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Europe’s battery energy storage system market, long dominated by the UK, is set to welcome a new leadership contender in 2024. Italy’s transmission system operator, Terna, is planning to launch a new tender process that experts say could see Italy overtaking Britain on energy storage by 2030.
The first auction under Terna’s Electricity Storage Capacity Procurement Mechanism (Mercato a termine degli stoccaggi or MACSE in Italian) is scheduled for December 2024 and will signal the beginning of the largest energy storage procurement program in Europe, targeting 71 GWh of capacity by 2030.
Unlike other markets globally, where energy storage systems operate on a merchant basis, MACSE will see Terna offering long-term contracts—of up to around 12 to 14 years—with fixed prices partially indexed to inflation, according to the UK consultancy Timera Energy.
The unprecedented level of investor certainty linked to MACSE means the scheme is “set to unlock a wave of new investment,” Timera Energy says.
MACSE is one of three pillars supporting Italy’s power sector decarbonization strategy. The central pillar is a contracts-for-difference scheme called DM Fer X that aims to overcome years of underwhelming renewable energy tender results.
DM Fer X could potentially push Italy’s installed solar photovoltaic (PV) capacity to as much as 70 GW by 2030, Timera Energy reports. Daily variations in solar radiation could see the output from Italian PV swinging by as much as 40 GW a day, putting immense strain on the grid.
Wind power could partly help to balance such shifts, but Terna is hedging its bets with the second pillar of its strategy—a capacity market that will reward grid flexibility providers such as demand response program operators and short-duration battery asset owners.
And then there is MACSE, which aims to complement the capacity market with longer-duration storage assets. Typically, these will be lithium-ion battery plants with four-to-eight-hour discharge times, with some pumped hydro thrown in for good measure.
“The game changer with this scheme versus those in other European markets is the extent of revenue support offered by the long-term contracts,” says Timera Energy.
“The resulting reduction in merchant risk exposure means that BESS [battery energy storage system] projects will fall comfortably within traditional infrastructure investment risk/return mandates. This should attract large volumes of infrastructure and pension fund capital to back storage developers.
“It should also support substantial volumes of debt financing at relatively high loan-to-value ratios.”
Most of the capacity being procured under MACSE is expected to go into Italy’s southern and island regions, which are farthest from grid interconnections with the rest of Europe and are also likely to have the highest penetrations of renewable energy on the electricity system come 2030.
Based on figures published by Terna in 2022, Timera Energy expects more than 34 GWh of storage to be installed in the South of Italy by 2030. Sicily meanwhile will need more than 21 GWh and Calabria could see almost 6 GWh being installed.
“The volume projections under the tender mechanism may be refined to reflect the Italian Ministry’s view that there is somewhat more potential for solar deployment in the north (given smaller scale and rooftop capacity development),” Timera Energy says.
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Meanwhile the outlook for merchant battery projects is that they will be prevalent in the north of Italy or will complement MACSE schemes elsewhere.
The MACSE program allows battery plant developers to choose how much capacity they want to allocate to the long-term contract mechanism with Terna and how much they want to devote to merchant sales.
This gives investors the ability to configure their portfolios according to their risk appetite, selecting the revenue protection afforded by MACSE or the upside potential of merchant exposure. Adding a merchant tranche to a battery project could significantly improve returns for investors.
Timera Energy estimates that the internal rate of return (IRR) for a long-term MACSE contract is likely to be between 5% and 6%, while merchant tranches could achieve IRRs of 8% to 10%--potentially attracting funding from private equity.
“The benefit of the MACSE long-term contracts is they are very attractive for facilitating debt financing with high loan-to-value ratios, particularly given the credit quality of Terna as a counterparty,” the consultancy says.
“So even if merchant BESS returns in Italy are lower than other European markets, they may drive significant equity IRR uplift.”
Further benefits of the market are that Italy’s runaway PV growth provides ample opportunities for co-location and electricity pricing is split by zones so investors can locate projects in places that will achieve the best spreads.
Strong developer participation
Terna must make things easy for investors because of the massive amount of storage it needs—Timera Energy says between 13 GW and 16 GW of capacity could be procured in the coming five years.
And while it currently offers an unbeatable package for battery plant investors, the MACSE model could easily be copied elsewhere and may well become widespread across Europe as other markets seek to address grid decarbonization challenges like those facing Terna in Italy.
For now, says Timera Energy, initial tenders under MACSE “are likely to see strong participation of developers with existing permitted project sites that are relatively advanced with planning and connection approvals.”
Pacific Green is looking to build a significant presence in the market following the November 2023 acquisition of a 51% share in five projects belonging to Sphera Energy, one of Italy’s first fully dedicated battery storage development platforms.
The projects have a total of 500 MW and 2.8 GWh of capacity, with plans for an initial 100 MW scheme in Campania already submitted for permitting to the Italian Ministry of Environment and Energy Security.
Pacific Green’s team in Italy is targeting financial close on its first 1.5 GWh of storage capacity this year, and final permitting for all five projects in the fourth quarter of 2024, ahead of the start of commercial operations in 2026.
The team also aims to further expand its origination portfolio to almost 5 GWh in the coming months, making Italy one of the top markets for Pacific Green in the world.
Publish date: 22 July, 2024