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- [00:00]
A
I'm your host, Ed Porter and welcome back to Transmission. Germany's battery storage market continues to grow quickly, but what are the bumps in the road that are coming and how can investors get confidence in the market? Whilst we love to get external guests on Transmission, it's a pleasure to bring you conversations with the experts at Modo Energy. If you're active in Germany, you can run a trial German forecast for free on the Moto Energy terminal or search for the German benchmark to see battery revenues. Today my guests are Till, our German research analyst and Cosima from the advisory services team at Modo Energy. Let's jump in. Hello Cosima. Hello Till. Welcome to Transmission.
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B
Great to be here.
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A
Let's get straight into it. So what is the one thing that everyone gets wrong about Germany? Cosma?
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C
So I think one that internationally people get wrong a lot is that Germany is not gb. And I don't mean that from a power system perspective so much, although there's also significant differences. But I actually mean it more from a political and regulatory culture perspective. So I think that then directly translates into how large infrastructure is developed and built. How is it different? So I think when you look historically at Germany, it's developed much more right from a bottom up approach. You have the Bundeslender, they all have their own constitution that creates much more local stakeholders, local rules that you need to comply with. It's much more decentralized. Of course you have that to some extent in gb, but I would say the general principle is much more top down, so things are more centralized. And if you go into Germany without knowing that, you can run into a lot of delays, issues and additional costs during your development process. And I think that's really a key, a key thing stakeholders need to understand when they enter that market. And one that is not necessarily understand
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A
all the time because you would expect it to be a very central process. But actually there are lots of specifics for each individual region, let's say.
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C
Yeah, exactly.
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A
Okay, Till, what does everyone get wrong?
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B
I think just coming more from a perspective of people who are already active in Germany and maybe are German, I think one thing that people are getting wrong is how quickly ancillary services will saturate. Right. So that's still one kind of service that battery provide to the grid and that's still one of the main revenue sources for batteries right now. But we've seen in markets all over the world that those are quite shallow services. I think we're going to talk about that a little bit more and then all over the world we've seen those revenues crash as batteries flood the market. So that's something that I think a lot of people in Germany aren't quite prepared for. I think a lot of people are saying, well, it will happen, of course, there's a natural way. But I think as modo we've, we've seen it in markets all over the world that things happen much quicker than everyone thinks before it happens. People saying, yeah, yeah, it will happen, it will be slow and then it crashes within a year or two and people are surprised.
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A
It's almost nice to be a market like Germany because you can look at other regions, you can look at gb, Texas, California, Australia, and you can sort of see how it's happened before and you can get this like data driven approach to it. So we shouldn't be surprised. But I imagine that as it happens, I imagine people will still be surprised.
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B
Exactly.
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A
Yeah, that is kind of consistent. Okay, so sticking with the revenue theme, Moto Energy have just released a German virtual battery that is tracking revenues over the course of last year, for example, and those revenues are around sort of €200,000 per megawatt per year for a two hour system and an undergraded system. So how much of that is sort of the structural setup of Germany and how much is it, the timing that the market is sort of pre saturation?
- [04:10]
B
I think a large portion of it is actually timing. So I think it's always interesting to kind of assess European markets based on current revenues. Right. Because obviously there's tiny markets like let's say the Baltics or something where you can make a massive amount of revenue at the moment, but those revenues will disappear pretty quickly because those markets are quite small and you basically build one big battery and it's gone. But I think. So a lot of it is timing, but that doesn't mean that the structural base behind it is actually not supporting batteries. So let's say 200k right now, maybe in previous years it was 300k, but that doesn't mean that once these ancillary saturate, especially with a market like Germany, more than 100 gigs of solar right now it's only growing. All that needs to be shifted and massively deep intraday market. So I don't think that means that we're going to be at revenue levels where it doesn't make sense anymore to build a battery. It just means that these extremely outside sized returns are going to just disappear.
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A
And let's talk a bit about those structural things. So you mentioned there's a lot of solar on the system in Germany. There's a very liquid intraday market, which means it's quite easy to trade and take advantage of any shifts in pricing. Are those kind of the two key things that you'd point out as being sort of the structural drivers of value in Germany?
- [05:29]
B
Yeah, I think so. I think that there is a lot of markets that we know from other regions that Germany doesn't have. Maybe that's a. Doesn't have yet kind of thing. So in terms of regional or imbalance or redispatch markets, all these kind of things that Germany doesn't have, but just based on the amount of solar generation that needs to be shifted. So quite often we have a net load ramp. So let's say we have the demand that's already been met by renewables, which we call the net load. So that goes up by 40 gigawatts in the space of a couple of hours because we have so much solar in the midday and then still the demand in the evening. All that needs to shift, all that needs to be moved in some kind of way. So that's just the. The energy shifting that's based on all this solar that's being built out.
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C
Yeah.
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A
So we starting to see those really big ramps in terms of solar generation, and then around those ramps you have work for batteries to do effectively. And those markets you referred to earlier that are coming along, you sort of. Germany today resolves its kind of locational problems with something called redispatch, which is the system operator kind of making changes to make sure the system actually works from a. From a geographic perspective. And you sort of. Are you sort of suggesting that we may start to see some of those mechanisms change to be perhaps different or more aligned with other markets?
- [06:54]
B
I would probably hope so. As more the way that I would put it, I think the current system is very German in that it's very fair, so there's no way you could game it. But it's also very expensive, so you have to pay compensation. The TSO has the only way to decide whether your generation is right for this moment, for this location. So if you're behind, let's say a bottleneck and you can't produce, then the TSO has the right to turn you down, but they have to compensate you for it. That's a very expensive system because on the other side of the bottleneck, they have to turn up some gas or coal units and have to pay those as well. So that's a very expensive system.
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A
That's A few. A few billion euros a year.
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B
Yeah, yeah.
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A
I think it's a crazy number right there. The GB number is sort of between one and two and we sort of find that to be an alarmingly high number.
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B
Yeah, yeah. So I think that's an insane number. I think we have gotten used to it a little bit. But obviously everyone knows that despite grid build out, this number is only ever going to go up with so much renewables on the system.
- [07:54]
A
Okay, well, let's also make sure that we cover the full part of this because we started to talk about saturation and let's make sure we do that sort of due service. So, Cosmo, coming to you on saturation. The main services we have, fcr, afrr, what are those services? How many gigawatts of those do need?
- [08:12]
C
Yes. So essentially these services, right, are services that are available to the TSOs in order to bring the grid back into the frequency that's needed when there's deviations. So FCR is sort of the first response, right? Like when there's a little deviation in frequency that can be activated or that is activated to keep the grid stable. And then AFR is essentially, if FCR is not enough, right, you need more response that's activated, activated within 30, 30 seconds and has to be fully active or ramp up within five minutes. When it comes to what do they look like? So FCR is symmetric, meaning like positive and negative direction together. It's about 500 to 600 megawatts large. As a service in Germany, AFR is asymmetric, so you can bid both positive and negative. And then it's much. It's much bigger. It's around 2 gigawatts in direction. So I think the question is saturation, right? And as Till said, we can use experiences from other markets to see how quickly these services saturate. By saturation we mean prices fall and batteries can't make that much money with them anymore, essentially. So what we do is that we look at something called the overbuild ratio. So we look at, well, how many batteries can provide the service versus how much demand is there of the service in general. And once we get to a ratio of one or higher, batteries, instead of competing with more expensive technologies like gas, start competing with themselves. And batteries are much cheaper. Actually, the cost is much cheaper to provide these services, which means that when they start competing with other batteries, prices drop. And we say the service is saturating, so revenues decline. The question we get all the time is, well, when is this happening in Germany? Quick answer. It'll happen soon or has already started happening to some extent. So when we look at how many batteries participate in Germany, what's, what's important is how much is pre qualified. That's how we can kind of say, okay, how much capacity actually can participate in the Service. So for FCR it's already around 1.5 gigawatts of battery. I said before, right, we have roughly like a demand of 500, 600 megawatts. So the overbuild ratio in FCR is close to 3. And that's also what we are seeing, right? FCR is essentially, it's less than 10% of the revenue stack at the moment. It's essentially a saturated service. AFR is a bit different. So afr, bigger service and also batteries. So it's actually like for, for quite a while batteries couldn't participate in the service. And then there was a regulatory change and so we essentially went from virtually no batteries being qualified and providing the service one and a half years ago to roughly 1.2, 1.3 mega. Yeah, 1.2, 1.3 gigawatts pre qualified today. So the overbuild ratio is still below one. And when we look at our own benchmark, right, we do see that the, the stack is still mostly dominated by AFR, so roughly 80% in the past year in Germany. But first of all, we do see prices sort of saturating and that's aligned with what Till was telling us before, right, about also dynamics with wholesale. So essentially saturation also means that your, well, your battery is going to start bidding more at its own opportunity cost, which is reflected or which is essentially the opportunity cost, the cost of not participating in wholesale. So that means that these prices get closer essentially to what you could make in wholesale. And this is something we're already observing in afr. So the dynamics align more, just very briefly on kind of the future. We definitely think by the rate of pre qualification, the past year in AFR overbuild ratio is going to be over one sometime this year. Prices are going to drop and within two, three years maximum, AFR is going to be saturated.
- [12:47]
A
Okay, so it sounds like the saturation of FCR has already happened and AFR is on its way. But you're also saying that in terms of how people bid into AFR today is quite influenced by the intraday optimization or the opportunity costs that they would get there. So for me, I think that when I think about gb, it kind of, it came down quite a lot. It came down between sort of 50 and 100k per megawatt per year. That was the size of the drop. But if in Germany pre saturation we're already pricing around the opportunity cost, then is there going to be so much of a step down in Germany?
- [13:25]
C
I don't think so. I think there'll be a step down but I don't think it'll go as low as it did in GB for multiple reasons. One, I would argue is the fundamental story of Germany. Right. The largest power market in Europe, solar builds out. I mean we, we all know this story. We have fossil base load being phased out. We have. So, so I think that it's a different fundamental story, very interconnected market as well. Although we can talk about like if this is positive or negative. But I think the fundamental stories are very different. It's, the fundamentals are very strong and that's also the future development we're seeing. I think it's important also to mention the intraday dynamics. So most liquid intraday market in Europe. And it's also one of the reasons we get, we often get like the question why is it like that? Right. So first of all, Germany essentially in order to make sure that assets net out their position will have very high imbalance fees. So because you have your renewables forecast error, basically you need to balance that out very close to your delivery and that leads to really high liquidity the closer you get to your physical delivery.
- [14:43]
A
So your renewable assets, if they are out of balance, that's expensive for them. So they all work very hard to try and make sure they're imbalanced and they trade a lot in intraday to make sure that that position's there. The knock on effect of that is there's lots of volume going through intraday which batteries can then take advantage of. Whereas in other systems they allow that imbalance to go into a giant sort of pot and then the system operator just manages that in delivery.
- [15:04]
C
Yeah, exactly. So I think from a market perspective, right already there's sort of a, I would say there's a strong, a stronger case whereby batteries won't fall that low, so to say. But there's also another point which is about how people are planning for this and building batteries in Germany. Right. So in GB in the beginning you had a lot of one hour assets building specifically for these ancillary services. Germany is different. Germany, there's already much more thinking about well okay, let's build longer durations in order to capture this, this wholesale. And it's true that at the moment duration is closer to 1.52 hours. Right. So we are not seeing like the four hours yet. But when we look at the medium term build out pipeline, when we look at what people are telling us, people are looking at the longer durations in conversations for hours comes up all the time. And then we look, when we look at our own fundamentals forecast right in our battery build out and we actually also start longer durations, like six hours, becoming economically viable in the 2000 and 30s. So yeah, I'd say there's the market aspects and then there's also kind of the, the developers that are like thinking about this already and building accordingly.
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A
Yeah, I think there's, there's, there's two things. It kind of falls, falls to me to be the person who pushes back on this. Yeah, we definitely talk about interconnection. Yeah. And I think that's a nice one to go through. But the other one is this kind of concept that the very liquid intraday market, I think that when we talk about the sort of saturation, we talk about saturation, FCR and AFR and okay, understood, that's kind of a classic saturation. I also think there's this kind of second saturation that we probably haven't talked enough about and maybe till I kind of come to you on this,
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B
as
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A
we add more batteries to the system, that volatility that exists in those intraday markets, surely that compresses, right? Because we add 10, 20, 30 gigawatts of batteries to this. The opportunities that were there from two years ago, every time another battery gets added to the system, it almost is going to act like an elastic band that's going to bring in, it's going to compress those intraday opportunities. How do you think about that?
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B
Yeah, so I think there's two ways in which batteries can. Because they have a very low marginal cost in almost anything they do, they can saturate any kind of market. It just is a question of how much do you need to saturate it. So even a day ahead market, if you build hundreds of gigawatts of batteries for a tiny market, then even the day ahead market will be saturated by these batteries. Right. Because if they bid against one another, they have to really go low in the intraday. I think the way we think about it is that one thing is actually having to correct your forecast error. I don't think that will go away. You will have that forecast error. You will bid on the day ahead based on a certain view of the world at the intraday will be A different view of the world. Obviously, weather forecasting might get better, all these kind of things. But that is one thing that still in real life will happen though. But then the other thing is spikes and squeezes. Right, so what the main value of the German intraday for batteries is right now is that quite often, you see, I think on half of days in 2025, there was a price of more than €1,000 per megawatt hour for at least one trade in the intraday market. So that's insane amounts of money for a tiny bit of energy that was actually traded at this price. But it just meant that there was a sudden shortfall and no one could really react quickly enough. So someone could just basically put whatever the price they wanted on that trade.
- [18:47]
A
Yeah, I mean, my suspicion is that that is exactly the kind of market that the batteries will sort of eat up. Let's go off that then let's go into the interconnection piece. I think it's like, it's a fascinating topic because in some theories it's sort of. While the interconnection gives you more volume and potentially that means there's sort of more opportunities for batteries to trade. What do you think interconnection, is it sort of friend or foe for the battery space?
- [19:11]
C
That's a good question. I mean, I think there's again a lot of layers to it. Right. And that also depends on are we talking about frequency services, are we talking about wholesale? Maybe I can start us off with for example, the AFR example and Till can take the wholesale part of it. But for example, when we look at AFR prices. Right. So AFR is essentially also service that is connected European wide. Right. And that means that we can have demand and supply across countries. And this is something that as part of a European effort to continue integrating the European power market, we have more and more regulation that essentially, well, couples different markets. Right. And tries to really pull from different, well, supply and demand across services or markets. So for example, what we've observed in AFR when France joined some time ago was that suddenly there was much more supply for this from nuclear plants and prices dropped, essentially. So in that case. Right,
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A
okay, well let's do that. Let's do the wholesale side. Till I can't see for wholesale.
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B
Okay, great. I think both friend and foe, depending on your hour, as everything in wholesale power.
- [20:37]
A
This is very, very cautious.
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B
No, I think because obviously islander grids have a lack of flexibility just by the nature of them.
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A
Right, that's what I would think. Right, exactly.
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B
Yeah.
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A
Island grid seems perfect for batteries. So the more interconnected you are, the worse it is.
- [20:51]
B
Yeah. But then on the other hand, I think you can also import a lack of flexibility from other countries.
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A
Yes. Okay, I'm agreeing.
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B
Which is what is happening let's say in the Netherland have a massive lack of flexibility. They have the most extreme negative prices in Europe. And quite often in the middle of the day and summer, Germany is importing from the Netherlands in the middle of the day when the Netherlands are at -499.99 and Germany is then at -497.99. That means without the Netherlands you might also have less steep negative prices and less of the battery opportunity. So overall I would say the rule stands stands that it's probably faux, but there are ways in the real world where actually it can help to be connected to a less flexibility rich market.
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A
And you've mentioned negative prices. So let's go there. This is this great call for flexibility. If you see power markets with deep negative pricing, they probably need some form of flexibility. So what do negative prices look like in Germany?
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B
Negative prices are. Yeah, I think very worrying for politicians at the moment. I think we had this one day first of May where the day had market cleared at minus 499.99. It has the border at minus €500 per megawatt hour. And then so everyone said we're close to a non clearing. I think in the end that's a little bit of a fabrication to be fair. Because that minus 500 is just an arbitrary rule. Right. Like the first intraday auction on that day ran fine and it cleared, it just cleared at minus 800 something. So as long as you allow the prices to go somewhere, it won't be a non clearing day. But I think that the reason why Germany has so deep intraday prices is also part of why it's so good at the energy transition. Right. Like it started the energy transition very early. It started might have been the first one to actually massively invest into solar.
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A
One of the big catalysts for Chinese solar manufacturer.
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B
Exactly. Yeah. And but the way that happened was with insane subsidies. And those are just feed in tariffs. My parents still have a solar plant that gets a 490 Euro per megawatt hour feed in tariff from 20 years ago.
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A
That's an incredible number.
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B
Exactly. So that is all these legacy systems that are still connected, they don't have an incentive to switch off. They can basically bid at minus 500
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A
in case of my parents and today's subsidy schemes. Right. A lot of those will cut out so the new designs don't offer that same negative pricing. So are we just kind of waiting for some of those old subsidies to kind of flush through and when they do, we'll see that negative pricing become slightly less deep and perhaps be close to zero?
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B
Yes, I think that's what we expect to a certain extent. There's two problems complicating this. One is the lack of smart meter penetration in Germany, which is always great. So, so many rooftop solar plants. We have got a massive amount of rooftop solar in Germany and so many of these are just not metered and not curtailable at all.
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A
So the four system operators just don't know what's happening with those.
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B
Yeah, exactly. So they couldn't even curtail them even if the prices went negative. Went very negative and the subsidy would stop. But then the government is pushing for these subsidies to stop during negative price hours and also to introduce two sided CFDs. That's what the EU is asking them to do. But then yeah, they even introduced a scheme which would allow older generators and I'm assuming this would be most likely the large solar parks and stuff to switch into the new regime, get a little bit of an uplift and then actually have a regime where they are incentivized to switch off immediately and just
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A
quickly for our listeners. A two sided cfd.
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B
Yes, a CFD is a contract for difference. That means that you commit to a certain price when you in an auction and then whatever the power price is in real time, you will get the difference to that. So if you're below it, you, you might get the difference to whatever your strike price is. Exactly. You get topped up. Exactly. And in Germany it's a one sided cfd. That means you get topped up in one way, but if it's higher, you just keep it. The EU doesn't like that and I think it's fair enough. So two sided cfd, if the price is high, you'd pay it back.
- [25:19]
A
Okay, okay, makes sense. This is great. We're going through the full sort of story of the German energy history which we're doing light touch on, but we're trying to get through the whole thing. Let's focus down into the sort of battery specifics because these are the questions we get all of the time. And so Cosmo maybe coming to you in terms of flexible connection agreements. We see this coming up a lot. It's maybe not unique to Germany, but certainly it's a really important part of any battery project in Germany. So what are they and what sort of impact do they have on battery projects?
- [25:50]
C
Yes, maybe. First things first. Why do we talk about flexible connection agreements? So I would say because. Because of everything that we've just spoken about, there's a lot of interest in German batteries, which is obviously why we're talking about it. And that means a lot of batteries want to connect and start operations. Right. But there is a limit of how much and how quickly the grid operators. Right. Can build out the grid and grid connections to connect all of this. So one of the solutions that Germany thought about, and as you said, it's not completely unique to Germany, but is flexible connection agreement. So instead of a firm connection, where basically you get a grid connection, you can do with your battery whatever you want, you get a connection. But it's tied to certain operational constraints. So it's a limited grid connection. So to say there's a few sort of components that system operators have available to put into these. So there's ancillary caps. So basically that would limit how much of your capacity you can bid into an ancillary service like FCR and AFR that we spoke about earlier, there is ramp rate. So a ramp rate basically means that you are limited in how quickly you can ramp up or down your power output. And then there's also import and export caps, so to say containment profiles, which basically say during certain hours of the day you're not allowed to import or export or just part of your capacity. And all of this is essentially in order to help manage the grid or help the grid operators manage. Right. Like all this capacity that wants to come online. So that's what it is.
- [27:41]
A
Given your starting view of how different German regions are by. By location, I imagine this is all very standard and it's the same contract everywhere.
- [27:49]
C
Ye, exactly. No, unfortunately not. So we have a lot of DSOs in Germany and we have seen an incredible amount of variety when it comes to these FCAs. So I have. I've probably never seen like as much variety in anything in the energy sector as in fcas. But I would say that. But we are starting to see certain trends still. So while, let's say six months ago, when this was all relatively newer, people were like, what is actually a ramp rate? Right. What's an input export cap? I think like, first of all, the knowledge is growing in the market, but also with the DSOs, and there's certain things that we are seeing recurring across DSOs. So for example, one of the things that's being proposed quite A lot at the moment is import and export caps that are tied to your renewables generation locally. Which basically means it's not just, oh, every day between, I don't know, 11 and 2, you're not allowed to export anything to the grid. Which by the way isn't one of the bad restrictions anyway, because you likely wouldn't do that, especially in summer. But what I'm trying to say is we are seeing more standardization and sort of templates. Yeah. That are good compromises as we see them. Does that answer your question?
- [29:19]
A
Yeah, I think so. But there's probably two things I like about it. I think they're particularly interesting. One is that if you as a system operator you get worried about batteries because you don't necessarily know what they are and how they behave so great that you can kind of put controls on them to get confidence to be able to connect them. The thing that I like about it is that that that might allow you to connect more stuff more quickly and so you can get higher utilization on the network and that will mean sort of a greater socialization of costs and lower cost energy for everyone. That to me feels like a great thing. And the second question I had, which is one you'll be able to help me with, is if I'm an investor in Germany, is this sort of like 0.01% on the IRR or is this a sort of 2 to 5%? What's the scale of the impact on my investment case?
- [30:01]
C
Yeah, again, there's so much variety. There's also variety in how much of an IRR impact that'll have. I would argue that maybe if we go from it from a revenue perspective because IRRs also vary quite a lot by like, where is your project located, etc. Right.
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A
Cost of connection.
- [30:24]
C
Exactly. Biocosten TU shows, you know, all these things. So I would say when we, when we talk about revenue impact, average revenue impact, let's say first 10 years of, of the asset operating generally, for instance, this import export cap that is tied to your local renewable generation is actually quite low as we see, between 1 and 2% per year. And this is basically because that is, is the same, is a similar signal to what the, the day ahead price, for example, would send you as well. Right. Because it's tied to your renewable generation. And then there's this 1 or 2% of your revenue that you lose because the local condition in these moments basically don't want you to do what the, the power price, a day ahead price, for example, wants you to do. So I think that's quite a good compromise. One to 2%, of course you'd like to have it, but it's the business case can carry it. I would say just very briefly, ramp rates are more impactful, especially longer ones like a 15 minute ramp rate which is generally quite slow, maybe closer to 5 to 6% on your annual revenue. And then ancillary services, they're actually so ancillary services caps, they're actually not that impactful in the sense that your battery can take the capacity that it's not allowed to put into ancillaries and re optimize that in wholesale because you would
- [31:55]
A
say they were bidding around the opportunity cost anyway, Right?
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C
Yes, exactly. And then also ancillary services and this is to Till's point from the start, they are going to saturate quite quickly. So.
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A
Okay, yeah, I think, I think it's a good, it's a good answer. And if we're niche in FCAs, we're going further niche because we're going to talk about inertia finally.
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B
Yes, yes.
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A
Athil, maybe I can come to you. What's the story with batteries providing inertia in Germany?
- [32:25]
B
Well, the story is, I feel like a similar one as in all over the world, that inertia, I mean maybe just a brief reminder of what that is. It's kind of the property of a grid that has loads of spinning generators on it and those spinning generators can stabilize the frequency whenever the frequency changes, basically in real time. And now that we have loads of renewables on the system, those are all inverter based rather than spinning. So the spinning generators are not on all of the time and then we have less inertia on the system. But batteries can provide that or grid forming inverters can provide that and batteries are great at doing that. And yeah, I think that's one of the great stories in Germany where we see that, yeah, the grid operators see what batteries can do and see what batteries can bring and actually said okay, well we need to make a product for that. We need to incentivize that we're seeing this massive wave of. They called it tsunami two years ago but I think they've gone away from that a bit. We're seeing a massive wave of batteries coming. It would be a shame if all of them were built in 10 years and none of them were actually helping with the problem that we had have. So yeah, what we now have is a. Yeah, a market. Well, market might be a strong word, it's expert, determined prices. But we have It's a start. It's a start.
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A
There are other grids with worse markets.
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B
Exactly. That's true. We have. And exactly. It's two to ten year contracts, which is exactly what you need in an early phase like that where you need to just incentivize these investments.
- [33:59]
A
And so if you're getting a grid forming inverter, so you're an asset owner, you decide, actually I don't want to have a grid following inverter which kind of does what it sounds like it does follow the grid. You have a grid forming inverter which can set its own voltage. You say, okay, well this grid forming inverter, how much more money would I get from the system operator to incentivise me to make the decision to have that different piece of kit?
- [34:20]
B
Yeah. So this is where it gets into the weeds a bit more. So I think there's two different kind of things. One is that you have to be available to provide inertia. That's the entire base of the contract or the only kind of requirement that you have to be available. But in order to provide this inertia you have to have some megawatt headroom to be able to do that in the case that something happens. So if I'm already charging at 100% and then actually would need to charge a tiny bit more to provide inertia, then I can't do that and I count as unavailable. So that's why if you're actually just running your battery as is, that's not the best kind of solution to that. And you're unavailable sometimes, but there's tech for that, that. And then that's the maybe slightly more expensive inverters that are overload capable or boost factor or whatever you want to call it, that can go over the rated power of the asset for a couple of seconds and then you can just market that overload to the TSO and that gets you around, let's say 10k per megawatt per year, which is significant. Yeah, exactly. I think even with the cost included, we've calculated that it's roughly a 1 percentage point increase on the IRR, which
- [35:33]
A
is, I mean, but that's doing the job that the system operator wants. Right?
- [35:37]
B
Exactly.
- [35:37]
A
Four system operators want, they want to see more grid forming capabilities and so that it's a good deal to people to put grid forming inverters on.
- [35:44]
B
Exactly.
- [35:45]
A
Makes sense.
- [35:46]
B
Yeah.
- [35:46]
A
Okay. And maybe one more thing I think we've got time for, on our German, sort of our German coverage, I want to talk about grid fees. Sort of hot topic. We've seen some announcements recently. Perhaps Cosmo, you could start us off on grid fees. What's been announced? Do we have a sigh of relief in the German battery industry?
- [36:06]
C
Yes, I think we do have a sigh of relief. So what's been announced? We now know that. Well, first things first, maybe why are we talking about grid fees? Because currently batteries that are online or are coming online before 4th of August 2029 get a 20 year exemption on grid FE. So the big question is what happens after then? And we now know essentially what's. What's going to happen. So we know that batteries will have to pay a capacity fee of around 4 to €7,000 per megawatt hour as a grid fee, plus a dynamic grid fee on top. And maybe first things first. So we like the capacity fee because what they also proposed was an energy based fee which would have had much more impact or would have cost the battery much more. And then we also like the dynamic grid fee because essentially this is an additional pricing. Till always says it's location pricing through the back door. And I think he's right. That a battery can optimize around. Right. Batteries are made to react to these price signals. So why do we like it? Just very briefly, first of all, if you are. Well, you know now that if you're coming online until August 2029, you're going to be exempt from the capacity fee. And even if you have delays and you come online later, 4 to 7k, it's not great. But you know, usually you can get
- [37:45]
A
below 5% of your net revenue. So it's not like it's going to kill the project overnight.
- [37:49]
C
Exactly. Okay. And then the dynamic grid fees, a bit different because they are also set to apply retroact or they are not in this grandfathering. But we see this as a net uplift for batteries and therefore it's another upside, like inertia, for example, for batteries. So, yeah, good news.
- [38:10]
A
So capacity fee is coming in, but it's not as big. The energy fee is not. And that's good news because. And it's good news for consumers as well, because an energy fee, just a blunt metric, could actually stop some batteries from cycling in times when they would have otherwise cycled. Right. Which means lower flexibility on the grid, which means more expensive. So, so good decision. Energy fees in the bin. Then we have dynamic fees. And this is kind of the concept that the fee changes in time depending on what the congestion is. I love this. I think markets need this type of thing. We have a big problem coming in congestion. And so we need the right tools to try and solve it till maybe coming to you. Like you've looked at the dynamic fees a fair amount. How come a battery is making money off a dynamic good for?
- [38:55]
B
Well, I think the basic principle is that whatever price signal you give batteries, you give them more price signals and they will operate around them. Right? So that's the one thing. The other thing is that especially batteries in constrained regions, what happens is when there's too much renewable feed in those regions, they get curtailed. That is usually correlated with price. So, for example, in Bavaria, like in the south of Germany, where there's loads of loads of solar PV installed and a region that many people maybe didn't have on their radar in terms of curtailment, we're now starting to see massive amounts of solar curtailment in the middle of the day. That means in the middle of the day, this dynamic grid fee would give you an incentive to charge. The price signal is already doing that, so you're just getting boosted to do that. But on the other hand, you are also operating around these curtailment cycles in a way that might let you skip a cycle just because you're waiting for the congestion to clear, but you're being incentivized to charge in the meantime. So that's great. So I think that these different dynamics based on different kind of shapes and periods of curtailment are really exciting. And I think it's a good way of actually giving the battery the signal that it needs to be grid friendly. Right. Grid operators, as you said before, they're often afraid of, of batteries doing something to their grid, but batteries don't necessarily actually have the signal. What do I need to do in this moment to help the grid? And so these dynamic grid fees would be at least finally a signal to do that.
- [40:28]
A
And we could do another episode on dynamic grid fees, I'm sure, and sort of the impact of locational pricing. But let's move on to a final question. So a contrarian view. Cosmo, I'll come to you first. What's a contrarian view? You hold on energy markets.
- [40:42]
C
I would like to say one specifically about Germany, if that's fine, because it's something that, yeah, I think about a lot. And I think my contrarian view is that DSOs are not the problem. So when you operate, when you work in German batteries, you hear all the time, oh, there's over 800 DSOs, they don't want batteries. Flexible connection agreements are killing our Business case. And I think this is wrong in multiple regards. So first of all, yes, there's over 800 DSOs. It's a big number. But when you actually look at where batteries are going to connect at which voltage level, the number is closer to 30 to 40. Still a big number compared to GB, but it's more manageable. There's also most of these are owned by one stakeholder. So yes, there's diversity, but it's, it's not the headline number that everybody always says. Another point is that people are saying DSOs don't have an incentive to connect batteries. That's also wrong. I mean, yes, of course they have an incentive to keep the grid stable, but I mean first of all, batteries can contribute to that, right? I mean, I know this is a TSO level, but look at inertia, right? So I think this, yeah, it's, it's again like a sort of. I think it's wrong. And also talking about incentives, system operators is like their prerogative is to build out the grid, right. And to build out connections. So I think, and this is what we need, right? We need to electrify, we need to build out a grid. So I don't think that DSOs and battery developers are working in opposite directions is the first point. I think this is a lot of noise that some people get distracted by and then they focus on all these complexities where with install in their development. And I think that's also why we are seeing in the German market some stakeholders that know this, that have the local knowledge, that know which communities to go to, to speak to and they are quietly, and some not so quietly, continuing fid, continuing commissioning assets. Right. And I think that's a reason why there, there'll also be quite a level of consolidation in the next year or so in the German battery markets and those operators that have that like local skill set are going to come out winning and many, many want.
- [43:16]
A
Okay, well we have in the near future on transmission, we have a German asset owner who has been bringing assets online coming on. So I think I have my first question for them, which is now locked in. But also if you're a DNO DSO in Germany and you think, actually, you know what, I'd love to sort of set the record straight then get in touch.
- [43:36]
C
I would love a DSO to come online.
- [43:39]
A
Yeah, yeah, we can't have them all, but we could definitely do one every day. Yeah. Till coming to you, what's your contrarian view that you hold?
- [43:48]
B
I think, yeah, it's more Of a prediction maybe. And I do think that in five to ten years in Germany we will have a market based locational signal. So that's not dynamic grid fees but it's a market based signal.
- [44:04]
A
This was very recently rejected, right? It was put forward.
- [44:07]
B
Exactly. So I think the current government is very adamant that it won't happen. But the TSOs are very worried about what they're doing in the grid. I think they had a day recently where they had to redispatch 30 gigawatts in one moment. So I think they are very worried about what's happening. And the other thing is, the reason why it's not happened so far is that Bavaria in the south of Germany was against it because they were thinking oh, we'll have to pay higher power prices. Bavaria is one of the Bundeslender with a very large sway in federal politics. But now we're suddenly seeing that Bavaria also has rising curtailment. So they might begin to benefit of something like this as well. Obviously in a very different way, summer versus winter. But I think the resolve there is maybe weakening. And I think the TSOs don't necessarily like the concept of dynamic grid fees. They think it's a lot for them to calculate what the market could be doing. And I probably that if you're going to do locational pricing then why not with the market? And I think we're going to have something like that in 5 to 10 years.
- [45:09]
A
Having just had the same debate in GB and still mumbling on there are the battle scars of it. I would say that the system operators get it and understand the need for it. I would say that the politicians are largely quite confused by it just because it's complicated in the same way that a dynamic grid fee is complicated in the same way that your redispatch in Germany is complicated. And so I would perhaps say that they just kind of a lot of how the energy markets work that isn't sort of first nature to them. I think the biggest, the biggest thing was on the asset owners and utilities talking about how the sort of complexity would drive up the cost of capital. That was kind of the biggest thing.
- [45:48]
B
Energy markets are always complex and that is true.
- [45:51]
A
Right. So you know, you look at other complicated markets. If you go and find locational markets, you could find Italy, you could find Texas, you could find California. Yeah, they don't see that, that same lift. So I think is going to be one of the biggest battlegrounds for energy markets over the next five to 10 years because we all have the same congestion coming up. We all have this brand new form of technology in terms of batteries or solar that we can kind of put anywhere. And so we all have this, this debate sort of coming towards us and we sort of maybe don't do it at the first opportunity, but then perhaps it happens by the sort of side door with dynamic grid fees. This is controversial. Yeah, I think it's a good topic. Well, till Kozima, thank you very much for coming on. I hope our audience has learned a load about Germany. Many more episodes coming on on those topics. And yeah, thank you for coming on.
- [46:38]
C
Thanks for having us.
- [46:39]
B
Thank.
- [46:48]
C
You.