German tender aims to maximize renewable energy & co-sited storage potential

Germany’s innovative bidding mechanism is at a crossroads. Although Germany’s solar bidding market is booming, its restrictive design has resulted in a small number of photovoltaic power generation and energy storage collaborative projects, limiting its economic benefits.

To ensure the long-term success of innovation tenders and create a more cost-effective energy system for users, developers of shared energy storage projects need to see a stronger business case and return on investment. Allowing energy storage systems to charge from the grid and generate additional revenue from wholesale electricity market participation will improve project economics and have the potential to reduce the increasing costs of renewable energy curtailment in Germany. Industry-leading energy storage technology and intelligent asset performance management software enable asset owners to maximize return on their market investments.

Since 2020, Germany’s Federal Network Agency (BNetzA) has been holding biannual capacity tenders targeting the construction of additional hybrid generation, including photovoltaic plants and wind farms connected to battery-based energy storage systems. The agency has identified the need to combine fluctuating renewable energy production with energy storage technology to more efficiently integrate green energy and improve grid management. Through innovative tendering, it plans to award up to 4GWh of contracts to developers of distributed energy storage systems by 2028.

The tendering mechanism is inherently flawed as it does not allow energy storage to participate in all available energy and ancillary services markets. This makes the business case dependent on feed-in tariffs rather than allowing owners to maximize return on investment. This is evidenced by the December 2022 and May 2023 tender rounds, which awarded less than 100MW of synergistic projects out of a potential 800MW. However, as feed-in tariffs increased, the most recent tender showed greater interest in September, awarding the full 400MW of capacity. The increase in maximum facility size from 20MW to 100MW may also have contributed to a renewed focus on innovative tendering mechanisms. Larger installations with better economies of scale will be able to participate and be approved in tenders in May and September 2023.

Within the industry, the decision to switch from a fixed feed-in tariff to a floating market premium was controversial before the first bidding round failed in December 2022. The feed-in tariff structure is less important than the absolute cap established by regulator BNetzA. Both new rules come at a time when inflationary pressures, largely due to the war in Ukraine, are starting to take a toll on the energy industry, with renewable energy developers facing unprecedentedly high material costs. As inflation triggers rising interest rates, the cost of capital for renewable energy projects is also rising. Therefore, the second main variable of project financing has changed significantly and needs to be taken into account in the design of tenders.

Recognizing the need to intervene, BNetzA announced in March 2023 that it would increase the maximum feed-in tariff for hybrid photovoltaic-powered battery systems by 25% to 9.18 euro cents/KWh. The May 2023 tender received more bids, but still not enough to get more projects approved. Research carried out by the Baden-Württemberg Center for Solar and Hydrogen Research (ZSW) shows that the average cost of a hybrid power plant coming into operation in 2025 will be 10.40 euro cents/KWh, which is much higher than the adjusted electricity price.

The role of innovative tendering in Germany’s energy transition

The current energy crisis has brought the need for smart integration of renewable energy back into focus, and the construction of green power generation is booming in Germany. By the end of October 2023, Germany has witnessed the installation of nearly 12GW of new PV capacity, already exceeding the annual target of 9GW. The annual targets for 2024 and 2025 are even higher, reaching 13GW and 20GW respectively.

At the same time, the high percentage of solar in the system has led to record periods of negative pricing. For example, on May 28, Germany experienced eight consecutive hours of negative pricing, reaching a maximum of 130 euros/MWh. As more photovoltaics are integrated, negative pricing will become the norm in Europe’s power systems.

This is why grid-connected power generation + energy storage systems can create incremental value. They can store electricity when photovoltaic production is at its highest and release it to consumers when renewable electricity is at its lowest. Grid-connected renewable generation and energy storage systems reduce energy market volatility and price differentials, limit grid congestion and costly wind and solar curtailment, and make the entire system more sustainable and efficient.

The necessity of smart bidding design changes

The revenue opportunities for energy storage are out there. Unfortunately, the current design of innovation tenders does not allow energy storage to access these opportunities.

The traditional solution is to further increase the cap on innovation tendering so that it fully reflects the rising costs. This will bring higher payment guarantees to project developers and improve project economics. The disadvantage is that this may increase feed-in tariff payments and increase costs for end users, namely taxpayers. However, in countries where stand-alone energy storage assets are growing rapidly, relying on regulators to determine appropriate feed-in tariffs should not be the main approach.

Currently, energy storage systems contracted under innovative tenders can only store power generated by grid-connected renewable generation assets and cannot be charged from the main grid. BNetzA implemented this rule to avoid mixing green electricity and fossil fuel electricity and limit the "greening" of gray electricity. The rule is also seen as a safeguard to prevent energy storage assets acquired under innovation tenders from participating in the lucrative frequency regulation market (FCR), where it would compete with fully commercial generation assets.

Unfortunately, current policymaking undermines the full potential of energy storage technology and its ability to integrate renewable energy into the grid and provide much-needed flexibility. As a result, solar-plus-storage systems sit idle for much of the year, such as at night and during the low-generation winter months. Instead, gas and coal-fired power plants were commissioned to fill the electricity supply gap. This needs to change if Germany still hopes to generate 80% of its total electricity generation from renewable energy sources by 2030 and achieve net-zero emissions in the power sector by 2035.

Efficient use of energy storage systems will also reduce network costs, as grid operators are currently paying asset owners significant wind and solar curtailment charges when networks are overloaded and unable to integrate more renewable energy. In 2022 alone, Germany abandoned 8 trillion watt-hours of renewable energy, mainly wind power. This is a huge loss of green power. However, this power can be charged and transmitted to the energy storage system. In the same year, the cost loss caused by the congestion of German power grid facilities was as high as 4.25 billion euros.

Allowing energy storage assets to be optimized in the wholesale market will not only reduce grid congestion and wind and solar curtailment, but will also increase the efficiency of the wholesale market and improve the economics of innovative bidding projects, thereby reducing costs for taxpayers and electricity consumers. Fluence is actively engaged (with industry stakeholders and associations) in driving these regulatory changes.

Maximize return on grid-connected assets

In addition to tender design and technology partners, performance optimization over the life of the asset is the third largest factor affecting project economics.

Project complexity for grid-connected renewables and storage assets is higher, requiring owners and operators to carefully balance revenue maximization and cost control. Challenges faced by asset management teams are often related to the amount of data being processed. For many portfolios consisting of multiple power plants with different technologies and OEMs, traditional manual data collection methods can become a constraint, forcing teams to look for modern asset performance management (APM) tools.

APM enables owners of hybrid renewable energy and energy storage projects to uncover hidden potential performance issues, minimizing downtime and improving operational efficiency and overall asset performance. With the rapid development of APM technology, artificial intelligence (AI) plays a pivotal role in performance monitoring and complete optimization. Some features of AI improving APM are related to the ability to quickly analyze large amounts of data to discover complex patterns and anomalies that teams cannot catch by analyzing SCADA signals.

For example, AI supports operators of energy storage assets by predicting when battery temperatures will be higher than expected. The model predicts what the maximum battery temperature should be under given operating conditions and issues a warning when the measured temperature exceeds a certain or even minimal threshold of this value or displays a worrying trend. Something similar applies to predicting potential failures of renewable generation assets in advance.

in conclusion

Germany’s innovation tender is an important cornerstone of the country’s energy transition, as it helps incentivize the efficient integration of large volumes of fluctuating green electronics into the German electricity market. Building to support renewable energy combined with energy storage will also enhance security of supply and introduce flexibility options to an increasingly decentralized energy system.

However, the regulatory framework for tendering needs to be better adapted to the current business environment. With inflationary pressures creating risks for project business cases, deeper measures are needed to overhaul the innovation tendering mechanism.

Smart bidding designs allow energy storage systems to charge from the grid and generate additional revenue from wholesale market participation, which will improve project economics and potentially reduce the costs of Germany’s growing renewable energy curtailment. At the same time, project owners and developers also need to work with experienced and trustworthy technology providers to minimize risks and maximize benefits.