments.
- European countries must identify potential financing gaps for energy storage, including BTM and other flexibility instruments, and consider introducing financing instruments that provide visibility and predictability of revenues.
- There is a need to explore whether energy storage services are sufficiently remunerated, and whether storage operators can combine the remuneration of several services (known as revenue stacking).
- Competitive bidding processes could be adopted to reach sufficient flexibility levels. For this, improvements must be explored in the capacity mechanism design to facilitate the participation of flexibility sources. Examples include reducing minimum eligible capacity and minimum bid size and facilitating aggregation.
- Further, countries must identify any specific actions necessary to remove barriers to the deployment of demand response and BTM storage. Examples include removing barriers linked to the uptake of electrification of end-use sectors based on RES, the deployment of individual or collective self-consumption and to bidirectional charging through EV batteries.
- Countries must accelerate storage deployment and other flexibility tools in islands, remote areas and the EU’s outermost regions with insufficient grid capacity through support schemes as well as revise the network connection criteria to promote hybrid energy projects
- NRAs must publish detailed data on network congestion, RES curtailment, market prices, RES and GHG emission content in real time, as well as installed energy storage facilities, to facilitate investment decisions on new storage facilities.
- Finally, countries must continue to support research and innovation in energy storage, in particular long-duration energy storage (LDES) and storage solutions coupling electricity with other energy carriers, and to optimise existing solutions.
While the EC has set the stage for accelerating the rollout of storage capacity, member countries have to implement the EU policy (by adapting national legislation to it) swiftly to be able to see the results on the ground.
Recent developments in key European markets
As part of the NECPs, less than half a dozen countries have set specific targets for energy storage. These are Croatia (150 MW by 2030), France (1.5 GW of pumped storage by 2035), Italy (6 GW by 2030), Greece (3 GW by 2030) and Spain (20 GW by 2030 and 30 GW by 2050). However, several countries have special laws on energy and storage, subsidy programmes or regulations.
The UK government has been actively supporting energy storage, which has Europe’s largest FTM driven by attractive revenue streams from ancillary services. At the end of 2022, UK had awarded funding of GBP69 million to 10 projects developing innovative energy storage technologies across two rounds of the Longer Duration Energy Storage (LODES) competition. Technologies in scope include electric, thermal and power-to-x. The first stream aims to demonstrate the capability of first-of-a-kind energy storage facilities through actual demonstrations by March 2025 and steam 2 by September 2024.
The Spanish government announced a call for aid for hybrid or co-located energy storage in December 2022 to provide EUR150 million in funding for new storage systems. Applications were accepted up to March 20, 2023. The selected projects will be eligible to have 40-65 per cent of their investment costs covered under the scheme. The funding is part of the country’s Strategic Project for the Recovery and Economic Transformation of Renewable Energies, Renewable Hydrogen and Storage (PERTE ERHA), which sets a target of 20 GW of energy storage to be deployed by 2030.
In May 2023, the Hungarian government announced energy storage investment subsidies worth HUF58 billion to promote RES through the addition of 146 MWh of grid-connected storage capacity by May 2025. The subsidies will be available to TSO Magyar Villamosenergia-ipari Átviteli Rendszerirányító ZRt. (MAVIR) and electricity distributors. It is estimated that the funding available for energy storage projects could add up to HUF120 billion after combining the latest allocation with other programmes.
In January 2023, Turkey made amendments to the Electricity Market License Regulation to complement the current rules for the development of storage units inside generation plant premises. The Turkish government plans to begin approving energy storage projects in the middle of 2023, which should support the Turkish grid in the wake of growing solar photovoltaic (PV) capacity.
The way forward
As the EU is pursuing an aggressive energy transition strategy, it must maintain a robust, flexible, stable and reliable grid to ensure smooth and continuous delivery of clean energy to consumers at affordable prices. Energy storage with various applications holds the promise of decarbonising the economy and ensuring that the rapid deployment of variable RES generation reaches its full potential. Further, as the technology matures, greater investments are expected in LDES to reap all possible benefits. To accelerate the uptake of energy storage in the EU, timely and full implementation of EC recommendations and EU electricity market legislation at the national level is imperative.