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Market Options
Italy’s ambitious drive towards renewable energy integration, targeting 50 GW solar and 28.1 GW wind capacity by 2030, has created distinct pathways for Battery Energy Storage System (BESS) investments – the MACSE auction and Capacity Market auctions.Choosing between these mechanisms involves weighing the trade-offs between long-term stability and short-term flexibility.
The MACSE programme (Meccanismo di Approvvigionamento di Capacità di Stoccaggio Elettrico or, the Electricity Storage Capacity Procurement Mechanism), managed by grid operator Terna, offers 15-year contracted storage opportunities with high revenue certainty, particularly suited to southern Italy’s abundant renewable resources but weaker grid infrastructure. The Capacity Market, prevalent in the industrialised north, provides shorter-term opportunities aligned with the region’s robust infrastructure and higher electricity demand.
While MACSE aims to deploy 50 GWh of long-term contracted storage by 2030, focusing on renewable integration, the Capacity Market addresses immediate grid stability needs through more dynamic, market-driven approaches. This regional and mechanical divide presents investors and project developers with risk-return profiles that need careful consideration of project specifics, location advantages, and investment horizons.
The timing of these markets adds a layer of complexity: Capacity Market auctions are happening soon, before MACSE’s first auction. This means developers and investors need to decide whether to commit to the capacity market or wait for potentially better terms with MACSE.
Four strategy options
Within this landscape, according to Timera Energy, investors can pursue four distinct strategies, each with unique characteristics:
- MACSE auction and sign 15-year contracts with high revenue certainty (IRR 5–6%), particularly suited to southern Italy
- Capacity market which provides 15-year contracts with potential merchant revenue upside
- A combination of stable MACSE contracts with merchant opportunities to optimise returns while maintaining security
- Market benchmark: merchant opportunities, but high risk
Comparing MACSE and capacity market options
The MACSE and Capacity Market mechanisms represent different approaches to incentivising storage deployment in Italy, each with distinct operational structures and risk profiles. This split approach reflects Italy’s broader energy strategy: MACSE focuses on supporting renewable energy growth in the south, while the capacity market helps keep the grid stable across Italy, especially in the industry-heavy north.
MACSE auctions
MACSE operates as a ‘pay-as-bid’ auction system with zonal quotas, specifically targeting new stand-alone storage projects that haven’t begun construction. Think of it as a stable, long-term partnership: projects get high revenue certainty (over 90%) through fixed capacity payments from Terna, Italy’s trusted grid operator. The mechanism has a revenue-sharing model – projects give up all their wholesale market earnings in exchange for keeping 80% of the balancing market revenues, with safeguards in place to protect against extreme price swings.
MACSE particularly favours longer-lasting batteries – the longer your battery can provide power, the better the price you’ll get per megawatt-hour. It also rewards more efficient systems with higher premiums. However, over the medium term, there may not be enough capacity within the limits set by the Transmission System Operator (TSO) to accommodate all projects. This dynamic may push participants toward aggressive bidding strategies, although the scheme ensures that bids must reflect prices participants are willing to accept.
Capacity Market auctions
The Capacity Market (CM) uses a ‘pay-as-cleared’ system with zonal pricing, open to both existing and new power capacity projects. While it also offers 15-year contracts, it lets projects keep all their market revenues on top of capacity payments (though there are caps on total earnings). But actual payments can be lower than expected because of ‘derating’. This means the payment might be reduced if the battery can’t deliver power for as long as the market needs it.
Regional considerations
Italy’s ambitious renewable energy targets present significant challenges for system security. A substantial portion of growth is expected in southern regions and islands, areas already facing critical grid flexibility issues. To address these challenges, expanding electricity storage and transmission infrastructure is essential to support the integration of renewable energy sources.
There’s disparity between Renewable Energy Sources (RES) capacity and peak load across different zones. Northern Italy shows a relatively balanced capacity-to-load ratio, but southern regions and Sicily face potential capacity surpluses that need robust storage solutions to manage energy flows effectively.
Right now, battery storage projects aren’t making enough money without some form of government support in Italy – that’s why choosing between these market mechanisms is so crucial. The capacity market in the north is getting crowded, with existing power plants already taking most contracts at the highest allowed prices. This makes it harder for new battery projects to compete unless they can offer something special.
Location plays a big role in which strategy might work best. Southern projects can benefit from MACSE’s focus on supporting renewable energy integration, though they face challenges with grid connections. Northern projects enjoy better infrastructure and reliable industrial power demand but face tough competition from existing players.
If you can’t get into MACSE auctions because they’re oversubscribed, mixing capacity market participation with energy trading is an option, but one that needs deep market expertise.
Market strategies
Baseline MACSE returns
The MACSE scheme offers long-term contract support, effectively swapping merchant revenue volatility for a stable, predictable premium over 15 years. This makes it particularly appealing for risk-averse investors. In contrast, the capacity market involves higher exposure to merchant risk. It compensates participants for maintaining standby capacity to ensure security of supply but does not provide the same level of revenue stability as MACSE.
The expected returns (‘unlevered IRR’) range from 5–6% if you stick purely to MACSE contracts. This can rise to 7–9% if you mix these contracts with market trading activities in a hybrid approach. But fierce competition is expected in MACSE auctions, which could mean lower returns than initially hoped.
Capacity market risks
The capacity market is well-suited to industrialised northern Italy with its developed infrastructure and higher industrial demand for power. While it offers 15-year contracts like MACSE, investors can stack their capacity payments (payments are then available when needed) on top of what they earn from selling energy in the wholesale market. This could mean higher returns, but you’re also more exposed to market swings. When energy prices go above certain levels, investors might have to pay money back, so they need to be comfortable with this uncertainty.
Hybrid strategies and risks
A hybrid MACSE strategy offers reliable baseline returns from the contracted portion while keeping the ability to earn extra through market trading: BESS operators keep 20% of earnings from grid balancing services (ancillary services) while passing the day-to-day market trading risk to Terna (Italy’s grid operator).
The timing conundrum
Capacity Market auctions are coming up first (late 2024 and early 2025), while MACSE auctions follow in the first half of 2025. This means investors face a choice: jump into the capacity market early or hold out for potentially more stable MACSE opportunities. This is tricky for projects that could work in either market.
For investors who prioritise steady, predictable returns, MACSE’s inflation-linked payments and clear protections against downside risk are attractive. Those comfortable with more market exposure might prefer the Capacity Market’s flexible structure and potential for higher returns through sophisticated trading strategies. Success in either market comes down to the specifics of your project – how long your battery can provide power (duration), how efficient it is, and where it’s located. MACSE particularly rewards batteries that can provide power for longer periods through its pricing structure, while doing well in the Capacity Market often depends on how quickly and flexibly you can respond to market needs.
