Renewable growth driving Italian BESS investment
Italy’s dependence on imported Russian gas has been uncomfortably exposed across the last two years. In the short term, Italy like other large gas importers, is scrambling to increase its LNG regas capacity. But it is clear to policy makers & investors that energy security & decarbonisation goals are now aligning to support rapid growth in renewable energy supply (RES) to ensure greater energy independence.
This is set to drive rapid growth in both solar and wind capacity in Italy. By 2030 Italian solar capacity will likely exceed 60GW (from ~27GW now), with wind capacity more than 20GW (from ~13 GW now). Strong structural growth in RES (particularly solar) is then likely to continue beyond 2050.
Where is the flexibility going to come from to balance swings in solar & wind output? Italy is losing thermal generation flexibility as it closes its coal fleet and ageing CCGTs approach retirement. Italian hydro provides valuable flexibility in the North but with limited growth potential (and less impact in southern regions & the islands).
Gas peakers are being developed but face the challenges of carbon abatement. Electrolyser capacity volumes will grow over time but are more limited in their ability to provide rapid balancing flexibility. That leaves a key role for batteries (BESS) to provide short term flexibility to balance RES.
In today’s article we set out numbers that summarise the extent of growth in RES fluctuations. We then look at a set of considerations facing Italian BESS investors.
RES fluctuations are growing fast
Chart 1 provides benchmarks for the rapid increase in solar & wind intraday output swing ranges as capacity grows.
Chart 1: RES output intraday swing distributions (GW)
Source: Timera Energy stochastic Italian power market model
At Timera we use a stochastic power market model to help analyse the value of flexible assets like BESS. This generates hundreds of correlated simulations of wind, solar and load outputs for each of the markets we analyse. The data in Chart 1 is generated from our zonal Italian power market model.
Let’s summarise some benchmarks from this analysis. By 2035, Italian renewable output is set to swing by up to 49GW intraday, against a projected peak demand of around 60GW. These output fluctuations can be broken down into:
- Solar swings up to 40GW a day
- Wind swings up to 9GW a day.
By 2050 solar swings within a single day may be over 70GW. These levels of fluctuations in RES output will require enormous investment in flexible capacity in order to maintain system stability.
5 considerations for Italian battery investors
Intraday swings in RES output require large volumes of relatively short duration and fast balancing flexibility. And Lithium-ion batteries are ideal to deliver this. They are also so far the only scalable form of low carbon balancing flexibility.
This presents a big opportunity for flexible asset investors. But investing in Italian batteries is not a straightforward undertaking. In Table 1 we set out 5 considerations for BESS investors.
|1.Capacity payment support
|• Italy has implemented a Capacity Market which helps underpin the BESS revenue stack
• Clearing prices have so far been high (70 €/kW/yr for new build) with BESS volumes successfully awarded capacity agreements
|2.Regulated BESS risks
|• Italy is implementing a policy to allow TSOs to tender for regulated BESS assets to alleviate network constraints
• Sale of BESS flex that is surplus to TSO needs will take place via a secondary market; understanding interaction of this with merchant BESS asset value capture is important
|3. Ancillary revenue erosion
|• Italian BESS assets in some locations can currently benefit from strong ancillary service uplift (via the MSD ancillaries market)
• Ancillary revenues are set to eroded relatively quickly by a combination of regulated & merchant BESS build
|4. Wholesale arbitrage drives investment case
|• The growth in RES output swings we show in Chart 1 is set to support a structural increase in wholesale energy arbitrage returns for BESS
• This is driven by swings in marginal price setting capacity (e.g. from RES setting zero/low prices to gas peakers setting high prices)
|5. Growth in within-day value capture key
|• Growth in intra-day RES balancing requirements are set to drive volatility & liquidity into the Italian Within-Day market
• This supports strong growth in value capture for BESS assets as RES output grows and thermal capacity retires
The Italian market is likely to see 10-15GW of BESS investment by 2030. As with other European power markets, ancillary service revenues are playing an important near term role in supporting the Italian BESS revenue stack. But relatively rapid saturation of ancillary markets means a viable Italian BESS investment case needs to be built on wholesale energy arbitrage returns.
Timera is recruiting
As the energy transition and focus on flexibility gathers pace, we are seeing a strong increase in client demand for our services. As a result we are actively looking to expand our team by recruiting Analysts with 1-4 years experience.
We currently have several vacancies (click on link for more details).