Investigating Europe's energy storage financing landscape

In this edition of Smart Energy’s Power Playbook column, Yusuf Latief explores the energy storage financing climate in Europe, looking into the different instruments and models that are available for investors attempting to move into the space.

Europe’s energy sector is undergoing a pivotal shift in investment focus as attention draws away from funnelling cash into renewable generation projects and towards their integration into the power grid.

Core to this, as may be no surprise to read, will be the uptake of energy storage systems, both behind and in front of the meter, to balance out intermittency while also enabling ancillary services, such as frequency regulation and voltage control.

We know that storage technology is crucial - there’s no doubt - but deployments are not necessarily on track.

According to Eurelectric’s Decarbonisation Speedways study from 2023, the financing required to support a major and much-needed step-up in energy storage systems leading to 2050 is estimated between €100 billion ($108.2 billion) and €300 billion ($324.5 billion).

To paint an image of what this represents, Europe’s electricity sector association elaborated that the continent will need between 531TWh and 782TWh of flexible capacity to complement variable renewable generation by 2050.

In 2022, battery storage reached only 9GWh, representing 0,009% of the 108TWh of flexible battery storage needed in 2040.

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This isn’t to say though that we can’t expect growth. Au contrair, growth is most certainly on the horizon.

According to Aurora Energy Research’s Central outlook, total grid-scale battery energy storage system (BESS) capacity is expected to grow sevenfold to 51GW by 2030 and 98GW by 2050.

These new capacity additions, finds the research powerhouse, represent a cumulative investment opportunity of €78 billion (84.4 billion) through 2050.

Regarding the battery market, Aurora’s European Battery Markets Attractiveness Report found Great Britain, Italy and the Ireland I-SEM (Single Electricity Market) as the top three markets for battery storage investment in Europe.

Aurora credits this to several shared attributes: solid spreads, strong policy support and capacity market remuneration, which provide investors with long-term contracted revenue, yet they differ widely regarding the markets’ maturity and size.

Despite this, barriers abound.

To quote Aurora’s Ryan Alexander, a research lead for European Power Markets, “…battery markets are challenging to navigate, and developers and investors alike will need to embrace complexity to deliver a compelling business case or keep a look out for public support schemes that can help them get a kick-start in emerging storage markets.”

So, we know that we need to invest in energy storage, not only batteries, but what has been holding the market back?

Addressing energy storage’s ‘financeability’

According to the Investors Dialogue on Energy (ID-E) – a stakeholder platform of experts from energy and finance sectors in all EU countries – there are three overarching barrier themes to ‘financeability’ that we need to be aware of when it comes to investing in storage.

According to ID-E’s study Financial instruments and models for energy storage, these include barriers in the realms of:

• Policy and regulation, branching into issues of double taxation and grid fees, restricted or limited access to flexibility and balancing markets from outdated policy design, lack of revenue-generating mechanisms to support storage business cases and, the big bad: permitting.

• Economics, including market risks such as energy price fluctuations, availability of finance and access to capital – considered by the study’s survey respondents as highly relevant for first-of-a-kind technologies – high upfront costs and lack of long-term contracts.

• Technology, extending into technology risk of uncertain future performance, supply chain risks and supply chain disruptions.

According to ID-E, through a range of instruments available at the EU and member state level, policymakers and investors can overcome some of the obstacles making energy projects, particularly innovative ones, too risky for the private sector alone.

At the EU level, examples of such instruments include: NextGenerationEU, which is directly managed by the European Commission; the InvestEU Programme, a combination of 13 EU financial instruments, partly managed by the Commission with support of national or international entities; the European Regional Development Fund, which is organised as a shared programme - both the European Commission and national authorities in Member States, such as ministries and public institutions, are in charge.

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To gather an overview of existing financing and support schemes at the member state level, ID-E conducted a mapping exercise, identifying 272 schemes available for energy storage across the 27 Member States, accumulating into €113 billion ($122.3 billion). Of these 272, loans and grants were found to be the most popular across the Union.

However, only three of the 272 identified schemes are specifically designed for energy storage. Most schemes target at least one more energy segment and 176 schemes target all segments of the energy value chain. While the number of schemes identified is certainly encouraging, it would be valuable to dedicate more to storage specifically.

Additionally, most of the instruments identified only support mature and market-ready projects, favouring SMEs and larger companies. ID-E states that smaller companies and households should not be at a disadvantage, calling for dedicated financing support schemes for smaller energy storage installations.

According to the study, all EU member states present at least one instrument supporting energy storage. Denmark, Hungary and Greece are the only member states with a share of instruments supporting energy storage equal to or higher than 70%.

On the other end of the spectrum, for Spain and Romania, such a ratio is lower than 20%. Instruments which only target energy storage have been found in three member states - Finland, France and Spain.

Additionally, the energy storage study found loans and grants as the most used types of financial instruments, urging that a “seamless provision of different types of financing” was identified as one of three key characteristics for a financial instrument to be effective. Long-term stability and visibility and technical assistance services with financing are the other two.

The study states that growing the offering of financial schemes will be particularly important for countries with lower market maturity. It adds that to mobilise private financing, especially in countries with high storage targets, the use of equity and guarantee schemes should be tapped more readily.

What has been your experience in financing storage projects? Are there any emerging financing models that have caught your eye?

Reach out and let me know.

Cheers,
Yusuf Latief
Content Producer
Smart Energy International

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