As Europe accelerates its shift to renewable energy, a fundamental change in electricity production and consumption is underway. With the decommissioning of traditional power plants and the rapid increase in wind and solar energy, the need for energy storage solutions is now more urgent than ever. Energy storage, providing stability and efficiency in renewable energy markets, is emerging as a distinct asset class with unique investment opportunities.
Ingmar Grebien, Managing Director of GS Pearl Street at Goldman Sachs Global Banking & Markets, describes energy storage as a “new and interesting asset class,” with a business model that diverges sharply from that of conventional renewables. GS Pearl Street, a Goldman Sachs platform dedicated to financing and trading clean energy technology, has been instrumental in shaping the European energy storage landscape. According to BloombergNEF, total energy storage capacity in Europe is expected to grow from 15 gigawatts last year to an impressive 375 gigawatts by 2050.
The Impact of Renewables on Electricity Markets
Europe’s energy market is experiencing a seismic shift. Currently, 30% of Europe’s electricity comes from renewable sources, but that figure is projected to soar to 72% by 2050. While this marks a significant step towards decarbonisation, it also presents challenges. Renewable energy sources like wind and solar are intermittent, leading to unpredictability in electricity production. As Grebien puts it, “Imagine a world where the light switch only works if the sun shines or the wind blows.” This intermittency has already led to market imbalances and, in some cases, extreme price fluctuations in regions such as the Netherlands and Belgium.
Energy storage is crucial in addressing these challenges. Storage solutions allow for electricity to be shifted in time, balancing supply with demand in a low-carbon manner, and reducing volatility across the grid.
Investment Potential in Energy Storage
Unlike traditional renewable assets that depend on absolute electricity prices, energy storage assets generate revenue from trading between low- and high-priced hours, capitalising on price spreads. As renewable penetration increases, so too does the frequency of price imbalances, making storage assets particularly lucrative. In contrast to wind and solar, which rely heavily on high electricity prices, energy storage assets thrive on volatility.
This sector is still nascent in Europe, but rapid technological advances, shifting market signals, and supportive government policies have made it increasingly viable as an investment. The total required capital investment to build out Europe’s storage infrastructure by 2050 is estimated to reach $250 billion, making energy storage a significant new frontier for investors.
Goldman Sachs, via GS Pearl Street, has positioned itself as a leader in this space, providing financing and market access for storage projects across Europe. With their expertise, the firm has identified storage as both a promising asset class and a potential hedge for investors with traditional renewable portfolios.
Technological Advances in Energy Storage
For short-duration storage, lithium-ion batteries are the dominant technology. Over the past decade, lithium-ion battery costs have decreased by more than 80%, largely due to technological progress and economies of scale. Improved performance and durability have bolstered its bankability. However, as demand for longer-duration storage grows, new technologies such as sodium-ion batteries, liquid air storage, and gravity-based systems are being explored. While these alternatives are still developing, they represent promising options for meeting future energy needs.
Revenue Streams for Energy Storage Assets
Energy storage providers benefit from three main revenue streams in Europe: capacity payments, ancillary services, and wholesale market trading. Capacity payments, a policy measure incentivising system reliability, are awarded through government contracts, providing a stable revenue stream over terms of up to 15 years.
Ancillary services are essential for maintaining grid stability. In exchange for short-notice ramp-up or ramp-down services, providers receive payments from grid operators. Finally, wholesale market trading offers profitable arbitrage opportunities by capitalising on price fluctuations. This model, which varies by country, is especially significant in markets like the UK, where wholesale trading and ancillary services constitute the primary revenue sources for storage providers.
Power Trading: Essential for Energy Storage
Effective trading strategies are paramount for energy storage, which operates differently from wind and solar assets. Storage assets are power trading instruments, making real-time decisions about when to buy, sell, or provide ancillary services based on market conditions. Advanced trading techniques are increasingly relying on data analytics and automation, although human expertise remains crucial.
In the UK, Europe’s most advanced battery market, there are currently 23 entities trading energy storage assets, providing a public leaderboard that enables performance benchmarking. As Grebien highlights, top trading results are achieved by combining modern trading technology with experienced human traders, ensuring optimal returns in a competitive and dynamic market.
The Risk of Market Saturation and Revenue Cannibalisation
As energy storage capacity expands, there is a risk of revenue cannibalisation, particularly in ancillary services. In mature markets such as the UK, services for frequency control, including dynamic containment, have seen decreasing value due to saturation. This saturation typically leads ancillary service revenues to align more closely with wholesale arbitrage, where profitability relies on shifting energy supply across periods of high and low renewable production.
To mitigate these risks, Grebien advises diversifying investments across markets and revenue models. As continental European markets embark on their own storage build-outs, opportunities remain to tailor storage capacity to the unique flexibility demands of each region’s power grid.
Evaluating Attractive Markets for Energy Storage Investment
Price spreads are the key indicator of market attractiveness for energy storage. As storage capacity grows, revenue streams across different markets will likely converge. In Europe, these price spreads are influenced by short-term factors such as gas and coal prices and longer-term factors like renewable penetration. While wholesale spreads were high during the recent energy crisis, they remain favourable across most European markets, providing a strong foundation for energy storage profitability.
Financing Energy Storage: A Growing Landscape
Europe’s energy storage financing landscape is evolving, with an increasing range of project financing options emerging over the past two years. Initially, most projects relied on floor contracts with revenue guarantees, but the sector has progressed towards merchant battery financing as lenders gain confidence in storage technology and business models.
GS Pearl Street’s experience suggests that while there is substantial interest from lenders in large energy storage projects, the industry’s financing mechanisms must mature further. Institutionalising energy storage financing through the participation of diverse financial institutions and funds will be crucial in meeting Europe’s ambitious energy targets.
In conclusion, as Europe races toward its renewable energy goals, energy storage represents an essential and highly promising asset class. Backed by innovation and strategic investments, the sector is poised for substantial growth, offering investors a unique opportunity to shape the continent’s sustainable energy future.
