Technical Article

System development strategy, power plant strategy and energy storage strategy - where are we heading?

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The importance of large storage systems for the energy transition in political space has been systematically underestimated for a long time. Improvements in the political framework for investments in large battery storage systems to create fairer competition with conventional, generation-side flexibility have been made by legislators at various points in recent years, but there has been no comprehensive strategy to describe the role of storage systems in the energy system. The fact that some of the central hurdles to storage ramp-up have nevertheless been removed is the result of many years of persuasion by the storage industry and is now reflected in high, purely market-driven expansion rates, particularly for large battery storage systems. As a result of the highly dynamic development of the market with investment announcements worth billions, regulatory issues relating to storage are now moving higher on the political agenda for the first time. This is because expanding renewable energy and networks alone is no longer enough. Political activities focus on three strategies in particular: the system development strategy, the electricity storage strategy and the power plant strategy.

But what are the strategies actually about? Here are the key takeaways:

With the Publication of the energy storage strategy on December 19, 2023 The Federal Government took a first important step to politically define and appreciate the role of electricity storage systems in the context of the energy transition. The energy storage strategy aims to support the expansion dynamics of electricity storage systems and comprehensively describes the central obstacles to an electricity storage ramp-up in Germany. In its current version, however, it primarily represents a political declaration of intent which, as a next step, urgently needs to be filled with concrete measures and a clear legislative timetable.

The system development strategy, to which one in Novembre 2023 through the Ministry of Economy an Interim report was presented, is currently being prepared. It develops a joint mission statement for a climate-neutral energy system and shows the transformation paths there. The system development strategy is based on long-term scenarios that look at the energy system up to 2045. Contrary to expectations, however, both the interim report and the long-term scenarios (February 2024), which have been updated in the meantime, are not in line with the Federal Government's electricity storage strategy. For example, the reference scenario, which is the basis of the system development strategy, does not assume an expansion of storage systems at all, while the energy storage strategy aptly describes why (power) storage systems (must) play a central role in the future energy system.

The recently announced Power plant strategy (February 2024), on the other hand, is essentially about the question of how secured generation capacity can be generated from H2-ready gas power plants. It thus primarily provides an impetus for a rapid expansion of the hydrogen economy by tendering a total of 4x 2.5 GW of H2-ready gas power plants in the short term. This should include funding for both CAPEX and OPEX. It is planned to be adopted by the Federal Cabinet by summer at the latest. In addition, there is the announcement of a "capacity market" from 2028, which is not specified in more detail. The extent to which storage systems should play a role in a technology-neutral market remains just as open as many other parameters that would be important for evaluating the proposed instrument.

Quite a lot of strategies, then, but where does the path actually point?

It seems clear that the BMWK has yet to take a straight line on (large battery) storage systems. This is because the respective individual strategies of the Ministry of Economy are still not coordinated with each other. And even worse - insufficient attention is paid to the reality of expanding energy storage systems. In particular, it is to be hoped that the long-term scenarios underlying the system development strategy will be thoroughly revised, because the assumptions made there, especially regarding the economic efficiency of storage systems, are simply incorrect. Inadequate technical understanding means that storage systems are often provided with inaccurate performance and capacity ratings, which leads to a significant increase in cost and marginalizes their effect on the energy system. The enormous technological dynamism in the storage sector, which is comparable to the situation with photovoltaics in the 2010s, is completely ignored. As things stand at present, it remains to be feared that the result will be incorrect conclusions with regard to system development.

At the same time, the calculations and statements of the long-term scenarios also directly contradict the BMWK's electricity storage strategy. It highlights the key role that storage technologies play in the energy revolution, sets the right priorities for accelerated storage expansion and addresses the hurdles and fields of action that must now be addressed quickly.

If you now look at the recently announced power plant strategy from the perspective of the storage industry, the question arises again as to what extent "storage power plants" should be considered there. While one can argue about the meaning of the announced tender for 4x 2.5 GW H2-ready gas power plants, the mere announcement of a capacity mechanism or a capacity market from 2028 is a bang. Because this decision has far-reaching consequences, as it would effectively abolish the energy-only market, which has been established for many years.

The announcement of a future capacity mechanism alone will have a significant impact on the willingness to invest in various areas of energy generation, whether in conventional, renewable or H2-ready generation as well as in storage solutions. It is therefore crucial that clarity is quickly established about the design of these mechanisms in order to prevent necessary and economically viable investments in energy generation and storage from being omitted due to uncertainties. Such a situation would aggravate the problem and make the capacity mechanism a self-fulfilling prophecy.

So what should be considered when discussing the introduction of a capacity mechanism?

Particular attention should be paid to ensuring that a future mechanism does not affect price signals on the energy-only market in a way that leads to excessive dampening of price volatility. Because this makes investments based on prices on the energy-only market uneconomical. However, it is precisely this market that is now the main field of activity of large battery storage systems, and distortions in price volatility would therefore have a particularly large impact on the economic efficiency of these systems.

In addition, it must be acknowledged that a capacity of just a few hours, as newly planned large battery storage systems (and also pumped storage power plants) usually have, is very valuable for the entire system: In foreign markets, it has been shown that even short-term storage systems are successful as suppliers of capacity, regardless of the question of whether capacity mechanisms actually make sense compared to the energy-only market. Although this may seem unintuitive at first, ensuring supply security plays a role not only when providing baseload generation during the "cold dark doldrums". The provision of additional capacity over short periods of time (typically around 2 hours for Kyon storage) also provides significant added value. Because really critical phases in a "cold dark slump", to stick with the example, do not last for days and weeks, but only affect short periods of time in which a very low supply of renewable energy meets particularly high consumption. However, power consumption fluctuates over time of day, which is why a few hours are generally more critical than others. In exactly these hours, the storage capacity then helps to ensure a reliable power supply.

In principle, when introducing any capacity mechanism, it should be critically examined why the current energy-only market is considered insufficient to meet the expected challenges and how a specific solution can be found for this that minimally affects the existing energy-only market. One example is the existing capacity reserve, which secures additional capacities in the sense of a "calming pill" for the system, but which should in principle "never" be called up - except in the event of a very rare, unforeseen critical situation for security of supply. This instrument helps to improve security of supply, but has no direct impact on the energy-only market.

However, when the market mechanisms of the energy-only market are interfered with, it is not only important to keep the effects under control, but also to ensure that storage systems receive their fair share, even if they supposedly contribute only slightly to security of supply during the "cold dark slump".

In addition, only such action is in accordance with EU law and the Federal Government is well advised to take this seriously. Without the implementation of legally secure mechanisms, there is a risk of a medium to long-term lack of investments, which can then really jeopardize security of supply.

The Federal Government is undoubtedly striving to press ahead with the transition from conventional energy generation to renewable energy sources in a clear and accelerated manner. In this context, storage technologies and their role in the energy system are also gaining in importance and are becoming a further focus of the political agenda. However, there are disagreements as to the coherence and clarity of the policy course. The variety of strategies, which are based on different principles and are sometimes contradictory, makes consistent implementation difficult. Despite these challenges, it is important to maintain a secure storage investment climate in Germany. The Federal Government must carefully consider this and make wise decisions so that the energy transition can be successful in the long term, both ecologically and economically. The fact that, in view of the existing contradictions, rapid action is required at the same time to minimize inefficient uncertainties on the market does not make it any easier for the acting political actors. However, politicians have put themselves in this dilemma.

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