“We shouldn’t be generous with batteries just for the sake of it. We need to develop the capacity market coherently and guarantee security of supply, but not be excessively generous with any one technology. We must remain technologically neutral,” began Javier Pamos Serrano , Iberia Product Manager at Aurora Energy Research.
Spain is moving towards launching its capacity market, with storage at the heart of the sector's expectations. The first auctions could be held in 2027 , but the final design still involves key definitions: contracting volume, price limits, firmness coefficients, technology quotas, and allocation between existing facilities and new projects.
In that context, Aurora Energy Research, through Strategic Energy, introduces a warning to the sector: batteries may be able to compete for that revenue signal, but the mechanism should not be created as a tool to guarantee their profitability.
“The capacity market isn’t meant to generate BESS system numbers. Don’t expect it to solve your business plan. It won’t, and it wasn’t created for that,” Pamos points out.
Aurora and the rules that will define who captures value
For the BESS sector, the capacity market appears as an expected element to provide predictability to revenues at a time of strong pressure on the electricity system: greater renewable penetration, price volatility, need for flexibility and a growing portfolio of projects with associated storage.
“What the government is seeking is to minimize the costs of the mechanism, without having a long-term commitment, which is why they have preferred to give subsidies to CAPEX so far instead of approving long-term mechanisms like MACSE in Italy .
Furthermore, Spain has its security of supply needs well covered thanks to its gas fleet, which is expected to guarantee it at low cost.
“Precisely because combined cycle power plants provide this security of supply more economically, the space available for batteries in the capacity market is reduced, which in turn decreases the likelihood that this market will be decisive for the development of battery technology,” Pamos argues.
The analysis comes at a time of regulatory definition, since after the European approval of the Spanish mechanism, the sector is still awaiting the regulations that will determine which assets can capture value, under what conditions and with what level of recognized firmness .
For BESS, this last variable will be crucial. The firmness coefficient assigned to each technology will determine how much capacity each asset can demonstrate and, therefore, its competitiveness compared to other solutions, such as combined cycle or hydroelectric plants.
Pamos warns that other markets offer useful lessons , but also signs of caution.
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For example, in the UK, price signals from the capacity market attracted a surge of investment in batteries, leading to the saturation of some less liquid markets such as the balance sheet market, compressing the revenue available to the aggregate fleet.
While the Italian case leaves a warning: if the system operator manages BESS within MACSE , assets left out could compete at a disadvantage in ancillary services.
According to the specialist, the problem is that the system operator is not seeking to maximize revenue, but to control the network , which can disrupt competition for assets that are left out of the scheme.
“The operator has no incentive to make money, it has an incentive to control the network, and this can push the rest of the competitors out of the market,” he adds.
The local challenge lies in avoiding a design that distorts market signals by artificially favoring one technology. For Aurora, support through CAPEX is less problematic because it does not compromise long-term regulated revenues.
“In Spain, compared to other countries, we have done well in not providing excessive incentives for batteries that could distort market signals and needs. However, we have erred in taking a little while to react to the avalanche of renewable projects, and in not establishing a clear regulatory framework from the outset that would incentivize the development of storage, such as clarity on demand permits, and the consequences that this has had for grid operation,” he acknowledges.
The blackout accelerated that discussion: “It has served to show that the grid can be unstable if we don't do it right. Since then, a lot of operational measures have been developed, such as voltage control, operating ramps, and flexible permits, which try to make the grid safer.”
For Pamos, the other challenge lies in bankability . Batteries require robust financing structures, but flexible assets present a puzzle for lenders, offtakers, and, by extension, the sector as a whole: access to demand, flexible permits, existing PPAs, the volatile nature of revenues, and the cannibalization of ancillary services, to name a few examples. Fitting all these pieces together is fundamental to building a stable revenue base.
Furthermore, he anticipates that today the main challenge lies in contracts and the deployment of capital.
“Storage requires financial support from banks and, like any emerging technology in a market, it has new risks that must be understood. Market entry always implies high returns, but also high risk,” he explains.
That's why tolling agreements , hedges , and hybrid PPAs are starting to take center stage.
“We are trying to figure out the best way to do this. The pain point right now is to deploy capital with a shared understanding of the risks and opportunities of batteries so that all parties feel secure and all risks are well defined,” he concludes.