ENGIE GEMS: BESS in Germany: A Booming Success — With Built-In Ceilings?

Germany’s energy transition stands at a crossroads.

With targets of up to 300GW of RES by 2030 (for a peak consumption of 70-80GW), without the ability to guarantee the balance between power supply and demand, the entire system risks instability, leading in the worst case to blackouts.

BESS have emerged as the leading option for providing the short-term balancing support that Germany urgently requires. These assets get paid for their ability to stabilize the frequency of the grid (ancillary services market) and for their ability to charge or discharge based on wholesale power market prices – which themselves represent the underlying physical needs of the grid. This ability is what is called flexibility.

While BESS offer a clear technical and economic solution, their viability rests on a careful understanding — and management — of risks.  BESS investments are today well protected against technical risks: technology warranties, insurance products, and increasingly standardized engineering reduce operational uncertainties.

However, assets revenues being driven by market conditions, the largest risk any merchant asset is by far its exposure to market risks. Throughout energy history, from conventional generation to renewables, investors and utilities have developed risk management strategies to ensure predictable returns: long-term contracts, subsidies, and trading products of all kinds.

While BESS do not require subsidies to be bankable, they are no exception to this risk, and therefore also require a well-defined market risk management framework.

BESS assets do not only need volatility to make money.

Quite often do we hear that “BESS make money on volatility”. This is both true and not accurate enough. BESS assets revenues depend on several factors:

• Price Volatility: fluctuations around market price levels allow BESS to charge at cheap prices and discharge at high prices. Less volatility means less revenues.
• Market Price Levels: At equal volatility, the higher the prices, the higher the charge/discharge spreads. The opposite is however also true: falling prices compress margins. 

• Price Shape: Daily patterns (e.g., the “duck curve”) drive the usage of BESS. Flatter shapes mean fewer arbitrage chances. 

• Liquidity: the capacity to efficiently match buy and sell orders at desired price levels is critical for maximizing revenue capture and minimizing execution risk. Price spreads offer potential value, but without sufficient liquidity, they remain unrealizable opportunities.
• Ancillary services levels: we have seen exceptionally ancillaries revenues in recent years, accounting for up to two-thirds of a BESS project’s revenues. Yet these markets are small and have a history of saturation. Lower revenues are inevitable over time. 

Blinded by Bias: Missing the Market Risks Hiding in Plain Sight 

“Past performance is no guarantee of future returns”. As seen previously in the UK where 50% drops year on year has been a reality, booming markets often breed overconfidence.

Several biases drive this overconfidence: 

• Past results: Fueled by geopolitical events driving prices and volatility upwards, recent BESS investments have performed extremely well. Those were however not normal market conditions.

• Consultants’ forecasts and decision makers incentives: To end up being the curve used by the investment committees, consultants have a tendency to show overoptimistic curves, or at least curves that do not represent market risks. This can be fueled by decision makers incentives, for instance if they are driven by volume (MW/MWh installed) goals and not risk-adjusted profitability .
• Optimizers’ projections: To convince investors to go fully merchant, optimizers have to show very high revenue forecasts – leaving the full risk on the shoulders of investors, with no means to manage them. 

Traders vs Optimizers: Equally important, but very different risks 

Clarifying a common misconception: optimizers and traders are not the same. Both play critical roles in the energy transition, but their functions — and risk profiles — differ fundamentally. 

Traders can actively offload market risk by offering fixed-price (instead of variable cashflows) Flexibility Purchase Agreements (tolls, floors, CFDs), because: 

• They have the tools and competences to hedge (for some at least) and manage market risks via portfolios, forward markets, and structured origination products. Hedging is what allows to build large positions and portfolios without risking bankruptcy, and this will apply to BESS as well.

• They have the creditworthiness to honor fixed-price deals. Fixed price deals are effectively swapping market risk for credit risk.  

Optimizers, by contrast, offer a service: dispatching BESS based on price signals. They cannot manage market risks component and miss the know-how to structure them. They cannot offer any form of fixed price on their own as their credit worthiness would result in a more risky deal for clients. They are however usually offering full transparency on achieved revenues towards investors. 

Where traders and optimizers meet: getting the best out of both is possible 

A smart risk strategy at portfolio level can blend both models: hedging some assets via traders and keeping others merchant with optimizers. Even single assets can be virtually “sliced” to combine risk strategies, to benefit from operational transparency with optimizers while securing cashflows with trader-backed hedges.  

Risks never disappear: they are either priced-in and managed by a trader, or the BESS owner caries them full – often without the mean to manage them.

 Investors must be clear-eyed: without any risk transfer mechanism is in place, the asset owner remains fully exposed, but with unfortunately no means to manage market risks. When working with optimizers, benchmarking clauses will only reduce optimizer performance risk, but not market risks.

Coming back to traders asking for a hedge after losses have materialized — as seen in the UK for instance— is unfortunately not a good solution. Indeed, traders look at the fair value of assets through the eyes of the market, and not as investors would wish it to be. This in turn explains why BESS pricing from traders typically varies for the same asset over time. 

Going fully merchant is a deliberate bet on the market. In that light, asking quotes from those who shape the markets — the traders themselves — might just be the smartest move investors can make.

Risk management is not a luxury. It is a necessity — both to protect investments and to secure the long-term stability of Germany’s decarbonized grid. 

ENGIE Supply and Energy Management in Germany is offering risk management solutions to BESS and RES investors, asset developers or utilities, to support their bankability or portfolio management needs. It has today more than 5GW of RES and more than 250MW of flexible assets under management, and were the first to sign a long term physical BESS fixed price Flexibility Purchase Agreement (FPA) last year in Germany, with the ambition to offtake more in the coming years.