Overproduction: could batteries ease it in 2025?

The news from SolarPower Europe is not good. In December, the industry body warned that year-on-year growth in European solar installations had fallen from more than 40% in 2023 to just 4% in 2024—a 92% cut in the pace of expansion. 

“At national level, five of 2024's top 10 solar markets installed less solar than in 2023,” SolarPower Europe added. “The other leading markets—Germany, Italy, France, Greece and Portugal—offered modest growth, with most installing around 1 GW more than they did in 2023.”

European wind installations are also lagging expectations. The European Union (EU) is expected to install an average of 22 GW of new wind capacity a year from 2024 to 2030 but needs 33 GW annually if it is to meet its end-of-decade climate targets, according to industry association WindEurope. 

Europe’s wind sector is smarting from a lack of project repowering and a Danish offshore auction for 3 GW of capacity that ended with no bids at all. 

Alongside uncapped negative bidding, the disappointing auction outcome was partly because “the costs to develop an offshore wind farm have increased significantly due to inflation and rising commodity prices,” WindEurope said. “Likewise, interest rates are now significantly higher than they were a few years ago.”

This is putting pressure on the economics of projects, said WindEurope. And lurking in the background is an even bigger threat to project financing: renewable energy across the board is finding it harder than ever to survive in markets that already have high levels of wind and solar penetration. 

Price cannibalization

Put simply, once you produce enough energy to cover available demand, any further production is effectively worthless. And as renewable penetration grows, so does the amount of overproduction. 

This problem, sometimes referred to as price cannibalization, is particularly evident in markets such as Spain, with high levels of wind and solar generation and limited interconnection capacity to export excess production. 

“Rapid renewable energy supply growth, improvements to energy efficiencies and contractions to energy use by industry have helped drag Spain's wholesale power prices down roughly 90% from their peak in March 2022 to multi-year lows last month,” said Reuters in May 2024.

In June 2024, the BBC added that “during daylight hours, when solar energy output is particularly strong, the supply-demand balance can be pushed out of kilter, having an impact on prices” in Spain. 

“While such low prices are welcome for consumers, they are potentially a problem when it comes to attracting investment to the industry,” said the BBC. 

This problem only looks set to get worse in 2025 as Europe’s energy transition advances. On January 1, electricity prices on the German wholesale market fell to just €0.95 per megawatt-hour as Germany’s wind farms experienced a 148% week-on-week increase in production, according to data from AleaSoft Energy Forecasting.

What can be done to solve the problem? Before answering this question, it is useful to add a little perspective. An electricity price of €0.95 per megawatt-hour may not provide much of an incentive for renewable energy project developers, but it is exactly the kind of thing that Europe needs to remain globally competitive. 

In September 2024, a report on the future of European competitiveness by Italian economist Mario Draghi found that “even though energy prices have fallen considerably from their peaks, EU companies still face electricity prices that are two to three times those in the US. Natural gas prices paid are four to five times higher.” 

Without a plan to transfer the benefits of decarbonisation to end users, “energy prices will continue to weigh on growth,” Draghi said. 

Draghi’s analysis illustrates how concerns about price cannibalization may be looking at the wrong problem. Instead of worrying about whether electricity prices will sustain further renewables growth, policymakers should be focusing on how to ensure low-cost clean energy can be used more widely across Europe, more of the time.

There is no shortage of ways to make this happen. One of the most obvious is to promote the growth of energy storage, so renewable electricity produced during periods of overproduction can be used to offset higher power market prices at other times. 

The potential for such energy arbitrage services is already driving the growth of storage across many European markets, but rule setters can help by removing red tape from the project development process. In time, vehicle-to-grid technology could allow electric vehicle batteries to add energy storage to the system.

And in the longer term, Europe needs to encourage the installation of plants that create green hydrogen from the electrolysis of water. This could have two advantages. The first is that it could free Europe from having to import natural gas from abroad, removing one of the main threats to competitiveness identified in the Draghi report. 

The second is that green hydrogen production could introduce a floor for clean energy prices. This is because green hydrogen will have a value greater than zero—since it can be stored and sold at some point in the future—so electrolysis operators will always be willing to pay something for electricity.

Energy storage can offset overproduction 

There are other ways to reduce price cannibalization, such as increasing levels of regional interconnection—so overproduction in one place is used to compensate for under-production in another—or electrifying space heating, which again could act as a sink for excess renewables production. 

Underlying these measures, it will help to have realistic carbon pricing. But the good news is that Europe is already leading the world in many of these areas, with some of the highest carbon prices on the planet and increasing moves to promote energy storage. The question is whether these efforts go far or fast enough.  

Heading into 2025, it would good to see Europe doing more to tackle a problem that some already believe may be greatly exaggerated. Yes, overproduction is a challenge for Europe’s energy transition—but with the right policy environment, it could be a real asset for the continent.