“Flexible” renewables and batteries: boosting the capacity market

The spotlight is on battery storage systems, the indispensable new “lungs” of our electricity system. The capacity market auction for 2024, which will open on 21 February 2022, promises a real leap forward in terms of quality (and quantity). The running-in period for the system has come to an end, and the new electricity production and consumption scene can look optimistically ahead to the ambitious and challenging target for which this new market instrument was developed in 2019. This is nothing less than the complete closure of coal plants by 2025 while maintaining adequacy conditions in the electricity system, promoting the investments necessary to replace the decommissioned capacity and maintaining a programmable generation capacity buffer capable of keeping pace with the continued growth of renewable energy.

The aim is to resolve the two structural problems of Italy’s new energy balance: the lack of programmability in the production of green energy, and the parallel reduction of the so-called reserve margins, i.e. the difference between electricity demand and total generation power actually available in our country, which has dropped to practically zero with the continual rationalisations of recent years.

What’s changing? The capacity market, i.e. the system of rewarding the availability of electrical capacity, to ensure that it continues to exist even when profitability is not guaranteed. In the last auctions, those which produced the safety “buffer” that will become operative in the next two years, agreements were reached with numerous traditional power stations to guarantee the highest levels of environmental sustainability pursuant to international reference parameters. Electrochemical storage systems, the new frontier to be paired with the older but still useful hydroelectric storage systems, made their début. This is highly encouraging, not so much because of the quantities achieved but because of the first signs of interest from investors, particularly considering that in addition to the 210 megawatts contracted for 2023 are an additional 250 MW through specific auctions, awarded at an average price of under €30,000 per MW.

This is a sure sign that technological progress, in terms of efficiency and therefore profitability, is making great strides and offers real hope for the future. The perfect example is the automotive sector, whose price fundamentals are similar to those of electricity storage systems: the cost of battery packs is expected to fall from €200 per kilowatt-hour in 2020 to €85 in 2030, with a simultaneous drop of around 40% for individual cells, even while taking into account the increasingly stringent obligations to incorporate end-of-life disposal or recycling requirements into the expected costs.

Technology and infrastructure. “Storage is now a mature business product”, according to many analysts. This is partly because the batteries used for storage have already made a further advancement in quality, in relation to their use: like the “lungs” they are often compared to, the scientists responsible for their development assure us that they will soon be able to provide invaluable services for reserves, not just for balancing. Their use could grow in a truly exponential manner.

These are excellent conditions for the major parallel instrument which should be activated in the coming years, based on updated estimates of future national storage requirements (the old estimates indicated a requirement of 6 gigawatts, around 10% of the power generation required in Italy during peak times), which should be identified within the next six months to be followed by specific auctions held in addition to those related to Capacity. In the meantime, the mechanism of the new capacity market auctions for 2024 has evolved to allow greater flexibility in meeting obligations for plants powered by renewable energy, which can find their real "raison d'être" thanks to battery systems.

The pace picks up in Sardinia. Who will feature among the early leaders? One of our major islands: Sardinia. Practically gas free, once powered by coal and fuel oil (which is also to be completely decommissioned), blessed with sunshine as well as wind. The coal plants at Fiumesanto, Sulcis and Saras still remain to be closed, for an overall total of around 1600-1700 MW. The goal is to enable their definitive closure thanks to the very initiatives which will be selected in the next capacity market auction, and to the entry into operation of an infrastructure which will have a decisive impact not only on the island, but also for Italy’s overall interconnection capacity: the Tyrrhenian Link (TL) electricity exchange line between the island and the continent. This will be a real game-changer in completing the decommissioning of coal throughout all of Italy, after the first stage which saw the closure of plants in Genoa, Bastardo (Perugia), La Spezia and one of the four groups in Brindisi.

Linking Sardinia to the TL will enable a two-way exchange, particularly if Sardinia really does turn out to be a leader in the battery storage system, given the possibility of ensuring around 800 MW of electrochemical storage on the island alone in the upcoming auctions. Rising from the ashes to become a new beacon for energy? Why not.