By Panagiotis Kefalas
Senior Associate, Aurora Energy Research
Intro
The Greek minister of energy has recently announced the targets of the new NECP which is expected to be published shortly. For energy storage, the target for 2030 is at 2.5 GW of installed capacity for pumped hydro and a whopping 5.6 GW for battery storage. These batteries are expected to accompany 14.1 GW of solar capacity, 7.1 GW of onshore wind capacity, and 2.7 GW of offshore wind capacity. To maintain grid stability and the smooth absorption of such volumes of renewable energy, that scale of battery capacity is to be expected. However, apart from the technical side and system needs, the largest obstacles for deploying 5.6 GW of battery storage in 7 years (that is a solid 800 MW per year on average) could arise in financing and project economics. More specifically, will the IRRs of such a large volume of batteries be at the levels where investors feel comfortable to build all these projects?
Market conditions
In November 2020, the Greek market entered a new phase with the introduction of the Target model which clearly separates the different markets (day-ahead, intraday and balancing markets). Since then, the market has been rapidly evolving further (market couplings, rule adjustments, continuous intraday trading etc.). Volatility has been very high the past two years, but this is mainly driven by broader factors such as gas prices. So, what’s in it for batteries in Greece? How and where could these projects make attractive returns?
According to the battery framework passed into law in July 2022, batteries can access four main markets:
- Day-ahead market (wholesale market trading)
- Intraday market (correcting positions of the Day-ahead market)
- Frequency Containment Reserve market (maintains frequency stability)
- Frequency Restoration Reserve markets (aFRR & mFRR balancing & capacity reserves)
Volatility in the DAM and ID markets is expected to rise. This is because higher renewables penetration will increase the periods of low prices, and increasing commodity prices (gas and carbon) will raise the costs of flexible thermal units, and by extension, the marginal system price when these assets set it. These markets are also large enough to accommodate arbitrage by large volumes of batteries. On the other hand, the balancing market services are not based on the same principles. These services, by definition, have much more limited volumes, but international experience shows that they usually are the most profitable for batteries, especially the ones that enter the market early. Understanding these markets and their potential will be crucial for successfully creating a business case based on revenue stacking for a battery project.
The auction
While the main details are now widely known, the two following important questions remain:
- Will the operation of subsidised assets be regulated and access to the balancing market prohibited?
- Will there be a transparent and clear regulation on grid connection terms as well as restrictions in charging/discharging?
If the auction serves its purpose well enough, one would expect to see them as a tool to kick-start the development of batteries in Greece and make the path for the development of merchant projects that will eventually take the lion’s share and will bring the system close to the 2030 targets.
Summary
The market dynamics have changed significantly over the last 3 years and will evolve further. There are enormous opportunities but also accompanying risks. Therefore, it is more important than ever to understand fully the different energy markets and analyse them with sufficient detail in order to make educated investment decisions. Aurora Energy Research, focusing solely on rigorous energy market modelling, is undertaking a large study that will develop long term outlooks for flexibility markets and will enable market participants to understand the revenue stacking potential of different battery systems in Greece. The study widens Aurora’s range of international market services, and enhances its role in providing energy market intelligence and in advising a wide range of players contributing to the Greek energy transition.