Energy & Infrastructure Insights — Large Battery Systems: The Key to an Affordable Energy Transition in Germany
As the renewable energy sector expands, significant storage capacities are necessary to ensure that the demand for electricity is met even during dark and windless periods. Large battery systems are a particularly interesting and efficient technology to help solve this problem.
During the event “Latham Infra Circle: The Future of Battery Storage in Germany,” Latham Energy & Infrastructure Practice partner Alexander Stefan Rieger spoke with Walter Raizner and Steffen Schülzchen about the current market development and opportunities for investors.
Walter Raizner was a board member of Deutsche Telekom and currently serves as CEO and Chairman of GESI Giga Batteries.GESI Giga Batteries designs, builds, and finances efficient, digitised large battery storage systems. The operational business is led by Walter Raizner (former COO of the IBM Technology Group, former Deutsche Telekom board member) and Jens Michael Wegmann (former board member at kloeckner & Co. SE, former CEO of Siemens Industrial Solutions and ThyssenKrupp Industry Solutions). https://gesi-deutschland.de/. Steffen Schülzchen is the founder and CEO of the flexibility marketer Entrix GmbH,Entrix is the leading provider and pioneer for multi-market optimisation of battery storage systems in Germany. The Munich-based energy tech company has been achieving market-leading performance for its customers since 2022 with its AI-based trading platform through dynamic marketing on various energy markets. In this way, the energy tech company actively drives the energy transition forward. Entrix’s founder and CEO is Steffen Schülzchen. based in Munich.
What exactly are battery storage systems, and why is this topic currently relevant in Germany?
Raizner: The battery storage market ranges from small home storage systems to large, pumped storage power plants which are typically located somewhere in the Alps. The large battery storage systems that our company operates falls in the middle of that spectrum. We focus on capacities between several hundred and 1,000 megawatts (MW). For comparison: 1,000 MW of power roughly equates to the output of a nuclear power plant. The demand for such storage systems is rapidly growing as conventional power plants shut down and renewable energies increase. Experts recommend that the capacity of battery storage systems must increase from around 1.4 to 100 gigawatts (GW) by 2030. The market ramp-up is therefore just beginning.
Schülzchen: I completely agree. Large batteries play an absolutely crucial role and are indispensable for completing the energy transition quickly and somewhat affordably.
Can you briefly explain how the business model works?
Schülzchen: Large batteries begin charging when a surplus of electricity is produced. At this time of year, electricity prices are usually very low. Batteries get then discharged when a shortfall of electricity is produced and prices are higher. Additionally, owners can earn additional income from grid operators by offering them capacities and thus flexibility. Simply put, ’balancing the frequency and thereby increasing grid stability is key. Large batteries are ideal for achieving this because they can respond to deviations in frequency within milliseconds.
"Large batteries are a natural hedge investment for wind and solar park investors."
Walter Raizner, CEO and Chairman of GESI Giga Batteries
Why are battery storage systems attractive for infrastructure investors, and what does success look like for battery storage developers and operators?
Raizner: Based on the mechanisms that Steffen Schülzchen has just explained, we can generate attractive returns over a long period — especially since the volatility or cyclicality of power generation is increasing, which offers rising opportunities to earn profit. Another important point, large batteries are a natural hedge investment for investors whose portfolios contain wind or solar parks, since storage mitigates the frequency by which generation plants need to be curtailed. And last but not least, these are sustainable investments that can improve the CO2 footprint. Large batteries reduce the demand for fossil gas power plants, and thus also reduce CO2 emissions.
Schülzchen: I would like to re-emphasize the point about natural hedge investments. When renewable energy producers struggle, storage operators often thrive. Anyone trying to compose a portfolio that will last them for the next decade should therefore consider large battery systems.
Are so-called merchant models, by which large-battery operators conduct short-term sales of electricity on the market, economically viable? Or do such models require hedging via tolling agreements, i.e., long-term purchase agreements?
Schülzchen: In Germany, we have so far mainly seen projects ranging from 10 to 100 MW. Most of them are merchant models without long-term hedging. In this area, we often see debt financing on attractive terms. This approach involves debt of not just 30%, but rather 50% or 70% — sometimes even higher. However, for larger projects such as those carried out by GESI Giga Batteries, operators obviously do not want to be fully subject to market conditions and therefore seek to draft tolling agreements, which are essentially long-term purchase agreements for storage, similar to power purchase agreements (PPAs) for renewables.
"Regulation in Germany allows market participants to build storage and earn money from it."
Steffen Schülzchen, Founder and CEO of Entrix GmbH
Raizner: We also prefer fully merchant models because they offer the best return opportunities. One of the key advantages of large battery systems is their flexibility. We can diversify the total capacity and use the same battery for different models.
Lawyers like to mitigate risks. What are the main risks in battery storage projects, and how can we reduce them?
Raizner: Three factors are essential for a successful project: (1) a site that is located near a substation, (2) a grid connection, and (3) all necessary components, from the battery to the transformer. On the battery side, prices and delivery times have eased significantly over some time. While the procurement of transformers is not as easy, we benefit from a strong team and a very resilient network. The issue of grid connection is somewhat more difficult to manage because we are dependent on regulation and/or the transmission system operators.
Speaking of regulation: How do you evaluate the current legal framework? Where are improvements needed?
Schülzchen: My answer may surprise you; the situation is not that bad. The regulation in Germany allows market participants to build storage and earn money from it. But of course, we are not where we should be in terms of regulation. Walter Raizner has just mentioned that the core problem lies in the way grid connections are allocated. Currently, grid operators assume maximum values in power consumption and supply and therefore often conclude that storage projects would overload the grid. The assumptions then include, for example, that batteries and solar systems provide full supply at the same time. This approach is highly questionable, since the probability of this scenario is close to zero. And even if it were to occur, we could still regulate the supply.
Raizner: A remark on that, I used to be on the board of Deutsche Telekom and was responsible its telecommunications network. Therefore, I am familiar with the regulation from a different perspective. At Telekom, we provided the network, and other market participants wanted to join it. Now, unfortunately, I’m on the other side. But the rule of thumb was, whoever wanted to access the network had to gain access within a clearly defined time period. Today, the Federal Network Agency says, we do not have the power to progress anything, so the network operators should process the applications in order of receipt — whether that takes six or nine months is not up to us. In my opinion, the process should not be like that. In monopoly networks, a regulator must ensure fair access opportunities.