Battery storage players in Europe are experiencing both the best of times and the worst of times.

The ongoing volatility in the European power market makes the case for grid-scale batteries like never before, but persistent supply constraints and the sky-high cost of key materials — including lithium — continue to paint a challenging picture for project development.

Batteries have become "incredibly profitable" in the volatile power price environment, according to Sam Wilkinson, director of clean technology and renewables at S&P Global Commodity Insights. In particular, operators involved in wholesale arbitrage — charging up when prices are low and dispatching when prices are high — have likely enjoyed a bumper year as market prices soared to record highs.

These catalysts for batteries look set to continue thanks to long-term policy signals such as the European Union's REPowerEU strategy, which plans to end Russian gas imports and accelerate the bloc's energy transition. The strategy sets higher capacity ambitions for wind and solar projects — 510 GW and 600 GW, respectively — and raises the targeted share of renewables in the bloc to 45% by 2030, up from 40%.

"The levels of renewables they're talking about requires an amount of storage way beyond what we've currently got," Wilkinson said in an interview.

Commodity Insights' latest forecast for 2030 energy storage installations in Europe, encompassing both EU nations and non-EU members, stands at 44.6 GW, nearly double its previous estimate of 23.7 GW that it made in February. While this cannot be directly attributed to REPowerEU, it is still the largest single forecast increase the group has ever made.

"Really we see exponential growth over the next 10 to 15 years in energy storage," said Peter Kavanagh, CEO of U.K.-based Harmony Energy Ltd., which brought online Europe's largest battery storage project in November.

"The more onshore wind, offshore wind and solar you have on the system, the more intermittency," Kavanagh said in an interview, adding that batteries are needed to "really make the network efficient."

Competing with EVs

Yet while the battery storage opportunity in Europe might be greater than ever, there has arguably also never been a more challenging environment for developers.

Heightened need for lithium-ion batteries by electric vehicle manufacturers is causing supply shortages in the storage market, which compared with EVs accounts for only a fraction of the overall demand for batteries. The project pipelines of the 10 largest energy storage providers equate in total to about 10% of automaker Volkswagen AG's battery procurement plans in the next three years, according to Wilkinson.

"Their purchasing power is almost zero in comparison with the automotive companies," Wilkinson said. "It makes it very difficult for them to procure batteries."

These supply constraints, combined with the rising cost of raw materials such as lithium, are putting huge pressure on the price of batteries.

After more than a decade of cost reductions, the volume-weighted average price of lithium-ion batteries rose to $151/kWh in 2022, according to BloombergNEF, up 7% from the year before in real terms. The organization expects prices to stay at similar levels in 2023, bucking the historical downward trend even further.

"The big challenge is ... the car industry doesn't really care too much about being exposed to lithium prices," Wilkinson said. Consumers buy cars at a given point in time, whereas energy storage projects have longer development time frames, which mean dramatic changes in cost can be a "huge problem" in raising financing.

UK market growing fast

Commodity Insights' latest forecast puts the U.K. as Europe's largest market for grid-scale energy storage by 2030, with 12.5 GW of capacity, followed by Germany with 8.1 GW and Spain with 5.1 GW. The group's February outlook for the U.K. was 6.5 GW.

Part of the U.K.'s leadership on battery storage is down to it being an early mover. In 2016, National Grid PLC provided four-year, enhanced frequency response contracts to eight projects totaling 201 MW — more than double what was installed in the whole of Europe at that point, according to Commodity Insights data.

"The market's evolved quite a lot since then," Kavanagh said. In particular, the narrative that batteries need long-term contracted revenues has almost entirely disappeared. Harmony Energy's battery portfolio provides eight different services to the system, from arbitrage to frequency response and ancillary services.

More fundamentally, operators also see an opportunity for batteries to complement the U.K.'s push for offshore wind, which is targeted to grow to 50 GW by 2030.

Batteries are "like an insurance policy or a shock absorber," according to James Basden, founder director of developer Zenobē Energy Ltd. When there's a sudden surge of offshore wind, instead of grid companies having to pay to curtail wind farms, excess electricity is stored by batteries then discharged when demand picks up.

"That has a big benefit in terms of savings to the consumer," Basden said in an interview.

Zenobē recently began the construction of three batteries in Scotland, totaling 1 GW/2 GWh, which the company said will lower consumer bills by more than £1 billion over 15 years by reducing the curtailment of wind farms.

Meanwhile, proponents say batteries should also come into their own on cold days when the wind does not blow — and could get compensated handsomely. On Dec. 12, as temperatures in the U.K. plummeted, two coal-fired power plants nearly returned to operation while a gas plant briefly earned a record £6,000/MWh in the balancing mechanism, the market used by National Grid Electricity System Operator Ltd. to balance supply and demand in Britain.

"It really is a super challenging time for [battery storage]," Wilkinson said, "but the overall opportunity is as big as it has ever been."

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