Enhanced Flexibility: Role of storage in EU’s energy system transformation

The European Union (EU) energy system is undergoing a transformation characterised by an increasing share of renewable energy sources (RES), an increased number of players and more de­centralised, digitalised and interconnected systems. These changes 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 the EU’s Fit-for-55 package. Meanwhile, in light of the current 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, the future energy system of the EU will require increased flexibility to complement the rapid and extensive deployment of variable renewables and the gradual phasing out of fossil fuel generators, while ensuring supply security at affordable rates. The European Commis­sion (EC) estimates that the flexibility required in Europe’s power system could rise 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 by these two years respectively.

According to a study conducted by the Energy Transition Expertise Centre (ENTEC) on energy storage in 2022, commissioned by the EC, several factors are expected to increase the viability of energy storage as a flexibility option in the fu­ture. These include declining technology costs for different storage options, the em­­er­ge­nce of profitable business cases due to te­chnological improvements like lo­n­ger lifetimes or an increased maximum number of cycles; and favourable market conditions owing to the phase-out of conventional fle­xibility options and increasing demand for RES. Further, multi-use concepts, which in­volve 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 notable developments have taken place recently as policymakers and the industry recognise the potential role that en­ergy storage is likely to play in the futu­re and the need to remove barriers to its de­ployment. Notably, on March 14, 2023, the EC adopted the “Recommendation on Energy Storage – Underpinning a Deca­r­bonised and Secure EU Energy System”, which comprises 10 recommendations for European countries to help accelerate storage deployment. The EC recommendations were released 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 ma­ndates EU countries to assess their flexibility needs and establish indicative ob­jectives for technologies, especially those that do not use fossil fuels such as energy storage. In ad­dition, the reform in­tro­du­ces more ways to support storage th­ro­ugh capacity me­chanisms, which ensure revenue for backup power suppliers and measures to tackle the regulatory barriers fac­ed by storage projects.

With the latest policy impetus, the Euro­pean storage market is poised for a rapid expansion. As per 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). 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 diver­se applications beyond the realm of electricity system. For instance, energy storage integrated with renewable heating and cooling generators as part of individual and district heating systems can enable a larger proportion of the heating de­mand to be met by variable and low-temperature RES. Their contribution to en­ergy system integration and supply se­cu­rity is significant. Further, these technologies can facilitate the electrification of different sectors, particularly buildings and transport.

The deployment of energy storage faces several challenges that can impact its po­tential to support the energy transition. Ac­cording to the ENTEC study, the most crucial perceived barriers include regulation and market access. Other notable challenges include financial barriers, the absence of long-term policy signals, the issues 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, thereby allowing 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. Transmission system operators (TSOs) are required to consider the potential for storage deployment in their 10-year network development pla­ns. That said, there is scope to further capitalise on the typical operational pattern of energy storage when planning networks.

EC’s recommendations on energy storage

The EC has made the following recomme­ndations to encourage the uptake of energy storage in the region.

• European member countries must avoid double taxation 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. The national regulatory authorities (NRAs) must also consider such a role while setting network char­ges and devising 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 behind-the-meter (BTM) storage, as well as demand response and flexibility in their updates of the national energy and climate plans (NECPs). The countries should 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 determine whether storage could be a cheaper alternative to grid investments.
• European countries must identify po­te­ntial financing gaps in energy storage, in­cluding BTM and other flexibility ins­tr­u­ments, and consider introducing financing instruments that improve the 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 (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 that rely on RES, deployment of individual or collective self-consumption and 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, and 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 op­timi­se existing solutions and support re­se­­arch and innovation in energy storage, especially long-duration en­er­gy sto­ra­ge (LDES) and storage solutions that co­uple electricity with other energy carriers.

While the EC has laid the foundation for accelerating the roll-out of storage cap­acity, it is crucial for member countries to pr­o­mptly implement the EU policy by aligning their national legislations with them in order to see tangible results on the ground.

Recent developments in key European markets

As part of the NECPs, only a few 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 other countries have implemented special laws, subsidy programmes, or regulations on energy and storage.

The UK government has been actively supporting energy storage. At the end of 2022, the UK had awarded funding of GBP 69 to 10 projects developing in­novative energy storage technologies across two rounds of the Longer Duration En­ergy Storage competition. The techno­logies under the scope of the competition included electric, thermal and power-to-x. Stream 1 of the competition aims to dem­on­strate the capability of first-of-a-kind energy storage facilities through actual demonstrations by March 2025 while Stream 2 aims to demonstrate first-of-a-kind energy storage system prototypes in relevant or operational environments by September 2024.

In December 2022, the Spanish government announced a call for aid for hybrid or co-located energy storage to provide Euro 150 million in funding for new storage systems. Applications were accepted till 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, which has set a target of 20 GW of installed energy storage capacity by 2030.

In May 2023, the Hungarian government announced energy storage investment sub­sidies worth HUF 58 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 HUF 120 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 on ge­ne­ration plant premises. The Turkish gover­nme­nt plans to start giving app­rovals to en­er­­gy storage projects in the middle of 2023, which should support the Turkish gr­id in the wake of growing solar PV capacity.

The way forward

As the EU pursues a rapid energy transition strategy, it must maintain a robust, flexible, stable and reliable grid to ensure the 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 the rapid deployment of variable RES generation. 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 effective im­plementation of the EC recommendations and the EU electricity market legislation at the national level is imperative.