Europe’s energy storage outlook is beginning to pale in comparison to its global counterparts. As deployments are ramping up in major markets, particularly the US and China, it is almost impossible to imagine similar developments occurring in Europe.

Europe will continue to possess higher proportions of variable renewable energy –wind and solar – than any other region in the world. We have already witnessed low and negative power prices in the region during coronavirus lockdowns earlier this year as a result of variable renewables.

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This points to a lack of system flexibility, a sign of what’s to come.

If we look at the US, which is the largest storage growth market, the pipeline in this region has the potential to make up 49% of global cumulative GWh capacity by 2030.

Why does this market have such a healthy pipeline, while Europe is lagging behind? The US is driven by utility procurement programmes and a generous ITC tax credit. Perhaps less obvious is its regulatory structure. Vertically integrated utilities – those that can be a retailer, network operator and generator within the same organisation – serve a large swathe of US consumers.

These utilities can assess their whole system portfolio, operational and delivery requirements and run a tender on that basis. Ultimately, they can contract with the lowest cost combination of technologies to deliver a whole system solution, therefore giving the best investor return while ensuring high quality power is delivered.

As a result, we are seeing renewables and energy storage outcompete alternative flexibility service providers, such as gas peakers, in an increasing number of procurements. This appears to be Goldilocks territory for energy storage development.

In Europe, the picture is different. Its standalone or hybrid project pipeline is small compared to the rest of the world. In contrast to the US regulatory structure, market liberalisation has brought about decoupling within the power sector, strictly splitting power generators from suppliers and network operation.

So, the case for storage in Europe is defined by the wider market players such as smaller project developers, not – as in the US comparison – a top down utility assessing the best whole system solution. The proposition is on a merchant basis, with multiple offtakers and contracts with higher risks and financing barriers.

It has become widely accepted that the only way to build a pipeline fit for the net zero challenge is through low risk, low return government-controlled auctions. Put simply, unless government auctions begin to incentivise flexible power, Europe will lose the energy storage race.

Wind and solar supply and hourly average day-ahead wholesale prices, 2020 to-date. Photo: Wood Mackenzie

Current renewable auctions in Europe offer little or no value for flexibility. For the market to develop an initial pipeline of projects, separate auction pots should be opened for hybrid renewables projects.

These auctions should be designed to incentivise optimal hybrid system configurations, while leaving enough exposure to market forces to allow the evolution of other services around them. This would incentivise the use of flexible solutions and energy storage by delivering power when it is needed most, not just when the sun shines or the wind blows. This ensures there is enough flexibility to keep the system stable and power prices affordable, ultimately for the benefit of the end consumer.

Hybrid PPA projects will also likely evolve in this story as corporates begin to materially value the importance of true net zero power. For instance, not just claiming 100% renewables through PPAs and renewables credits but matching in real-time, 24/7, consumption of power with renewable generation.

We saw this a couple of months ago, with Google committing to being powered exclusively by renewable energy by 2030.

Europe is beginning to dip its toe in hybrid renewables auctions, and this should begin tipping the scales into energy storage investment trigger territory. But more needs to happen, and soon.

· Rory McCarthy is principal analyst for research group Wood Mackenzie