Is Germany on the verge of a battery storage boom?
At the turn of the year, the connection requests submitted to the transmission system operators (TSOs) for 226 GW of battery capacity were discussed under the glaring spotlight of public attention. But can this be seen as a sign of an imminent battery boom in the German market? And how sustainable is the current sentiment?
What’s driving Germany’s battery storage market?
In fact, the 226 GW figure refers to projects that are still in a very early planning stage—this number should therefore be viewed with caution. Nevertheless, the German power market remains one of the most attractive in Europe. A look at the Market Master Data Register (Marktstammdatenregister) shows that the currently installed capacity of just under 2.5 GWh is set to multiply by another 4 GWh within the next two years. Additionally, there are numerous battery projects that, due to their early development phase, that have not been registered yet.
Frequency Control Reserve (FCR): a market saturated by batteries
What exactly makes the German market so attractive for batteries? Over the past years, large-scale storage systems operating on the electricity markets have been used almost exclusively to provide frequency control reserve (FCR)—in other words, to stabilise grid frequency. This is a partial market of frequency-based ancillary services and an alternative form of marketing to the classic wholesale markets. However, this has led to the revenue potential in this market being largely exhausted. The reason for this lies in the technical properties of batteries: they are ideally suited for providing FCR at low cost. Here, the participants are paid for making their capacity available. The amounts of energy to be provided are comparatively low, so the focus is more on power up and down to stabilise the grid frequency. Yet, the comparatively shallow market depth was quickly saturated due to the rapid build-out of battery systems.
The shift to Automatic Frequency Restoration Reserve (aFRR) markets
Now, with the increasing scale of battery storage projects, the automatic Frequency Restoration Reserve (aFRR) markets are becoming more attractive. This is another submarket of frequency-based ancillary services. AFRR can be seen as a further escalation level of FCR. However, in this case the frequency is not supported but further adjusted to the target value. The reaction is not as fast as with FCR, but more energy in total must be provided if it is called upon. These aFRR-markets offer significantly greater depth, making them very lucrative for batteries at present. Batteries have the advantage of being able to bid symmetrically in this asymmetrically organised market, simultaneously in both directions, thereby optimising their revenue potential. The structure of this market has evolved from a combined market—where capacity and energy prices were awarded together—into two separate markets. This means that a battery can now submit bids in the capacity market without first being awarded in the energy market. These so-called "free bids" can be made up until shortly before delivery, enabling flexible assets like batteries to adjust their trading strategies in response to short-term changes in market conditions.
How is arbitrage trading unlocking new battery revenue streams?
Beyond ancillary services, arbitrage trading—leveraging price differences between trading periods—is emerging as a key revenue driver.
Day-ahead vs. intraday trading: where do batteries profit most?
In addition to frequency-based ancillary services such as FCR and aFRR, classic arbitrage trading—leveraging price differences between various trading periods—will gain significant importance for battery marketing in the future. Storage systems can, for example, exploit temporal price differences in the day-ahead market or profit from spreads between two different markets, such as the day-ahead and intraday markets.
Importantly, it is by no means necessary for every kilowatt-hour traded to physically flow through the storage system. It can often be profitable for a battery to engage in purely virtual trading. In such cases, electricity purchased for a specific delivery hour is resold on downstream markets at a profit.
This is how it works:
On the day-ahead market, bids can be placed until 12 noon for the entire next day in hourly (soon to be quarter-hourly) increments.
From 3 p.m., the first intraday auction opens and marks the start of continuous intraday trading. Bids can be placed for the same time slots within the delivery date on all these markets.
However, as these take place at different times, have different pricing systems and different granularities, spreads may occur between the markets. If electricity is bought on one of the upstream markets, it can be sold at a profit on a later market. This virtual trade generates a profit without electricity flowing. The big advantage here is that no degradation costs are incurred for the battery, as it does not need to be physically operated. The battery is only available as a real option if the spreads do not occur as predicted.
Flexible bidding strategies for maximised battery profits
Currently, storage operators would be well advised to consider all of these mentioned markets in their trading strategies. This multi-market approach makes optimal use of a battery's flexibility and enables operators to react to the daily and even hourly changes in market conditions. But how will the importance of these markets develop in the future?
Market trends: what lies ahead for battery storage in Germany?
A multi-market approach is currently the best strategy for battery storage operators. However, market dynamics are shifting.
Increasing market volatility is creating new battery opportunities
At Montel Analytics, we use a proprietary battery storage revenue model to assess these dynamics. Based on our in-house fundamental price forecasts, the model makes daily optimisation decisions for the marketing of a large-scale battery storage system. Taking into account technical constraints—both from the battery’s characteristics and grid conditions—our model simulates all plausible marketing strategies across the available markets in daily iterations and selects the optimal strategy.
The composition of revenue potential across the different markets varies significantly depending on the size and duration of the battery. The operational strategy—for example, at what spread level to trade—also has a direct impact on revenue potential and cycle load. Revenue projections remain highly project-specific and must be calculated individually based on the respective framework conditions.
However, to provide a benchmark, we conducted a sample simulation (Figure 1), modeling a 50 MW / 100 MWh battery without considering degradation. This two-hour storage system operates under a moderately aggressive two-cycle strategy and is marketed across both wholesale power markets and ancillary service markets. For the price curves, market saturation levels, and expansion volumes, we selected and simulated the most probable expansion pathways from our scenario analyses.
Wholesale power markets will overtake ancillary services
The results show that the optimal marketing strategies will, in all likelihood, shift significantly away from ancillary services toward the wholesale power markets. However, pure day-ahead trading is expected to play a rather subordinate role in this context. In particular, trading on the intraday markets is set to gain substantial importance.
But what drives this trend, and what are the influencing factors? In the German market, one of the key drivers is the transformation of the generation mix. Ambitious expansion targets for fluctuating renewable generation, combined with the phase-out of coal-fired power plants, are creating a significant increase in market volatility. This increase in volatility will be partially mitigated by the expansion of flexibility on the demand side. However, the market depth of the German wholesale power market is so substantial that this effect is not sufficient to significantly dampen the revenue potential. A similar effect is expected for the ancillary services markets, as has already been observed in the Frequency Containment Reserve (FCR) market. The growing number of battery storage systems is facing a limited market, causing prices to decline as a result. Consequently, this market is running out of steam.
As market dynamics shift, Germany's battery storage sector is poised to move beyond ancillary services, with wholesale power markets playing an increasingly vital role.
