LCP Delta: Italy will add 9 GW of front-of-the-meter batteries by 2030

pv magazine Italia spoke to Euan Killengray, associate consultant at London-based energy transition consultancy LCP Delta, about Italy’s MACSE energy storage auction and its capacity market procurements, placing the programs in a European context. Killengray confirmed MACSE is an Italian tool to drive long-duration battery energy storage and also discussed project oversizing, internal rates of return, and the lifespan of battery energy storage systems (BESS).

pv magazine: The first auction of the Energy Storage Procurement Mechanism (MACSE) will be launched on September 30. Do you expect the first auction to have many participants? Will the second have fewer?

Euan Killengray: There is strong developer interest in the first MACSE auction. The slight delay of the first auction, from the originally scheduled date, gives developers more opportunity to finalize their projects for the auction. However, some operators may wait for the second auction while they are still finalizing site details, permits, and bidding strategies. The first auction will likely be addressed by mostly well-capitalized operators (IPPs [independent power producers], utility-level). The second auction will likely be characterized by similar (or even higher) competition, depending on whether the first share clearing price is attractive.

For the first auction, we are talking about 10 GWh, right? It seems that the BESS projects for the first auction have already been defined, right? Now it is just a matter of understanding the price? Or rather, what is the market waiting for from the first MACSE auction?

Yes. Terna has initially set 10 GWh for the MACSE because this is the amount of BESS needed in 2028. Or it will be set at 80% of the capacity qualified for the auction, whichever is the lower value.

Another publication will be released 20 days before the auction showing the actual target volume for the first auction – this could see a reduction from 10 GWh if projects come online between March and August.

Pricing is the key parameter to focus on. It will be based on the amount of volume offered compared to the final target volume, as well as the perceived “opportunity cost” of not being able to participate in the capacity market and the revenues of merchant [BESS] projects.

What is the specificity of the MACSE auction compared to other European schemes?

In many European countries (e.g. the UK, Belgium, Ireland, Poland), capacity auctions typically do not differentiate [energy] storage from other sources of [electricity] capacity, or only partially (such as the UK Capacity Market, which requires some de-rating factors for batteries [estimates of true output versus nameplate capacity]). MACSE is more akin to a specialized tender for long duration electrochemical storage.
MACSE also involves more complex operational and commercial considerations than typical capacity mechanisms in Europe. MACSE involves assets being activated frequently in wholesale and [grid-strengthening] ancillary services [markets], whereas typical schemes only involve calling capacity when a stress event is identified.

This sourcing exercise will offer a stable and predictable premium for 15 years, making it particularly attractive to risk-averse investors. Who are these risk-averse investors? In general, who are the investors most interested in this scheme?

Risk-averse investors typically include pension funds, insurance companies, and large utility companies which, having a lower cost of capital, are often looking for stable, predictable returns.

What should be the internal rate of return (IRR) for projects participating in the MACSE auction? How does it compare to the IRR of other BESS investments in Italy?

Public values ​​of internal rates of return for BESS in Italy often vary between 6% and 10%, depending on whether it is a commercial project or a long-term contract. In the context of Macse, given the stability of revenues, lower interest rates could still be attractive for risk-averse capital. We are not able to provide more details on this answer. These are too sensitive questions, given the commercial value of this information.

What about other IRRs, of BESS investments in the United Kingdom, Germany, and Poland?

We are not able to provide an answer. These are too sensitive questions, given the commercial value of this information.

Oversizing [building more energy storage capacity than bid for] will be an important decision for projects participating in the MACSE auction, also in relation to the MACSE regulations. What level of oversizing do you expect? Do you expect oversizing to be more pronounced in some regions? Or better, what are the factors that affect the oversizing of the project?

Oversizing is expected in MACSE, primarily due to the 1% [BESS] degradation per year requirement. The alternative is a “merchant-tranche” approach, where the share of [BESS] capacity allocated to MACSE [participation], relative to [unsubsidized] merchant [operation], over time is slowly increased to meet degradation requirements; this allows for a lower bid in MACSE and the benefit of merchant upside . Which strategy is best will depend on the additional cost of oversizing and how this is priced into bids, relative to the value opportunity captured through merchant upside.

What could be the strategies for developers? A progressive scaling of the project, eg participating in MACSE only with a certain percentage of a BESS project’s capacity and increasing MACSE participation over time? Can you explain again why?

Yes, as explained above. The merchant-tranche approach is viable. This way you ensure some security of revenue with the MACSE share but you have the possibility to get more benefits from merchant revenue, or from additional MACSE auctions.

The capacity market will be another driver. Can you quantify and explain when this scheme will be relevant and when projects will come online?

While most Northern Italy sites will consider the capacity market (CM), it is still important to consider it for Southern assets, as it is still part of the alternative strategy to MACSE to secure long-term revenues. CM prices, or expected prices, will influence MACSE bidding strategies as that is an opportunity cost that developers will have to consider. The CM is currently awarding contracts for target capacity by 2028, which will impact both the volumes needed for MACSE [auctions] and the pricing level.

Do you think the Italian target of 131 GW of renewable energy by 2030 is realistic? Do you think the 10.5 GW [of battery projects] to be added in Italy by 2030 is reasonable?

One hundred and thirty-one gigawatts is an ambitious target but I would consider it achievable if permitting bottlenecks were addressed and auctions for wind and solar were accelerated. The BESS target is also ambitious but these targets need to be met to accelerate the transition to zero emissions. The trading environment is well set in Italy, with MACSE, CM, increased liquidity in wholesale markets, and Tide [regulatory reform to include renewable energy in electricity dispatch rules], but more needs to be done on permitting bottlenecks. Our LCP Delta Storetrack product is a dataset that tracks the status of storage projects across Europe, allowing users to follow aggregate trends in MW, MWh, and storage duration across countries; drill down into specific projects; and identify owners, optimizers, financiers, grid connections and planning status; and more. Storetrack indicates that over 20 GW of [utility-side] “front-of-meter” battery products are in planning or development as of March 2025. Our market forecast indicates that 9 GW of front-of-meter battery storage capacity will come online between 2025 and 2030.

In terms of energy storage duration, intermediate solutions of four- to six-hours hours are needed: four hours for the CM, especially in the North of Italy; six to eight for the MACSE. This is what [Chinese storage company] Jinko ESS expects. Do you agree? Why?

I partially agree, six- to eight hours makes sense for Macse, as grid needs in the South [of Italy] fit the evening ramp profiles, due to PV turndown, and mitigate renewable [energy] overproduction during most daytime hours. However, from a commercial perspective, four-hour-duration plants could achieve better returns than longer-duration plants, based on the higher capex [capital expenditure] per megawatt for these longer-duration plants and the more favorable bid coefficients for four-hour duration plants.

How do you expect duration models to change over time?

Longer duration assets (six- to eight-hours) are expected to be more important in the South through 2030 and beyond, for the reasons above, related to ramps and matching with solar PV profiles. Medium-duration assets (two- to four-hours) are expected to be the dominant technology in the North. Short duration assets (one- to two-hours) are expected to be built for [grid] fast reserve auctions and existing assets are expected to come online but will not be built further due to saturation of ancillary service revenues over the next two to three years.

From pv magazine Italia.