Prospects for battery investments in Germany – pv International magazine

May 28, 2024 Baris Serifsoy

From pv magazine 24/05

The German government is increasing the pace of implementation of renewable energy sources. However, the target of 80% renewable energy by 2030 remains highly ambitious, with solar capacity needing to almost triple to reach 215 GW by the end of the decade.

From 2022, the government has launched several initiatives, including increasing feed-in rates for developers (FIT), making more sites available – e.g. along highways and railways, and including concepts such as agrivoltaics and floating solar in tenders. Rooftop photovoltaic installation also enjoys political support.

The solar industry has changed gears, driving mergers and acquisitions. German developers, investors and generators concluded only a few deals between 2010 and 2021, but 2024 could be the third year in a row with transaction volumes exceeding 20 GW (see table).

Crowded market

Increased activity has increased competition for land, labor, and FIT associated with auctions. The crowded market means that project quality and development premiums have begun to vary significantly.

High interest rates have impacted investment in solar projects, with clean energy bonds, for example, now appearing to be an attractive alternative. Wind developer margins are more resilient due to higher capital expenditure requirements and more complex permitting, which deters new market entrants.

The divide is stark in the valuations of publicly traded European solar and wind developers. Both suffered after March 2023, but wind companies have since recovered some of their losses. On an enterprise value versus earnings before interest, tax, depreciation and amortization (EV/EBITDA) basis, wind companies achieved a multiple of 14.4 compared to 9.4 for solar developers – a premium of around 50%.

Number of transactions and transaction volume in Germany (announced and completed)

Period	Offers	Gross MW
2010-19	38	1067
2020	2	237
2021	5	4935
2022	37	23715
2023	19	21203
March 2024	6	5571
Year 2024 on an annual basis	More than 20	Over 20 thousand

Source: GreenCap research

Storing value

Energy storage also attracts investors. German clean energy companies have told GreenCap partners that deploying a battery energy storage system (BESS) is a top priority, mainly at the point of generation. Revenues from arbitrage – charging batteries with cheap electricity for sale during peak periods – as well as ancillary services and network generation capacity are attractive.

As part of the German government’s innovation tender, FIT contracts are offered for a period of 20 years for facilities using solar energy and batteries, with the possibility of trading stored energy.

However, this tariff is subject to certain conditions. The batteries can only be charged from the solar park and not from the grid, which means they may go unused. Electricity generated in the park is also marked as “gray energy” and therefore cannot be covered by the Guarantee of Origin and clean energy certificates. Trading of stored energy is also limited to a maximum of two cycles per day and a minimum of 25% of storage capacity must be maintained at all times. Finally, more recent changes resulted in a shift from a fixed market fee to a variable fee for battery operators, which was considered less attractive, leading to undersubscription in tender processes.

Actual data on expansion capacity in Germany shows that large-scale BESS deployment is still in its infancy. As of March 2024, only 1.5 GWh of capacity has come online, although this is expected to increase to 4.6 GWh by the end of 2025. Meanwhile, small home behind-the-meter battery storage has seen strong growth over the past five years, with 10.8 GWh.

British BESS

To better understand the situation ahead, the UK can offer a useful perspective. British developers are about three to five years ahead of their German counterparts. The results of our recent survey of UK infrastructure managers may provide useful discussion points for German developers and operators.

Network access is key. In the UK, the industry expects at least 15 GW – but more likely 20 GW to 30 GW – of BESS to come online by 2030. Many projects struggle to obtain grid connection permits before the mid-2030s. century. Large development projects will have difficulty remaining financially viable over such long periods.

Increased competition has also led to a decline in battery revenues. There has been severe undercutting of auction prices in government-sponsored tenders for regulatory services. Although some BESS operators have historically generated 80% or more of their revenues from these services, they are now willing to switch to arbitrage strategies.

We also have anecdotal evidence that engineering, procurement and construction service providers are becoming more selective in which BESS construction projects they sign on, preferring larger and more profitable locations. Over the last 18 months, a significant number of turnkey BESS projects have appeared on the market, indicating both strong interest in BESS and potentially the highest level of valuations. Operators without deep, dedicated development resources may be better off purchasing completed BESS projects rather than taking on the development risk themselves.

Final thought

We believe that the German solar market will remain very attractive for developers, given the strong regulatory and financial support in the AAA credit-rated country. Some of the existing surpluses are being digested and both project sellers and buyers are agreeing to a new price balance, taking into account both lower energy prices and higher interest rates.

BESS will play an increasingly important role in Germany, both as a stand-alone support for grid performance and as a solution co-located alongside solar power plants. However, investors will need to carefully navigate the competitive landscape to select attractive and ultimately valuable projects.

About the author: Baris Serifsoy is a partner at GreenCap Partners, a London-based corporate finance and M&A boutique focusing on European renewable energy sources. He has over 20 years of experience in finance and was previously a managing director at UBS AG. He obtained a PhD in Finance from Goethe University in Frankfurt and holds a CFA Charter.