BATTERY ENERGY STORAGE

SYSTEMS (BESS) — ENHANCING

SYSTEM STABILITY AND
EFFICIENCY
White paper
 Battery Energy Storage Systems
Enhancing System Stability and Efficiency

CONTENT Introduction
Sustainable energy systems based on fluctuating renewable

INTRODUCTION . . . . . . . . . . . . . . . . . . . . . . . . . 2
energy sources require storage technologies for stabilising
grids and for shifting renewable production to match electricity
demand. The stability of grids and hence the security of energy
supply depends on a constant balance between generation and
1. T HE TECHNOLOGICAL consumption, which intermittent renewable resources such as
FRAMEWORK OF BATTERY wind and solar cannot sustain on their own. Moreover, the rapid
growth of renewable energies and their integration within the
STORAGE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 grid is increasing pressure on power networks. Thus, the need for
battery energy storage systems (BESS) to provide grid balancing,
keep pace with rising renewable capacity and further reduce car-
2. T HE BUSINESS CASE FOR bon emissions has never been more urgent. Indeed, during peak

BATTERY STORAGE . . . . . . . . . . . . . . . 4 demand hours, BESS can be discharged to regulate, balance and
stabilise the energy grid, whereas by charging batteries during
2.1 Renewable synergies . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 periods of low consumption, utilities and independent power
2.2 Revenue streams . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 producers can reduce the cost of energy they provide.

2.3 Cost efficiency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10

There are several demand drivers for the expansion of BESS
2.4 Regulatory framework . . . . . . . . . . . . . . . . . . . . . . . . . 12 capacity, namely the sharp and continuing fall in costs of battery
2.5 ESG opportunity and risks . . . . . . . . . . . . . . . . . . . . . 13 storage technologies, making battery optimisation even more
affordable, and the significant drop in lithium prices after the
spike witnessed in 2022, which will benefit battery development
3. OUTLOOK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 pipelines. Greater volatility in trading markets and increasing op-
portunities to participate in ancillary services related to frequency
response and balancing, as well as the optimisation of electricity
wholesale markets, are also further boosting the revenue potential
4. AQUILA GROUP BESS of battery storage.
PORTFOLIO HIGHLIGHTS . . . . . 15
The battery storage segment thus offers investors sustainable
investment opportunities that also increase diversification within

CONCLUSION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 their renewable energy portfolios. This paper will explore why
batteries offer a high degree of flexibility as short-term storage
devices and why they are a key component of a renewable energy
system.
ABOUT AQUILA GROUP . . . . . . . . . . . . 17

© 2024 Aquila Clean Energy 2

 Battery Energy Storage Systems
Enhancing System Stability and Efficiency

1. The technological framework by a substantial ramp-up in manufacturing capacity by Chinese,

of battery storage
American and European battery makers and the use of ever larger
prismatic cells for energy storage, allowing for more energy storage
capacity per unit and greater system integration efficiency.
As short-term storage devices, batteries offer a high degree of
flexibility by balancing power outputs and scheduling discharges
to efficiently manage their energy and increase potential reve-
nues. Batteries have lower capacities and discharge times com-
pared to long-term storage. While pumped-storage power plants,
hydrogen applications and other long-duration technologies offer
opportunities to compensate for weekly, monthly and seasonal
differences via in certain cases just a few cycles per year or to
build up longer-term reserves, batteries can go through several
cycles per day. Thus, the roles of BESS and pumped hydro energy
storage are largely complementary, generally operating most
economically in the under ten-hour and over ten-hour duration
spaces, respectively.

The majority of newly installed large-scale electricity storage

systems in recent years utilise lithium-ion chemistries for increased
grid resiliency and sustainability. The capacity of lithium-ion bat-
teries to make energy available again quickly thus makes them the
ideal short-term supplement to the fluctuating daily generation
of renewable electricity compared to other technologies. This is
particularly the case due to a cost-learning curve resulting from
the industrialisation of lithium-ion production in the transport sec-
tor and the high efficiency of lithium-ion when storing electricity.
These factors are expected to continue in the foreseeable future
and hence lithium-ion is forecasted to maintain its lead over alter- As a result, LFP chemistry is increasingly becoming the preferred
native storage technologies such as flow batteries for potentially choice for large stationary battery storage, which has a much
up to ten-to-twelve-hour storage duration. lower sensitivity to weight compared to other sectors. LFP is also
being used more and more in cost-sensitive automotive applica-
In the field of lithium-ion batteries, a key distinction is made be- tions. LFP batteries are designed to handle utility-scale renewable
tween lithium nickel manganese cobalt oxide (NMC) and lithium power generation and energy storage capacities up to several
iron phosphate (LFP). NMC has been for many years the technol- hundred megawatt-hours, given their ability to endure high load
ogy of choice for the transport sector, home solar systems, power currents with a long cycle life. All lithium-ion batteries also benefit
tools and utility-level storage due to its higher energy density from technological progress and massive economies of scale due
and the resulting low weight compared to other technologies. to their use in the fast-growing electric vehicle market, resulting
However, despite a lower energy density and thus a higher weight in batteries experiencing substantial price drops in the past few
compared to NMC for the same performance, LFP chemistry is years and making BESS a far more competitive business case.
increasingly gaining market share due to the technology’s clear
advantages in other respects. In particular, the non-use of critical Emerging technologies such as sodium-ion batteries might cap-
raw materials such as cobalt and nickel makes LFP more cost effi- ture some market-share from LFP in the next few years, especially
cient to manufacture whilst also increasing its life cycle compared in China, which has been promoting national targets and stand-
to nickel-based lithium-ion chemistries. ards for sodium-ion batteries to accelerate its commercialisation,
thereby reducing lithium supply bottlenecks (see chart 1 below).
Furthermore, LFP’s lower energy density increases thermal stability, The gradual introduction of sodium-ion cells, assuming the
reducing the risk of fire accidents, while also being less of a concern expansion of localised supply chains for the technology outside
for the energy storage segment given weight and space are less of China, will thus be another key tailwind for long-term growth
material issues for stationary systems. Indeed, as evidenced by in BESS buildout, further enhancing cost efficiencies due to the
chart 1 below, LFP is expected to remain the dominant chemistry for abundance of sodium compared to lithium supply and its low
energy storage until the end of the decade and beyond, driven extraction and purification costs.1

1 PV Magazine, ‘Sodium-ion batteries – a viable alternative to lithium?’ (2024), available at: link

© 2024 Aquila Clean Energy 3

 Battery Energy Storage Systems
Enhancing System Stability and Efficiency

CHART 1: BATTERY STORAGE CHEMISTRY MIX OUTLOOK 2

based on gigawatt-hours in %

100 % 3 3
9 6 4 5 8
14 11 12
90 % 18 13

80 %
27
70 % 35
60 % 49
50 % 95 95
91 93 93 91 87
84
40 %
62
30 %
50
20 %
33
10 %

0%
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

LFP NMC NCA Sodium-ion

At Aquila Group, most of our projects are using LFP as the leading 2. The business case for battery
storage
chemistry in the utility-scale battery storage segment and com-
bine the ideal technical characteristics with our focus on sustain-
ability. All of Aquila Group’s European projects are developed by
the business unit Aquila Clean Energy, which generates value by Batteries are an important component in the energy system to
strategically selecting sites that offer the best infrastructure solve the challenges related to the reliability of fluctuating renew-
potential and develops hybrid clean energy projects that optimise able energy by storing surplus electricity for the periods when
the grid connection. Aquila Clean Energy’s in-house expert teams wind and solar energy is not available. This flexibility of supply is
in investment, development, procurement, construction and mar- the basic prerequisite for increasing the integration of renewable
kets management have built an integrated and sustainable clean energy sources and thus enabling a higher share of renewable
energy business by applying a holistic and industrial approach. energy feeding into electricity grids.

Aquila Clean Energy’s BESS development portfolio has projects 2.1 Renewable synergies
totalling over 4 GW in capacity, spread across Germany, Spain, Mature renewable technologies such as wind and solar PV offer
Portugal, Italy, Greece, Belgium, the Baltics and Nordics. Aquila opportunities to sustainably reorganise energy systems. However,
Clean Energy is targeting more projects in these markets as well energy security and affordability are key components for an effec-
as new opportunities across Europe and APAC until 2030, bene- tive transition that would ensure fundamental acceptance. Despite
fitting from attractive remuneration for system flexibility, capacity renewable technologies having already significantly surpassed
markets and ancillary services (see chart 13 below). grid parity and offering advantages even when compared to the
operation of existing thermal power plants3, these advantages
are only recently beginning to fully materialise for consumers in
real terms. Indeed, the market consensus is that a more promising
macro environment, with commodity and electricity prices having
fallen last year from the highs reached in late 2022 and inflation
in the Eurozone expected to reach the European Central Bank’s
target of 2.0 %, should result in a reduction in interest rates in the
second half of 2024. These developments should help acceler-
ate investment in renewables, given the lower cost of debt and
discount factors underlying this scenario.

2 Bloomberg New Energy Finance (BNEF), ‘1H 2024 Energy Storage Market Outlook’ (2024), excludes other battery technologies other than lithium-ion
and sodium-ion batteries as well as non-battery technologies such as thermal storage, gravity-based storage and mechanical storage. NCA, NMC and LFP
refer to lithium-ion battery chemistries, NCA is lithium nickel cobalt aluminium oxide, NMC is lithium nickel manganese cobalt oxide and LFP is lithium iron
phosphate.
3 Levelised costs of electricity generated by renewables match or are lower than those of conventional power plants.

© 2024 Aquila Clean Energy 4

 Battery Energy Storage Systems
Enhancing System Stability and Efficiency

However, a very inelastic demand for energy allows for fossil fuel solution for surpluses during other hours. In contrast, BESS can be
power plants to continue to set the price on the market, despite charged during these surplus periods and thus mitigate grid-relat-
renewable energy production dampening the impact of the high ed and economic curtailments for wind farms and solar PV plants.
prices of fossil fuel generation. Thus, to ensure the stability of In hours marked by low production from renewable sources, the
electricity grids, a constant, sensitive balance between generation corresponding emission-free electricity can be fed back into the
and consumption in real time is needed. Whilst conventional pow- grid.5 An added benefit would be a lower reliance on energy im-
er plants generate a stable and controllable base load depend- ports, which would have a positive impact on energy sovereignty
ing on demand, renewable technologies are dependent on the and security whilst also limiting the effects of volatile commodity
weather, posing challenges to energy security due to the volatility prices.
inherent in their production. As evidenced in chart 2 below, the
daily pattern of solar energy generation increases volatility in daily Continued seasonal smoothing of renewable energy production,
price spreads. The high midday solar output meets or exceeds benefitting from regional interconnection and technological
energy demand, reducing prices, whereas a constant evening diversification, would also eliminate the need for gas-fired power
demand which cannot be met after sunset causes prices to surge. plants as a bridging technology. The advantages of seasonal
An increased solar PV capacity buildout alone would amplify this smoothing are evidenced in Europe by the negative correlation
volatile pattern, hence requiring grid flexibility solutions. of solar-PV compared to wind and hydropower as well as the
regional differences between high wind speeds along the coasts
and high solar irradiation in southern Europe, with all technolo-
CHART 2: ENERGYMIX IN SPAIN gies complementing each other. The Iberian Peninsula illustrates
this correlation, as its natural resources and geography offer very
ON A REPRESENTATIVE DAY 4 good and equivalent conditions for all three technologies, which
would result in a smoothed, stable generation profile. Never-
66.52 EUR
theless, there continue to be significant daily fluctuations which
Day-ahead price
must be balanced by flexible generation and demand for which
(EUR/MWh)
lithium-ion batteries are the ideal solution.

However, contrary to the daily or weekly flexibility requirements,

41.00 EUR there persists a demand for long-duration energy storage to
Import Solar energy address the seasonal and regional variability in renewable energy
generation generation. While lithium-ion batteries play a significant role in
Co-generation
short-term flexibility, they are likely uncompetitive for durations
exceeding ten to twelve hours. Emerging technologies offer
Wind promising solutions to meet this demand. Hydrogen, in particular,
has garnered increasing interest due to its ability to provide sea-
Hydro sonal buffering. For instance, it can store energy generated during
0.44 EUR
Nuclear the summer from solar PV systems for use during the winter
months when PV generation is typically low.
1AM 4AM 7AM 10AM 1PM 4PM 7PM 10PM

Combining renewables and batteries in one portfolio therefore

creates significant positive effects. In the case of Iberia, while dif-
In this context, the use of flexible gas-fired power plants could be ferent solar assets display a strong correlation in revenues (> 0.75),
seen as a good counterpart to renewables, given the rapid startup batteries have weak to no correlation (< 0.25) to renewable assets
and shutdown of gas-fired power plants according to the feed-in (see chart 3), indicating their ideal complementing potential to a
from renewable sources. However, the minimum load and ramp renewable asset portfolio. Moreover, BESS can be leveraged to
requirements do not make it a good complement for renewables. improve the value of renewable projects by improving capture
Moreover, the technology is not compatible with net zero emis- rates or mitigating technical curtailments by grid operators. The
sion scenarios and the dependency on exporting countries raises co-location with solar PV parks would allow the battery storage
questions about the long-term sustainability of this model. systems to charge any technically curtailed energy during the day
and discharge it at night without curtailment. Indeed, technical
Batteries have become increasingly competitive in terms of curtailments are becoming a growing problem at times of unfore-
costs and flexibility, as well as boosting the efficiency of the seen surpluses in wind and solar generation, given the transmis-
energy system. While gas-fired power plants can compensate for sion and distribution (T&D) network constraints in many European
bottlenecks in the energy supply by producing when renewable countries.
generation is not sufficient, the technology does not provide a

4 Omie, as at 3 May 2024, available at: link

5 See below section ‘2.5. ESG opportunities and risks’ and Aquila Capital, ‘Lifetime avoided emissions for battery energy storage systems’ (2023), available at: link

© 2024 Aquila Clean Energy 5

 Battery Energy Storage Systems
Enhancing System Stability and Efficiency

Co-located batteries are thus an increasingly crucial application The benefits of portfolio diversification with BESS can also be
in light of the rapid buildout of renewable capacity, which would seen in the illustrative chart 4. The addition of co-located and stan-
otherwise make curtailments by grid operators a more constant dalone battery investments in a renewable energy portfolio shifts
threat. In situations where renewable power plants are located in the IRR distribution of the portfolio to the right (i.e. higher average
areas with poor grid connections, the maximum output of power IRR returns due to higher merchant IRR of BESS versus renewa-
plants is often capped at a specific power level by the energy bles) and reduces the width of the distribution (i.e. lower volatility
utility. The co-location of batteries can also help resolve this issue of returns), highlighting the potential for investors of BESS as
by ensuring that batteries are charged during periods of overpro- a sustainable complementary investment opportunity that also
duction or grid curtailments and discharged when power plant increases diversification within their renewable energy portfolios.
production is below the maximum permitted level.

CHART 3: ILLUSTRATIVE
REVENUE CHART 4: ILLUSTRATIVE IRR PORTFOLIO
CORRELATION MATRIX OF SELECTED COMPARISON 7
RENEWABLES AND BATTERIES 6 Portfolio + Battery Portfolio
Frequency

SOLAR
Spain 1 0.58 0.97 – 0.12
WIND
Greece 0.58 1 0.67 0.25
SOLAR
Portugal 0.97 0.67 1 – 0.02
BATTERY
Belgium – 0.12 0.25 – 0.02 1
SOLAR WIND SOLAR BATTERY
Spain Greece Portugal Belgium
IRR

Battery storage can also play a significant role in supporting grid 2.2. Revenue streams
operators directly by preventing grid congestion, providing voltage Technological progress and fundamental changes in Europe’s
control, providing or absorbing reactive power and restoring electricity sector are leading to the adoption of BESS facilities
power after blackouts (‘black-start’). This is especially relevant in with higher capacities and longer discharge periods, enabling the
Europe, where EUR 584 billion of investment in T&D is estimated realisation of economies of scale and opening up the potential to
to be needed by 2030 to modernise grids and accommodate serve a number of different markets on a technology basis. There
growth in renewable capacity.8 are three main market categories from which BESS generate their
revenue streams, the design and maturity of which still varies
greatly across Europe:

— Ancillary services: daily auctions for primary, secondary and

tertiary reserves;
— Wholesale electricity market: day-ahead, intraday and im-
balance markets;
— Long-term auctions: e.g. capacity markets and grid support
services such as voltage control, reactive power and black-start.

6 Aquila Capital, based on information available on Entsoe Transparency Platform and EEX from January 2015 to March 2023. The correlation matrix is calculated
based on hourly revenues (price times production) aggregated monthly.
7 Aquila Capital, based on data from 500 scenarios calculated for the original EMEA portfolio and the portfolio with the addition of co-located and standalone
battery investments.
8 European Council on Foreign Relations, ‘Gridlock: Why Europe’s electricity infrastructure is holding back the green transition’ (2023), available at: link

© 2024 Aquila Clean Energy 6

 Battery Energy Storage Systems
Enhancing System Stability and Efficiency

Ancillary services 3. Manual Frequency Restoration Reserve (mFRR): mFRR, also

Ancillary services relate to frequency response and balancing called tertiary reserve or manual frequency control, is a supple-
and may have different names and definitions across markets. mentary ancillary service utilised during extreme grid events or
Frequency response services refer to any services that can be when primary and secondary reserves are insufficient. Unlike
provided by market participants in connection with unexpected automatic reserves, mFRR involves manual intervention by grid
changes to the transmission system frequency, such as provid- operators or market participants to restore grid frequency. This
ing or consuming additional energy. When realized production service is typically activated during rare but severe events such
or demand for electricity deviates from forecasts, batteries can as large generator failures or major grid disturbances, where
efficiently restore a stable frequency. There are three key types immediate action is necessary to prevent cascading failures and
of ancillary services, all of which are paid for by the transmission blackouts.
system operator (TSO):
These ancillary services work in tandem to maintain grid stability
1. Frequency Containment Reserve (FCR): FCR, also known as pri- and ensure reliable electricity supply, with each service playing
mary reserve or frequency regulation, is a crucial ancillary service a specific role in responding to different types and magnitudes
that maintains the grid’s frequency within acceptable bounds of grid disturbances. Power systems must always be balanced by
(50 Hz in Europe). As electricity demand and supply continuously grid operators, given the high variability of demand (e.g. summer
fluctuate, FCR providers adjust their output within seconds to peak consumption, temperature swings, end-user consumption
balance these changes and stabilise the grid frequency. FCR pro- changes) and supply (e.g. plant outages, intermittent wind and
viders, such as power plants or energy storage systems, must be solar production). These system imbalances are balanced in real
capable of rapidly responding to frequency deviations to ensure time via the primary, secondary and tertiary reserve which forces
grid stability. market participants to achieve full activation within pre-defined
timeframes. These reserve mechanisms ensure the system fre-
2. Automatic Frequency Restoration Reserve (aFRR): aFRR, also quency gradually recovers to the 50 Hz level (see chart 5 below).
referred to as secondary reserve is another ancillary service used A majority of BESS revenues is expected to transition away from
to restore grid frequency following significant disturbances. While existing ancillary services to wholesale market optimisation in the
FCR responds to rapid frequency changes, aFRR provides longer- next four to five years, with more markets benefitting from attrac-
term frequency restoration by adjusting generation or consump- tive remuneration for system flexibility, arbitraging opportunities
tion levels over minutes to hours. Grid operators use aFRR to from real-time imbalance trading and long-term renumeration via
counteract sustained imbalances between supply and demand, capacity markets, as discussed below.
helping to bring the grid frequency back to its nominal value.

CHART 5: OVERVIEW OF ANCILLARY SERVICES

Frequency (50Hz)
Frequency recovers to 50Hz

Large electricity
generation loss Tertiary Reserve – mFRR

Frequency falls

Secondary Reserve – aFRR

Primary Reserve – FCR

Reaction time

Within... 30 seconds 7.5 minutes 15 minutes

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 Battery Energy Storage Systems
Enhancing System Stability and Efficiency

CHART 6: EXEMPLARY BEHAVIOUR OF A 50 MW/100 MWH BESS

IN GERMANY’S DAY-AHEAD MARKET9
BESS Charge (+)/Discharge (-) Day-ahead price

130 40
Day-ahead price (EUR/MWh)

BESS (-dis)charge (MW)

30
80
20
30 10
0
-20 -10
-20
-70
-30
-120 -40
00:00

01:00

02:00

03:00

04:00

05:00

06:00

07:00

08:00

09:00

10:00

11:00

12:00

13:00

14:00

15:00

16:00

17:00

18:00

19:00

20:00

21:00

22:00

23:00
Wholesale market optimisation
Wholesale market optimisation involves leveraging the energy
storage assets to maximise revenues by price optimisation and
time shifting in an auction for electricity delivered on the next
day (day-ahead auctions) or the continuous market for energy
deliveries (intraday market) close to real time, where batteries can
earn by arbitraging price spreads (e.g. charging the battery at low
prices and discharging at high prices, see chart 6).

Another key revenue source for BESS in wholesale markets is

imbalance steering, whereby batteries try to anticipate system
needs, adjusting their trading positions to gain additional reve-
nue by deviating their charging and discharging patterns in the
opposite direction to the imbalance position of the system, hence
taking advantage of high volatility and price spikes. Elevated vol-
atility can thus be seen as a positive dynamic for BESS operators,
by profiting from purchasing electricity from renewable sources
at low prices to charge their batteries and then feeding power
into the grid at high prices when production from renewables is
low. Whilst a rapid BESS buildout is expected to lower volatility
in power markets, a growing share of renewables in the energy
mix will act as a contrasting force to drive volatility higher again.
Accounting for additional revenue opportunities from this close to
real time volatility in mid- to long-term forecasts is generally quite
challenging, thus these are typically underestimated in consult-
ants’ forecasts for BESS revenue stacking.

9 Aquila Capital, based on publicly available market data for 1 January 2023. More details on the German BESS market can be found in an earlier analysis by
Aquila Capital, ‘System Stability and Efficiency through Battery Storage – A Turning Point of the Sustainable Transformation?’ (2021), available at: link

© 2024 Aquila Clean Energy 8

 Battery Energy Storage Systems
Enhancing System Stability and Efficiency

Chart 7 below illustrates system imbalance prices in Belgium,

which tend to be more volatile than day-ahead or intraday prices
in either direction, reflecting the ‘shock’ response of the system
when market participants produce more or less electricity than
they have sold or bought. This phenomenon typically occurs
when there is a deficit in nuclear supply due to ramping down and
maintenance works or when renewables output is suddenly lower
than expected (e.g. low wind or cloudy day), driving up the imbal-
ance price as other power units scramble to fill the unexpected
gap in demand.

CHART 7: SYSTEM IMBALANCE MARKET PRICES IN BELGIUM10

(in EUR / MWh)

800
Day-ahead price Hourly intraday price (AVG)
600 System imbalance price

400

200

-200

-400

-600

-800
0

00

00

00

00

00

00

00

00

00

00

00
:0

:0

:0

:0

:0

:0

:0

:0

:0

:0
0:

2:

0:

2:

0:

2:

0:

2:

0:

0:

0:
2

12

12

12

12

12
00

0
1

1
0

24

24

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3/

3/

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3/

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3/

3/

3/

3/
3/

3/

3/

3/

3/

3/

3/

3/

3/

3/

3/
/0

/0

/0

/0

/0

/0

/0

/0

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/0
17
11

29
05

20

23
08

26
14
02

07
01

31
19
10

25
13

16

28
04

22

Long-term auctions Currently, six countries in Europe (Belgium, Ireland, France,

To encourage private sector investment in new electricity genera- Poland, the United Kingdom and Italy) have established capac-
tion plants and ensure sufficient capacity (safety margin) between ity markets approved by the European Union through different
peak demand and installed capacity, several transmission network auctions that allow the participation of energy storage systems.
operators have implemented capacity mechanisms that offer The auction dates and contract periods differ from one country
electricity generators additional revenue streams through capacity to another. In addition to these capacity mechanisms, there are
payments, in addition to the incomes from the wholesale market other subsidy programmes across Europe that provide recurring
and ancillary services, as well as greater visibility through long- revenues for successful projects procured through auctions. For
term contracts for investors. example, in Greece, this process involves an operational subsidy
implemented through a contract-for-difference (CfD) like mechanism.

10 Aquila Capital, based on publicly available hourly market data from 1 to 31 March 2024. Other sources: Elia, Regelleistung.net and Entsoe Transparency
Platform.

© 2024 Aquila Clean Energy 9

 Battery Energy Storage Systems
Enhancing System Stability and Efficiency

Optimisation strategy
The key to a successful BESS project is the optimisation of the
above-mentioned revenue streams during the lifetime of the
assets and within its technical constraints. Some of the revenue
streams can be stacked on top of each other and therefore
require a multi-market optimisation approach. This is done on
a 24/7 basis and for certain markets like intraday or imbalance
close to real-time. It requires complex optimisation algorithms that
can analyse the large required real-time data for market prices,
fundamental factors like weather forecasts and any other variables
impacting the optimal usage pattern of the battery system. The
aim is to optimise the charge and discharge behaviour to maxim-
ise overall revenues across the different wholesale and ancillary
service markets. For a co-located asset, the battery optimisation
also needs to consider the interaction between the renewable as-
set and the battery on the jointly used grid connection. Combined
renewable energy and battery portfolios, like the ones managed
by Aquila Clean Energy, can thus benefit from the synergies of a
joint optimisation.

2.3. Cost efficiency

A key competitive driver for BESS is the substantial drop in global
energy storage system costs in the past few years as a result of
Storage systems in Greece submit a bid price (EUR/MW/year) economies of scale, intense market competition and technologi-
which becomes their annual reference revenue for a ten-year sup- cal progress in alternative battery compositions (see chart 8). This
port plan. The portion of annual reference revenue not obtained trend was further reinforced by a considerable drop in lithium-ion
from electricity markets (DA, ID, Balancing Market) is guaranteed battery pack prices (see Chart 9), decreasing by 90 % since 2010,
as part of the support plan. and extensive battery supply due to increased competition in the
sector. Costs are expected to continue to fall as improved battery
In Germany, subsidy schemes operate differently by means of cells and system designs are adopted and competition continues.
innovation tenders, providing developers with fixed premiums In 2024, a further drop in lithium-ion battery pack costs is expect-
to encourage the deployment of renewable energy and storage ed as the twenty major lithium-ion battery manufacturers have
projects throughout the country. These premiums are awarded for announced a 50 % planned manufacturing capacity expansion.11
twenty years, however come with certain restrictions on battery
utilisation (e.g. not charging the battery with grid electricity) which According to the International Energy Agency (IEA), increased
reduces the value of the battery from an overall system perspective. manufacturing is projected to reduce global average lithium-ion
battery costs by a further 40 % from 2023 to 2030, with innovation
In Italy, Terna, the country’s transmission system operator, lowering upfront costs and bringing about additional perfor-
launched a ‘Fast Reserve’ pilot project that will procure 250 MW mance improvements in the form of higher energy densities
of BESS capacity for delivery between 2023 and 2027. This ‘Fast and longer useful life.12 Battery manufacturing capacity is set to
Reserve’ project provides assets with capacity-based renumera- increase nearly fourfold from 2023 to 2030 if all announced plants
tion and allows new categories of resources to participate in the are built in full and on time, reaching a level of circa 8 TWh per
ancillary services market, with the objective of testing their perfor- year that would be sufficient to remain on track with the battery
mance before full integration. requirements of the Net Zero Emissions (NZE) Scenario by 2050.
Battery production is also set to diversify in the coming years,
with China’s share of lithium-ion battery manufacturing capacity
expected to decrease from nearly 85 % in 2023 to 67 % in 2030,
a shift primarily driven by significant investment in Europe and
North America in the coming years.13 These positive trends will
reduce supply chain risks and ensure a sustained acceleration in
BESS buildout.

11 BNEF, ‘Energy Storage: 10 Things to Watch in 2024’ (2024).

12 International Energy Agency (IEA), ‘Batteries and Secure Energy Transitions’ (2024), available at: link
13 IEA, ‘Batteries and Secure Energy Transitions’ (2024), available at: link

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CHART 8: GLOBAL AVERAGE CAPEX FOR FULLY INSTALLED ONE-, TWO-, FOUR-HOUR
DURATION LARGE ENERGY STORAGE SYSTEMS AT BEGINNING OF LIFE14
in real 2023 USD / kWh (based on usable capacity)

480
1-hour 2-hour 4-hour
430

380

330

280

230

180

130
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033

CHART 9: LITHIUM-ION BATTERY PACK PRICES15

(Real 2023 USD / kWh)
90 %
1.391

1.079

848
780
692

448
345
258
211 183 161
160 150 139

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Battery storage offers great potential for countries that are plan- having already become approximately 78 % cheaper than in 2016
ning a comprehensive phase-out of base-load capable fossil and and expected to become even more competitive in the coming
nuclear power plants, considering the corresponding capacities years. It should also be noted that to remain on target with the net
can only be replaced by the stabilisation of renewable produc- zero emissions scenario by 2050, the energy-intensive process
tion. At 125 USD / MWh, four-hour duration utility scale battery required to produce and store hydrogen will necessitate the input
storage has already surpassed traditional gas motor power plants of renewable energy sources, this use case will be another impor-
as the cheapest mitigation technology (see chart 10 below), tant catalyst for BESS expansion.

14 BNEF, ‘Energy Storage System Cost Survey 2023’ (2023). Includes costs for battery rack, balance of system and energy management system, power con-
version systems, transformers, other expenses and system integrator margins. Costs vary widely by region, with turnkey energy storage systems deployed
in China costing significantly less than in Europe and the US, given China’s well-established battery manufacturing capacity, mature supply chains, over-
supply of battery cells and intense competition among battery makers.
15 BNEF, ‘Localization and the Cost of Batteries’ (2024).

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CHART 10: LEVELISED COST OF ENERGY (LCOE)

OF FLEXIBLE ENERGY SOLUTIONS16
(USD / MWh)

Open gas turbine Gas motor power plant Utility-scale-battery (4 hours) Hydrogen

600

500

400
2023

300

200

100

0
16

18

20

22

24

26

28

30

32

34

36

38

40

42

44

46

48

50
20

20

20

20

20
20

20
20

20

20
20
20

20
20

20

20

20
20
Thus, lower battery supply chain prices, battery improvements operational and development solar PV parks in these countries,
including the uptake of larger cells at a record pace and intense as a means to maximise value creation and mitigate any potential
competition in the sector will continue to drive down costs for technical curtailments.
BESS projects even further, whereas stationary storage project
hour durations are expected to grow as use cases evolve to deliv- A project at the EU level, Picasso, is aiming to harmonise the
er more energy. In Europe, this is exemplified by plans from the Eurozone’s market design, whilst the Benelux countries and Ger-
Italian grid operator Terna to introduce auctions for long dura- many already have a market design that provides a good basis for
tion energy storage systems (including lithium-ion and pumped investing in BESS, including a constant optimisation of the battery
hydro), targeting 9 GW / 71 GWh of additional storage capacity across different market segments. However, the regulatory classi-
by 2030. The first such auction is expected by 2025, targeting first fication of BESS remains a critical open point, insofar as its current
delivery in 2027 or 2028. dual role as electricity consumer and producer can create a risk of
double surcharges, grid connection bottlenecks, transmission fees
and taxes.
2.4. Regulatory framework
However, a prerequisite for accelerating the development of BESS Furthermore, a strong tailwind for BESS expansion will be the
in Europe is also a corresponding regulatory framework that offers launch of a new technology-neutral capacity market in Germany
operators a positive and stable market environment in the long by 2028, as part of a reform of the country’s electricity market de-
term. Several countries have yet to open up power and ancillary sign. An agreement was also reached to procure 10 GW of flexible
services markets and adopt regulations that ease interconnection gas-fired power plants which will need to switch over to hydrogen
constraints and clarify battery storage participation models in their fuel before 2040, with tenders designed to be integrated in the
markets. European Union (EU) countries are increasingly adapting future capacity mechanism. The fact that this capacity market
their regulatory frameworks; however, the lack of a harmonised will not discriminate on the basis of technology is a significant
and heterogeneous strategy continues to require a selective opportunity for BESS developers and operators. Other European
approach. For example, Italy, Portugal and Spain continue to have markets which have introduced similar mechanisms, such as the
restrictions on the participation of batteries in ancillary markets UK, Belgium, Italy and Poland, have experienced high volumes
(e.g. primary reserve), even though their market designs are now of participation from battery groups and have ensured a solid
subject to expected changes that would improve framework con- revenue stream for BESS projects. The framework designs in those
ditions for BESS rollout. In anticipation of these changes, Aquila countries also further contributed to unlocking project finance for
Group is implementing co-located battery storage at most of its new standalone batteries. The backdrop for this proposal is the

16 BNEF data (2023).

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 Battery Energy Storage Systems
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governing coalition’s plan to procure up to 25 GW of new energy 2.5. ESG opportunities and risks
capacity, which initially envisaged hydrogen-ready gas-fired pow- In order to maximise the potential of battery storage and to
er plants (H2-ready gas peakers) as the exclusive source of elec- contribute significantly to sustainability goals, a comprehensive
tricity. However, the high cost of subsidies for that proposal led analysis of global supply chains is essential, given the dominant
the government to reduce capacity from H2-ready gas peakers to technology of lithium-ion batteries requires a significant supply of
only 10GW, paving the way for a technology-neutral capacity mar- raw materials. In this context, mining should meet high standards
ket to help fill the shortfall. A final proposal by Germany’s business on a social and environmental level. From the extraction of raw
ministry will be presented in the summer of 2024. materials to production and recycling, a life cycle analysis must be
carried out. The recycling of raw materials or the use of renewable
In February 2021, the Spanish Government approved an energy energy in production could significantly reduce the CO2 footprint
storage strategy, with the approved measures aiming to increase of battery production. In addition, battery research will make
the role of storage in the power sector by increasing system flex- decisive progress in reducing the need for limited raw material
ibility and ensuring security of supply. The roadmap foresees the deposits and increasing efficiency. Alternative battery compo-
country ramping up its storage capacity to 20 GW by 2030, with sitions already exist in the dominant lithium-ion technology. As
an additional 10 GW by 2050. While seasonal storage (e.g. large mentioned earlier, lithium-iron-phosphate (LFP) is increasingly
hydro reservoirs) is envisioned to increase in the next decade, gaining market share as it benefits from lower costs than nick-
most of the increase will come from shorter duration systems (e.g. el-manganese-cobalt (NMC) chemistry, since it is less reliant on
batteries, vehicle-to-grid, etc.). The Government expects a greater scarce raw materials. These alternative battery compositions result
role for storage, although different considerations are needed for in more diversified supply chains, while simultaneously increasing
various storage technologies in terms of their response time, ca- the transparency of working conditions. Another already men-
pacity, efficiency and maturity. Storage will benefit from additional tioned technology is sodium-ion which has the potential to reduce
revenue streams in ancillary services, more favourable capacity future demand of lithium for batteries.
markets due to a potential Capacity Remuneration Mechanism
(CRM) and greater flexibility for local markets from the alleviation A typical BESS asset generates emissions at the beginning of its
of grid congestion. Moreover, the Government intends to analyse lifetime, including emissions from resource extraction, transporta-
the potential role of distributed storage capacity in local markets. tion, energy consumption and other emission sources to produce
the anode, cathode, battery management system and pack
Thus, a beneficial regulatory framework allows BESS facilities to housing of the battery. Nevertheless, BESS have been shown to
participate in additional revenue streams, including wholesale deliver positive lifetime avoided emissions after a certain payback
market optimisation and ancillary services, boosting their com- period17, due to the correlation between power prices, the emis-
petitive appeal and business case compared to fossil fuel power sion intensity of the grid and price-optimised load cycles.18
plants.
Overall, BESS will be an increasingly integral part of the world’s
energy system, enabling the integration of renewable energies
by freeing up grid capacity and providing ancillary services that
ensure the stability of electricity grids. These benefits should be
considered in conjunction with avoided emissions to fully capture
the role of utility-scale battery storage in the decarbonisation of
the power sector.

17 Payback period is a term used to measure the amount of time required for the BESS to recover its embodied emissions through emission avoidance.
18 Aquila Group, ‘Lifetime avoided emissions for battery energy storage systems’ (2023), available at: link

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3. Outlook
The European Union’s target of renewables meeting 45.0 % of
final energy consumption in 2030 will lead to a considerable CHART 11: ANNUAL GLOBAL GROSS
increase in the bloc’s electricity demand throughout this transi-
tion, given the underlying assumption that renewable capacity will
ENERGY STORAGE CAPACITY
need to triple by 2030 to 1.3 TW, in line with the global goal set at ADDITIONS20
the COP28. Solutions to stabilise the electricity grid’s supply and China US Europe RoW Buffer
demand are thus indispensable considering the urgency of these
targets. 150

In light of this backdrop, wind and solar-PV capacities are expect- 120
ed to more than double by 2030. In particular, solar-PV plants will
90
become increasingly important for the European electricity supply
GW

chain. Given these developments, grid-related curtailments are 60

also expected to increase, and renewable energy generation
will not match consumption patterns. In addition, the advanc- 30
ing electrification is also expected to intensify peak loads in the
0
morning and evening hours. Thus, both the economic conditions
2015 2020 2025 2030
for battery storage and system efficiency would be enhanced and
costs would be streamlined.

The record-breaking growth in global wind, solar and storage

installations in 2023, up 57 % from 2022 levels and driven mostly CHART 12: ANNUAL
GROSS ENERGY
by the solar industry, is set to continue over the rest of the decade. STORAGE CAPACITY ADDITIONS
However, limits to local grid capacity and lower realised power
IN EUROPE21
prices on spot markets are triggering extraordinary growth in
battery energy storage buildout. 2023 saw global deployments UK Germany Italy France
reaching 44 GW / 96 GWh, a close to threefold increase relative to Iberia Other Europe
2022 and the largest year-on-year rise on record. 2024 is forecast
to see global deployments rise to 67 GW / 155 GWh, an increase 35
of 61 % in gigawatt-hour terms (see chart 11). 30
25
As a result of government investments and policies, new utility
20
GW

proposals and capacity auctions are expected to substantially

expand project pipelines, with annual additions in energy storage 15
capacity forecast to increase to approximately 137 GW / 445 10
GWh in the year 2030, a compound annual growth rate of 21.2 %
5
to the end of the decade relative to 2023 levels, compared to
8.9 % and 6.6 % for the global solar and wind markets during the 0
same period. For the first time, global cumulative battery storage 2015 2020 2025 2030
installed capacity is forecast to overtake pumped hydro in 2025,
increasing exponentially to a total of 783 GW / 2,206 GWh by
2030, with deployment rates set to continue to accelerate into the
2030s and beyond.19 In Europe, annual additions are expected to
increase from circa 9 GW in 2023 to approximately 31 GW in the
year 2030 (see chart 12). The need for enhanced system efficiency,
renewable energy integration, lower energy supply costs and the
imperative of avoiding emissions are the driving forces for this
exponential growth market for battery storage.

19 BNEF, ‘1H 2024 Energy Storage Market Outlook’ (2024).

20 BNEF, ‘1H 2024 Energy Storage Market Outlook’ (2024). ‘Buffer’ represents headroom not explicitly allocated to an application, ‘RoW’ indicates energy
storage capacity additions in the rest of the world.
21 BNEF, ‘1H 2024 Energy Storage Market Outlook’ (2024).

© 2024 Aquila Clean Energy 14

 Battery Energy Storage Systems
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Furthermore, by observing relevant ESG standards and focusing

on sustainable construction and operation, the project has also
set a high benchmark. Building on our expertise in the energy
markets, this project increases our commitment to supporting the
energy transition while offering attractive and sustainable invest-
ment opportunities for our investors. The realisation of the project
on the site of a former coal-fired power plant underlines the
4. Aquila Group BESS Portfolio ongoing transformation taking place within the European energy

Highlights
supply system. The project benefits from optimised revenues from a
combination of ancillary services, wholesale arbitrage, imbalance
steering and capacity markets and was awarded a 15-year capacity
Aquila Group launched its dedicated BESS strategy in 2016 in market contract by the Belgian TSO Elia, expected to start in 2025.
Japan and today BESS constitutes a key contributor to our real The performance of the asset in 2023 was above expectations,
asset growth strategy. The Group has been deploying capital further corroborating the business model of multi-market optimi-
into dedicated BESS projects in the EMEA region since 2020- sation for BESS in Continental Europe.
2021. Through several funds and on behalf of its clients, Aquila
Capital Investmentgesellschaft is actively pursuing an ambitious In Germany, Aquila Clean Energy is developing a large portfolio
growth strategy in the European market for storage solutions and of battery storage projects consisting of 45 – 85 MW projects with
rapidly growing a portfolio of highly attractive assets. In addition, two-hour storage duration, marking Aquila Clean Energy’s consist-
Aquila Group’s business unit Aquila Clean Energy has established ent growth in Germany’s stand-alone large-scale BESS market.
dedicated development expertise for standalone projects and is
targeting several co-located assets. The company’s BESS devel- Aquila Clean Energy has also successfully commissioned a solar
opment portfolio maintains a project pipeline exceeding 4 GW in PV with co-located BESS project in Germany as of December
capacity, spread across Germany, Spain, Portugal, Italy, Greece, 2023. The project was awarded the Innovation Tender Program
Belgium, the Baltics and Nordics.22 and is eligible to receive a feed-in premium in addition to the
market price. It is the first project in Aquila Clean Energy’s portfo-
Aquila Group gained valuable experience from a first mover lio that combines a renewable energy plant with a battery storage
advantage standpoint in relation to one of its first co-located system. The project was initiated and developed in-house after
battery storage projects in northern Japan back in 2016, a pioneer capitalising on additional free space as a result of a repowering
in the sector. The project comprised a 38 MW photovoltaic plant programme and is a stepping stone for further expansion in the
coupled with a 19.8 MW / 11.4 MWh lithium battery storage sys- more advanced German BESS market. The park has a solar ca-
tem, in what was then the largest solar and energy storage project pacity of 8.2 MWp along with 3.2 MW / 6.9 MWh BESS, produces
in Asia. A valuable insight gained from developing the project clean energy enough to supply 3,500 households.
was in minimising the developmental lead time with the use of a
pre-installed and containerised system whereby the battery could In Finland, Aquila Clean Energy is developing a large utility-scale
be deployed in weeks rather than months.23 standalone BESS greenfield project, expected to become oper-
ational in 2025 and one of the first projects of its kind in the country.
In Belgium, Aquila Group’s business unit Aquila Clean Energy and
a partner have successfully developed and commissioned one
of the largest battery storage facilities connected to the national
grid in Europe. The BESS project, with a capacity of 25 MW and
energy volume of 100 MWh, was completed at the end of 2022.
The project is one of the first four-hour battery storage facilities in
continental Europe.

22 Aquila Group, as of May 2024. See chart 13 below.

23 Aquila Capital, ‘Insights: charging ahead – renewables coupled with storage’ (2018), available at: link

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CHART 13:AQUILA GROUP’S PRESENCE

ACROSS EUROPE FOR STANDALONE
AND CO-LOCATED BESS PROJECTS24
Conclusion
The burgeoning market for battery energy storage systems
presents a compelling investment opportunity amid the rapidly
evolving energy landscape. As the electrification of industry and
transportation accelerates and as variable generation from re-
newable energy sources comprises a growing share of the overall
energy mix, battery storage is ideally placed to provide short-term
Target Countries flexibility by reducing losses and congestion in electricity grids,
Current Countries while also ensuring the provision of enough supply to meet peak
#1 Project demand through fast and accurate responses to market signals.

The synergistic potential of combinations of BESS with renewable

energy, the improved economics of battery storage and tech-
nological progress in battery cells and system designs, are all facil-
itating the emergence of BESS as a cost-efficient and sustainable
alternative to fossil fuel power plants. Changes to regulatory mar-
ket designs across several European countries are also opening
up additional long-term revenue streams through capacity market
auctions, further accelerating BESS rollout. Moreover, greater
#1 Project volatility in certain trading markets, particularly in real-time imbal-
ance markets, and wider opportunities for ancillary services are
#9 Projects enhancing the revenue potential of BESS. Overall, battery storage
increasingly offers investors attractive high-yielding sustainable
#1 Project
investment opportunities whilst being a valuable source of diversi-
fication for renewable energy portfolios.

#25+ Projects

~#40 Projects ~#15 Projects

24 Aquila Group, via its business unit Aquila Clean Energy GmbH, as of May 2024.

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 Battery Energy Storage Systems
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About Aquila Group

Aquila Group is focused on generating and managing essential Aquila Group manages wind energy, solar PV, hydropower and
assets on behalf of its clients. Aquila Group contributes to the BESS assets of 19.8 GW capacity. Additionally, 2.2 million square
global energy transition and strengthens the world’s infrastructure metres of sustainable real estate and green logistics projects have
backbone by investing in clean energy, timber and sustainable been built or are under development. Aquila Group also invests
infrastructure assets. in energy efficiency projects, carbon forestry and data centres.
Aquila Group manages its own CO2 footprint. Sustainability has
Currently, Aquila Group manages EUR 15 billion on behalf of always been part of Aquila Group’s value system and is an integral
institutional investors worldwide. Its primary objective is to con- part of its investment strategies, processes and management of
tinuously generate performance for its clients by managing the assets. The company has around 750 employees from 60 nations,
complexity of these essential assets. operating in 19 offices in 17 countries worldwide.

Authors:

James Branca Kilian Leykam

Investment Analyst Director Commercial Energy Storage
[email protected] [email protected]

James Branca is responsible for drafting investment research Kilian Leykam is leading Aquila Clean Energy’s storage
papers and supporting investment managers in the evaluation investments in the EMEA region. He has worked in the re-
of potential investment opportunities. James joined Aquila newable energy sector since 2009. Before joining Aquila
Capital in 2022. He holds a bachelor’s degree in history and a Group in 2020, Kilian was leading strategy and business
master’s degree in management from Durham University, as development at Vattenfall Energy Trading. Kilian holds a
well as a master’s degree in accounting and finance from the bachelor’s degree in international affairs and a master’s
University of King’s College London. degree in economics from the University of St. Gallen.

© 2024 Aquila Clean Energy 17

For more information please contact:

Aquila Clean Energy

Valentinskamp 70, 20355 Hamburg, Germany

P +49 40 87 50 50-100
[email protected]

Hamburg · Athens · Frankfurt · Invercargill · Lisbon · London · Luxembourg

Madrid · Milan · Oslo · Prague · Schiphol · Singapore · Taipei · Tokyo · Zurich

This document is provided for informational purposes only and does not constitute invest-
ment advice, investment service or any invitation to make offers or any declaration of intent;
the contents of this document also do not constitute a recommendation for any other actions.
While it has been prepared with the utmost care, we make no warranties regarding the time-
liness, accuracy, or completeness of the information. The information and opinions contained
in this document have been obtained from sources that have been judged to be reliable
and accurate. Nevertheless, Aquila Group does not guarantee the timeliness, accuracy and
completeness of the information and disclaims any liability for damages that may arise from
the use of the information. Rounding differences may occur in charts and tables. Diagrams
that have been marked in this document without a reference have been compiled from the
company’s own data or data from Aquila Group, which is why the corresponding information
has not been provided. Charts based on external sources are marked with the corresponding
source information. We reserve the right to update or modify this document to address
changing conditions and requirements.

Aquila Clean Energy is the clean energy platform of Aquila Group (“Aquila Group” meaning
Aquila Capital Holding GmbH and its affiliates in the sense of sec. 15 et seq. of the German
Stock Corporation Act (AktG)).

The terms Aquila and Aquila Group comprise companies for alternative and real asset invest-
ments as well as sales, fund management and service companies of Aquila Group.

A publication of Aquila Clean Energy GmbH; as of June 2024.

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