The design of the much-anticipated capacity market, presented for public consultation, is positioned as a key mechanism to ensure firmness in an increasingly decarbonized electricity system.

In this context, batteries are presented as one of the technologies with great potential to provide flexibility and stability to the system.

Chema Zabala, Managing Director of Alantra and advisor to AEPIBAL, positively evaluates the document proposed by MITECO, highlighting its alignment with the transition to a decarbonized electricity system.

One of the main novelties is the increase in the duration of capacity contracts, which could now be extended to ten years or more, linked to the assets’ useful life.

This change represents progress over the previous five-year contracts, which, for the expert, means: “greater visibility and predictability, key to the bankability of projects.”

However, in dialogue with Energía Estratégica España, he warns that there are still critical details to be defined that will determine the real impact on batteries, such as the firmness coefficient and the environmental criteria for emission thresholds of the total awarded capacity.

This first indicator, which measures a technology’s ability to provide firm power to the system, will be calculated by Red Eléctrica, considering stress scenarios that represent between 5% and 10% of the annual hours.

“The associations of each technology involved will suggest the best alternative for the sector they represent,” Zabala indicates.

Another key point is the inclusion of emission thresholds in capacity auctions, which could favor batteries over combined cycles and other emitting technologies.

However, the real impact will depend on how the final regulation is articulated, including specific values for these thresholds.

Alternatively, establishing a weighting of offers with an emission factor could be a very effective alternative.

The amount of capacity assigned to batteries within this mechanism remains uncertain.

Based on studies conducted by Alantra, it is estimated that the additional firmness needs for 2025-2028 will range from 2 to 3 GW, with the possibility of reaching 4 GW if demand requires it.

In fact, according to estimates from the research firm, there are currently only about 8 GW of combined cycles that are viable, which, based on the stress scenario considered, would leave room for a significant amount of additional firmness capacity. All potential firmness suppliers would compete in this space.

Zabala emphasizes that the capacity mechanism is not designed as a direct driver for batteries, but as a tool to guarantee supply security, and he stresses: “To reach more ambitious goals, it will be necessary to complement this market with a flexibility remuneration scheme, which MITECO plans for the end of the decade.”

Competition with mature technologies

Batteries will face tough competition in the auctions, especially from mature technologies like combined cycles, hydropower, and cogeneration.

These technologies, already operational and amortized in many cases, can offer firmness services at competitive costs.

“The marginal cost of maintaining some combined cycles may be lower than that of batteries, but with the evolution of technological solutions, batteries can become very competitive,” says Zabala.

Despite these limitations, the introduction of emission thresholds could level the playing field for batteries, as technologies like combined cycles emit up to 550 grams of CO2 per kWh, while batteries have zero emissions if charged with renewable sources or lower than that reference of cycles if charged from the grid.

Establishing a 100-gram CO2 per MW limit—or a weighting with an emission factor for the offers—would guarantee significant space for emissions-free technologies like storage and, in some cases, hydropower generation, as discussed by the Alantra expert.

He also points out that battery costs have dropped significantly in the last three years, which could make them competitive even against more traditional cost references.

Which batteries would be the most competitive?

“Based on our calculations, a storage battery with four hours of autonomy would be well-positioned to obtain a high coefficient,” Zabala assures.

The scheme also allows the participation of hybrid projects, a notable novelty in the proposal that expands opportunities.

According to the analyst, hybrid projects, by combining renewable generation with storage, have the potential to diversify their income sources and improve their competitiveness.

“The key will be how the firmness coefficient is defined for hybrid batteries and their ability to contribute to system firmness,” he comments.

On the other hand, standalone projects, by specializing exclusively in storage, could offer greater stability in their contributions to the system.

The choice between both options will depend on factors such as installation costs, auction design, and the specifics of the Spanish electricity system.

Next steps

Regarding timelines, after the closure of the public consultation at the end of January 2025, the Ministry for Ecological Transition and the Demographic Challenge (MITECO) will analyze the sector’s contributions to adjust the final design of the capacity market.

It is expected that the final version will incorporate key details, such as firmness coefficients for batteries and emission thresholds to prioritize clean technologies.

Transitory auctions to cover immediate firmness needs will be held between 2025 and 2028, providing opportunities for emerging technologies such as energy storage.

The first main auctions are expected to begin in 2029, although Zabala believes they could be operational before that date.

“We don’t understand why the entry into operation of the main auction winners can’t be considered before that date,” he questions, suggesting that the framework could benefit from more flexibility in its implementation and that some claims could consider shortening this period.