Speaker 1But what we actually see this year is this big first wave of deploying this battery storage in the system. So the installed capacity increases quite significantly and there's now at a rate where we install gigawatts of capacity per year. I mean, the arbitrage opportunity is huge, right? You mentioned the installed capacities of solar. We are getting close to 130 gigawatts installed only in Germany.
Speaker 2[Music] In its mid-year energy update, solar power Europe concluded that Germany has a flexibility gap. And that's a result of ongoing really robust solar installations. Eight gigawatts in the first six months of 2026 solar power Europe finds up to an installed capacity of 126 gigawatts. A really huge fleet of PV. So how do you plug a flexibility gap? Battery energy storage systems is one of the best ways utility scale distributed as well. Today's pricing is a principle with Aurora Energy Research here in Berlin and we're going to dig into the German battery energy storage market. Thanks for joining this Maori podcast. Thank you so much. Well, when we look at where we are in terms of deploying particularly utility scale energy storage here in Germany, how would you sum that up?
Speaker 1I would sum it up in a way that we are, I think, seeing the Harkestik growing. I think one or two years ago we still had a lot of projects under development. Of course, we also see all of these grid requests that are still in the queue, right? But what we actually see this year is this big first wave of deploying this battery storage in the system, so the installed capacity increases quite significantly. And there's now at a rate where we install gigawatts of capacity per year. And before we also maybe hit one or two or half of a gigawatts before, but it was not common.
Speaker 2Okay, so when we're talking gigawatts, low or high single digits, are we talking or maybe up above 10 gigawatts of capacity?
Speaker 1We're not yet at 10 gigawatts added per year, but maybe single digits, small number gigawatts a year. But I think this is probably something that we continue for a while in the German market.
Speaker 2Okay, and the drivers are this flexibility gap, of course, that means price cannibalization if you are a solar company. So that means very low or even negative daytime prices and very high peaks as well. So how big is the arbitrage opportunity for batteries in Germany at the moment?
Speaker 1And then, of course, the surrounding countries also install solar as a very cheap source of electricity. And that, of course, if you were looking to capture all of this electricity and move it to higher pricing hours, then you could theoretically think of a potential of up to 100 gigawatts of battery storage. But ultimately, you don't need to do that for all of the electricity in the midday hours, but you already mentioned you have close to zero or even negative prices. So you get even money for charging your battery and then bring that to the higher pricing hours, offers indeed a very big potential in the gigawatts. And what about the
Speaker 2other revenue opportunities then? So the frequency regulation market, these ancillary markets, how attractive are they?
Speaker 1Exactly. So in the German market, we have next to the day ahead market, we also have the intraday market. And then on auxiliary services, we have the AFR and FCR markets. They are relatively shallow markets with a total size of 4.5 gigawatts. So as soon as we have, let's say, four to five gigawatts of batteries installed, they will probably be the price that are in these markets.
Speaker 2The batteries will just come in and consume that overnight.
Speaker 1Exactly. Exactly. And then we'll probably see a relatively sharp price, so because then batteries are setting the price. They have a relatively low reservation cost compared to thermal assets which either need to run in order to provide these services or price in their short run margin costs to ramp up or down to then cover these services.
Speaker 2And building this revenue stack then, there's also grey and green batteries in Germany, another layer of complexity. So how difficult is it for developers to make this revenue stack kind of stand up and look attractive to the lenders and investors that they have?
Speaker 1Good question. I mean, it depends a lot on the project and also what the local grid operator allows you to do, right? Obviously, everyone would like to install a grey battery next to their solar PV asset. The legislation is actually favourable, because we now have the misspell legislation that actually allows you to do both charge green electricity, feed it into the grid and still get the EEG remuneration on this electricity volume. While also doing energy arbitrage with the grid charging the battery from the grid, discharging to the grid, and then stacking up revenues, basically, as you said, however, in a lot of places you cannot connect a battery. Not necessarily and immediately get charging permits for that battery. In these cases, what developers are doing is they are defaulting to this concept of green storage where they only exclusively charge the battery from the renewable asset can be PV, can be wind, and then feed it back to the grid in later hours. There are two effects here. One is that the battery increases the capture price of the renewable's electricity, which is quite obvious, right? You don't feed into the grid when prices are low, but you feed in when prices are high. And the second positive effect is that you can secure some of the volumes that would otherwise get lost when the renewables asset would feed into the grid in times of negative price hours. You can now charge this electricity and discharge it later, provided to the grid in hours where there's actual value for the electricity.
Speaker 2Yeah, and gray, as we said, was charging and discharging from the grid. That really is the huge arbitrage opportunity, though, right? So as you said, everyone would prefer to install or develop a gray battery.
Speaker 1Exactly. I think everyone would like to do it because revenues are higher, and then you have relatively similar capex, and then if you have higher yield, and then obviously your return expectation can be quite a bit higher. What we are seeing, though, is that this green storage is becoming attractive and is becoming economically viable, just because battery capex are falling very much. And on the other hand, solar developers are really struggling to get solar-only projects across, keep their pipelines up, and one way of mitigating that is to install a battery next to the solar park, and then increase the margins just a little bit to make the IR and make landers comfortable to lend against these types of projects.
Speaker 2Yeah, we saw a few years ago that every solar project utility scale was being developed as being battery-ready. It seems like in Germany in 2026, nearly every project has to have a battery next to it.
Speaker 1Yeah, exactly. We just said a discussion yesterday with some of our clients, and we raised exactly this question. How many projects are you still planning to deploy in a standalone setup? And the vast majority, more than two thirds, said okay, every single project that we are deploying will have a battery next to it. It doesn't matter if it's green or gray. We hope to get a gray connection, obviously, but if we don't get it, it's just going to be a little bit of a smaller battery and then a green battery.
Speaker 2We'll talk about the prospects and the challenges facing solar and battery project developers here in Germany just in a little bit, but let's look into some of the barriers then to developing a gray system in particular from these electricity network operators for the distribution system operators. What are the barriers being put up? Why do you feel they're uncomfortable with batteries operating on their little part of the network? Yeah, good question.
Speaker 1I mean, I think the most important piece for the grid operators is that they have trouble understanding and predicting the exact schedule of a battery, right? Because a battery can trade. First of all, it can switch from charging to discharging within seconds or even milliseconds. So that by itself is already an uncertainty for the grid operator.
Speaker 2But that's also why batteries are so good at providing grid services, like frequency regulation, these auxiliary markets.
Speaker 1Exactly. I mean, and it's even needed to provide auxiliary services. but the grid operators specifically on the distribution grid level. They are just not super comfortable with having a lot of batteries installed in their grid and then not being able to predict their next move basically. And so there's this switching between charging and discharging, but then there's also very frequent changes in schedule, right? Batteries in Germany can do the so-called continuous intraday trading where they use the continuous intraday market to buy and sell the same exact quarter hour within a given day. They buy and sell it back and forth a couple of times before they actually deliver in that specific quarter hour. And that gives a lot of uncertainty to grid operators as to how these batteries are operating. And ultimately that means they don't know the flows, the actual line flows in their grid. So that becomes super-hatra predict and then it becomes super-hatra predict whether or not this grid is operating in the stable mode. And that is why they're imposing flexible connection agreements, ramping constraints and these sorts of things.
Speaker 2And okay, well you mentioned flexible connection agreements, FCA's. You hear about it a lot when discussing the battery working in Germany. Just how much of a challenge are
Speaker 1they for developers? I mean I think there are a big challenge. So the first challenge is of course that the revenue decreases compared to a project without these kinds of restrictions.
Speaker 2Because you're putting limits on what the battery can do.
Speaker 1Exactly. You're putting limits up. You're saying okay, you are only allowed to charge in specific hours, you're only allowed to discharge in specific hours. Usually this is aligned or somewhat aligned with what the battery would anyhow do, but it's not always aligned. So there's some revenue already lost due to that. Then there's also usually a ramping constraint which means you can only so this switching from charging to discharging within one millisecond is not allowed anymore. What is allowed is that you ramp up bit by bit to then reach fully charging and then ramp down to fully discharging within S-band off in our soul. So that takes quite a bit of time to then actually change your inferior drawing from the grid.
Speaker 2Yeah, okay. And HFCA is a bespoke thing with the individual distribution system operator. We know in Germany there's hundreds and hundreds and hundreds of them. So it's each one is a new thing. It is a little bit different.
Speaker 1So this is how it began basically. Okay. But then then the EON companies or distribution grid operators organized under the EON roof basically put out a guidance on how to design an FCA. This is fairly common and fairly standard. I would say that 80% of the projects that I'm seeing in my day-to-day work are operated under this framework of an FCA. This FCA includes these so-called power envelopes. So you are getting told when you can charge in discharge, you get a ramping constraint, you're not allowed to participate in all of the auxiliary markets and some of the and the markets where you're allowed to participate are reduced in capacity. So you can only participate with like 20 to 30% of your capacity. So that's fairly standardized and that is something that is good from a planning perspective but still eats into your revenues. So this is fairly standardized. What is project specific though is then the actual outcome of this power envelope formula. So basically this formula tells you if the local infeed of renewables energy is relatively high, then you have to decrease or you're not allowed to also feed into the grid. You're only allowed to charge or stay idle, don't do anything. So this part is defined on the local renewables feed-in and that is of course something you somehow need to get comfortable with and have a view on and that is sometimes what developers are struggling with but also something that you can make out if you know what assets are actually in that specific radarium.
Speaker 2Yeah, okay, so you can bundle certain aspects and there is some standardization which is encouraging and how confident are you then that with these kind of efforts, this kind of maturity and standardization that some volume can really start to flow into the battery energy storage system market here in Germany because as I said right at the start there is this flexibility gap and a lot of solar still being installed.
Speaker 1So I would divide it a little bit and say okay, there's there's a volume that can now flow a little bit easier because there is some standardization obviously into smaller batteries that are connected on the DSO level. I think that's first of all this standardization is a good thing. I would also hope that after a couple of months and potentially years of review that FCA is getting a little bit more easier to handle from a revenue perspective so they are not as restrictive anymore because maybe DSOs also become comfortable with how batteries are actually operating and hopefully realize or get instruments to make the batteries behave in a way that doesn't hurt the grid but still allows a little bit more leeway to actually realize this revenue. So this is on the distribution side of things. There we have a lot of projects but smaller projects. What we also see in parallel if we check the transmission grid side of things. There we see a lot of pipeline announcements with very, very big assets. We just had the release of a major project with over a gigawatt of installed capacity in Germany. We also see a couple of other players with projects ranging from 200 to 500 megawatts each and this is of course when you talk about capacity this is probably an even bigger share that we don't fully know yet where it will be and how many of these projects will actually be realized but if you add 500 megs with one single project and you have 12 of them in the pipeline you have quite a substantial additional capacity addition that is that is waiting there to be connected and potentially also less restricted. So what we see is on the transmission level is that the restrictions are actually a little bit more easy to handle from a revenue perspective there of course also some uncertainties but that is what we currently see in the market.
Speaker 2And these big batteries could be really effective in terms of debottled netting the grid as well so plugging that gap.
Speaker 1Definitely. I mean they definitely have this potential. When we talk about bottlenecking the grid this is maybe touching also another topic not only the flexibility need in the market right where we see negative prices and very high spreads between midday and afternoon so this is more like the market flexibility that is needed on the other hand what we also somehow need is a solution to de-congress the actual physical grid right and that is also something that batteries are a prime suspect of helping there grid operators don't yet have an effective way of actually telling batteries what to do because they don't they're not able to send any price signals or whatever to a battery to say okay I have an actual congestion in this area mostly from north to south right and then saying okay batteries in the north please charge batteries in the south please discharge this is not an element of the market that is that is already set up it is conceivable that through dynamic grid fees which are discussed by the German regulator at the moment that these might lean into that and help grid operators sending these kind of grid signals to the battery and could relieve some of the pressure of the grid we need to see how they how they actually managed to do it how the how the design will be and there's still some open questions on on how this will actually pan
Speaker 2out that will be interesting to see how it evolves in in terms of battery capacities then what kind of durations are we saying for these utility scale solar system storage systems is it too for what's what's kind of the trend that you're
Speaker 1picking up I think the trend is definitely going toward four hour batteries I think more recently we had seen two hour batteries usually because the from an IRR perspective or from a return perspective usually the two hour battery performs slightly better than before our battery however given that grid capacity is gas developers are thinking more in a way of how can I optimize or maximize the the absolute return on my grid connection not the relative return on the money spend because there's only limited money to spend if I if I don't max out the grid connection so that is why a lot of developers are actually leaning toward four hour batteries okay and you mentioned
Speaker 2prices are coming down that's flowing through to the end market here in Germany as well
Speaker 1exactly yeah and
Speaker 2from the investor side or particularly the lender side how comfortable would you say lenders are in terms of providing debt finance project finance to these battery systems
Speaker 1I think pretty comfortable actually okay I'm I'm yeah I'm not surprised anymore but I was a price that it happened relatively fast. In Germany, I think there's still kind of a division on how secure and secure these margins are seen for the batteries. But I think banks have found structures that make it so that incentives between the equity and the debt are aligned in a way that they can use cash sweeps to get a little bit of cash out of the project early on to cover the debt early on. So in the first years where the battery is merchant and has a very high revenue that the bank also gets a piece of the cake, basically. And that aligns incentives pretty well and that makes banks a little bit more comfortable. On the other hand, what we are also seeing is a developer market for tolling agreements, which means that developers are basically renting out their capacities. - Or maybe part of their capacity. Or part of their capacity is exactly to large off-takers with a very big balance sheet. And then the bank also says, OK, this is mostly like a fixed revenue for the next seven years or whatever. Seven to 10 years. And then they also can lower the DSCR that is needed for that revenue stream. -
Speaker 2Yeah, it is interesting to see the kind of financial innovation that also allows projects to go ahead. Because we focus a lot about the kind of technical stuff, the battery cells and the modules. And also the solar modules and systems. But there's also financial innovation like you were saying in the early merchant years of a battery system to get lenders on board because that capital is crucial. -
Speaker 1Definitely. And we also wouldn't see the deployment rates that we have been seeing if there wasn't a lenders standing behind it, right? It's definitely an evolving market. I think one added complexity, and maybe we'll speak about this a little bit later, is if you have a hybrid project, right? If you combine a solar asset with a battery asset, how do the revenue streams look there? What part of the, what share of the revenue stream is actually a hatched stream or is part of the EG potentially? What part is a merchant revenue stream? And how can I distinguish between the two if I have a shared project? So that is the next step. I think some banks already think towards that. But I also know that some are still struggling to then define the correct and their eyes correct. DSCRs, let's say, for these different revenue streams. - And what is DSCRs? - How much discount does the bank take on the revenue to define how much they're lending against this revenue? So if you have a DSCR of 1.3, you would need to have for a revenue of 130 per year the bank would only lend you 100. - Okay. - So 30% discount. -
Speaker 2Excellent. Thank you very much for explaining that. And yeah, when we're talking about these co-located projects, like you said, through quarters of the developers that you spoke to just the other day are only looking at solar plus battery projects, these hybrid projects. The EG, which is the German Renewable Energy Act, which provides a kind of floor price as I understand it. It's kind of like a contract for difference, kind of mechanism. How important is that still in kind of creating a base price for co-located projects if they operate in a green capacity? -
Speaker 1That's precisely the question, right? It is definitely a crucial part of the equation because there is this revenue stream that is theoretically a rock bottom revenue stream that you can always achieve. And you would, in a green setup, you would even increase the electricity that falls under that scheme because in negative price hours you don't need to, you don't need to feed into the grid, you can charge it into the battery and then discharges later. So theoretically you would be able to save or secure the electricity in negative price hours as well. So there's this effect, but then there's also this added effect, this will fall under the category of a very secure revenue stream, right? On the other hand, you have this uplift that the battery can provide. And this uplift is something that is dependent on market prices, specifically on peak prices. And market prices have very volatile. So it is more like a merchant upside. And yeah, we'll see how banks will cover that in their landing processes, but that is basically the key question there. -
Speaker 2And it will depend on sophisticated modeling to kind of play out these different scenarios, also system sizes, battery capacities and so on. So there's a lot of variables at play but we've talked a bit about solar project developers. We've had news just very recently, the inner park are very prominent and kind of storied German solar developer for some 15 years of history has entered into kind of voluntary insolvency proceeding. So we'll see how that plays out. It's a bit of a shock to the industry. And it really does demonstrate that things remain very challenging for renewable energy developers here in Germany. Why would you say that that's the case? How do you describe the kind of market settings at play? -
Speaker 1Definitely agree that it came kind of a shock to see that that inner park started the insolvency process. It's definitely a very tough market environment for solar developers because the solar market is just very, very competitive. So you need to have a specific scale to be able to develop a project on a reasonable price or with a very low price so that you can actually secure bits in the EEG that is constantly oversubscribed and secure your EEG contract. So you have to go very, very low and really turn every storm basically to see if you can make it with a little bit less revenue out of the EEG and still make the bank comfortable. In summary, it's a very, very competitive market and we have seen that the government is also implementing some changes or has been implementing changes over the last couple of years that exempt electricity in negative price hours from getting this floor revenue which then actually means that you are becoming more exposed to market prices. And I think that is something that is very, very hard to estimate or to factor in for these business cases and can be a reason why solar-only projects are getting tougher and tougher to realize and also on the other hand, the reason for adding battery capacities straight away to the solar projects to make them a little bit more stable. -
Speaker 2But there's also risks with battery development as well. So if you're a developer and your FCA doesn't play out, in the way that you wanted to and you've already invested in land or already purchased the project more or less and component. So it can be very risky as well. -
Speaker 1It is also risky. I think if you think about it from a hedging perspective though, if you are a solar developer that leans into the battery market just in order to keep developing solar projects because you believe in solar project and ultimately the energy transition, right? There's maybe a different risk that you take when developing batteries because you would only develop batteries in secured locations with a secured grid connection. You might, as I said initially, you might only get permission to have a green battery but this green battery might still be sufficient to bring your solar asset or keep your solar asset alive basically, whereas pure battery developers might have a little bit of a different risk profile and also a different way of approaching lots of different DSO, lots of different grid connections try to get as many grid connections possible and then see which of these actually turn out into projects with favorable FCA's and conditions. -
Speaker 2And you could also have a portfolio of projects. - Exactly. - Yeah, exactly. - To hedge this risk. Now looking a little bit further afield just a kind of final look around Europe. So what is the most attractive battery markets? Would you say in kind of Germany's region? -
Speaker 1I think Germany is still very, very attractive. I mean, I personally also cover Switzerland and Austria. We see that battery projects are picking up there as well. In Austria we have still part of the regulation, namely the grid for regulation which is not favorable for the battery business case because you pay a relatively high capacity base fee and then this makes the business case unattractive but it is about to change. This might be an interesting market to look at. From an IRR perspective, from the depth of the spreads perspective, Germany is probably still the most attractive market. The market is also changing so you wouldn't expect to have 20 plus percent IRRs in the German market anymore. If you were looking to secure these kinds of margins and probably smaller markets or less mature markets are, better way to realize that. -
Speaker 2And also batteries have the potential to cannibalize their own market as more of them come in. But maybe that's a story for a few years or maybe a year or two down the track. Tadeos Kreisig from Aurora Energy Research here in Berlin. Thank you very much for joining the Smartery podcast. Thanks a lot. [Music]
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