Backup power for Europe - part 3: Italy's bet on BESS

In part 2 of this series, we explained how the UK became the leading European country in terms of installed and planned Battery Energy Storage Systems (BESS) capacity thanks to its strong governmental support. Support mechanisms such as capacity market participation are used to attract the BESS capacity required to integrate the UK’s targeted additional wind and solar generation. In this article, we will examine the lucrative opportunities the Italian government has created for BESS investment, positioning Italy among the most attractive countries for BESS in Europe.

Italy’s transition to renewable energy sources

Italy is going through a rapid transition from an electricity system that depends on programmable thermal generation plans to one that mainly depends on intermittent renewable energy sources (see figure 1). Solar electricity generation, in particular, will see a significant increase. In its most recent National Energy Climate Plan (NECP), , Italy aims to increase its solar PV capacity from 36GW at the end of 2024 to 80GW in 2030. Wind generation capacity should increase from 13GW in 2024 to 28GW in 2030. Combined, this would entail a 60GW increase in intermittent generation capacity.

Integrating this amount of intermittent generation capacity requires a lot of flexibility on the grid. That is why Italy aims to add 15GW of BESS capacity by 2030 (of which 11GW should be standalone and 4GW co-located).

As of March 2025, Italy has got 1GW of grid-scale BESS capacity online, placing the country in third place in Europe (shared with Ireland) in terms of installed capacity, behind Germany (1.6GW) and the UK (5.6GW). Another 1.75GW is under construction, projects totaling 230MW have obtained permits, and 1.2GW of new BESS capacity has been announced. If the entire pipeline comes online, Italian installed capacity will amount to 4GW. This means the country will need to attract an additional 11GW of BESS capacity within the next five years to meet the national target of 15GW (see figure 2).

The increase in solar and wind capacity, and the reliance on gas-fired plants for programmable generation is expected to have a positive impact on the merchant business case. The large buildout of solar PV will create low daytime prices, while gas plants will cause high peak prices –especially in the southern and island regions that have limited hydropower and interconnection capacity. Reforms in power market regulation are expected to further improve the merchant opportunities both in terms of the wholesale market and the ancillary services.

However, it will take a number of years before the additional solar and wind capacity is built and the regulatory reforms are implemented. Meanwhile, at the current capex requirements, wholesale price spreads do not sufficiently support a merchant business case. Furthermore, the Dispatching Services Markets (MSD), Italy’s mechanism for balancing and ancillary services, in which batteries can participate to earn additional revenues has become saturated. This raises the question of whether investor confidence is high enough to realize the required BESS capacity by 2030.

We do expect the merchant business case to improve with the changes in Italy’s regulatory landscape under the Text of Electricity Dispatching Rules (TIDE). TIDE will lead to major changes in Italian electricity dispatch regulation, including an update of Italy’s grid code. These changes are intended to accommodate the transition from large-scale programmable plants to smaller intermittent generation units. Implementation of these new rules started at the beginning of 2025 and are expected to take up to 2029. The implementation of TIDE is set to bring the structure of the Italian power market closer to that of the rest of Europe.

The regulatory changes under TIDE will create new opportunities, but will also lead to increased complexity in BESS optimization. The shift from hourly to 15-minute intervals for intraday and imbalance prices in Q1 2025 and the introduction of a 15-minute price model in addition to the existing hourly model for day-ahead prices in Q2 2025 are crucial changes. The resulting higher granularity in the wholesale markets will increase the opportunities for BESS to take trading positions and is expected to increase volatility and even create the possibility of negative prices. For existing BESS projects, keeping up with these market changes will require faster response times and possibly enhanced optimization software.

The introduction of dynamic bidding zones will cause further complexity. Batteries at locations that may fall in varying bidding zones will have to adjust their strategy to account for this. This will also create a novel opportunity for new arbitrage strategies, in which a battery can charge in one bidding zone and discharge in another.

Improvements are also expected in the MSD, which will be rebranded as the Balancing and Redispatching Market (MBR). A key change there will be the introduction of a market-based Frequency Containment Reserve (FCR), next to the existing mandatory FCR. Italy will also join the European platforms for other balancing services (PICASSO, MARI, TERRE). However, these changes will take up to 2029 to be implemented and, given the expected buildout of new BESS projects, it is unsure to what extent these changes will offset declining revenue potential from market saturation.

To attract more BESS capacity, the Italian regulator[1] and Transmission Service Operator (TSO), Terna, are offering contracted revenue streams for BESS projects. As of early 2025, this has resulted in two waves of BESS projects coming online. The first wave was under the Fast Reserve auction mechanism and the second wave was the result of BESS project developers being able to competitively bid in capacity market auctions. To boost the storage capacity on the Italian grid to the desired 15GW by 2030, Terna is launching a new mechanism this year, known as MACSE,[2] in which the TSO will award 15-year tolling contracts to BESS owners.

The first wave: Fast Reserve auction

The Fast Reserve auction, held in 2020, resulted in the first wave of BESS projects coming online in Italy. The auction resulted in 250 MW of BESS capacity coming online. This capacity consists of smaller projects with a capacity of up to 25 MW and a short duration.

The Fast Reserve service is designed to support the system inertia, which is decreasing with the shift from spinning thermal plants to renewable energy sources. Fast reserve is activated during the very first moments (typically between 20 to 30 seconds) of frequency deviations when the primary reserve, FCR, may be insufficient to assist. This requires an activation time of under one second, which batteries can achieve.

The BESS projects that secured a Fast Reserve contract need to provide the service from 2023 to 2027 for 1000 hours per year and can operate in other markets for the remaining 88% of the year. In compensation, projects receive between EUR 23,500 per MW per year and EUR 61,000 per MW per year, depending on their location.

The Fast Reserve service is a pilot and it is not known if the auctions will be repeated. A significant share of BESS projects that won Fast Reserve contracts were in the north of Italy, where Terna will not target capacity in the MACSE mechanism. Without new Fast Reserve contracts, Terna will have to rely on merchant battery projects to provide sufficient Fast Reserve.

The second wave: Capacity Market auctions

The second wave of battery projects coming online in Italy resulted from the participation of BESS developers in capacity market auctions. From 2022 onward, batteries have been successful in the capacity market auctions. Besides the projects that came online after securing Fast Reserve contracts, the majority of the 1GW of BESS capacity online today is the result of the capacity auctions. In the last auction for delivery in 2027, held on February 26, 2025, 95% of new capacity that won capacity contracts involved BESS projects. Timera estimates that this translates to a total of 800 to 1200MW of new BESS projects that have secured a capacity contract.

Terna organizes capacity market auctions on a yearly basis, two years ahead of delivery. New projects can secure 15-year fixed pay contracts, based on the power capacity they add to the grid. The capacity of a battery is derated based on the project’s duration: BESS projects with a longer duration have a lower derating coefficient. Existing projects can secure one-year contracts. The clearing price of the capacity-market auction in February 2025 was EUR 47,000 per MW per year.

On top of the fixed contracted payments, asset owners can use the full capacity of their BESS to participate in merchant markets. However, prices in the day-ahead market are capped by a strike price that is set on the variable cost of a gas turbine. This is to ensure that awarded capacity does not make excessive profits on top of the subsidized fee. By combining the fixed revenue from the capacity contracts with merchant revenues, potential revenues may still be high. However, revenue certainty is fairly low due to the variability in potential merchant revenues.

We expect that capacity market auctions will continue to attract new BESS capacity, particularly for projects in the north of Italy (where capacity contracts are the only available source of contracted revenue) and for investors that prefer a merchant business case over long-term fixed revenues.

The third wave: MACSE auctions…

A third wave of BESS projects is expected to come online as a result of the new MACSE mechanism. MACSE is a capacity mechanism specifically targeted at energy storage systems. The first auction for MACSE is scheduled for September 2025 and will target 10GWh of battery projects that should come online by 2027. This would translate to 1.25GW to 2.5GW of added BESS capacity, assuming a four to eight hour duration.

The MACSE mechanism offers a unique opportunity for BESS project owners to tailor a business case to their risk appetite. Essentially, a MACSE contract is a 15-year fixed-price (in EUR/MWh/year) tolling agreement between the BESS owner and Terna. The unique feature is that project owners can choose what percentage of the energy capacity of their project they want Terna to operate under MACSE. This allows a project owner to choose to let Terna fully operate the BESS project and secure 15 years of fixed revenue, or to keep a percentage of the battery capacity available for merchant revenues.

… or more merchants with capacity market contracts?

But how attractive will the MACSE mechanism be for investors that are willing to take on more risk? In figure 3, we compare three business models: a MACSE model, a hybrid MACSE model with 25% merchant revenues, and a merchant business case with a capacity market contract. For this illustrative example, we assume that a MACSE contract will generate EUR 100,000 per MW per year, that potential merchant revenues range from EUR 50,000 per MW per year to EUR 150,000 per MW per year, and that the capacity contract earns EUR 35,000 per MW per year.

In the full MACSE case, the project will generate the highest guaranteed revenue over the entire term of the contract. Choosing a hybrid MACSE business model with 75% of capacity for the MACSE contract and using the remaining 25% for merchant revenues creates the opportunity for higher total revenue, but at the expense of lower guaranteed revenues. With the risks involved in this model, the potential upside versus the full MACSE case is limited.

[1] The Italian Regulatory Authority for Energy, Networks and Environment (ARERA)

[2] The Electricity Storage Capacity Procurement Mechanism, or the Meccanismo di Approvvigionamento di Capacità di Stoccaggio Elettrico (MACSE) in Italian

Comparing the hybrid MACSE case to the merchant business case with a capacity market contract, we see that the expected revenue in case of low merchant revenues are roughly the same. In case of high merchant revenues, the upside revenue potential of the merchant business case with a capacity market, however, is over 50% higher. The MACSE mechanism will therefore likely be the best option for risk-averse investors, while investors who are willing to take on more risk would likely prefer a merchant business case over the hybrid MACSE option.

BESS investors and developers in Italy must take the regional differences in electricity prices and storage needs into account. Italy has multiple bidding zones and each zone has its own characteristics in terms of its current and future flexibility needs, generation mix, and electricity prices.

As shown in figure 4, price spreads on the day-ahead market tend to be much larger in the south than in the north of Italy, and are particularly large on Sicily and Sardinia. Between March 2024 and February 2025, price spreads in Sardinia were 42% higher on average than in the bidding zone of the north. BESS projects in southern regions therefore have greater energy arbitrage opportunities than those in the north.

The differences in the price spreads between the regions arise from regional differences in the electricity system. The majority of Italian solar PV capacity, which tends to increase prices spreads, is located in the southern regions. Hydropower, which tends to decrease price spreads, is located in the north. On top of that, most of Italy’s interconnection capacity is located in the north, where landlines connect the Italian grid to France, Switzerland, Austria, and Slovenia. In Italy’s southern regions, only the Central South (with Montenegro), South (with Greece), and Sicily (with Malta) have small cross-border subsea interconnectors. In the long run, prices across Italy are expected to converge due to increased interconnection capacity between the bidding zones.

No MACSE capacity in the north

Besides leading to different price spreads, the differences in the installed generation capacity also lead to differences in flexibility needs. To account for this, the Ministry of the Environment and Energy Security has set regional targets for attracting BESS capacity through the first MACSE auction (see table 1).

The majority of the BESS capacity requirements are in Centre-South, South, and Calabria. The island regions have a minimum capacity of 500MWh per region, which must be attracted through the MACSE auctions. These are precisely the regions with the highest solar PV capacity in the pipeline. The northern part of Italy already has the biggest installed battery capacity, so BESS projects in the two northern regions will not be able to secure a MACSE contract, leaving the capacity market auction as their only option for contracted revenues.

The need for additional BESS capacity in Italy is clear and confirmed by the target set by the Italian government. The incentive schemes offered by the Italian regulator and TSO (Fast Reserve, Capacity Mechanism, and MACSE) show that Italy views BESS as a critical part of the electricity infrastructure. This is further confirmed by the recent simplification of the permitting process for the construction of BESS projects. The UK has shown that a positive regulatory environment is key to increasing BESS capacity. Further reductions in capex costs and improvements in merchant conditions due to increased solar and wind capacity and the adjustments in the power market under TIDE also positively impact Italy’s merchant attractiveness.

Most of the BESS projects that are now coming online are four-hour batteries. Given the current mechanics of the Italian capacity markets and the available merchant revenue streams, experts consider four-hour batteries the best option. In the coming years, eight-hour battery projects, which are better suited for solar PV integration, are expected to become a bigger part of the BESS landscape.

In Italy, BESS investors have the unique opportunity to choose between contracted and merchant business models, and to tailor a business model to their own risk appetite. However, there are still a lot of uncertainties that will affect both business models. For example, if we consider decreasing capex and changing market conditions, partly resulting from TIDE, how attractive is a MACSE contract over its entire 15-year term? And when considering a hybrid MACSE model, at what ratio will it become more attractive to choose a merchant model? At the same time, how big of a risk will Terna be taking by tolling up to 50GWh in BESS capacity for such a long period? Could competition from merchant BESS projects result in lower than expected returns? In such cases, it Terna may need to adjust the conditions for future MACSE auctions or may have to revise the regulatory changes under TIDE. Last year’s suspension of Italy’s participation in the PICASSO platform shows that, when needed, the regulator will come into action.

Nevertheless, we view Italy as one of the most attractive countries in Europe for BESS investments in the coming years. The opportunities for growth of the BESS sector are substantial, both through merchant and through contracted routes. By staying informed, adaptable, and seeking partnerships with financiers comfortable with this new market, investors can navigate the Italian BESS landscape and contribute to Italy’s energy transition.

BESS are becoming a key component of the European electricity system, providing much-needed flexibility by storing surplus renewable energy and supplying it during peak demand. However, market conditions for BESS projects vary across countries and continually change with the progression of the energy transition. As a result, evaluating a BESS business case is far from straightforward and requires a holistic assessment.

This article is the third part in our series on backup power for Europe. In part 1, we summarized the market attractiveness across the UK, Italy, Spain, the Netherlands, Germany, and France. Part 2 concerned the lucrative BESS investment landscape of the UK.