The publication of the final design of the Spanish capacity market broadened the range of competitors for firm power and, with more precise rules, began to organize a scenario in which existing power plants, new investments and storage were subject to different logics.
Within this new framework, aggregation gained a particularly relevant position by being able to integrate demand, generation and battery units under a single offering.
The change opened the door to portfolios capable of accessing the mechanism by relying on assets whose investments had already been executed and, for that same reason, competing with potentially lower costs than those of a greenfield project that still had to justify a new investment decision.
“Previously, aggregation was considered solely as an asset for aggregating demand. Now it can be an entity that offers different units of demand, generation, and storage,” Roger Pasola Dolader, Spain’s Head for Corporate Affairs, Regulation and Strategy at SSE , explained to Energía Estratégica .
The change introduced a new variable into the competition that BESS would face. A greenfield battery would not necessarily only face another storage system, a conventional power plant, or a hybrid renewable installation, but also portfolios capable of combining different resources to build a joint firm power offering.
According to the executive, this configuration aligned with one of the scheme's central objectives: ensuring system availability at the lowest possible cost. Aggregation would allow for maximizing revenue from existing facilities without requiring that all the income generated justify a new investment.
“If I were the State, what I want is a guarantee of firm capacity at the lowest price. In this sense, the mechanism is very well designed. We'll have to see if anyone can participate with that configuration ,” he stated.
However, the regulatory progress had not yet transformed this design into a quantifiable economic signal for investors. Although the Order had established the general rules, the calls for tenders that would determine the contracted volume and several of the parameters necessary to translate the mechanism into a concrete offer were still pending.
“We have no way of knowing how much the contracted volume will be or what remuneration we will be paid for availability according to the technology we present, whether it be renewables, storage, pumping or others,” the executive said.
Among the incorporated modifications was also the reliability standard. The load loss expectation, or LOLE , was set at 1.5 hours , after previous versions had placed the benchmark at 0.94 hours and various institutions had recommended an upward revision.
The specialist told this publication that its impact should be analyzed in conjunction with the future contracting curve. Depending on how the bids are combined and the need for firm power, this parameter could ultimately influence the volume awarded or the economic level at which the cut-off occurs.
In parallel, the mechanism introduced differences between existing assets and new investments, which determined how each would be included in the auction. Operating facilities were subject to restrictions related to both emissions and maximum prices, while new projects would operate under a different logic, requiring revenue to back capital that was not yet committed.
This contrast could prevent all contracted capacity from becoming concentrated in existing assets and, at the same time, open up space for technologies that still needed to build their investment case.
Limits on existing assets opened up space for new capacity, but cycles remained within the equation
The existing operational capacity had a clear advantage: it didn't need to recoup the initial investment equivalent to that of a greenfield project. Therefore, the design included restrictions aimed at preventing this difference from completely displacing the new facilities.
“You can participate with a number of existing assets that don't require excessively high returns to justify an investment decision. It's an investment already made, and you'll try to make it more profitable by offering a service to the system,” Pasola Dolader stated.
One of the questions centered on combined cycle power plants . The emissions limit set at 550 grams of CO2 equivalent suggested that a significant portion of Spain's fleet could be eligible for the mechanism.
“The question is how much combined cycle power will be added ,” he warned.
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The Order also added restrictions aimed at preventing the entire market from being absorbed by that technology. This configuration could leave room for new investments, including renewables combined with storage, which would require longer-term contracts and additional signals to support their entry.
Therefore, the balance would not consist solely of choosing the cheapest offer, but of articulating existing capacity with new resources that could sustain the future needs of the system without turning the mechanism into a concentrated remuneration on already operational assets.
For greenfield investments, capacity payments also did not become the sole source of profitability. Roger Pasola Dolader estimated that they could contribute a minimum income of around 10% to 15% , enough to support certain financial decisions without replacing other sources of income.
“No new investment is relying 100% on the capacity mechanism to be profitable. In the end, it will be like a revenue floor of around 10-15%, but it always helps in making that investment decision because the investment decision comes down to tenths of a percent,” he stated.
That percentage positioned the mechanism as a complementary piece within structures that would continue to depend on the electricity market, bilateral contracts, arbitration, or other revenue streams. For a project nearing its break-even point, however, that additional component could ultimately tip the scales.
Interaction with aggregated portfolios added another layer. While a new facility had to build its offering by incorporating CAPEX, operating costs, and expected returns, a portfolio made up of existing resources could primarily focus on maximizing additional revenue and compete with a different economic structure.
The new deadline brought pumping back into a competition from which it could have been virtually excluded.
Among the modifications with the greatest impact on new investments, Pasola Dolader focused on extending the period available for certain projects to reach operation.
The scheme had initially envisioned a maximum of five years between the award and commissioning of the new facilities, a window difficult to reconcile with technologies that required particularly long development times.
The possibility of extending that margin to nine years particularly altered the prospects for pumped hydro storage.
“For projects like pumped storage, which take much longer to process and to carry out the necessary actions to put the turbines inside the hydroelectric dams, it gives you much more leeway to process your project, make the investment decision, start construction and have it operational,” he explained.
With the previous limit, administrative, technical and construction times could leave these developments out of the mechanism before they even had a real chance to compete.
“Ultimately, what I was doing was removing the pumping from this mechanism,” he noted.
The modification was further complicated by the economic characteristics of that technology. The projects required substantial investments and faced a capital recovery that was difficult to sustain solely through arbitrage in the wholesale market or participation in certain adjustment services.
For SSE, pumping needed precisely greater revenue predictability to support capital-intensive investments with longer execution times.
The temporary extension did not eliminate that risk or make the capacity market a sufficient source of remuneration on its own, but it allowed projects that previously might have been excluded due to scheduling to have a realistic way to apply.
The result was a system in which competition for firm capacity extended beyond the traditional comparison between thermal generation, renewables, and batteries. Combined cycle plants with specific constraints, new investments, pumped storage, and aggregated portfolios of demand, generation, and storage would all end up sharing the same arena, despite having very different cost structures, development timelines, and revenue needs.
The call for applications would ultimately show how much space each one would get.