Potential of the energy transition for investors in Germany Noerr Insight No 4: Renewable energy storage

In our briefing German energy transition: Potential for investors we gave a detailed overview of the opportunities and risks of the energy transition in Germany for domestic and foreign investors. After looking in detail at the opportunities and challenges in the offshore wind, onshore wind and photovoltaics sectors in our series, we take a closer look at renewable energy storage in part 4.

Renewable energy storage

1. Current situation and challenges

There are many different asset classes in the field of renewable energy storage. We take a look at the most relevant ones currently, i.e. power stores/battery storage and carbon capture and storage technology (CCS).

Even without direct investment subsidies, there has been substantial expansion in battery storage in recent years. This shows how favourable the conditions are and how profitable power stores can be. Most of the expansion stems from domestic storage. Over the past few years, home storage capacity has trebled. Large-scale battery storage is also increasing. Decommissioned nuclear and coal-fire power plants are suitable sites for building storage facilities and already have the necessary grid capacity. Forecasts indicate that battery pack prices will continue to fall.

a) Power stores and battery storage

Power stores are becoming more important – if not even crucial – to help the system maintain a balance between energy consumption and feed-in and to stabilise current frequency. In times of low demand as well as in times of high generation of renewable energy, the additional power not feedable into the grid would be wasted without a storage system. In many countries, (natural) hydroelectric energy storage is a key factor in quickly balancing fluctuations in generation and demand. But the opportunities are limited in Germany due to geographical factors. Instead, Germany relies on thermal or gas storage for long-term balancing. Market analysis shows that even without major investment subsidies, power stores are constantly being expanded. However, it is still cumbersome to transfer surplus power into in hydroelectric, gas or thermal storage. Without investment incentives being created, only a limited storage infrastructure will emerge. This means the peaks cannot be fully utilised for the aim of meeting 80% of energy needs from renewables.

In recent years, battery technology has undergone a revolution. While investors (and the banks funding them) were sceptical about these technologies for many years, lithium-ion batteries are now fairly inexpensive to manufacture and are becoming more efficient. The German government recently secured investment in a manufacturing plant in Schleswig-Holstein by a large battery manufacturer. Further manufacturing plants are being planned or under construction. What’s new is that the lithium-ion technologies are now no longer only used in electric vehicles, but are also set to be used in larger-scale storage projects. There is also tangible progress in research into alternative battery technology using lithium ferrophosphate (LFP) batteries and sodium-ion batteries.

The market for this type of power store is split in two. While investment in battery technology now seems to be peaking again after cooling down briefly, other power stores, while attracting increasing interest, do not seem to be receiving much attention from investors yet. So it’s now time to boost investors’ appetite in this field by making legislative amendments.

b) Other types of storage such as carbon capture and utilisation (CCU) and carbon capture and storage (CCS)

In the foreseeable future, CCU and CCS will also offer highly attractive investment opportunities. However, for systematic reasons the challenges of these methods differ from those of power stores.

Carbon storage used to be banned in Germany. It was only on 29 May 2024 that the federal cabinet adopted the cornerstones of a Carbon Management Strategy (CMS) and a bill based on it to amend the German Carbon Dioxide Storage Act (Kohlendioxid-Speicherungsgesetz). The bill defines the cornerstones of CCS/CCU application in Germany, providing for the transportation and then offshore storage in Germany and in international waters. Although renewables are the main focus for achieving net zero, carbon emissions to date have been hard or impossible to avoid in the cement and lime industry. Experts agree that a net zero economy will be impossible without neutralising unavoidable emissions by means of carbon capture. The technologies currently available are: (1) direct air capture (DAC) which removes carbon dioxide directly from the atmosphere through chemical bonding to special surfaces; (2) bioenergy with carbon capture and storage (BECCS), where biomass is incinerated to generate power and the carbon dioxide released is separated off and stored in geological formations, and (3) biochar, a process of creating charcoal by pyrolysis of biomass in limited oxygen and then storing the carbon emitted long term in the earth. In DACS and BECCS plants, transport to a reliable storage site after carbon capture is highly relevant. To enable this, an amendment to the German Carbon Dioxide Storage Act will create a clear legal framework for a carbon dioxide pipeline infrastructure. In suitable sites, offshore storage will be permitted in the German exclusive economic zone or continental shelf (except in marine conservation areas). Amendments are to be made to the German Deep Sea Disposal Act (Hohe-See-Einbringungsgesetz) for this purpose. Onshore carbon storage is to be allowed only in certain narrowly defined exceptions on a trial basis. Permanent storage within certain boundaries will be authorised via regional laws (opt-in).

Europe-wide use of these technologies is also being driven by the European Commission, including through the Net Zero Industry Act and the Industrial Carbon Management Strategy published on 6 February 2024.

2. Regulatory framework

In the past, the problem for storage facilities in general was incurring the double grid fees for buying electricity and for feeding it back into the grid. Relief from this burden was initially introduced for power stores to be put into operation up to 2026. This exemption was recently extended to power stores to be put into operation up to 2029. It applies to the first 20 years of operation. This extension appears promising primarily for battery storage. However, given the fairly long planning and construction times for other types of storage, the extension is not enough.

The favourable economic situation for storage expansion in the market is now set to be supported further by legislation. The construction of power storage facilities has also been classified as being in the overriding public interest, according to section 11c of the German Energy Industry Act (EnWG) (Urban Planning and Other Regulations Amendment Act (ROGÄndG) of 22 March 2023). The expansion of power storage, alongside the expansion of renewables, has thus been given a privileged status in authorisation procedures.

Since 2023, power stores have also been exempt from all levies under the German Energy Finance Act (EnFG) (CHP levy and offshore grid levy) according to section 21(1) and (2) of the German Energy Finance Act, provided they are used bidirectionally. A netting rule reduces the levy requirement accordingly, provided the electricity used in the feed-in is taken from the grid and the electricity generated in feed-out is fed back into the grid. This is intended to incentivise the bidirectional use especially of domestic solar energy storage setups. The rule also applies to bidirectional charging points for EVs. The technology is still in its infancy but is set to become increasingly important. On 11 March 2023, the Advisory Council of the National Centre for Charging Infrastructure presented a roadmap for introducing bidirectional charging in Germany. According to the roadmap, bidirectional systems are to be firmly integrated into the market by 2030.

Germany’s Federal Ministry for Economic Affairs and Climate Action (BMWK) unveiled its electricity storage strategy on 8 December 2023. The strategy aims to further reinforce the favourable conditions for grid expansion. The transitional rule in section 118(6) of the German Energy Industry Act, which exempts power stores, pumped hydroelectric energy storage plants and electrolysers from grid fees, is to be extended and made permanent. The Federal Network Agency (Bundesnetzagentur) is considering the option of enacting mandatory construction cost subsidies and grid connection contributions for energy storage facilities. The focus there will be on transparency, fairness according to causation/origin, and regional standardisation. Subsidising onsite energy storage facilities and the removing obstacles to authorisation hurdles are also at the heart of the storage strategy.

The electricity storage strategy has been criticised in particular for currently failing to include specific actions and targets for expanding storage capacity. Subsidies under the German Renewable Energy Act (EEG) are to be restructured in such a way they do not preclude the use of storage for the electricity grid, for example for balancing energy. To date, subsidies under the German Renewable Energy Act have only been granted for the storage of exclusively renewable energy, which cannot be guaranteed where storage is used as a grid service.

Regarding the future regulation of CCS and CCU, the German government’s Carbon Management Strategy states that in principle, all carbon emissions may be captured using the storage technology, except for emissions from coal-fired power generation. The introduction of a subsidy module for CCS and CCU is also planned in the Federal Funding Policy for Industry and Climate Protection, with unavailable or hard-to-avoid emissions intended to be the focus of government support. Conventional gas-fired power stations are excluded from the scheme.

3. Outlook

R&D into storage solutions has been booming for years and certain investors are speculating on a revolutionary invention in the market for electricity storage with greater efficiency for medium and long-term storage plus rapid availability.

Meanwhile, the German government is creating additional incentives for the activation of ‘switchable loads’. One such incentive is likely to result from the new section 13k of the German Energy Industry Act, with an initial trial phase from 1 October 2024. According to this provision, incentives for the activation of additional electricity consumption (known as switchable loads) will be created for electricity users (not just for storage methods) if they make use of electricity peaks in times when surplus energy is generated. The legislators’ aim is to prevent having to down-regulate increasingly large amounts of power to avoid grid overload. After the trial phase, the switchable loads will be allocated in a competitive tender procedure.

Overall, the market is in a state of flux and it remains to be seen how it will evolve. Only time will tell which of the incentives offered to investors will prove decisive. On the other hand, the market for battery storage will continue to boom as the various technologies become increasingly sophisticated and demand continues to rise sharply. If the EU keeps to its plan to outlaw the registration of new vehicles with combustion engines from 2035, battery storage for electric vehicles will remain the leading technology, at least for the time being.

The development of CCS and CCU technology will depend to a large extent on how the carbon transportation infrastructure evolves, which in turn requires the corresponding regulatory conditions in the German Carbon Storage Act. As there is still a huge shortfall in emissions reductions, strong competition for CCS and CCU capacity is likely if the nationally and internationally agreed reduction targets are retained. This should make the technology attractive to investors.

One example of the increasing regulation in the field of CCS is the European Commission’s draft of a delegated act dated 18 June 2024. This removes the obligation to purchase emission certificates for emissions from the manufacture of certain construction products if those products permanently store the carbon emitted. Mineralising carbon in building materials is likely to become a promising future technology in the construction industry, which is under considerable pressure to cut emissions.