UK

The main drivers for implements hybrid projects in the UK are:

  1. Advanced grid services: The UK comprises the most advanced standalone battery storage market in Europe, having pioneered since 2017 through the proliferation of grid-services.
  2. Mature Industry: Due to vast commercialization expertise, the industry is the most welcoming when it comes to innovation such as co-located assets and Hybrid PPAs.

The UK is Europe’s largest energy storage market – by far. Advanced sophistication of network operators, regulators and legislators has created a plethora of innovative regulated grid services, Europe’s archetype Capacity Market (CM), and lucrative opportunities through balancing services incentivizing the deployment of fast-responding batteries over the past few years. As of Q2 22023, installed capacity of battery storage is more than 1.9GW – 1.5GW of which on a standalone basis and 270MW co-located with renewable energy projects. Some 2.3GW is under construction, and 11.5GW have received planning approval.

From a financing perspective, both equity and debt are familiar with the asset’s risk profile, with the presence of listed storage-dedicated funds being responsible for a wide portion of large storage capacity commissioning every year.

Over the past years, the market has experienced profound growth acting as a blueprint for further European deployment. Looking at the applications for permits submitted by year (irrespective of the outcome of the application), in Q1 2023 the volume of hybrid solar projects seeking approval (3,4GW) significantly outgrew applications of standalone solar (921MW). Such data are great to understand the intentions of local developers and confirm the trend we saw in the beginning of the report towards the momentum in co-locating storage with renewable generation.

It’s not a surprise that the UK is also hosting Europe’s first contractual arrangements for co-located assets. Starting from the first-ever floor storage optimization agreement between solar developer Anesco signed a floor storage optimization agreement with EDF Energy, in partnership with Upside Energy (now Kraken Energy) for the optimization of 10MW Clayhill farm, which was co-located with a 6MW (2 x 1.5MW) battery storage asset. It was the first time a storage optimization agreement was offered on a floor basis, to increase certainty of revenue, with the deal offering optimization of both the solar and storage asset. The project was already commissioned for two years.

Spain

The main drivers for implements hybrid projects in Spain are:

  1. Increased solar cannibalization risk: As of 2022, Spain hosted more than 19GW of installed solar capacity, with the price cannibalization effect already impacting the country’s sector.
  2. Need for more Sophisticated volume structure: Spain is set to remain a top market for merchant renewables across Europe, with corporate PPAs being a main tool to finance new additions. Sophisticated offtake demand requires innovation from the sell PPA side.

Spain doesn’t currently have advanced grid services offering route to market for energy storage assets, neither an up-and-running Capacity Market. Therefore, the driver for hybrid projects is different to the UK, and the focus is on improving asset performance.

Nonetheless, the Spanish Government has indicated its intentions to support further integration of smart renewables, with a key signal having come from direct grants supporting the up to 65% of the capex for storage additions either to existing or new renewables projects. In addition, the country has made significant steps towards improving the legislative and regulatory environment for the new asset class, giving the country a positive outlook.

Germany

The main drivers for implements hybrid projects in Germany are:

  1. Innovation auction: The country was the first to hold government-backed auctions for hybrid projects, with solar-plus-storage having swept more than 1GW of the awarded capacity. Due to the merchant element included in the partial subsidy scheme, such hybrid assets could be on the look-out for further contractual arrangements.
  2. Market-driven dynamics such as increased volatility in wholesale markets and price cannibalization: As the country is home to some of the largest renewables capacity per capita, price cannibalization and the risk of negative pricing are increasingly concerning the renewable energy industry.

A few years back, when the term ‘energy storage’ started making its appearance in the vocabulary of European renewables, Germany was a front-runner in driving deployment of the ‘exotic’ asset class. As Germany also constitutes the prime early adopter of renewables, with some of the largest installed capacity of solar pv and onshore wind across Europe, it didn’t come as a surprise that Germany was also ready to dominate in the energy transition 2.0 phase.

From an ancillary services perspective and available routes-to-market, some years back Germany’s Primary Control Reserve (FCR) market, which is a form of frequency regulation, attracted a fair amount of investment in standalone battery storage facilities, making it the second-largest battery storage market in Europe.

However, the country did not maintain momentum in enriching grid-focused routes to market for storage assets the way the UK did. Fast forward to the present, amid pressure from the EU for all member states to set robust targets and use-cases for energy storage, Germany is already focusing on improving the grid-services set up to be more inclusive to storage assets.

It’s also worth noting that not all existing and future installations are market dynamics driven. For example, local utilities energy storage projects to better manage their responsibilities and operations – which is also a prime reason behind the vast contractual activity between local utilities and either standalone or co-located energy storage projects across the US.

In addition, the so-called ‘Grid Booster’ projects have started making their appearance over the past years, fulfilling the popular prophecy that energy storage could replace expensive grid infrastructure updates. More specifically, the country’s transmission system operators, who have the responsibility of balancing the hefty renewable energy generated in the north with the consumption side in the south, are increasingly planning energy-storage-as-transmission projects across the country.

Germany also has a prolific residential storage market – the largest in Europe – as more and more households are looking to retrofit their rooftop solar pv systems when they exit their subsidy period. By July 2023, aggregated capacity reached an impressive 4.2GW across more than 801k installations!

The Nordics

The main drivers for implements hybrid projects in the Nordics are:

  1. Price cannibalization mainly affecting onshore wind: Wide deployment of onshore wind in the Nordic countries has resulted in notably low capture factors thus far, and therefore significant profile costs. As the cannibalization risk increases in the future, the industry is exploring the concept of energy storage to capture better rates.
  2. Baseload PPAs requiring a physical hedge: Baseload PPAs have been traditionally popular in the wider Nordics region. Amid increasing market risks around profile, price and committed volumes, the region is a prime candidate for innovation in the wind-plus-storage space to mitigate risk exposure of baseload hedges.

Finland, Sweden, Denmark, and Norway have deployed generous onshore wind capacity and certain regions are responsible for some of Europe’s first merchant onshore wind assets brought to life under private PPA arrangements. But with more capacity connected to the grid, price cannibalization particularly for onshore wind has made its appearance well ahead of other European onshore wind markets.