Why battery energy storage is essential for Germany’s solar targets
Source：www.ess-news.com
While Germany’s battery energy storage sector is booming, developers should be aware of the various hurdles to overcome and could learn lessons from the United Kingdom battery market.
ermany’s renewable energy industry is in full swing and delivering new generation capacity to the grid at unprecedented levels. With 90 GW of installed capacity, as of mid-2024, of which 7.5 GW were newly installed in the first six months of 2024, the solar market is likely to crack the 100 GW mark sometime in 2025. Despite that pace, Germany’s solar target of 215 GW of capacity by 2030 will require an even swifter run rate than the current 15 GW per annum.
Yet, at the same time, solar developers face increasingly unfavorable economic conditions which could lead to reduced enthusiasm to keep up this pace. A generally lower energy price outlook, relatively low guaranteed prices from (oversubscribed) FIT [feed-in tariff]/EEG [German renewable energy law]-auctions, and the increasing prevalence of negative power prices during the day are seen as the main culprits.
The latter point has developed into an increasingly challenging phenomenon as the number of negative hours in the EEX [European Energy Exchange] day-ahead market leapt from 69 hours, in 2022, to 301 hours in 2023, and to 330 hours by mid-August 2024. This becomes problematic for power producers. For instance, they lose their feed-in promotion for the time when energy prices are negative, provided that prices remain negative for at least three consecutive hours. This “3h-rule” was planned to be stepped down over the coming years to one hour, however the German government recently announced that the 1h-rule could be brought forward to 2025. Whether this will actually happen remains to be seen. The current governing coalition is generally very divided and parliamentary elections are scheduled for 2025.
As capture rates have deteriorated accordingly, PV developers have been looking for ways to alleviate this. One commonly seen approach is that the panels of newly planned parks are increasingly aligned in an east-west-facing direction which diversifies the energy generation away from peak production hours during lunch time. The other “silver bullet” is adding battery energy storage systems (BESS) to solar parks. Consequently, it is said that about 80% of all new solar parks are now planned as co-located sites, i.e. they include BESS.
BESS has the obvious advantage that it enables energy producers to delay the release of energy into the grid until prices are most attractive, thereby improving capture rates and income levels. Depending on the set-up, it also potentially enables BESS operators to participate in certain grid ancillary services, such as capacity and balancing markets, which can further help to generate income.
Developers that consider building BESS need to be aware of the following legal aspects, however:
Permitting procedures for BESS
There is currently little practical experience with the approval of BESS in Germany. BESS are generally to be realized via building permission (Baugenehmigung). However, in individual cases, planning approval (Planfeststellung), in accordance with the Energy Industry Act (Energiewirtschaftsgesetz, or EnWG), is also possible. The planning approval procedure would be an optional procedure in such a case. The applicant can therefore decide whether to go through the planning approval procedure or apply for building permission and any other necessary approvals. The prerequisite for building permission is usually a development plan (Bebauungsplan), which the municipality must issue.
Furthermore, even if there is no development plan, a BESS can eventually be permitted under Section 34 of the Building Code (the Baugesetzbuch, BauGB), if the project is located in an inner area (innenbereich), or even under Section 35 of BauGB if the project is located in an external area (außenbereich). Approvals for projects in external areas are currently more challenging as BESS do not have a privileged status in the BauGB, according to the prevailing opinion. However, if the BESS are not standalone projects and instead serve a specific wind or solar system (which is regularly privileged), then the BESS themselves also acquire privileged status.
Nevertheless, there remains considerable legal uncertainty in such cases. In addition, each individual local building authority decides for itself whether a permit can be granted so that it will hardly be possible to make general statements about the possibility of obtaining a permit in such cases in the near future.
Construction cost subsidy
According to Section 17, paragraph 1, sentence 1 of the EnWG, operators of energy supply networks are generally permitted to levy a one-off construction cost subsidy (Baukostenzuschuss) from connection customers. This construction cost subsidy is generally based on a performance price model proposed by the Federal Network Agency (the Bundesnetzagentur). With regard to BESS, the Higher Regional Court of Düsseldorf (the Oberlandesgericht Düsseldorf) has ruled that the price model proposed by the Federal Network Agency does not apply to BESS. However the Court ruled, as well, that operators are permitted to levy the subsidy in general. As the Federal Network Agency appealed the decision, we await the verdict of the Federal Court of Justice (the Bundesgerichtshof).
No priority connections to the grid
According to Section 8, paragraph 1, sentence 1 of the Renewable Energies Act (the Erneuerbare-Energien-Gesetz, or EEG), grid operators must immediately prioritize the connection of systems for the generation of electricity from renewable energy and mine gas to their grid. However this does not apply to BESS. If the BESS are not standalone projects, however, they can use the same grid connection as a plant itself. In such a case, fast grid access will be regularly provided. Even in all other cases, the grid operator cannot delay the connection of a BESS by arguing that systems under the EEG are to be given priority. This is explicitly regulated in Section 17, paragraph 2a of the EnWG.
Participation in the balancing market
In principle, plants can participate in the balancing energy market (the Regelenergiemarkt). Statistics show that this is already happening. Like any other facility, the BESS must undergo a pre-qualification procedure (Präqualifikationsverfahren). Here, it is to be demonstrated that the respective plant fulfils the necessary conditions for the security of supply. After that, the BESS can participate in tenders for the balancing energy market.
Securing access to the grid is of particular economic relevance for developers, as the experience from the United Kingdom – a country where the BESS sector is three to five years ahead of Germany’s – shows.
With more than 800 BESS projects currently in different stages of development, the United Kingdom is leading Europe’s efforts to build out storage capacity, especially at utility-scale level. However a significant number of these projects will not receive grid access until the mid-2030s or even later. This in turn represents a major challenge for developers as they struggle to keep their projects economically viable.
In addition, the income from BESS operations has become more challenging. With the increase in BESS projects participating in auctions for ancillary services, clearing prices have dropped significantly, leading to markedly lower income levels for operators compared to the heydays of 2021 and 2022. While, anecdotally, we have seen revenues of GBP 140,000 to GBP 160,000 ($175,000 – $200,000) per megawatt in 2022, the picture is very different in 2024, where income levels are down by more than half.
Against this backdrop, UK-based developers have started to prioritize projects and dispose of assets from 2022 onwards, which means that deal activity has been far higher than in Germany, France, Italy and Spain combined. The large majority of these deals are projects that are either at the ready-to-build or earlier stages.
Source: GreenCap research. Deals include announced, signed, in progress transactions across Europe. EU-4: Germany, France, Italy, and Spain
While the two countries are not identical, there are nevertheless some lessons that German project developers, investors, and regulators can draw from the UK experience. As in the United Kingdom, access to the grid could develop into the key constraint for a rapid expansion of the BESS network in Germany. Whilst less of an issue for co-located solutions this, in particular, may become a problem for standalone BESS solutions which are very much sought after at the moment, given their high profitability. It must therefore be ensured that the projects have grid access and that legal uncertainties around the construction cost subsidy are removed as soon as possible, something we expect to be the case once the Federal Court of Justice conclusively decides on the latter matter, in 2025.
Despite these uncertainties, BESS are undoubtedly on the rise in Germany as the federal government emphasizes the importance of battery storage for the energy transition at every opportunity. The current teething issues on the legal front are likely to be addressed by the government, courts, and regulators.
About the authors:
Baris Serifsoy is a partner at GreenCap Partners, a London-based corporate finance and merger and acquisition (M&A) boutique focused on the renewable energy sector in Germany and other European countries. Baris has more than 20 years’ experience in finance and was previously managing director at UBS AG. He holds a doctoral degree in finance from Goethe University Frankfurt and is a CFA Charter holder.
Thomas Dörmer is a partner at international law firm Hogan Lovells International LLP. He advises on complex cross-border transactions and joint ventures in regulated industries, in particular in the energy and infrastructure sectors. Thomas has around 20 years’ experience in energy and infrastructure. He holds a doctoral degree in law from the Freie Universität Berlin and a Master of Law Degree from Cornell Law School.
Tim Heitling is a partner at Hogan Lovells International LLP. He advises domestic and foreign enterprises, sponsors, banks, and financial investors with respect to M&A, joint ventures, projects, and related finance. He has around 20 years’ experience in energy and infrastructure and holds a doctoral degree in law from the University of Osnabrück.
By Baris Serifsoy, Thomas Dörmer, Tim Heitling