Energy storage: Policy developments and the investment landscape

In the previous article in our energy storage series, we provided an overview of the role of storage and the different technological solutions in this emerging market. We now examine the development of the market in the Netherlands, how policy and regulation is supporting the development, and where further improvements can be made to support market growth. Within this article we focus on grid-scale electricity storage.

The current position in the Netherlands

The electricity grid networks in the Netherlands are becoming increasingly stretched as they respond to the increased levels of renewable energy generation in the country and the electrification of the economy which is increasing demand. This is resulting in higher levels of congestion in the electricity network which is increasing the risk of blackouts. It is also preventing new generation capacity being developed and restricting construction of new residential and commercial developments due to the lack of capacity on the grid network.

Over the past 12 months, the transmission and distribution network operators (i.e. TenneT, Alliander, Enexis, Stedin) have issued announcements regarding the challenges they face in maintaining their network and the significant sums of money required to be spent to upgrade their networks. As part of the upgrades to their energy systems, they have recognised the importance of creating a more flexible electricity system. Storage assets are forecast to play an important role in the future in providing this flexibility to ensure the electricity grid can operate in an efficient manner. For example, TenneT’s latest announcement in June 2023 outlined that it will need at least 10GW of battery storage by 2030.

Although it is expected that storage technologies will play an increasingly important role in the energy transition to a greener economy, the development and use of such technologies in the Netherlands – certainly at a grid scale – is currently behind that of other countries (e.g., operational capacity of 135MWh in the Netherlands compared to 3.1GWh in the UK 3.1GWh). There is an element of the ‘chicken and egg’ scenario. Whilst storage is recognised by the network operators as being important to facilitate the energy transition, there is hesitancy in adding significant capacity on the grid since it might even lead to additional congestion issues if not properly managed. Any agreement between a developer of storage assets and the network operator is therefore required to have detailed contractual arrangements in place around the use of the assets.

In the Netherlands, there has also historically not been a roadmap or detailed industrial strategy with supportive legislation, policy, taxation reliefs, or investment incentives for the energy storage market. The major moves have therefore been those made by developers and operators, supported by investors, to get a foothold in the energy storage market as it grows. Until the policy and favoured technologies for the future roadmap of energy storage become clearer, there are risks for these early movers but, naturally, there are also many likely rewards for those who invest wisely in a developing field.

Whilst there has been a slower start compared to other countries, we are, however, seeing some promising developments in the sector. For example, companies such as GIGA Storage and SemperPower are each developing a portfolio of operational grid-connected storage assets. GIGA Storage has two operational lithium battery projects comprising 36MW/55.5MWh. SemperPower has an operational lithium battery project comprising of 9.3MW/9.9MWh and two projects totalling 60MW/131MWh forecast to become operational in the third and fourth quarter of 2023. These projects are smaller by comparison to what has been seen, say, in Germany (i.e. RWE project totalling 200MW/235MWh due to be operational in 2024) or the UK (i.e. Pilswood Project has an operational capacity of 98MW/196MWh), but they are a positive step forward for the Netherlands’ energy market nevertheless.
 

Recent policy developments

The past six months have seen a number of policy and regulatory announcements from the EU and the Dutch government that recognise the increasing importance of storage assets to support the energy transition. It is hoped that these announcements and accompanying or proposed policy changes will help to support the growth of storage assets in the Netherlands and wider EU.

EU policy developments

In response to the recent volatility in the energy markets and longer-term changing nature of the electricity system, the EU Commission announced their electricity market reform plans in March 2023. This included measures that would help to bring more clean flexible solutions into the electricity system to compete with gas such as demand response and storage.

While the EU Commission has not yet set specific targets for energy storage assets, as part of the electricity market reform plans they announced a list of recommendations on energy storage. These recommendations offer member states guidance on how best to exploit the potential of energy storage. The document underlines the fundamental role of flexibility that storage can provide to the electricity system. The Commission recommends that EU countries consider the specific characteristics of energy storage when designing network charges and tariff schemes, and to facilitate permit granting.

Alongside this, the RePowerEU plan also highlights the importance of energy storage in ensuring flexibility and security of supply in the energy system by: (i) facilitating the integration of renewable generation; (ii) supporting the grid; and (iii) shifting energy so that it’s available when it’s most needed. Meanwhile, the EU’s Fit-for-55 package contained relevant provisions on energy storage, including the proposal to revise the Energy Taxation Directive with a specific provision to end the double taxation of energy storage. At the time of publication the proposal for the Energy Taxation Directive continues to be examined within the European Parliament and European Council.

Through the EU Net Zero Industry Act the EU has also outlined a range of initiatives to stimulate investment into key net-zero technologies, including batteries and storage. The initiatives outlined includes (but is not limited to); identifying strategic projects, cutting red tape and accelerated permitting, supporting innovation in the key technologies and setting up Net-Zero Industry Academies to provide training and education on net-zero technologies.

Dutch policy developments

The Dutch government has introduced some policies to support the energy storage market in recent years. Examples of these include the removal of double taxation of energy storage (i.e. the asset is charged when it is both recharging and discharging), and allowing for cable pooling (i.e., sharing a grid connection) of storage assets with renewable generation assets.

Although there’s considerable EU guidance in this area, the level of explicit national government financial support and direction for the part energy storage will play in the transition to a greener economy is limited. This shows up particularly in the lack of capex or revenue subsidies for those developing standalone storage projects in the Netherlands. Projects with co-located projects with storage and generation assets, such as solar or wind farms, may benefit from the support available for alternative energy production, but otherwise have little formal support and therefore may be seen as risky investments for less-experienced energy investors. To lower the risk profile, storage assets are currently required to enter into long-term rental contracts or floor arrangements, to support the development of a bankable business case. This topic is explored in further detail in our next blog.

Whilst specific subsidies are not provided for grid-scale projects at this stage, it is acknowledged that the government does provide some financial support to the sector through amongst others tax benefits for battery systems (i.e., Energy Investment Allowance Scheme for Entrepreneurs), Innovation Credit (i.e. Eurekite received funding for a battery separator application in 2020), equity investments in new technologies (Invest NL has invested in LeydenJar and Elestor), and R&D support for new technologies (battery-related technologies have been supported in the National Growth Fund’s second and third rounds via the NXTGEN HIGHTECH (EUR450m allocated) and Material Independence & Circular Batteries (EUR296m allocated) proposals respectively).

Despite these initiatives, 75% of the market participants we surveyed in Q1 of 2023 responded that they felt that the current policy and regulatory landscape was either neutral or unsupportive to support the future growth of the energy storage market. The main area they highlighted in developing their business case was the current grid tariff regime, which results in storage assets facing tariffs as they are considered to be both a consumer and producer of electricity (in the Netherlands only consumers are charged grid connection tariffs). These costs can often make up a majority of the opex costs for energy storage assets which negatively impacts the business case. Market participants also indicated that they wanted national targets set for energy storage solutions, and more efficient permitting procedures to support them in the development of storage assets.

The government responded to some of the feedback from market participants, issuing its first Energy Storage Roadmap in June 2023. Amongst other points, this recognised the important role that energy storage will play in the coming years and the importance of market participants coming together to develop a holistic approach for storage assets.

Although recognition of the role storage assets will play in the future energy market is key, it is important that this is backed up by the introduction of policies and initiatives to support the growth of the market. For example, the government acknowledges that the existing tariff structure is unsupportive for storage business cases, and is undertaking a consultation with Authority for Consumers and Markets and network users to determine whether storage and conversion should be treated differently within the tariff structure. This has already been removed in other countries (e.g., Belgium and the UK), which has helped with the growth of the sector.
 

Investor landscape

From an investor perspective, we see that there is appetite from both debt and equity investors in grid-scale Li-ion projects (either standalone or co-located with other renewable generation assets) due to the relative maturity of this technology. This can be seen through recent investments by investors such as Triodos (GIGA Storage and SemperPower) and Meewind (SemperPower).

The level of financing activity is however proportionately lower than
other countries where we see strong interested in grid-scale storage assets
from large institutional investors and lenders (e.g. UK and Germany). This is
due to some of the factors outlined above creating challenges in developing a
bankable business case for grid scale storage projects in the Netherlands at
the current time. If the challenges can largely be resolved then there is
strong interest from investors in providing financing to support the build out
of storage capacity in the Netherlands.

For the less mature storage technologies and projects, we are seeing interest primarily from equity players focusing on investing in companies producing new technological solutions during their pre-commercialisation phase. One example involved Deloitte acting as lead advisor to Elestor (flow battery technology developer) in 2022 in its €30m fundraising round led by Equinor and Invest-NL. Next to raising equity, various European grants & incentives programs (Innovation Fund, CEF – Energy, LIFE) and even debt financing instruments can provide interesting funding alternatives for (earlier-stage) technology companies. Deloitte has supported clients in their applications for grants and incentive programs, including the Innovation Fund, and we have also successfully supported clients in raising debt financing. One examples is acting as lead advisor to LeydenJar Technologies (advanced battery technology developer) in raising €30m of growth financing provided by the EIB in December 2022.

Key to the path ahead is greater alliance, cooperation and collaboration between respective stakeholders at local and national level, supported by government initiatives to make the path ahead as efficient as possible – not relying on market and consumer forces alone for the evolution of this sector.
 

In our next article, we will look at the revenue markets storage assets can operate in and the business models that are currently adopted by storage projects. If you would like to discuss how our teams could support you in raising finance for storage technology business or storage projects then please view our webpage outlining our holistic funding solutions.