Backup power for Europe - part 4: Spain's BESS market is heating up

In part 2 and part 3 of our series on Battery Energy Storage System (BESS), we showed how the BESS markets in the UK and Italy are rapidly growing thanks to the combination of high penetration of renewables and transparent regulatory environments. The current situation of the Spanish BESS market confirms that both of these factors are required to gain market attraction: Despite a high penetration of renewable energy, the Spanish regulatory framework has been lagging and the first BESS projects of significant size have yet to be built. In April 2025, Spain’s installed BESS capacity is only 60MW, whereas the UK and Italy already have 5.6GW and 1GW of online BESS capacity, respectively. In this article, we discuss the latest developments in Spain’s regulatory framework and power system that will improve the market attractiveness for BESS investments.

The projected storage needs of Spain in 2030 are similar to those of the UK and Italy. In its National Energy and Climate Plan (NECP), the Spanish government aims to have 22.5GW of energy storage by 2030 (see table 1). This amount of storage capacity will be needed to integrate the growing capacity of intermittent generation. By 2030, solar generation will grow from 32GW to 76GW, and wind generation capacity will grow from 32GW to 64GW. The need for storage capacity to provide flexibility is amplified by the limited interconnection capacity of the Iberian peninsula with the rest of Europe.

Grid-wise, Spain (and the Iberian Peninsula) has a very limited interconnection capacity with the Central Europe network. It is currently close to 3000MW, resulting in a 1.9% cross-border capacity ratio, which is far from the 15% that the European Commission set as a target for 2030. The ongoing project of a submarine cable across the Biscay gulf will increase this capacity to 5000MW but even then Spain’s level of interconnection will remain well below the European targets.

Competition from other storage technologies

Spain’s grid resilience

Another reason the integration of BESS is less urgent in Spain is the high resilience of the Spanish grid, despite its low level of interconnection. The Spanish TSO operates a very solid matrix-design grid, which includes a system for technical restrictions centrally operated in the Renewable Energy Control Centre (CECRE). CECRE’s operation procedure includes real-time reporting for all generators above 1MW and remote disconnection ability for any unit above 5MW. As a result, the Spanish system consistently shows one of the lowest curtailment ratios for variable generation, despite its high levels of penetration of variable renewable energy, as illustrated by the IEA.

Lack of a clear regulatory framework and market fundamentals

Along with the lack of urgency around battery storage on the Spanish grids, key regulatory and market fundamentals have been lacking for the BESS business in Spain. The Spanish market has primarily relied on pumped hydro storage and thermal storage. As a result, the regulation required for BESS projects to participate in energy and ancillary services markets has been lacking, and progress in the necessary regulatory updates has been slower than in other European countries.

Aside from the missing regulatory framework, merchant conditions in Spain have also been relatively unattractive due to low energy arbitraging potential and the lack of a capacity remuneration mechanism. Day-ahead price spreads (see figure 3) on the Spanish wholesale electricity market have been comparable to those in the UK and Italy. In both of those countries, the long-term stable income stream from capacity market contracts is needed to create a sufficient return on investment. The absence of a Spanish capacity market makes it difficult to create a solid case for BESS investment.

Solar and wind capacity are starting to outgrow the grid

Despite the Spanish grid’s capability to integrate very high shares of renewables, the expected growth of solar and wind capacity will require a growth in storage capacity in the short term to maintain the Spanish power system’s resource adequacy. This challenge is further exacerbated by the planned decommissioning of gas-powered plants. Spain’s ongoing network development plan is meant to “promote renewable energy, a more robust and resilient power supply, and greater well-being and prosperity for the regions.”

The emergence of negative price hours in 2024 is a key indicator that the Spanish power system is reaching the limits of its current integration of renewable energy sources (see figure 4). Negative electricity prices are a signal from the market that additional (renewable) electricity is undesirable during that hour. Unlike most of the other countries in our study, Spain had not seen any negative prices prior to last year. But in 2024, the number of negative price hours exceeded those in the UK, signaling that Spain was producing significantly more renewable electricity than the system could handle.

According to Spain’s climate plans (see table 1), 15GW of additional storage is set to come online within the next five years. Here, BESS has an edge over alternative storage technologies due to shorter lead times. The rapid growth in BESS capacity in countries like the UK, Italy, and Germany demonstrates that batteries can play a crucial role in achieving the necessary storage capacity.

For BESS projects, a positive side effect of the further buildout of renewable energy sources, in particular with Spain’s low curtailment rates, is the expected increase in price spreads across the wholesale markets. The high solar capacity factors for solar photovoltaic (PV) generation in southern Europe could result in even higher price variability than observed in Germany and the Netherlands.

Adding batteries to solar and wind projects can improve the business case

Besides standalone BESS projects, we also expect a significant growth in co-located storage projects. Batteries can improve the business case of wind and solar projects by providing a better utilization of the grid connection.

This particularly holds in the context of Power Purchase Agreements (PPAs). PPAs are crucial to making wind and solar bankable, and Spain has been the biggest market for PPAs in Europe for years. Adding storage to a wind or solar project has a positive effect on the price of a PPA, because of the impact on the project’s feed-in profile. The emergence of negative price hours, which drastically complicate PPA negotiations, can give hybrid generation-plus-storage an additional edge over wind and solar PV projects that are not co-located.

Crucial reforms of the regulatory framework

A lot of the missing pieces in the regulatory framework are already well advanced in the pipeline. Spain’s regulatory framework for BESS is set in its Strategy for Energy Storage. The Strategy identifies the required regulatory measures – such as grid access, market structure, and addressing double tolling – that are currently needed to ensure the deployment of a solid energy storage market.

Access to balancing markets

The BESS access to balancing markets was introduced in the resolution from the National Commission on Markets and Competency (CNMC), on December 11, 2019. Spain’s participation in the European platforms for restoration reserves will make three ancillary services available to BESS projects: Automatic Frequency Restoration Reserve (aFRR), manual Frequency Restoration Reserve (mFRR), and Restoration Reserve (RR). For mFRR and RR, Spain follows the guidelines from the European platform MARI and TERRE, respectively. Spain is scheduled to join the PICASSO platform for aFRR in May 2025. Though Frequency Containment Reserve (FCR) is not a market-based service in Spain, it is mandatory for generation units.

BESS projects will also be able to participate in markets for non-frequency related services. Currently, BESS can participate in the voltage support service and the Black Start service is expected to become available as well.

From hourly to 15-minute bidding intervals

Further improvements in the revenue potential of the wholesale markets can be expected with the shift from hourly to 15-minute bidding intervals in the intraday auction market and in the continuous market. The implementation of 15-minute intervals in the day-ahead market is scheduled for June 12, 2025. These shifts to shorter bidding intervals will offer increased opportunities for BESS projects to take trading positions and will likely increase price volatility.

Capacity remuneration mechanism

A crucial development is the draft proposal for a capacity market. The draft is undergoing public stakeholder review by the corresponding Spanish ministry. The proposed capacity mechanism would allow all existing market participants, including demand aggregators, to participate as long as they are bellow an emission factor threshold (550 grCO2/kWh). This de facto entails all technologies except coal power plants. New installations are, however, restricted to those of storage or renewables. Existing installations will be able to opt for yearly contracts, while new ones will be allowed to bid for half of their technical lifetime bids. Such provisions clearly aim to contribute to the bankability of BESS.

The bidding process will incorporate mechanisms to ensure that the offered capacity is not over captured by existing installations and blocks the new (BESS) facilities’ access to their required return on investment. For all the assigned years of a bid, the capacity will be paid as bid, and they will be assigned in a decreasing cost merit order. Although a solid assessment of the potential revenue requires knowing both the volumes and resulting prices, some sources estimate the expected proposal will result in a EUR 500-1000 million yearly market.

Grid access

The connection of storage assets has already been included in the corresponding grid access Royal Decree 1183/2020. At the same time, the Spanish government is currently running a public consultation on the update of the Royal Decree 413/2014, the “renewable general framework”. Among other measures, the proposal updates the injection priority order in the grid for renewable generation. The new system proposes giving priority to renewable generation facilities with co-located storage, as long as storage capacity remains below the generation capacity. Such facilities would be followed by: Renewable generation with storage not meeting the storage capacity threshold, high efficiency cogeneration plants, pumping and stand-alone storage, and finally the rest of conventional technologies. On the operational side, the National Commission of Markets and Competition (CNMC in Spanish) is elaborating the corresponding technical procedures.

It has also already regulated the details of the connection process of storage technologies to the transport and distribution networks in the Circular 1/2024. The Circular addresses issues such as how BESS should behave when charging from the networks, through an hourly pattern of allowed charge and discharge.

European Regional Development Fund

The recent approval of the use of the European Regional Development Fund (ERDF) funds to support the storage deployment in Spain opens the door for a first batch of around 2GW distributed in close to 100 projects, heavily supported by public financing. The corresponding draft call has already undergone a public consultation process.

The Spanish BESS pipeline is starting to grow

In line with these shifting conditions, the pipeline of BESS projects is indeed starting to grow. In March 2025, UK companies Renewco and Atlantica announced the development of up to 2.2GW of BESS projects across Spain. Other projects in the pipeline primarily involve storage co-located with solar or wind generation.

According to BloombergNEF, the total capacity currently in the BESS pipeline is around 3GW. However, Red Electrica’s (the Spanish TSO) registry of requested connection capacity, shows that accumulated requests add up to 22.1GW. If all such projects were to be realized at the requested capacity, this would already lead to almost achieving the national 2030 targets. Though the market fundamentals in Spain are currently not as supportive as in the most advanced European markets, it is clear that significant improvement is expected. On the variable generation side, the registry adds up to 25GW of assigned wind generation and 65GW of PV, pending resolution of an additional 12GW of wind and 16GW of solar generation.

After a period of trailing behind other major European countries, the Spanish BESS market has significant growth potential for the coming years. The storage requirements to accommodate more than a doubling of the renewable electricity generation capacity are clear, and the necessary changes in the regulatory frameworks are reaching their finalization.

The business model for Spanish BESS projects will be similar to those in other European countries. The main merchant revenue streams will be provided by energy arbitrage and participation in frequency services, while contracted revenues from a capacity mechanism should ensure sufficient returns on investments. The proportion of each revenue stream in the stack will have to be assessed per project and will change over time, depending on multiple dynamics in the wholesale and services markets. To get an understanding of how the revenue stack of Spanish BESS projects may evolve over time, lessons can be learned from more mature markets, such as the UK.

For co-located storage projects, it is important to stay informed on how adding a battery impacts the business case of a wind or solar project. The emerging negative price hours have a big impact on the PPA market, and batteries can play a critical role. However, the market for PPAs for hybrid generation-plus storage projects is still in its infancy and it is not yet clear how big the advantages of co-located projects are over standalone generation.

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 continuously 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 fourth 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 UK market and part 3 explored the Italian BESS landscape.