Marketwatch: Netherlands storage plans to hit the buffers?

• ‍Netherlands TSO says country needs 9GW of battery storage by 2030
  ‍
• ‍But transmission tax system jeopardising storage business models
  ‍
• ‍Poor understanding of battery revenue streams causing financing problems

No one can fault the Netherlands ambition when it comes to plans for expanding the deployment of energy storage. Earlier this month, TenneT, the transmission system operator (TSO) for the Netherlands published a report entitled ‘TenneT’s position on Battery Energy Storage Systems’. The publication of the report was in no way premature – indeed, the TSO’s silence on the storage issue up to that point had been causing considerable frustration among energy storage developers.

But in the face of several imminent challenges – including near-term grid volatility – TenneT was forced to show its hand and outline its plans for battery storage. The TenneT report acknowledged that greater dependence on wind and solar power means there will need to be a concerted effort to stabilise the system and achieve an acceptable Loss of Load Expectation (LOLE). TenneT’s conclusion was that, by 2030, it needs around 9GW of BESS [battery energy storage system] “connected to the TenneT grid for system stability”.

It was a bold headline figure, but setting a target is one thing, reaching the target is another. One of the major obstacles to the further deployment of storage in the Netherlands relates to the government’s rules on energy transmission. This is a problem that has been highlighted by energy storage technology provider Wärtsilä, which says the energy transmission rules present a “considerable commercial challenge”. Specifically, Wärtsilä has lamented the fact that “producers in the Netherlands don’t pay taxes when they produce energy, but this exemption does not extend to consumers.” This means that when an owner of an energy storage system takes energy from the grid it is charged as a consumer. And these charges are not inconsiderable. Maarten Quist, COO of GIGA Storage, sums up the problem succinctly: “It costs approximately €70,000 a year in transmission charges for one megawatt, for which the total revenue is around €120,000. That is clearly not a sustainable business model.”

Transmission tariff structure major barrier to deployment

At the root of this problem is the fact that The Dutch Electricity Act 1998 fails to define electricity storage. Consequently, the term is used to cover a combination of consumption (that is, the charging of batteries) and generation (when electricity from batteries is fed to the grid). As the law firm CMS has highlighted, this lack of definition “makes it difficult to delineate and regulate for the specific characteristics of storage systems”. As such, it is the fact that electricity storage qualifies as consumption and generation that renders the existing tariff structure problematic. And this is one of the main barriers to the further deployment of storage in the Netherlands because it means batteries currently pay more in transmission costs than “polluting wholesale consumers” in the words of CMS.

Investors struggling to grasp storage market complexity

Energy storage development in the Netherlands also faces a number of significant financing challenges. DNV has highlighted issues investors face in terms of breaking down the “complexity of the different markets a BESS project-developer could be active in, as well as assessing the relative contribution of these markets to total projected revenues”. As a result, the financing of battery storage in the Netherlands can be problematic, largely due to a lack of understanding of potential revenue streams. For example, when developing a business case for storage it is important to consider revenues from ancillary services to the system operator (such as congestion management) or portfolio optimisation (for example, peak shaving and imbalance risk management). It’s important to note that, as these revenue streams are dependent upon conditions in the grid and the location of the BESS, the revenue potential varies depending on the location.

Another issue that has been highlighted in the Dutch market is that options for stacking revenues can introduce considerable complexity to any potential investment. Potential revenue streams include: balancing services, wholesale market trade on the day-ahead or intra-day market; portfolio optimisation services (via peak-shaving) for balance responsible parties; and/or contracts to provide local grid (congestion) management services to grid operators.

Equity stakes required

In addition, the internal rate of return [a metric used in financial analysis to estimate the profitability of potential investments] of a BESS business case is sensitive to both the costs as well as future revenues of the project. It is therefore highly dependent on the assumptions regarding future FCR [frequency containment reserve] and FRR [frequency restoration reserve] market prices as well as the revenues from trading activities on DA [day-ahead] or ID [intraday] markets. Given such uncertainties, it is likely that, when investing, a higher equity stake will be required when compared to more traditional business cases.

A roadmap for increasing Netherlands storage deployment

Challenges such as these mean a number of obstacles will have to be overcome if the Netherlands is to be successful. But there are a number of steps that the country could take to ensure it is on the right path. They are:

• Give more consideration to revising transmission taxes with a view to providing exemptions for batteries
  ‍
• Ensure investors understand what the basic, ensured revenue streams will be, such as those from bilateral arrangements or other long-term contracts that help to reduce business case uncertainties
  ‍
• Given that certain locations can offer opportunities for additional revenue and cost savings, such benefits need to be incorporated into business cases
  ‍
• Ensure development teams include sufficient experience and capabilities to determine dispatch and trading as this will give investors more confidence in the developer’s ability to develop a successful project.

‍