​Spain is seeking to launch a capacity market that could add significant long-term revenues for battery storage. In Great Britain, the capacity market accounted for 10% of BESS revenues in 2025, rising to 15% by Q4.

Spanish BESS projects cleared in main auctions could secure contracts lasting up to half the asset's useful life, providing revenue certainty for project financing.

The proposal is still under discussion by the European Commission, and key details remain undefined. Most importantly, the de-rating factors, that determine how much firm capacity BESS can offer, have not been finalised.

Key Takeaways

• Spain is launching a capacity market to address security-of-supply concerns and battery storage is eligible alongside generation and demand response.
• New BESS investments can secure contracts up to half the asset’s useful life, providing long-term revenue certainty for project financing.
• Auctions use pay-as-bid pricing instead of pay-as cleared, with firm capacity (MW) as the product.
• De-rating coefficients will determine how much firm capacity each technology can actually offer. In European countries values range from 0.14 to 0.44 for a 2-hour BESS and from 0.28 to 0.67 for a 4-hour BESS.

​To learn more, reach out to the author - paulo@modoenergy.com

Spain is expected to miss its reliability targets

Spain is walking a tightrope in terms of reliability. To keep the system in check, the installation of new BESS and renewable assets must ramp up quickly enough to fill the gap left by the progressive phase-out of nuclear and gas power plants.

Red Eléctrica (REE), Spain’s TSO, has warned of reliability risks for the last couple of years. In its 2023 and 2025 reliability assessment reports, Spain failed to stay below its reliability target of 1.5 hours of Loss-of-Load Expected, reaching 2.34 and 2.41 hours, respectively.

ENTSO-E, the association of European TSOs, also raised concerns on this matter. In its yearly European Resource Adequacy Assessment (ERAA) reports, it reached conclusions similar to those of REE.

​In the 2025 ERAA, the Spanish system surpassed the reliability target in all the years analysed. Even the lowest value, 6.37 hours in 2033, exceeded the Spanish reliability target by more than 4 times. On the other hand, the highest value, 18.61 in 2035, was more than 13 times higher than the target.

To address these problems, the Spanish government announced in December 2024, that it would implement a capacity market. This new market would attract new generation, storage and demand response assets to provide firm capacity. This was long-awaited news for investors, after the failed 2021 proposal.

When must capacity providers be available?

Capacity providers must be available during "stress hours", which are periods when REE identifies there is a reliability risk. These stress hours would be capped at 10% of annual hours and would be published before the start of each delivery year. This would give capacity providers visibility to plan maintenance and commercial operations.

For BESS specifically, this means ensuring state of charge and dispatch availability during these windows. Failure to meet these availability obligations would trigger penalties, detailed in the future operating procedure.

How will capacity market auctions work?

The capacity market will use competitive auctions to procure firm capacity from generation, storage, and demand response. The proposal introduces three auction types: main, adjustment, and transitional, each having different timeframes and goals.

All auctions share these characteristics:

• Product: Firm capacity, calculated as the installed capacity of an asset multiplied by a technology-specific de-rating factor.
• Pricing: Pay-as-bid. You receive what you offer, not a clearing price.
• Demand curve: Built from LOLE projections and the value of lost load.
• Reserve price: Existing generators will face a confidential price cap. Offers above the price cap are discarded.

Pay-as-bid pricing creates strategic complexity. In pay-as-cleared auctions, investors can reflect their real financing needs and receive higher revenues if they are not the marginal unit. In pay-as-bid auctions, achieving revenues above financing needs requires bidding higher. However, this increases the risk of not clearing.

New generators cleared in the auction will be able to obtain contracts lasting up to half the assets’ useful life, up to 15 years. Existing assets will only be eligible for a 1-year contract.

Any asset cleared in the auction could trade its firm capacity, and its associated obligations and potential revenues, to another asset in a secondary market post-auction.

De-rating factors will determine BESS revenues

The de-rating factor is perhaps the most important design element for potential investors. However, the capacity market proposal left the de-rating factor calculation process almost completely undefined. Nevertheless, we can compare how other countries with capacity markets determine de-rating for BESS and the values they have used in the latest auctions.

Countries analysed calculate BESS de-rating factors by considering the marginal impact of these assets on the system's reliability, or by how they generate when the system needs them most. In contrast, both Great Britain and Ireland scale up these marginal de-rating factors by considering the impact of the entire BESS fleet.

The different de-rating methodologies and country generation mixes result in de-rating factors that vary across countries. For example, de-rating factors range from 0.04 for a half-hour BESS in Ireland to 0.93 for an 8-hour BESS in Great Britain. REE's initial estimates range from 0.27 to 0.70, in line with other European markets.

For a 2-hour BESS, European de-rating factors range from 0.14 to 0.44. While for a 4-hour BESS, values range from 0.28 to 0.67.

What's next for Spanish BESS investors?

The proposal requires European Commission approval before implementation. Key outstanding questions include the final de-rating methodology, penalty structures for availability failures, and the timeline for first auctions.

Investors should monitor REE's de-rating factor decisions closely. The difference between a 0.27 and 0.70 de-rating factor more than doubles the firm capacity a BESS project can offer, directly impacting contract revenues.