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Battery storage for Germany’s energy transition: Unlocking untapped potential

Battery storage systems have the potential to absorb excess, often renewable, electricity, thereby preventing grid congestion. While the German Federal Network Agency (Bundesnetzagentur) has established criteria for large grid-connected storage systems as dispatchable loads under the “Use Instead of Curtailment 2.0” measure, these do not accurately reflect the actual behavior of large battery energy storage systems and are therefore too restrictive to be truly effective.

The new model could be useful for certain industrial customers, but is not yet fully developed for storage operators. It could be argued that the current regulatory framework, which includes storage systems with over 100 kilowatts of power in redispatch according to §13a EnWG, is already sufficient. However, the effective use of storage systems in this context requires a fundamental revision of the existing compensation mechanisms.

Redispatch: A Central Challenge for Grid Stability
A persistent problem in the ongoing energy transition is the consistently high cost of redispatch measures, which contribute to rapidly rising grid charges. From July 2021 to July 2023, redispatch costs fluctuated significantly, ranging from EUR 32 to 477 million per month, with a long-term upward trend. Despite this, the flexibility offered by large battery energy storage systems in the grid often remains underutilized, as it is often cheaper to curtail (renewable) generation plants than to store the electricity in large batteries at the request of the grid operator.

A key criticism of the current cost-based approach for storage systems is that it creates structural incentives for cost-inflating bidding behavior. Under this approach, the costs incurred by the use of storage systems or other power plants are reimbursed. Despite expressing concerns during the last consultation on the redispatch compensation mechanism, the Federal Network Agency has yet to respond, even though it has not fully addressed these concerns.

An astonishing reaction, as the entire cost-based market design is based on the premise that strategic bidding can be ruled out in principle. However, since this assumption cannot be guaranteed for battery storage in the cost-based redispatch process, and the Federal Network Agency seems to view the issue of little relevance, the rationale for blocking market-based redispatch for storage systems becomes questionable. A more promising compensation mechanism for battery storage systems is needed.

Market-based redispatch could eliminate disincentives and enable more efficient and, in particular, more cost-effective use. Instead of reimbursing excessive costs derived from unrealistic formulas confirmed by the Federal Network Agency, storage systems could be compensated according to their market value for grid relief. This would enable them to offer their available flexibility to the grid at a lower cost, leading to more grid-friendly behavior. This is a critical aspect, as battery storage operators are sometimes accused of their flexibility being too expensive and their behavior less grid-friendly than claimed. However, the fact that storage operators are forced to receive “Cost-Plus” rather than their true cost basis, and are not allowed to offer their flexibility at a lower cost, is often overlooked.

A market-based approach would address this issue by allowing battery storage systems to undercut the cost basis of renewables in redispatch. The result would be strategic yet inherently grid-friendly behavior of these systems, seeking to anticipate grid bottlenecks, assess the value of a grid-friendly schedule, and allocate flexibility where it has the greatest value – whether locally in the grid or the “copper plate.”

If grid operators were allowed to prevent grid-damaging behavior, such as discharging during generation-related bottlenecks or charging during load-related bottlenecks, without compensation, a strategic bidding behavior in the sense of the nightmare scenario of “Inc/Dec-Gaming” would indeed be excluded. This contrasts with the current “Cost-Plus” redispatch, where there are clear incentives for “Inc/Dec-Gaming.”

Challenges in Integrating Battery Storage Systems
The optimal integration of battery energy storage systems, including into the redispatch process, is vital for a successful energy transition. These systems can balance the fluctuations of renewable energies and significantly improve the stability and efficiency of the power grid. However, integrating battery storage presents both technical and regulatory challenges within the redispatch process. The dynamic nature of battery storage systems – their state of charge and their ability to swiftly switch between charging and discharging – poses new demands on grid management. Even more complex is determining lost additional revenue and battery wear due to frequent charging and discharging. Only the storage operator truly understands the actual cost structures, making a market-based redispatch mechanism essential for meaningful storage integration. Incidentally, only this would meet EU legal requirements.

Given the complexity and significant potential of battery storage, the Federal Network Agency is in the spotlight, facing the daunting task of developing a system that strengthens grid stability through the efficient integration of these systems. The German government has also emphasized the importance of storage for renewable energies and the power grid in its recently published growth initiative. To tap into this potential, the government reaffirms its support for the Federal Network Agency in creating long-term planning security for storage systems.

However, to fully realize the potential of battery storage systems, close collaboration between legislators, regulatory authorities, grid operators, and storage operators is essential. Only in this way can battery energy storage systems fully realize their role as a key technology in the energy transition and contribute to the optimization of the entire power grid.

About the author:

Benedikt Deuchert, is Head of Business Development & Regulatory Affairs at Kyon Energy, one of the leading developers of large-scale battery storage systems in Germany. He is responsible for developing new business models and leading initiatives to shape the regulatory environment for flexibility services in the power grid in general, and for battery storage in particular.

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