Investor appetite for the deployment of energy storage is continuing, with Bloomberg predicting installations will reach a cumulative 358GW/1,028GWh of non pumped hydro energy storage by the end of 2030. It is anticipated that the significant deployment seen in some countries such as the UK and US, will be reflected in other jurisdictions looking to increase renewables penetration and energy security whilst meeting stringent decarbonisation targets. However, the specific market structures and dynamics and legal environment can differ significantly. In the first of a series of articles, we reflect on the energy storage position in Germany.
Energy storage trends - Spotlight on Germany
Achieving zero greenhouse gas emissions requires a fundamental restructuring of the energy market, with energy storage playing a major role due to increasing use of renewable energy with its fluctuating feed in profile and decentralised generation. Following adoption of the amendment to the Climate Change Act (Klimaschutzgesetz) in June 2021 with its ambitious targets for achieving zero greenhouse gas emissions by 2045, storage of renewable energy is set to become even more important in Germany. Conventional power generation will be closed down much sooner than previously planned, removing a controllable method of balancing generation and consumption. Energy storage is also taking on greater relevance against the backdrop of the war in Ukraine.
Ultimately, energy storage is about much more. The aim is to boost the flexibility of the overall German system on the basis of appropriate power grids such that conventional electricity generation is no longer required. A range of technologies and business models can be used to achieve this flexibility, standalone, co-located and behind the meter storage, alongside power to gas and demand side management. The original intention was that accelerated phase out of coal fired power generation would lead to greater use of gas power plants to provide generation side flexibility during the transition period. Due to recent developments, however, there is pressure to end dependence on Russian oil and gas supplies as quickly as possible. Greater energy self-sufficiency is set to be achieved through LNG or hydrogen, combined with faster expansion of alternative energy generation and storage.
Development of the associated flexibility market poses new challenges for all players. The applicable regulatory framework will need to evolve to provide the necessary legal and planning certainty. With this in mind, investment decisions must be carefully considered in terms of the medium and long term outlook. This calls in particular for detailed analysis of the relevant legal framework and anticipated developments for energy storage.
Below, we provide an overview of some of the issues that should be considered by those interested in investing in the energy storage sector in Germany.
Energy law and regulation
The field of energy storage and electricity storage is notable for the lack of a consistent legal framework in terms of energy law and regulation. From a historical viewpoint, this can probably be explained by the fact that electricity storage, unlike natural gas storage, has hitherto not played a major role in the German energy market. Against the backdrop of climate change and increasing sector coupling, however, that situation is now changing.
Classification of electricity storage using the standard energy market roles resulted in it being assigned a dual role, in the absence of a separate definition. Feeding electricity into a storage facility qualified as consumption, with the facility being regarded as a final consumer. Subsequently converting the stored energy back into electrical energy and feeding it into the grid was regarded as generation, with the storage facility then counting as an electricity generator. This dual role led to double charging of electricity storage facilities with regard to the EEG surcharge, CHP surcharge and offshore liability surcharge. Lawmakers attempted to at least partly avoid this double charging through the netting rule in section 61 l of the Renewable Energy Act 2017 (Erneuerbare-Energien-Gesetz, EEG 2017), although the rule is often criticised as being problematic and complicated in practice. This exemption also applied to the other two surcharges mentioned above, by virtue of the references in section 27 b of the Combined Heat and Power Act (Kraft-Wärme-Kopplungs-Gesetz, KWKG) and in section 17 f (5) sentence 2 of the Energy Industry Act (Energiewirtschaftsgesetz, EnWG) in conjunction with section 27 b of the KWKG. The 2021 amendment of the EEG by the Act on Immediate Measures for an Accelerated Expansion of Renewable Energy and Further Measures in the Electricity Sector and the introduction of the Energy Surcharge Act (Energie-Umlagen-Gesetz, EnUG) allowed a simplification of the previous method of avoiding double charging by introducing a new surcharge system (the surcharge is now only applied when power is withdrawn from the grid). To do this, section 61 l of the EEG 2021 was substantially incorporated into section 21 of the EnUG. The previous provision in section 27 b of the KWKG 2020 lapsed without replacement due to the transfer of section 61 l of the EEG 2021 to section 21 of the EnUG and its resulting direct applicability to the CHP surcharge and offshore grid surcharge.
In addition to tackling the risk of double charging, other energy industry and regulatory aspects are also important for the successful deployment of electricity storage. Possible exemption of storage facilities from network fees and the extent of any such exemption are particularly significant here. The choice between claiming individual network charges or a fee for decentralised feed in must also be taken into account. Ways of avoiding any double charging of electricity tax likewise need to be considered.
Contract design and corporate law issues
When looking at investing in, planning, constructing and operating electricity storage facilities, the question inevitably arises as to the best contractual and corporate law structure for such a project. This applies in particular to the use of large battery storage systems, which are expected to play a major role in the future, where appropriate corporate law and contractual structures first need to be established.
For example, it is important to adapt the contract structure to the different scenarios in which battery storage systems are deployed. As things stand, regulatory requirements prevent the simultaneous use of battery storage units for providing primary balancing power and supplying industry with (green) electricity. In addition, transmission system operators are only permitted to construct and operate energy storage facilities if they are granted an exemption by the Federal Network Agency (BNetzA) (section 118 b of the EnWG). As such, they can only build storage facilities for grid stabilisation purposes under certain conditions. Creative solutions are called for here to provide all market players interested in using storage with a secure legal basis for doing so.
Environmental and planning law
Energy storage systems are generally complex projects that take up a varying amount of space, depending on the scale and technology deployed. Construction and operation require a licence under public law. However, the legislator has recognised the increasing importance of storage facilities for the energy market and energy transition. Section 43 (2) of the EnWG introduces an optional plan approval procedure for them. This applies if they have a rated output of more than 50 MW and are not subject to the Federal Mining Act licensing regime as underground storage facilities (section 126 of the Federal Mining Act (Bundesberggesetz)).
The requirements under substantive law when seeking approval for environment related projects are high. In this context, possible issues include the need for an environmental impact assessment, national and European legislation on nature and species protection, and water law, especially in the case of large scale storage facilities such as pumped storage power stations and large battery storage systems.
Securing the land needed for construction and ongoing operation is essential for the success of an energy storage project. Based on a typical timeframe of 20 to 30 years, various options are available.
Since the amount of land required for energy storage facilities is usually not particularly large (compared to, for instance, onshore wind farms), acquisition of the site (i.e. outright ownership) by the operating company is likely to be the simplest and safest solution in many cases, although purchase of the land must be notarised and attracts real estate transfer tax.
Acquisition may not be possible in some cases, such as when the landowner is not willing to sell, or it is undesirable to buy the land, e.g. due to the risk of pre-existing contaminations. In these circumstances, a long-term lease is usually the method of choice. However, the lease should be secured in rem by registering a limited personal easement in favour of the operating company, since even long-term lease agreements with a fixed term can be terminated prematurely in certain cases, such as insolvency of the property owner, or if the lease breaches the statutory written form requirement for long-term lease agreements. In such cases, the operating company could then continue to use the site based on the easement registered in its favour.
Since statutory law allows any party to terminate a lease after 30 years, creation of a hereditary building right (Erbbaurecht) is an option for projects with an expected term of more than 30 years.
If the project is debt financed, the interests of the financing banks must also be taken into account when acquiring the site. In typical non recourse project financing arrangements, the banks will want to be in a position to continue the project without the operating company in the event of default. To allow this, banks typically require the right to enter into the leases and/or their own rights in rem such as easements, priority notices or land charges on the property.
Especially in the case of a debt financed energy storage facility on third party land, the contractual arrangements for acquiring the site can therefore be quite complex, with a need to balance the interests of the operator, the landowner and the financing bank.
Public Procurement law
Public Procurement law often plays a key role in the implementation of energy storage projects. That applies in particular to the law on the award of contracts at the higher thresholds pursuant to sections 97 ff. of the Act against Restraints on Competition (Gesetz gegen Wettbewerbsbeschränkungen, GWB). This legislation generally requires a Europe-wide procurement procedure to be conducted, meaning that free choice of the contract partner is not possible. Rather, the partner must be selected in a fair and non discriminatory procurement procedure, in compliance with the relevant procedural regulations. Unsuccessful companies can seek judicial relief before the competent procurement tribunal, where the award decision will be reviewed and possibly quashed. Before embarking on an energy storage project, it is thus advisable to take the precaution of checking whether the project is subject to public procurement law, so that any necessary steps can be initiated in good time.
For public procurement law to be applicable, a contracting authority within the meaning of section 98 of the GWB must obtain a service against payment. The GWB definition of contracting authorities is not limited to public bodies (e.g. federal government, federal states, local authorities or other legal entities under public law). Private companies may also be bound by the law on the award of public contracts at the higher thresholds. In the energy sector, the term “sector contracting entity” as referred to in section 100 (1) No. 2 of the GWB is relevant in this respect. According to this provision, a private company is subject to public procurement law if it carries out its energy related activity on the basis of special or exclusive rights, or a public contracting authority exercises a controlling influence, either directly or indirectly. If these conditions are met, the private company is bound by public procurement law as a sector contracting entity.
In the case of an energy storage project, all services procured by the contracting authority in the course of a project may, in principle, trigger the obligation to apply public procurement law. Examples would include construction work for a pumped storage power station or a large battery storage facility, delivery services for an energy park with an electrolyser, or services for a swarm storage facility or virtual power plant. Many other scenarios are also conceivable, especially when awarding IT contracts.
Having said that, the basic requirement for applying public procurement law is that the relevant EU threshold value is reached or exceeded in the specific case. Since items procured for an energy storage project are generally used for a sector activity as defined in section 102 (2) of the GWB, the thresholds for the sector apply in this respect. These are currently EUR 5,382,000 (net) for construction contracts, and EUR 431,000 (net) for supply and service contracts. If this means that public procurement law is applicable, the relevant procedural requirements are based on sections 97 ff. of the GWB and the Sector Ordinance (Sektorenverordnung, SektVO). These provisions generally require a Europe-wide competitive procurement procedure to be conducted.
Below the above mentioned thresholds, budget procurement law may be applicable. However, this only applies to public bodies that are bound by budget law; private companies usually do not fall into this category.
It should also be borne in mind that public procurement law may apply in connection with subsidies. If an energy storage project is publicly funded, the notice of approval or funding agreement may require the recipient of the subsidy to apply public procurement law if parts of the project are subcontracted. Even private companies, which are generally not subject to public procurement law, may thus find themselves in the unfamiliar – and challenging – position of having to carry out a flawless contract award procedure in order to avoid the risk of demands for the return of subsidies.
Distribution system operators and transmission system operators in the electricity market may also face the need for a tender procedure pursuant to Art. 36 and 54 of the Internal Market for Electricity Directive (Directive 2019/944/EU) and section 11 a of the EnWG. Under the above legislation, an electricity supply system operator may put the construction, management and operation of a facility owned by a third party that generates electrical energy out to tender in an open, transparent and non discriminatory process if the energy storage facility is necessary for the operator to efficiently fulfil its grid related obligations as required under section 11 (1) sentence 1 of the EnWG. The primary purpose of this tender procedure is to identify a market failure, thereby allowing the system operator to exceptionally acquire, construct, manage or operate the energy storage facility itself. The tender procedure must not be confused with a procurement procedure pursuant to sections 97 ff. of the GWB, although there are parallels. If both regulations apply at the same time, the question arises as to the relationship between them.