What Spain’s capacity market means for storage

Batteries look set for a boost in Spain this year as the country introduces a capacity market to help integrate renewable energy into the grid. The launch of the nation’s first capacity market was announced in October 2023, following a consultation in 2021. 

It will allow the electricity network to accommodate the higher levels of variability characteristic of grids dominated by solar and wind production. Spain’s acting Secretary of State for Energy, Sara Aegesen, said at the time that the market would begin operating mid-2024. 

The announcement was followed by a European Commission consultation on Spanish electricity market reform, which closed in December. 

Further details of the market are unlikely to emerge until towards the end of  of 2024 as the Spain’s ruling coalition government awaits the outcome of European elections and regional polling in the Basque Country and Catalonia. 

However, plans floated in 2021 suggest the market will be like that of the UK, featuring two sets of auctions. In the UK, the auctions are for flexible capacity procured four years and one year in advance. Spain’s proposals are for grid operator Red Eléctrica de España to secure capacity five years and one year in advance. 

Initially the big winners of a Spanish capacity market are expected to be the country’s 50 combined-cycle gas plants. These sum 26.6 GW of power and are currently underused, with a 2021 study by consultancy PwC finding that 70% of the facilities were operating at a loss. 

"Storage is Fundamental"

However, the market could also provide a valuable support mechanism for energy storage. Pumped hydro storage already plays an important role in helping to balance large amounts of renewable energy on the Spanish grid, which as of April 2024 was operating with between 60% and 70% renewable energy penetration.  

Battery storage, meanwhile, is increasingly being co-located with renewable energy plants to avoid revenue cannibalization. 

In January 2023, the Spanish Ministry for Ecological Transition and the Demographic Challenge (Ministerio para la Transición Ecológica y el Reto Demográfico or ‘Miteco’ in Spanish) launched a support scheme covering up to 65% of the cost of storage co-located with wind or solar plants. 

In December, Miteco said it had handed out €150 million across 36 co-location projects, totaling 904 MW of capacity. “Storage technology is fundamental for the guarantee of a 100% renewable electricity system in 2050,” said the ministry. “At the end of 2023, almost 51% of the electricity generated in Spain is already renewable.”

The country plans to have 22 GW of storage capacity in place by 2030, said the ministry. This will include battery and pumped hydro plants, as well as potentially some thermal storage associated with concentrated solar power technology, which Spain is a leader in. 

The Spanish government is also looking to create an energy storage value chain within a €1 billion investment program. 

A Strategic Project for the Economic Recovery and Transformation of Renewable Energy, Hydrogen and Storage (Proyecto Estratégico para la Recuperación y Transformación Económica de Energías Renovables, Hidrógeno y Almacenamiento in Spanish) includes a focus on battery manufacturing. 

Adding a capacity market into the mix would only increase Spain’s attractiveness for energy storage investment. In the UK, the National Grid’s capacity market auctions were last year credited with “turbocharging” the battery storage sector after 5 GW of new-build projects secured contracts in the T-4 four-year-ahead tender.

“In February, there were 143 winning battery storage units, more than 90% of which secured 15-year contracts,” PV Magazine reported. “The T-4 capacity auction cleared at £63 ($71.07)/kW per year, representing the highest clearing price on record. The price was more than double the previous record.”

February 2024 once more saw battery storage benefiting from the UK’s capacity market as batteries bagged a bigger slice of the year-ahead T-1 auction than any other clean technology, according to Energy Storage News. 

Battery plants picked up more than 655 MW of capacity in the auction, with a clearing price of £35.79 per kW a year. This volume was dwarfed by the almost 3 GW of capacity awarded to gas plants, which is likely a guide to what will happen in Spain as well. 

However, the economics of gas plants in both countries are affected by carbon pricing, which is less of a problem for batteries. In April 2024, emissions allowances on the European Union Emissions Trading System were at around €70 a metric ton after having topped €100 in February 2023. 

In the UK, meanwhile, carbon emissions were trading at around £35 a metric ton after hitting an all-time low in December 2023. Gas plants in both countries are also affected by the price of fuel, of course. 

Over time, these factors are likely to favor the growth of battery storage over gas in capacity markets, especially since batteries are already outperforming combined-cycle plants in markets ranging from Australia to the US.  

Plenty of Reasons to Invest in Spanish Storage 

In Spain, the launch of a capacity market would add to favorable tailwinds including massive solar and onshore wind resource and government willingness to drive development of alternative technologies such as marine renewables. 

Furthermore, Spain’s economy is outperforming that of many European peers, in no small amount thanks to its commitment to the energy transition. However, it should be noted that Spain also has a patchy record when it comes to energy policy. 

While the current administration is seen is one of the most progressive in Europe in terms of the energy transition, it was elected in national polls last year by the narrowest of margins and its room for maneuver could be curtailed by the outcome of regional elections in 2024. 

Whether this might affect the launch of the country’s capacity market remains to be seen. And in any case, there are plenty of reasons to invest in Spanish storage projects even without the immediate prospect of capacity payments. 

In the medium term, it is hard to see how the country’s electricity network could be maintained without a capacity market, so the outlook is bright regardless of short-term political considerations.