Financing the Storage Transition: Policy Risk and Stranding Scenarios for Centralized vs. Decentralized Battery Investments in Germany and Sweden

Abstract

Battery energy storage sits at the centre of Europe’s low-carbon transition, yet financing these assets remains fraught with uncertainty. This thesis asks a pointed question: how do market volatility, shifting regulations, and the threat of asset stranding jointly shape the ability of investors to fund centralised and decentralised storage projects in Germany and Sweden? Drawing on a comparative case study rooted in pragmatist thinking, the analysis pairs discounted cash flow modelling with a careful reading of policy documents, regulatory rulings, and industry commentary. All market data, wholesale electricity prices from ENTSO-E, ancillary-service auction results from national grid operators, cover the period 2019-2024 and are publicly accessible. What emerges is a stark contrast. German centralised battery energy storage systems (BESS) projects carry the heaviest risk burden: frequency containment reserve (FCR) market saturation, confirmed grid-fee hikes, and a massive connection-queue backlog combine to push the internal rate of return from 11.5% down to 2.8% under stress, rendering projects economically unviable. Swedish centralised projects fare better for now, though their dependence on a handful of ancillary-service markets introduces a concentration risk that warrants close monitoring. Across both countries, decentralised storage proves more financially resilient, revenue diversification across retail savings, frequency markets, and peak shaving translates into lower risk premiums and more favourable debt terms, even where headline returns are lower. Monte Carlo simulations confirm that investment feasibility is highly sensitive to revenue cannibalisation and policy shocks. Theoretically, the study extends asset stranding literature by demonstrating that stranding risk in modern storage infrastructure is fundamentally revenue-driven rather than technologically deterministic, with regulatory interventions capable of eroding cash flows as rapidly as market saturation. From a policy perspective, the findings underscore the urgent need for regulatory clarity on grid tariff structures in Germany, the development of a coherent national storage strategy in Sweden, and the effective implementation of the EU Storage Infrastructure Act. For market participants, the analysis establishes that decentralised, revenue-diversified storage configurations offer a more robust risk-return profile, lowering hurdle rates and facilitating capital allocation in Europe’s evolving flexibility markets.