Making revenues stack up

New solar is unlikely to be profitable in Europe within the next decade, as generators struggle for space on overcrowded networks in the middle of the day. Energy storage can help to counter this and make solar available when it’s needed. However, new batteries will also soon have a hard time being profitable enough to reassure investors.

An energy storage project can still make significant revenues on a merchant business model, provided it is commissioned soon. Clean Horizon’s S2 2024 price forecast central scenario makes that conclusion based on numbers from France, but a similar story is playing out all over Europe.

With an operations date in 2026, a 100 MW/300 MWh standalone battery energy storage system (BESS) project is sufficiently profitable to risk a full merchant business case, as its unleveraged internal rate of return (IRR) exceeds 15%.

Time pressure

This window is closing. In the next decade, new storage projects should be less profitable. The same project commissioned in 2030 would see its unleveraged IRR drop to 11%, which is more than 400 basis points. Put another way, losing the first years, which are the most lucrative (see chart below), is not compounded by the predictable decrease in storage capital expenditure.

At this IRR level, it is far from obvious that a lot of investors will risk going ahead on a full merchant business – and if a tolling agreement is found, the project profitability is likely to be too low, anyway.

The picture for new PV projects does not look bright, either (see chart).

In France, a country that is not the most aggressive for solar deployment, energy prices when the sun shines the most will soon hover around €10 ($10.98)/MWh. It seems logical that a lot of PV investors won’t find it worth their money to keep developing new PV projects by themselves.

New strategy

With profitability conditions for both solar and storage projects likely becoming too difficult, Europe will have to reexamine its strategy to meet growing energy demand.

One option would be to increase natural gas imports. This might prove politically difficult, not to mention financially and environmentally, as the main sources for this gas would be Russia or the United States.

A more ambitious way out for Europe would be to put in place policies to support energy storage growth into the next decade and beyond. For new PV to be useful, it needs to make energy available when there is demand, not just when the sun shines. This means storage must be there to shift it. As for storage, pure merchant signals will probably not be sufficient to jump-start new projects after 2030. If Europe is really set on furthering its energy transition, it has no choice but to acknowledge that the fates of PV, wind, and storage are bound.

It is not difficult to envisage auctions, tenders, market premiums or power purchase agreements (PPAs) which – while still offering a competitive environment – would prevent purely merchant price signals from hindering the development of storage. At the same time, this would ensure that PV energy is delivered when needed. If those mechanisms serve to couple PV and storage development and provide some long-term revenue guarantees, Europe could solve three problems at once: keep deploying clean energy capacity, provide more flexibility to existing solar and wind, and cut the cost of energy generation. Sure, these mechanisms will cost something to introduce, but the alternative is likely to be catastrophically expensive.

This trend has already started. It is difficult to predict whether European countries go toward long-term procurements, similar to the planned MACSE auction in Italy, which focuses on standalone storage, hybrid auctions as we have recently seen in Spain, or toward other implementations.

But it seems that the only reasonable way out for Europe’s energy landscape will be to very heavily shift toward renewables and storage, without leaving their development to markets alone. The latest development in energy storage auctions across Europe is a reassuring sign that this trend has already started.

About the author

Michael Salomon founded Clean Horizon in 2009 in Paris, France. Since then, Clean Horizon has carved out its place as an energy storage “one-stop shop” consultancy and now boasts a team of 35-plus professionals, operating mostly across Europe, Middle East and Latin America.

From pv magazine global May issue