Power dispatch: storage wars - batteries and dams in focus

Daniel: Hello, and welcome to "The Power Dispatch," an Argus Media podcast from the European Electricity report. I'm Daniel Craig, a senior reporter here at Argus, focused on Nordic electricity. On "The Power Dispatch," we attempt to step back from the immediate day-to-day fluctuations and fundamentals, to take a longer view of the issues, ambitions, and policies shaping the market. Interbit and renewables are transforming the European power system, sparking a rush for grid flexibility through energy storage, whether battery or otherwise. And to discuss this, I'm joined by Deputy Editor Apostolos Tsarikas.

Apostolos: Pleasure to be here with you, Daniel.

Daniel: Thank you for being here, Apostolos. And market reporters, Ilenia Reale...

Ilenia: Hello.

Daniel: ...and James Doran...

James: Thank you for having us, Daniel.

Daniel: ...to discover the lessons and pitfalls from the storage race so far, and to consider hydropower's role in a flexible, green grid. Speaking of successes and positive lessons, Ilenia, I think you've got some happy lessons to share about how Italy is responding to this storage challenge.

Ilenia: Oh, absolutely. We could say that Italy is sort of a pioneer in the storage world. All Italians are very proud of this scheme known as MACSE, because it was a big success. The Italian grid operator, Terna, was able to award all capacity available, that is 10 gigawatt-hour of battery storage. And that was at a premium of 13,000 megawatt-hour per year. And I was really happy about that, because Italy is really trying to push forward batteries. And as of April, Italy had 12.19 gigawatts of battery energy storage system capacity. And that was up by 1.69 gigawatts on the year. So, that was quite the jump, I believe. And as of last month, they also had plenty of connection requests. That was 296 gigawatts of storage, including both batteries and hydro. 

But while Italy is definitely making a step forward for batteries in Europe, not everyone was happy with the auction results. And that is for a few main reasons. First of all, most of the capacity was awarded to only one participant, and that was Enel. So, a few people I've spoken with are asking to change the rules a little bit for the next few auctions, so that there's a cap for the operators that decide to participate. And that brings me to another problem, which is, unfortunately, the Italian ministry hasn't given a lot of information about upcoming auctions. Actually, that seems to be an issue that Italy has overall with plenty of their mechanisms, because they bring a lot of incentives, but then they tend to not go forward with them. So, again, this first auction, very successful overall, because there was a lot of participation. But then again, we know nothing about the next auction, essentially, apart from one thing, which is that hydro pump storage will not be a part of it. 

Daniel: And that sort of comes to one of the issues that we're gonna discuss later on, is the instinct to separate hydropower and battery storage from each other when it comes to storage targets and so on, even though, you know, leading us to perhaps, as an industry, focus too much on batteries. But let's, you know, keep the positivity flowing for now, and keep talking about positives. You mentioned the success of the MACSE market. And I think one of the reasons the UK has been very successful at deploying battery, grid-scale battery very quickly, is it's [inaudible 00:03:54], from the outset, tried to allow developers to revenue stack, you know, through accessing multiple different markets. And one of those has been the capacity market. Have we seen any of that sort of activity in Italy? 

Ilenia: Yes, absolutely. In the past couple of auctions, actually, batteries were awarded a lot of capacity. The last one, with 2027 delivery, 563 megawatts were awarded to batteries for new capacity, out of 594. So, basically, most of it. 

Daniel: Wow. 

Ilenia: And from what I've heard, actually, market participants expect BESS to continue dominating the capacity market in future auctions, while still having MACSE auctions happening. 

Daniel: Okay. So, that's proof that capacity markets work. And speaking of capacity markets, and markets without capacity markets, James? 

James: Yes. This revenue stack topic is quite key to the whole thing. Having spoken to people working in energy storage space, this is something that comes up time and again in Spain, is the fact that the revenue stack is very undeveloped. Things like FCR, which, although have been cannibalized quickly in other markets as a way to revenue, is mandated in Spain, but not remunerated, which is obviously something that's lacking. And clearly, as you've mentioned, capacity market is the big one that everyone's talking about. There is, of course, an upcoming capacity market in Spain. Details are fairly scant. We've been told it'll be before the end of the year. But I think that's something that's put off investors massively from the Spanish market because that's been such a key revenue stream for other markets, and it is something that means this revenue stack in Spain makes Spain much less appealing than, say, GB, Germany, Italy, Poland. So, yeah, I think capacity market is quite key. 

Daniel: Yeah, because it just provides a regular, you know, modellable amount of income that you can use to make a project investable. 

James: Yeah. 

Daniel: You just don't seem to have that in Spain. But aside from investability issues, you also have other regulatory barriers. I know, Apostolos, down your way, regulation can get in the way. 

Apostolos: Yes, yes. That is very true. We certainly had the success stories, but we also had issues in some of the competitions. Greece is an example of that. We had three rounds of auctions for battery storage projects, which were very welcomed from market participants. But what ended up happening was that the licensing process took a lot more than previously expected. That meant the projects could not be delivered by the date that was initially agreed, and this project was due to come online in order to get the full financing as per the terms of the auction. That forced participants to consistently ask for extension in the date of commissioning. There was a lot of uncertainty, and a lot of back and forth with the energy ministry. There has been some extensions, but there's still discussions that there should be more extensions up until at least October 2026, while these projects were initially expected. The projects of the third round were expected to come online by June. So, certainly, that has been a barrier. We've seen that Romania, as soon as it changed its regulation, the double taxation that was part of the market for battery storage projects, as soon as that changed, within a couple of months, we've seen our power up to one gigawatt-hour of projects coming online. So, regulation plays a key part in making these projects feasible. It's certainly a barrier, and also, it shows that, as soon as small changes, or even significant changes are made to that, these projects become a lot more viable. The market, the stance of the market changes quite a lot towards these projects, and their attractiveness. 

Daniel: Definitely. I can see that in my own markets, where Denmark is crying out for more battery storage, but it has this double taxation issue, whereby you are charged a grid tariff to charge and a grid tariff to discharge. 

James: Same in Spain. 

Daniel: And same in Spain? 

James: Mm-hmm. 

Daniel: Yeah. So, then, that's a massive block on the profitability of these assets. But, again, it's like anything in this debate. You can see where the grid operator is coming from. If you're using the grid to charge and you're using the grid to discharge, the grid is agnostic about that. All it experiences is use. So, you can see where we're gonna have to find a compromise between these two. And it speaks to the broader challenge in this, is finding a policy that fits everyone, and fits the market's needs. Apostolos, I know that in your markets, there have been some mega battery projects come out of almost nowhere. Are they, you know, what mechanisms are realizing those projects, or are they mechanism-free, and merchant 500-megawatt batteries are popping up left and right? 

Apostolos: Yeah, it is true, Daniel. It was a surprise, reading and covering projects of almost 500 megawatt-hours appearing out of nowhere, as you said. And it wasn't just the case that we just learned too late. People in the market were not really aware of the project details. Of course, I'm referring to the Bulgarian market, that we have seen a very big development over the past year or so, with big, large-scale projects coming online. I've had the opportunity to speak with the Bulgarian transmission system operator at the start of the year, and the figure that they gave me for the installed capacity was at around 1.1 gigawatt-hour of installed capacity. Well, a couple of weeks ago, at industry conferences, people were talking about two gigawatt-hours already have been installed within these months. For sure, there's been a fast pace of developments of battery storage projects, mainly the Bulgarian market. That was mainly driven by competitions. And the RESTORE program, there's been two rounds of the RESTORE program in Bulgaria, has supported three gigawatt-hours in the first round, 1.9 in the second round, and all of these projects have to be online by the end of this year. So, we certainly, if we focus on one success story in the region, it certainly has to be Bulgaria. 

Daniel: And are they all battery storage projects? 

Apostolos: But yes. 

Daniel: Okay. 

Apostolos: Battery energy storage systems. Pumped storage, as you mentioned, is, and Ilenia mentioned as well, is a different kind of discussion. It's relevant for the region, but I'm pretty sure you want to speak about it in a later phase, or... 

Daniel: Definitely. 

Apostolos: Yeah, yeah. 

Daniel: And so, we're gonna keep the final round of positivity before we start picking some of the problems. I think we're gonna try and find a positive in Spain. And I think it is that Spain now, maybe, has a battery target, or has a sense of direction? Before, it just had a general storage target. Now it has an idea of what it wants to do. Is that right, James? 

James: Yes. It's safe to say, Spain is the elephant in the room, or rather the bull in the room, when it comes to battery energy storage. But there is progress being made, mainly on the regulatory front, as you mentioned. With the post-blackout...well, the blackout was what drove a lot of this regulation, really, when BESS was highlighted as a future cornerstone for grid stability. And the first royal decree that came after the blackout peeled back some of that red tape regarding permitting and simplified environmental assessments. And the latest royal decree from March, in reaction to the Iran war crisis, has also helped to solve some permit-hoarding issues, which I think we might get onto a bit more later. But yeah, Spain does have a firm target, a lofty target, I will say, based on how things are looking at the moment. But as you touched on earlier, Spain doesn't really separate forms of long-duration energy storage, like pumped hydro, from battery. So, this is a collective target, and yeah, 22.5 gigawatts for the end of the decade... 

Daniel: Wow. 

James: ...and we're currently below 200 megawatts. 

Daniel: Excellent. Okay. 

James: Some ground to be made up, but I think, as we'll maybe go onto a bit more later, there are some things to be cheerful for, perhaps. 

Daniel: Oh, what are those? Is it perhaps their attitude to hydropower? 

James: On the hydro front, yeah, things are very healthy, and I think this is something that's not talked about enough in Spain as something that's holding back, or has historically held back, battery development, in the sense that Spain, in relation to its demand needs, actually has quite a large amount of pumped hydro, compared to its European peers. I mean, it's around six gigawatts. For a country with demand around, like, 28 gigawatts, that's pretty substantial compared to other European markets, so, the fact that this very long-duration form of energy storage exists at such a scale already, I think, has perhaps hampered progress in battery, and would it go some way in explaining why Spain is so far behind its European peers. 

Daniel: Yeah, because I think that's one thing that we have to kind of clarify at this stage, is that batteries are kind of the buzzword. Everyone wants to build batteries, and they have to deploy batteries. But right now, they're still, for the most part, responding immediately to grid problems, and for short periods of time. Whereas, you know, hydro remains the best tool, probably, for long-stability solutions, and a greater flexibility over those extended time frames. So you do kind of need both. But I think the conversation seems to have neglected that. And Spain, like you say, has managed to kind of thread a needle, and come back to batteries, having already established its comfort with hydro. And also, Spain seems to be, at least from my loose recollection and reading your excellent coverage of the market, James, is a country that's still comfortable building large-scale hydro in a way that other markets are not so much. 

James: Yeah, that's very much the case. There is still an appetite for hydro. Of course, there are larger capex barriers maybe than battery, and the actual duration of building it. But there is definitely still a quite strong pipeline in Spain. Another two or so gigawatts, two to three gigawatts, is kind of expected before probably the end of next year. And I think, as you touch on as well, part of the appeal is, again, something that we don't look at quite so much, is the fact that these state-of-the-art models that are coming online for pumped storage in, say, Galicia, have durations of up to 40 hours, where, in the case of batteries, most are two hours in Spain, or push four. So, it does offer a great deal more flexibility over a longer time period. 

Daniel: Yeah. And, Apostolos, you mentioned that in Bulgaria, hydro pumped storage has not really been included in some of the growth from new storage there. Can you talk to us about why it's maybe running into challenges or why it's not a priority? 

Apostolos: I would say there certainly has been a lot more focus recently on battery storage systems, but I think it's also important to highlight that this region, and Bulgaria, is included. There is significant hydropower capacity. There is pumped storage projects. Bulgaria, at the moment, is working at restoring one of the largest pumped storage sites in Europe, the Chaira pumped storage hydropower plant, which was severely damaged in 2022. Two units have already been put back online. There is one more unit that we expect to be restored soon, and another unit that seems to be in the most severe situation, and will probably return later on, from 2028, maybe onwards. There are also long-term plans for new pumped storage sites in the Bulgarian market as well, at least according to the NECP. And also important to highlight that at the moment, the Greek market, the Amfilochia pumped storage plant, the 680-megawatt site, is currently under construction. So, there's definitely projects, there's definitely some balance between those two. We also need to take into consideration that this region, obviously Spain, that James was talking about earlier, the blackout was a big driver, but we had a blackout in the SEE region last summer as well. And it was in North Macedonia. The situation was managed quite effectively, as a result of the intervention from the Bulgarian market that managed to restore the voltage, just because of the flexibility that it has from hydropower. And I remember that in the press release from the ministry the day after, from the Bulgarian ministry, there was a call for countries in the region to actually invest in pumped storage. So, I have to say that it's still part of the game. Certainly, there's battery storage, as you say. There's some buzz around the name of BESS projects, but it is not neglected, for sure not. 

Daniel: No, that's good to hear. I think one of the issues, when we think about building new hydro, or what pumped storage could really do for the system, is that it plays into the more traditional way the system works, insofar as if you have an enormous hydro reservoir that can provide pumped storage, but it's in a constrained part of the grid, it's still gonna run into the same problems as your traditional grid constraints that you see in the Nordics, you see in Spain, and maybe was responsible for the blackout, who knows, but that kind of thing. Whereas you can dot lots of little batteries around the place. They're a much more quick fix, that you can tack onto a struggling grid. Now, just to bring it back to Italy, because it's one of Europe's more intense, not necessarily intense, but more ingrained hydro economies, where is the pumped storage conversation in Italy, or are they just all BESS all the time? 

Ilenia: Yeah, the conversation on pumped storage is almost nonexistent, I would say. Everyone does talk about BESS, mainly. But there was a moment when, after the very successful first MACSE auction, it was announced that they were considering including hydro pumped storage in future auctions, ideally for delivery in 2033-'34. And that was very welcomed by most people in Italy. But it seems that either way, BESS kind of remain the priority in the market, because I guess they give, like, a quicker turnaround overall. And I think, from what I understand, the main problem why hydro pumped storage is not going to be included in the next auction, which should happen by the end of the year, but we still don't have a specific date, is that mainly the number of operators that were likely to complete all the relevant authorization procedures to go ahead with the pumped storage sites were just not sufficient to have its own specific auction, essentially. So, yeah, BESS definitely remains ahead. 

Daniel: Because that's the thing. I mean, regulation is such an important part of this, particularly with new hydro, because it is so capital-intensive and infrastructure-intensive. You might be damming a whole valley, you might be running pump tunnels, drilling enormous holes. And that comes with a environmental cost and a regulatory cost. We've seen the EU move heaven and earth to support new nuclear, and other forms of new generation capacity, but there still seems to be kind of a neglect around changing environmental rules for hydro. I know Sweden is currently trying to recalibrate the way that it internally interprets EU regulation when it comes to new hydro, or assessing existing hydro, to make sure that its lifespans can continue. I don't know, in any of your markets, are there any sort of regulatory burdens on hydro that are slowing down development there, or is it mainly a clear run? I mean, Spain seems to have quite a clear run, but I don't know. 

James: I'd say in Spain is a relatively clear run. Going back to something that you touched on earlier, which is the issue of grid constraints, and distance from demand is possibly something that could cause issues with pumped hydro going forwards, this is something that MITECO said, the energy ministry in Spain, that they're, alongside the TSO, they will be looking into the cost-benefit of future pumped hydro, because we are seeing issues now where, naturally, because of geography and how pumped hydro works, the pumped hydro sites are in quite remote areas of, say, Galicia and Castile-Leon, very far from the traditional big hubs of demand in the Basque Country, Catalonia, Madrid. And this is causing issues. So, I think that is something to keep an eye on because, as you say, BESS can be put very close to points of demand. And that's something that pumped hydro by its nature doesn't have in its favor. 

Daniel: Yeah. Because that's the thing. I think when Sweden were doing this reassessment of hydro plants, they realized that not only where it's biggest, but a whole swathe of them were part of, I can't remember the name of it now, but essentially this network of areas that the EU demarcates as areas of natural beauty, that come in with a whole bunch of other environmental regulations and things you've gotta [inaudible 00:22:32] up to. But like you say, not only are they often in difficult places environmentally, they're also far away from people and demand centers, although maybe not Norway, where the whole country seems to have been turned into a hydro reservoir. But we come back to this issue of duration and scale, but also of chemistry. The EU has this made-in-Europe policy, but yet, battery chemistries are, for the most part, currently dominated by one country outside the EU, that will remain nameless. And yet there seems to be this push internally to have a made-in-Europe economy. Is, are alternative battery chemistries a way forward for the EU, to have its own industry? 

James: I think, when people talk about made in Europe, they immediately would look straight back to hydro, as we've been discussing, where these pumped hydro sites, component-wise, can be built entirely within Europe's economy. This is something that MITECO has spoken about as well, the energy ministry in Spain, have said that this is something that can support industrial supply chains perhaps more than batteries can, because, as you say, all of the components for batteries are coming from one place. In terms of upcoming battery options and chemistry of the future, I wouldn't be able to add much more on that, unfortunately. I don't know if anyone else knows of any of the technologies. 

Apostolos: There isn't anything concrete at the moment, at least as far as other chemical materials used in batteries are concerned, at least for projects in the region. I would say there has to be some priority set. At the moment, there are, at least for the region that I cover, there is a need for flexibility. Even today, the ACER was calling for countries in the region to invest as much as they can, and encourage participation from flexible assets, to avoid the price spikes that we saw in the summer of 2024. This requires any form of investment, I would say, whether that's batteries or pump storage. As soon as you manage to at least conquer that and establish that, then obviously you can look into where is that made. You see, my point here is that there has to be an order, and at the moment, the region is facing quite severe issues with price spikes and disconnections, that it's not the top priority to invest in alternative chemical materials for batteries, at least not for this region that I mostly focus on. 

Daniel: Yeah, and that might just be the reason why, when we're having this conversation, it's so dominated by batteries, is that the need is immediate. The need is now. We can get these batteries deployed now, and the long-duration storage we're talking about is very far down the line. But yet, the problem for volatility is now. Just in Finland alone, let alone southeastern Europe or elsewhere, when it's windy, prices are low, but when it's not windy in the winter, prices can go anywhere in Finland, and they can go through the ceiling or through the floor. So flexibility is needed now. That much is clear. So maybe that's just, it's just the nature of the argument. Batteries, we can go with. The lead times in hydro are just not there. So, maybe we've solved the issue. Maybe we understand that yes, we do see the need for hydro, we do see the need for batteries. They are definitely, there's a purpose to both, but unfortunately, batteries are dominating the conversation just because of their immediate ability. 

Well, thank you for joining me, unless anyone has anything additional to say, but I think we've done a good job of solving our original question of why are we neglecting hydro for batteries. And thank you for joining us on "The Power Dispatch." We'll be back in the future with further episodes, but in the meantime, look out for the range of podcasts available on argusmedia.com.