The Capacity Market
Spain is advancing in its energy transition, but the intermittency of renewables poses a challenge: ensuring electricity supply. To address this, the government has revived the capacity market, a mechanism to incentivise firm power. After a failed attempt in 2021, in December 2024, it presented a new proposal, which is crucial given the progressive closure of nuclear plants and the risk of greater energy dependence.
One sector that could benefit from this market is energy storage, which emerges as a potential solution to compensate for renewable variability. But is it truly an opportunity?
by mercedes galán
THE ROLE OF ENERGY STORAGE
The capacity market seeks to incentivize technologies that provide firmness to the electrical system, and energy storage fits perfectly within that profile. Batteries, pumped hydro, and other technologies could participate in auctions to ensure energy availability during critical moments. As María Pilar García Guijarro, managing partner of Watson Farley and Williams Madrid office and Head of Energy in Europe and America, points out, “the sector has long been calling for the approval of the capacity market and the holding of the first auction because it is expected to have a very positive impact.” While awaiting details of the first auction, it is expected to boost financing and transactions in energy storage in Spain, she explains.
From the legal and financial sectors, doubts are already being raised about the viability of the system. According to Antonio Morales, a partner at Baker McKenzie and Head of the firm’s Public Law, Infrastructure, and Energy Department, “it is positive to develop such a mechanism that can incentivize the use of technologies that provide firmness and flexibility to the electricity system. These mechanisms are essential for stimulating investments in generation capacity and ensuring security of electricity supply, thus preventing the premature closure of essential infrastructure for the system”.
However, Morales also notes that this capacity market will entail an additional cost for the electricity system, which will be financed by energy retailers through unit prices updated periodically by ministerial order. “Developing a capacity mechanism that ensures a secure electricity supply is essential to meeting the challenges of the current energy transition,” he adds.
Regarding its implementation, Gonzalo Olivera, Head of Energy and partner at Addleshaw Goddard, highlights the main associated risks as “the possible insufficiency of service provision periods, which could hinder the profitability of investments made by developers.” Additionally, he warns of “the lack of specificity in certain key parameters for each auction call, which generates uncertainty about the real impact of the mechanism, its conditions, and its attractiveness for developing new investments in the sector,” he explains.
REGULATORY CHALLENGES AND OBSTACLES
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