The capacity market in Spain: regulatory update and outlook for storage

Update from Carlos Redondo, Deputy Director General of Electric Energy, Ministry for the Ecological Transition and the Demographic Challenge

The capacity market is a mechanism designed to ensure the security of electricity supply, complementing revenues from generation, storage, and demand response. However, it should not be considered a tool to guarantee the profitability of storage projects. Its primary goal is to provide system stability, and while it may generate additional revenue, it does not grant automatic rights to ALM projects.

At the  III Cumbre de Almacenamiento y Hidrógeno Renovable organized by UNEF, the challenges and opportunities of this market were analyzed, along with its complementarity with other existing mechanisms. This article reviews the current state of the capacity market in Spain, its design, and its implications for storage. Carlos Redondo addresses the topic considering the differences that may exist between various markets.

Capacity Market Design in Europe and Spain

Capacity mechanisms vary in design depending on the country:

• Centralized, as in the United Kingdom and Spain, where the system operator (TSO) manages the identification of needs and capacity allocation.
• Decentralized, as in France, where participants manage their own capacity within the market.
• Strategic reserves, as in Germany, where they are activated only in the event of a supply risk.

In Spain, the capacity market, still in the legislative proposal phase, presents the following characteristics and is subject to possible modifications:

• The TSO (Red Eléctrica de España, REE) collects bids and identifies firmness needs by nodes.
• It is technologically neutral, allowing the participation of technologies such as combined cycles, storage, and renewable generation.
• It is based on a competitive bidding system, favoring lower prices.

Functioning and Types of Auctions in Spain

The Spanish capacity market will operate through a series of auctions in which the amount of firm capacity to be contracted will be determined. These auctions will follow a firm power demand curve, which will intersect with the traditional supply curve.

Key design aspects include:

• Technological neutrality, measured through "de-rating" coefficients (ranging from 0 to 1), which reflect the availability of each technology.
• Capacity to be auctioned according to the firm power demand curve, setting a price cap for existing technologies. For new investments, the price will be determined by the intersection with the demand curve.

Current Status of the Regulatory Process

The development of the capacity market in Spain has progressed in recent months with the publication of a public consultation in December 2024. The process is currently following these steps:

• Public consultation: Recently concluded after a six-week period, during which feedback was received from various industry stakeholders.
• Analysis of feedback: The impact of the received comments is being evaluated. A key issue has been the lack of adaptation of the mechanism to hybridized plants, a topic under review with the TSO.

Next steps:

• Publication of the final text and request for authorization as State aid from the European Commission.
• Parallel processing of the Ministerial Order and the Operating Procedure.
• First auction expected in 2026, although there are uncertainties about meeting the objectives set in the PNIEC.

Complementarity of BESS with Other Markets

Since the capacity market does not guarantee the viability of projects on its own, storage facilities will need to diversify their participation in other markets to optimize profitability:

• Day-ahead market: Provides stability and high liquidity.
• Continuous intraday market: Crucial for storage systems (BESS), offering arbitrage opportunities due to high volatility.
• Balancing markets:
  • Regulation band: Currently very profitable, though expected to have lower liquidity in the future.
  • Tertiary and adjustment services: Offer attractive prices, but with uncertainty regarding their sustainability.
  • Constraint management market: Not advisable at present.

Challenges and Risks of Storage in the Capacity Market

Participation in this market presents significant challenges, especially for storage technologies. One of the main risks is battery degradation, as some highly volatile markets can significantly reduce their lifespan.

Key aspects to consider:

• The TSO must provide adequate incentives to compensate for battery degradation.
• Compatibility with other remuneration mechanisms must be ensured, avoiding restrictions that could impact the economic viability of projects.
• It is essential to establish a stable and predictable framework that offers security to investors and operators.

Regulatory Outlook and Next Steps

In the coming months, key progress is expected in the regulation of Spain’s capacity market. The main milestones to follow include:

• Publication of the final text with adjustments derived from the public consultation.
• Request for authorization as State aid from the European Commission.
• Development of the Ministerial Order and Operating Procedure, which will establish the regulatory foundations for implementing the mechanism.
• Launch of the first auctions in 2026, although uncertainties remain regarding the achievement of PNIEC objectives.

Conclusion

The capacity market in Spain represents an opportunity for the storage sector but cannot be considered the sole basis for investment. Its design must be complemented by a diversification strategy in other electricity markets to ensure the profitability and sustainability of projects.

At Vector Renewables, we closely monitor regulatory developments and their impact on the sector, providing strategic advice to our clients to optimize their participation in different energy markets.