Infrastructure GPs have been piling into German BESS in the last year or so amidst record returns, but challenges lie ahead.

Germany’s battery storage market, Europe’s largest merchant market, currently offers some of the highest BESS revenues in Europe, and investors are entering in droves. Recent entrants include Allianz Global Investors, whose investment in a 789 MW under-construction portfolio owned by TotalEnergies’ subsidiary Kyon is sure to bring it highly lucrative revenues once those assets become operational.

As of last year, batteries in Germany, which does not yet have a capacity market in place, can make EUR 200,000-EUR 250,000 per MW per year, when revenues are stacked well across day-ahead trading, intraday trading and ancillary services, a battery storage analyst said. In comparison, GB batteries made around GBP 70,000-80,000 per MW last year, according to estimates.

Aware of the attractiveness of batteries, German developers have put their sale premiums up, in a bid to capitalise on this bright moment for BESS, the analyst said. In spite of this, investor interest continues to build, with 13 asset managers entering the market since the start of last year, acquiring some 38 GW of pipeline assets, according to Infralogic data. Foresight is the latest manager to join the BESS stampede, investing last month in a 12.GW BESS pipeline owned by German start-up Mirai Power.

Who’s winning the race?

A handful of investors are already sitting on lucrative BESS portfolios in Germany, having made early moves into the central European market. Brookfield has emerged as the leading asset manager when it comes to operational capacity, with some 253 MWh of operational batteries, data show.

According to analysis of data compiled by the ISEA Institute at RWTH Aachen University, Brookfield’s German portfolio company Eco Stor is closely followed by EQT’s ju:niz, with around 227 MWh, while in third place is Swiss Life Asset Management-backed BCP Battery Holding.

Brookfield’s Spanish renewables platform X-Elio around two years ago agreed to develop a 6 GW battery pipeline with Eco Stor, which is due to begin construction of the huge 300 MW Wengerohr battery this year. The company currently has an additional 700 MW of batteries under construction or due to enter construction by the end of 2028.

Eco Stor also has a hefty pipeline in planning stage of around 2.3 GWh, the ISEA data show.

The Canadian manager is also active in Germany through its French renewables platform Neoen, which is due to commission its first 45 MW battery in Saxony-Anhalt this year.

Brookfield, EQT and Swiss Life are the only managers with operational portfolios exceeding 100 MWh (see first table).

AllianzGI’s March investment in Kyon will likely propel it up those rankings. Kyon currently sits in eighth position, with a modest 19.8 MWh of operational capacity.

Meanwhile Eurazeo will be able to generate returns immediately from its January investment in German battery platform Terralayr, which sits on around 85 MWh of operational capacity, the data show. Terralayr is also backed by Rive Private Investment.

Other asset managers in the top 10 include Denmark’s Obton, Asterion-backed Iqony, EIP-backed BayWa r.e. and Partners Group, following its EUR 1bn investment in green flexibility last year.

Saturation on the horizon

But Germany’s BESS landscape is changing fast. Last year saw total German BESS operational capacity reach 2.4 GW, a figure that could rise to 5.7 GW by the end of 2026, said Till Stehr of battery analytics platform Modo Energy in February. With over twice as many batteries potentially operational this year compared to last, the real test will be whether current markets can absorb the extra load while continuing to provide bankable revenues for investors.

The battery analyst predicts that the market will start to saturate in 2026, with revenues declining roughly 33%-50% over the next two to three years. But saturation will not be a straightforward, nor a linear, process.

According to Marc Daube, a director at Baringa in Germany, increasing BESS capacity is expected to start compressing ancillary services quickly, mainly FCR and aFRR. However, limited overall market size means that aFRR, which is procured in 15-minute blocks, meaning much longer usage and demand for the battery than FCR, will still deliver “significant value” this year, he said.

But as ancillary services fill up, compressing revenues, this will push more value into energy arbitrage, where owners charge the battery when cheap and discharge when power prices are at their peak. In particular, intraday trading and re-trading, specialist segments of arbitrage, will become increasingly important, the analyst said. Intraday involves the purchase and sale of battery power within the same day, while re-trading involves the purchase and sale of power multiple times over the short term to profit from price volatility or to optimise assets. These are highly specialist strategies, thus raising the knowledge bar for new entrants, especially non-domestic infrastructure investors, the analyst said.

For funds to outperform in this more competitive market will require a sophisticated battery optimisation or trading platform – or choosing a counterparty with proven intraday and balancing knowhow, he said.

Regulatory uncertainty increasing costs

Investing in German BESS is not for the faint-hearted. Germany is, according to the analyst, a “very idiosyncratic and bureaucratic” market, whose government has yet to adopt a clear strategy on batteries.

BESS projects currently enjoy a 20-year grid fee exemption if grid-connected before August 4, 2029. Yet this exemption is under review, with German energy regulator BNetzA considering whether to end it for planned assets and even retroactively remove it for existing ones.

This has shaken investor confidence in the market, the analyst said, adding that ongoing reforms can quickly move BESS projects from financeable to unfinanceable.

He said the regulator’s workshop earlier this year, where those ideas were first floated, “caused outrage,” adding “the regulator framed it as “thinking aloud”, but markets react badly to that kind of uncertainty”.

Unsubsidised, grid fees for batteries would currently be around EUR 66.5/MWh, which would likely make storage unviable in Germany. For this reason, some developers have paused final investment decisions, as costs could look entirely different within two years, the analyst said. BNetzA is expected to announce its decision on grid fees by mid-2026.

All this comes as the government also undertakes preparations to roll out the country’s first capacity market, expected later this year. The scheme is expected to facilitate the procurement of around 10 GW of annual power capacity, although how batteries play into this is yet to be confirmed.

State-aid approval from the EU for the scheme is also yet to come through, while the government is yet to develop a detailed derating methodology, meaning the scheme could be delayed into 2027, the analyst said.

Derating factors are adjudged for different technologies based on the value they provide during stress events.

If designed well, the scheme could provide secure long-term income and attract debt finance for batteries, but if designed badly, it could lead to batteries losing out to gas power through unfavourable derating payments – as happened in Poland recently.

According to Daube, the impact of the scheme is difficult for investors to predict given the range of factors dependent upon it, including the availability of contracts for new build versus existing assets, the auction clearing design and the derating factors applied to different durations of batteries.

The capacity market’s value could thus range from “negligible” to a “significant share” of the overall revenue stack, he said.

This year the government has introduced inertia payments, a form of fixed payment available to qualifying batteries that maintain over 90% availability rate.

This will be a crucial de-risking tool, providing a level of contracted capacity which can help investors attract project finance, the analyst said.

But until the matters around grid fees and capacity market are settled, BESS projects in Germany will carry higher capital costs driven by higher regulatory risk.

Cautious capital

It is perhaps for these reasons why some investors are more cautious.

Macquarie Asset Management for instance has dipped its toe in German BESS but not ventured further. It owns a 49.9% stake in Hydro REIN, which has some 6.7 MWh of German BESS capacity but does not treat Germany as a core market. Macquarie did not respond to a request for comment.

One of the earliest entrants into Germany was BESS investor Gore Street Capital, with the development of its 22 MW Cremzow asset announced back in 2019.

Since building that battery, which generated around EUR 2.6m of revenues last year, the investor has not increased its exposure and last year announced plans to sell Cremzow to realise value.

There are also several high-profile managers with BESS exposure elsewhere in Europe but not Germany, including, according to Infralogic data, Mirova and Nuveen Infrastructure.

Others yet to enter include Gresham House, which focuses on the UK and Ireland, and SUSI, which has other renewable investments in Germany outside of storage.

It may be that these investors are biding their time, waiting for clarity on Germany’s regulatory framework, or relying on developer premiums to fall if risks begin to bite.

But should investors target development-stage pipelines or operational portfolios?

According to Pavlos Trichakis, a partner at Baringa, the choice “depends on the investor’s risk appetite, return target, execution capability, and time horizon”.

Although grid connection uncertainties drive up development risk, development-stage pipelines can make sense for investors with strong “market execution capabilities,” he said.

For investors without those capabilities, investing into operational portfolios will deliver value from the current scarcity of BESS in the market, which supports a returns-focused strategy, he adds.

Investors that do proceed will likely have studied the German market for one or two years already, given the complexity of rules and regulations, the analyst said.

One thing is for certain – the timing is never perfect when entering a battery market. Investors who do take the risk may win big, but those waiting for ideal conditions could see others capture electrifying returns.