Unlocking Italy’s battery energy storage market - with Mahael Fedele (Sphera Energy)

Hello, and welcome to another episode of transmission. I'm Luke, and today we're taking a deep dive into a country that's making bold moves in battery energy storage, Italy. Joining you is Majel Fadel, CEO and partner at Sphero Energy. Majel has spent over fifteen years in renewables, working across Europe, APAC, and the US before co founding Sphero to originally deliver large scale battery projects.

Right now, his focus is on Italy, a market undergoing rapid transformation as storage becomes an essential part of grid stability. In this conversation, they explore what's driving Italy's battery boom, how the new TSO led auction model is shaping investment, and whether developers should be shifting from project development to long term asset ownership. Mahel also breaks down the unique challenges Italy faces compared to the UK or US, from grid congestion to revenue stacking and what that means for developers trying to build a sustainable business in this space. It's really fascinating to hear how deliberate Italy's approach to storage has been.

Unlike other markets that have scaled storage through merchant risk, Italy is relying on structured capacity auctions, raising questions about how quickly private investment could follow. So is this model the key to unlocking large scale battery deployment in Europe, or does it create barriers that could slow things down? We'd love to hear your thoughts in the comments. And if you're you're enjoying transmission, hit like and subscribe.

It really helps us reach more listeners and bring you more discussions like this one. Alright. Let's jump in.

Hey, Maher. Welcome to the podcast.

Thank you, Quentin. Great great to be here.

So every time we do one of these special episodes where we look at a market or a the power market or a country, it tends to go down really well with our audience. So we had Lars Stefan on to talk about the German market. We did one deep dive into the the market in Netherlands. We've done one in Australia.

And, generally, these get a lot of attention, and we get loads of really good feedback where people say, hey. I didn't know that, and I'm really glad that you went into such depth. So I'm hoping that this can be another one of those all about the Italian market. So you're very welcome to come on, and, we're really looking forward to this this conversation.

Yeah. Great great to be here. I I was also a big fan of those, of those, episodes. Learned a lot. So, hopefully, I will, be able to sort of deliver a bit of, knowledge about Italy today.

Alright. Let's let's set the scene then. So your company, Sphera Energy, can you just give a quick overview about what that does and what you guys are up to and specifically about the Italian part? And then we're gonna I'm gonna ask you loads of questions about the Italian market, and we're gonna go deep.

Yeah. Sure. So, Spiro Energy, is a battery storage development company. We, we opened shop in late twenty twenty two, very late twenty twenty two. I've been in it full time since the beginning of twenty three.

And we've we've focused so far predominantly on the Italian market. We have started some activities in Germany last year, but that remains sort of a smaller part of of what we do. And in Italy, we are now eight people. We're based in Milan, and we've become, I would say, in this sort of, you know, new wave of development of battery storage in Italy, one of the larger one of the larger, players in terms of development.

And, you know, we'll talk about that more, I'm sure. We we we started the the company with the idea of being a pure play developer. So, you know, originate, develop, and then monetize by, you know, divesting to to to other investors that would pick up the projects, and and build them and operate them. We're now working we've been working for a while on a on a on a possible transition to a model where we we build on and and operate ourselves, at least some of some of the projects we're developing.

And it's remarkable how many companies do that that start out to just develop, and then there's something attractive about owning assets. Maybe before we talk about Italy then, could you just talk about the decision that you made there, where rather than just flipping assets, there's a bit of a loose term, But you're moving into the the ownership and operating model.

Yeah. Well, you know, I don't know. I think probably, you know, all developers might have a slightly different story. Our our thinking there was that there is certainly a lot of value you can create in originating and developing, you know, good good investment grade sites.

But especially where you have markets that, you know, need work to be done to get the project to a financial investment decision, you know, to get a revenue stream strategy locked down, to get financing, to you know? And then, you know, building them and and starting to, you know, prove the operation. We we feel there's a ton of value there in the value chain beyond just ready to build.

And I think one side of it is that we we think we have the capabilities, and we wanna, you know, be part of capturing that value that's beyond our TB. Now whether it's, you know, all the way to earning gas that's twenty years or whether it's, you know, taking it to COD operating for a couple of years and then, you know, downselling it, that that's still sort of, you know, something we're we're we're we're we're we're looking into. But but there's value there. Right? That's one point. And the second, I think, is just, you know, interest in our previous careers. We've all been part of IPPs, so we've seen products being built.

And and, yeah, there is something nice about, you know, going from paper to so it's an operating asset.

There's also a lot of intellectual property or value in if you know all the nuance if you had to develop that site, you know it at the back of your hand. Right? You know the nuances. You know all sorts of legal or physical characteristics about that site, which can sometimes get lost in a transaction.

So you think that the people who developed it and built it might be the might be the best people to operate it, But there's a few parts to that thinking. So let's go to Italy then. What's can you give us a lay of the land for battery developers and asset owners in Italy? Why is the Italian market so attractive for batteries?

And let's work backwards from there.

So the the the well, first of all, I think the the Italian market is still a relatively, new market. You know? So to give you an idea, there are currently in operation, one thousand roughly, you know, give or take, one thousand megawatts in Italy, a grid connected utility scale battery storage.

There's there's a lot more sort of residential and commercial. There's about four gigawatts thereabouts. There was a boom of of of residential and commercial in the last few years. But if if we're looking at, you know, utility scale, which is, I guess, what we we both focus on mainly, we we've only got one gigawatt installed.

And to give you an idea, roughly, I think it was eight hundred megawatts were actually connected in twenty twenty four. So, you know, very, very recent installed base. There's another gigawatt, give or take, being sort of under construction, which will connect by the end of twenty five. And and that's what's sort of, you know that that that is what's currently the the lay of the land in terms of of of existing existing existing assets.

There are a couple more hundred megawatts which recently won some capacity market auctions, so they'll presumably be, you know, built between the end of twenty five and twenty six. But, you know, those are the projects that have FID, and that'll be built and connected. The rest is still to be to be sort of built.

We'll build in the sense of, you know, it's it's the future of the market. It's it's what we're all working working towards.

And of the assets, let's say let's talk about those eight hundred megawatts that have been built in twenty twenty four. So they've just come online. How are those assets making money right now?

Yeah. So the the this first wave of projects that have been built, I think it it it I I really see the market as as having two very distinct waves. Right? We've had the first wave between twenty twenty and twenty twenty two, and I'll I'll go into a bit more detail now.

And then there's a completely new wave that has started, since then. And and so the assets that are being built have been connected and are being built now. They they still belong sort of to the first wave of projects. And and now, you know, there's a whole new chapter that's that's being written.

So when we go to this first sort of wave, the first so there there there was some smaller pilot projects, you know, in in the twenty tens and beyond mainly built by the TSO, but, you know, very minor stuff. The first sort of more significant mechanism that was rolled out was a fast reserve auction in twenty twenty, which procured I think it was around two hundred megawatts, although not all of it was utility scale. There was a bit of demand response aggregation.

There was, you know, a EV sort of aggregation in there.

But but it it it ultimately was predominantly batteries. And so that was the first sort of mechanism, and and around a hundred and fifty megawatts of those have been built now. And, and that was a mechanism where the size of project was constrained to twenty five megawatts, so it's still relatively, you know, small projects and very short duration. Like, they were one hour projects mainly.

Then moving on from that, there was two rounds of capacity market auctions. So Italy's always had, you know, has has had capacity market auctions for a longer time, but they were they were opened up for batteries and and sort of batteries with the CapEx coming down and all that. Battery started to be a player in these auctions.

First, I think it was in twenty twenty one, the first auction where batteries actually started playing a bit of a role, and then twenty twenty two, the second auction. And between these two auctions, I think it's around one point eight gigawatts were awarded of of nominal battery, battery storage with average durations increasing. So they were more sort of between two and four hours, quite a bit of four hour assets as well. And and and those are the projects that are being built now and and that have connected in twenty four.

And and and these projects have have been, built on the basis of a, you know, the capacity market with with pretty good, you know, good tariffs. They secured some pretty high tariffs, but that forming part of a revenue stack then together with, you know, your wholesale trading and, balancing market and service activity. So so, you know, that's kind of UK typical UK kind of revenue stack that you would you would you would typically think of. Now the interesting bit and that's why, again, I like to think about that as as the first wave is that I think it's close to ninety five percent of that capacity is Enel green power.

So it's, you know, it's basically being totally dominated by Enel. And a couple of other utilities and players have picked up the rest, but it's it's basically been Enel gained so far in Italy. And and that sort of brings us to where we are today where I think there's a completely new different phase that is that is starting.

How how did NL Green Power get so much market share? What did they do that was special?

I think there's two things.

Well, first of all, I mean, Enel is is is is a great company. Like, they're, you know, they're they're a global leader in in energy and energy transition. So, you know, they had the vision that that Italy was gonna need that. And, of course, Enel is a very embedded player in Italy as well.

They're they're fuzzy, you know, governmental. They were a government, you know, owned entity. So, you know, they're they're, they're extremely strong in Italy. So, you know, I think they, of course, could see storage coming in a long, long, long time before anyone else could, and and they prepared for it.

And, of course, they have the means. You know? They're a massive company. So so that's, I think, the biggest reason.

But the second reason was also in terms of development. A lot of these sites were, let's say, easy, you know, low hanging fruits in terms of being located, you know, with land they already had next to, you know, big existing, power plants or power plants being decommissioned, so they had grid. So they had a very privileged position also from the point of view of, you know, actual projects, and then they were able to develop and and consent some projects pretty quickly while the rest of the market was still sort of, you know, starting to think about batteries.

So to take stock in Italy then, we've got about a gig of batteries online right now, and then you've got a pipeline. So what what does the pipeline look like?

Yeah. So now if we if we look if we look at sort of the the phase two so development activity has picked up a lot, you know, already since probably twenty twenty one, twenty twenty two. The first sort of developers started operating. We we got in, you know, I think relatively early.

We weren't the first ones, but, you know, we're first maybe one of the first really fully dedicated storage companies. But but, you know, we certainly weren't the first energy company to start doing storage. And since then, activities really ramped up in twenty three, and then it it really boomed in twenty twenty four. So as of now, if we if we start looking at sort of what's coming on the second wave, there are four I think it was four point seven or four point eight, gigawatts of, consented projects at the moment.

But that includes the two gigawatts or that that are that are already being built. So let's say there's around, you know, two point eight three gigawatts of new projects that have been consented.

Now I'm always talking about stand alone. So there is there is a a separate, you know, pretty big pipeline of collocated projects in Italy, but that that's a bit of a different you know, it's been just mainly developers putting batteries into their planning consents for for for for for products that are predominantly in a solar or or or wind. So that there is, you know, I I'd say they're not particularly, you know, deeply thought of collocated. It's just let's throw in some batteries. So there's there's a lot of that, but the numbers I'm sort of you know, I've got in my head there are about stand alone. And so you've got those those four point eight consented projects.

There's another this so we don't have very transparent public data. There's there's a yearly sort of report that comes out in terms of projects that have been that that have been, filed into planning and that are undergoing permitting.

And last year in in in May, we were at around fifteen gigawatts in in in permitting.

I my my feeling is that now we should be around you know, we've probably crossed the thirty gigawatt mark of of projects undergoing, in in the planning process.

So, you know, if you if you if you think of the second wave of projects that's coming up, these are the mature ones. Right? These are the ones that are now in planning, and then they're coming out, and these are the ones that are gonna play a role in the, you know, short to medium term in terms of what's gonna be built.

Beyond that, of course, as in, you know, many markets, there's been a massive boom of sort of early stage, developments. You know? There's there's, I I don't have the, you know, the figure. You hear figures every now and then, but it's it's, I'm I'm sure, you know, quite a bit above a hundred gigawatts of sort of, you know, land and grid projects kicking around, still trying to figure out, you know, exactly if they're gonna file for permit, what the grid situation is like. So there's there's a there's a huge amount of early stage, grid applications out there, which is, you know, common to, I guess, UK, Germany, a lot of a lot of other places.

And before we zoom in on the revenue case, so that how batteries are gonna make money, we've got this new TSO driven storage auction mechanism, which is quite exciting to talk about. But before we get there, can you just talk about the wider energy picture in Italy? So what what does what does peak demand look like, for example? What does the energy mix look like? And are there any big governmental or policy changes that are driving change?

So in terms of of energy mix, Italy is, if I'm not mistaken, we're around forty percent of, consumption which comes from from renewables. So it's a pretty high share already. The thing is half of that is is hydro. So we we have, you know, a pretty decent amount of legacy hydro in the Alps predominantly.

So, you know and I'm I I don't have the exact figures, but it's just to give a rough idea. You know, probably twenty ish percent hydro, twenty percent renewables, wind and solar. And we've got a decent amount of imports in Italy, so we do import, some you know, I I don't have the exact percentage, but we we are a net importer of electricity mainly from France and other neighboring countries.

And the rest in Italy is predominantly gas fired with a bit of other legacy fossil fuels, but but, you know, there's there's a big, big chunk of gas fired. So that's kind of today's energy mix in Italy. Going forward, we we have you know, there's there's a couple of sort of reference publications if you want. Yeah.

There's there's the European plans, which it's it's always a complicated acronym, but it's it's, I think it's national that translates the national plan of energy, you know, future energy, something like that. I I I can't remember what the what the acronym stands for, but it's it's the, you know, the central going planning of of, regarding the the energy system. And we have a target there by twenty thirty to add another sixty five gigawatts of, wind and solar, predominantly solar. Italy's, you know, Italy's wind resources aren't great onshore.

They've pretty much been exploited, most of the the good ones. So it's gonna be predominantly a solar growth. And these extra sixty five gigawatts of installed renewables should bring our overall renewables percentage up to, you know, beyond sixty percent, sixty, sixty five. And that's without hydro growing.

You know, hydro is, you know, not not gonna grow significantly. So we we are really moving quickly, towards a much more sort of, you know, intermittent generation, mix.

And and and I guess that's, you know, that's one of the big drivers why why why the the the TSO and the regulator has, you know, been been planning this this growth of of battery storage. And not only battery storage, also pump hydro, but basically of storage capacity to be to be built into the, into the energy system.

If you think about the solar solar irradiance that Italy gets and also the the Alps as a hydro resource, Italy and and also so much coastline. Italy has got some incredible natural resources.

We we have also some pretty big challenges. One one being, you know so the the hydro bid is has been great. I mean, a lot of Italy's growth has has relied on on on on hydro in the past, but that's sort of, you know, pretty much been been been exploited.

Wind wise, the problem is that these were we're a pretty small country, very and very hilly. So, you know, you we don't have vast amounts of flat land like you might have in, you know, Spain or or France or or even even the UK, I think, has, you know, some sort of bigger bigger landscapes where you can, you know, build tons of wind in Scotland things like that. We we are a pretty land constrained country, hilly, densely populated.

And so, you know, it's not it's not such an easy it it is a, you know, it is a challenge, the the the the the massive build out of renewables. And and offshore is a great sort of prospect for the future, but we've got very, very deep seas around Italy. So it's basically there's very few non floating wind projects that are that are in the pipeline. The the big offshore game in Italy is gonna be floating. So, you know, that's still sort of, I guess, you know, sort of in the making. Right? I mean, floating is still a little bit, not there.

And in the UK, choosing between farmland and solar panels is quite an easy decision. So that's gonna really wind people up, sorry, if you're a farmer. But choosing between a vineyard and, solar irradiance for generations is quite quite a difficult decision. So let's talk about this new TSO driven energy storage auction mechanism. I'm sure our listeners will have will have a keen interest in this, and it's it's very different. It's very different compared to other mechanisms so far in other markets in Europe and elsewhere. So can you tell us more about what's the strategy here, and what does this look like for assets?

Yeah. So that that that's no doubt. I mean, it Italy has chosen a path to to the deployment of of of storage that that is quite different from from other countries. It started very similar, right, with the kind of organic capacity.

Yeah. Some some sort of fast reserve sort of, type of mechanism, then a capacity market with a revenue stack. And and then it sort of pivoted to a much more centralized regulated mechanism to deploy vast amounts of storage. And and what what we're referring to is this so called MACSE mechanism.

So it's So that's the that's what it what it sort of stands for.

And what it reflects is a strong view from Italy's regulator and TSO that batteries are, you know, to some extent, almost grid assets. So they're seen as grid enablers rather than, you know, rather than rather than, you know, like, generation projects that can be that that that that makes sense that, you know, private, company owns them, operates them, and does whatever they want with them. So they it it all starts from this vision of of of of storage. And, look, I I can't say I'm a massive fan of this vision.

I I quite you know, in general, I think markets do a pretty good job of optimizing things, and I think we've we've seen, you know, success stories of deployment of storage in in very market, you know, market driven environments like Australia, the US, the UK. So so, you know, I'm I'm not necessarily an immediate fan of this approach, but on the other hand, look, I think it it it it does provide Italy a huge opportunity to deploy storage quickly. It's just gonna be a bit different. And so if we go into it in a in a bit more detail, what what this mechanism, is about, it's about the TSO procuring pretty large amounts.

So we're talking about the target here is fifty gigawatt hours, between now and twenty thirty. So considering we're in twenty twenty five, there's about five years or a bit less than five years to go. We're talking, you know, ten gigawatt hours per year to be to be to be procured.

And and, and the the idea here is that you will there there will be an auction system. You will be bidding as as a project owner, as a project operator. You will be bidding into the auction system to secure a fifteen year, flat tariff. There's there's a small indexation portion of it, but it's essentially a fixed tariff with a bit of a bit of indexation for the o e, o and m part.

And you'll be bidding in terms of euros per megawatt hour per year. So you you, you know, you're bidding your price. If you win, you secure this fifteen year tariff, and that will be essentially the the the very large part of your revenue. You do have a small component, which is not fully regulated because these assets will also you know, they'll they'll essentially be operating on the basis of, you know, inputs from Turner.

So Turner, the TSO, is is is your, you know, is is the one providing the tolls, so they're operating your battery.

Although the the when you're not operating, you know, on on their orders on on the under the Maxi, you you can participate on the ancillary service market, the so called MSD.

And the revenues that you will secure on that market, you get to keep twenty percent of them. This at least in the last draft. So, you know, the the the the the process of of developing the MAXA has been going on for a few years. It's been through several rounds of consultation approval. We're basically almost there, but we're all still waiting for the last and final, you know, rules to come out. So some of these parameters may be slightly tweaked, but, you know, not not that much. So the the point is fully regulated tolling revenue from the TSO, plus a little component of upside you're probably gonna be able to get by by participating in balancing markets.

And it's this is so fascinating and so far removed from anything we're used to. Right? So the so the optimizer is the TSO, and you're giving the keys to TSO over fifteen years. And your job is just keep the thing available, I guess, and you have some sort of availability requirement. So so what about cycles and availability and and how the asset is used and degradation and all of those technical parameters. How how is the this auction mechanism or this this new service gonna account for that?

Yeah. So that's that's been, of course, the objective of a lot of, you know, work from Turner to start with and then from all all us as industry players sort of, you know, contributing in this consultation process. And I think we're still, you know, there's still gonna be possibly some tweaks. So the the the numbers I'm gonna give you are from the last round of what was published.

They might change slightly when the final rules come out. But you're absolutely right. So you have the the TSO operating optimizing your battery. There has to be a set of rules.

Right? So who who's, you know, who's doing what, who has which obligations.

And so as an asset owner, you're obliged if you win the auction well, first of all, to build the asset and then to to, make it you know, to to essentially make, make the batteries available according to a set of parameters for the entire fifteen years. There are in terms of duration, there there's well, first, before we go into sort of degradation and and and availability and all that, a big a big topic of discussion around Maxi has always been the the topic of of of duration. So you're bidding in, euro per megawatt hour terms, but, you know, there there isn't a the the only thing the auction rule says that you can bid with assets that are between four and twelve hours duration.

So that opens up a, you know, pretty a pretty broad window of durations.

And to to account for the different service that different types of durations can provide to the to the to the to the electricity system, they've introduced some coefficients, in charge and discharge that essentially tried to level the ground a bit. So, you know, I'll I'll give a few numbers, and, hopefully, they'll be clear. But so if you if you assume, you know, you wanna bid, thirty thousand euros per megawatt hour per year, right, as your as your, as your bid, if you bid with a four hour system, so where these, you know, where your each megawatt hour can be delivered quicker if you want.

Right? If you've got four, you know, four hour system compared to an eight hour system, then your bidding price, in the merit order curve that will determine who wins the auction will have a bit of a a bump up. So you get a you get a bit of a boost, and that's given by by some some coefficients that have been determined by it in these rules. Whereas if you're bidding with an eight hour, they they've they've built those sort of the rules around an eight hour as the default case.

So if you're bidding with eight hours, then then, you know, no no coefficient changes. And if you bid for more than eight hours, which, you know, probably no one will, at least no no lithium ion, you know, battery will we we expect will will be, you know, going in with longer durations, then you you get a slight bump down because, you know, you you're you know, per each megawatt hour that you can provide to the system is gonna take you longer. You're gonna react, you know, slower and all that. So so they've they've created a mechanism where you can bid with a range of durations, these coefficients, and, of course, what's happening on the CapEx side will and development side will determine actually what duration projects are optimal.

And at the moment, I think, you know, the consensus is that although Turner has always sort of spoken about eight hours as being the ideal from their point of view, my feeling and and I won't say it's a consensus, but my feeling our feeling is that we're probably gonna sit between four and six hours generally on one side because what's been developed so far in the market has predominantly been four hour assets. There are a lot of projects now going in as eight hours, but but then again, there's other, you know, aspects around firefighting rules and distances and all that, which which will make it, you know, not super easy to cram a lot of capacity in.

Anyone who knows me well knows I am a bit of a free market guy, and I don't understand how I might make myself quite unpopular in Italy for this, but I do understand how this because so many questions. How would this work? And why why would the TSO think they have the foresight to know what the operating parameters of these kind of assets will look like in a fifteen year period? Because if you if you have a more of a market driven approach like in the UK and the US and in other you know, Australia, then you don't need to tie your hands on a fifteen year contract because you're because the the market does that for you, and then you have price signals and pricing and projects behave in the way you want them to throughout that fifteen year life cycle, depending on what you need rather than what you set up front. So if you needed to get a fifteen year contract to make projects make sense, I get why you do that, but you don't because this is a pretty mature technology.

And given the right market structures, investors are happy to invest. So I don't see why the TSO would make that move. But, also, who's who's the counterparty here? Right?

So the TSO is on the hook for fifty gigawatt hours by the end of this decade. So who who's the counterparty? Is the TSO's balance sheet big enough for this, or is it just wrapped up into some sort of big rec regulated asset base where ultimately it's the the ratepayer, the taxpayer who, you know, whatever happens is the the counterparty here. It just feels it feels like it's I don't know.

How how does it how does this work? I just I know. My my brain, is is blown by this.

It it is, it is very different. I mean, for sure, it's very different. And and I think we we sort of take it now. You know, we've been in it for a few years. You know?

We've seen it developed, so we sort of, you know But I must be missing something.

Right. So let's do the counterfactual. Why is this a really good thing for TSO to wrap this up for fifteen years? What am I missing? Why is this important to do it this way? What's the argument?

So the arg so well, first, let me let me answer the question about who the counterpart is because that's important. It's not it's not the balance sheet of the TSO. What what they've designed is I mean, so I've told you about what it looks like for the asset owner, so for, you know, guys like us. What happens on the other side is that Turner wants to be the sort of so, with these assets that'll come online, Turner will create, you know, products, with various durations, hedging products, if you want, time shifting products.

I think that's how they it's time shifting, essentially. So they will create time shifting products with different durations from, you know, hourly, sub hourly to yearly, even multiyear products for time shifting that will be then traded on the regulated electricity market and that, you know, people will take the position on the other side. So it will be utilities, traders, large consumers, and, you know, all all people or or anyone accessing the wholesale electricity market will be able to be on the other side of this big trade. It's just that you will have Turner in the middle coordinating all this with its algorithms, you know, guiding where more or less capacity is gonna be built because Italy is also a zonal market.

We've got seven zones. And so one one of the characteristics of this auction will be that there'll be different allocations depending on the zones. So, you know, the the the why why does it have to be like this? I I don't think it necessarily has to.

I'm I'm also, you know, a a a more of a markets guy. But I think the the the argument from, you know, the the regulator, Interna, is that it it's they they prefer a centralized planning. They think centralized planning of the rollout of this technology that they see as a grid support rather than a merchant asset. They feel it's important that it's guided and controlled and and and, you know, and and they love the idea, I think, of operating fifty gigawatt hours of batteries on the market, you know, as a tier.

So let's make it make them feel pretty Don't we all?

Yeah. Yeah. That's that sounds like a fun job. Yeah. I'd like to do that. Okay.

Maybe maybe it it, so okay. You that's my next question that there's a, there's, of course, the location element to it because it's Italy. What's interesting to me though is in order to design this system, it's just a it's a big it's a big risk on move. Right?

So in order to design a a service or a mechanism to lock in this many megawatt hours or gigawatt hours, you either if if I was doing it, you know, I'm no expert, but you you you have to take one one of two approaches. You either do it really flexibly, so you you you buy yourself room to maneuver throughout the fifteen years if if the grid or system requirements change and you haven't forecasted that right, Or you lock it up. But if you lock it up, you could be overpaying. Right?

And you could, you're you're lacking the flexibility that you leave later. But then if you put too much flexibility in, you might as well have just left it as a market and done, you know, less you know, more frequent auctions and, shorter durations. But I must say, there is if you listen to this and you're thinking Q's just talking his own book, that is kinda true. Right?

Because from our point of view, to do indices on this market and benchmark it, if everyone's got a fifteen year contract, it's, it's less interesting. So there is a conflict confidence of interest there. I must identify that. But that's not the reasoning for my argument here, I must say.

Yeah. No. No. Of of of course. And and and, again, look, I think, you know, it it is it is a different approach.

Now the good thing, though, and and I hope we're gonna talk about that as well, is that we and many other market participants don't think that's gonna be the only way of doing battery storage in Italy, for various reasons. I mean, one reason being that, at least so far, Turner has given pretty strong indications that they expect to procure batteries for now only in the sort of center south regions of Italy and islands.

They've indicated that they don't want any batteries in the center north and north. Whereas, you know, there are there are there are, you know, merchant spreads up there. There's there's, ancillary service revenues that can be taken. You can just spend the capacity market. So, you know, there's there's there is a business case to be made.

But but are we heading to a world where the route are we heading to a world where the round trip efficiency of battery lithium ion batteries is so much higher than pumped hydro that you'd probably you know, as a developer, you'd wanna you'd wanna size up next to some of these hydros and eat their margins as CapEx comes down.

Yeah. It could be. We haven't we haven't we haven't looked at that. That's a good point.

We should look into it. Yeah. So that's, you know, the the we we still firmly believe there will be both models in Italy going forward. And and, yeah, there there are some positives from our point of view, and, you know, I understand fully that from a from a, you know, trader point of view, from an optimizer point of view, the whole Maxis story isn't particularly attractive.

Right? But from a from a developer point of view and an investor point of view, I I do think it it does create a mechanism that has some some aspects that are very attractive, very attractive. And then that's, I think, one of the big reasons that is is, you know, making it to be one of the sort of, you know, hot markets hopefully in the near future in in Europe. You know, big volumes and very clear regulated, revenue streams that are perfect for for, you know, infra infra investment.

Yeah. Absolutely. For for an asset owner, it sounds fantastic. I guess it depends how stringent the, the requirements are and how competitive it is.

This first auction is gonna be fascinating to see what price comes out. I might be totally wrong. Right? They might get it might be like some of these Middle Eastern, solar auctions, which come out at so, so cheap that it all sort of makes sense in the end.

Who knows?

Yeah. That that's you know, we're we're all waiting to see. I think you're right. There's one aspect of it, which is the technical parameters.

So, you know, we we sort of mentioned it before. But, of course, having Turner as your as your, you know, toll provider, you've gotta set some rules and and, you know, there's there's some rules around degradation, which are a bit weird at the moment. You know, you you you they the, the first the the the rule or the last set of rules came out with degradation, profile, which now granted it's Telna is saying that it's only gonna be one cycle per day. So it's it's batteries that are not cycling particularly hard.

But but still, you know, at least we can't you know, of all the supplies we talked to, you you don't get one, you know, one percent per year degradation at least from, you know, your your typical starting point at at SAT. So so either they change the rule or people are gonna have to oversize or augment along the way.

RTE wise, they Also, how how are you gonna measure it?

Crucially, how are you gonna prove it? If it's like the because there's a load of ways you just look at the UK cup capacity market and how you prove capacity. There are so many different ways to to to slice that up.

Yeah. Yeah. Yeah. And and there's things that make it even more difficult because we we've got also some, you know, requirements on our team, which have their own set of definitions.

You have another thing that is gonna make things interesting, which is that you can also have hybrid projects. So if you say have a, you know, a two hundred megawatts, project, you can bid a portion of it into the Muxy Auctions and decide to run the rest merchant. So that'll add additional complexities in terms of, you know, proving that you're meeting the degradation IT requirements.

You know? So so, you know, on one hand, it is a on paper, quite a simple straightforward, you know, revenue stream structure, but there's a lot of devil in the details. So I think, you know, it still will require a lot of expertise and a lot of, you know, a lot of a lot of what lessons learned from other markets will still come in handy in a different way, though, in a different way.

Absolutely. Let's talk about the more merchant side then. So this is not the only game in town if you're a developer. There is the other side. Can we talk about that for a minute?

Yeah. So we're we're definitely looking at it, you know, in in in a lot of detail. We've got projects in the north, and and at the moment, you know, we don't expect those to have to have a a a market contract. Now the the the the scenario there looks very similar to the UK. So you're you're, you're you're building your financial model assuming, you know, wholesale trading revenue. So you've got the day ahead MGP market and then the intra day MI market.

You have then the ancillary services market in Italy, the so called MSD, which is a pretty liquid and deep market. Now I'm not a massive expert of ancillary services, so I've you know, I might say it wrong, but either way I understand it and and a and a and a kid would understand it is that whereas in some markets like, I don't know, Germany, you have some, very specific products for different types of ancillary services. And and as a as a as a market operator, you kind of bid into each one of them or or have a contract in each one of the different ones. In Italy, there's this sort of big pool of of of, ancillary service volume that you can bid your asset into, and then it's the TSO that kind of allocates that into the different types of services it needs.

And this is the MSD, and it has a day ahead component and this sort of intraday balancing component to it. So these these are the two, you know, big chunks. And then and then look. We're all still hoping, and and planning to bid into the capacity market, the future capacity market auctions.

So Italy has said clearly that it's gonna be structural. So, you know, we now have, confirmed auctions for twenty twenty seven. There should be a twenty twenty eight capacity market auction coming out, towards the end of this year. And Turner has indicated it's gonna be structural, so we're gonna expect, you know, there's gonna be a twenty twenty nine capacity market auctions and so on.

And when you bid in with existing assets, you get a one year contract.

When you bid in with new assets to be built, then you get a, a fifteen year contract as well. So that, you know, is is an element which is very good, especially in terms of, you know, hedging revenue streams a bit, having a contracted part that you can then go and finance. So the the way we're looking at it is that these non max assets, we will we we're aiming to have a capacity market portion, and then we're aiming to reach, probably fifty to sixty percent, hopefully, hedged revenue with four like products, most likely, and then have the rest merchant. And on that basis, you know, try to try to close project finance and and and get the projects with FID. That's that's at least our our our approach, our, you know, what we're what we're going for.

Yeah. I mean, the the development doesn't stop beyond this this new mechanism. I'm just thinking this through my head. So not to keep banging on about this, and I'm really sorry if I, you know, if you're a big fan of this mechanism, then I would love to have you on a podcast and come and talk about it.

But, so picture the scene. It's let's say it's year twenty thirty, and the Turner, the Italian RTO, has contracted up, let's say, twenty gigawatt no. You said fifty. Let's say they did twenty gigawatt hours, twenty thirty gigawatt hours of batteries at, I don't know, thirty, forty thousand euros, megawatt hour to give it a number.

I don't know what that'll be.

Yep.

But but midway through that period, you the the the CapEx curves for battery technologies come down so aggressively that developers have also built a load more batteries that are outside of this mechanism who are predominantly making their money in from traditional price signals from the from the wholesale market. Yeah. And in that scenario, the grid looks very different. What if in that world, you actually don't need twenty or thirty gigawatt hours contracted fifteen years, and Turner doesn't need them at all.

They're not even getting utilized because the the bulk of the work is being done by price signals in a zonal market as is. And then the the rate payer is on the hook for all of this contracted revenue when the other assets are doing it anyway. I mean, it it depends what you believe is gonna happen to CapEx curves. But Yeah.

I think they're gonna keep on decreasing aggressively, and we're gonna have batteries everywhere.

Yeah. Look. I I we hope so too. I mean, again, we're not we're not, you know, we're not cheerleaders for the Maxi mechanism.

We we we think there's a lot of goods good, you know, aspects of it. For for us as developers, there's there's a big yield compression opportunity with Maxi, a massive yield yield compression opportunity. So, you know, we like it, but we also like we want Italy to have a non future. Right?

We we we need that. And my only answer to that sort of, you know, to what you said, which which I partially agreed to, is that I think it's not that different from, you know, I don't know. I could say like a a a twenty year wind CFD or offshore CFDs or these kind of things. You know?

Or or or even worse, feed in tariffs. Right? Now CFDs, they have a bit of an element of, you know, you give or take, but the old feed in tariffs, they would just give. Right?

And and I think, again, Italy has sort of chosen the TSO, the regulator has chosen to maybe, you know, give up if you want a bit of optimization because, sure, you know, the the the this LCOS will would will come down probably. So, you know, they're they're now locking themselves into something. But I think they're doing that saying, you know, we're willing to to to sort of, you know, sacrifice that optimization because we need to get a lot of batteries in the in, you know, built now because that's what we need to to to enable the energy transition. That's what we need to offset, you know, even bigger grids reinforcements.

And so I think in in their mind, in the whole long term picture of what the energy system is in Italy, this still makes sense. You know? That's that's at least the answer.

I I I, you know, I get my No.

I I I yeah. I get I get the argument. I guess the problem is it depends where on the technology s curve you are. And if what if you need us if you're willing to overpay to stimulate a new technology to get moving, then great.

As long as you're on the first bit of the s curve. But when you're in the almost vertical bit and it's gonna it's gonna happen anyway, which I actually think we're approaching, then is it do you need the stimulus anyway? But anyway, we talked too much about that, and I I didn't get you wanting to defend that program. In fact, I didn't know much about it until now, and I've just been shooting from the hip.

So I might if you're listening to this, I might change my mind in the future. But, hey ho, we've got so many questions that we didn't get through, but we've run out of time. So I wanna go to your last two questions. Is there anything that you wanna plug?

This is the chance to talk to the energy storage community.

What what do you want our listeners to know?

Well, look, you know, we don't we'd I'd say we're excited about our projects. I mean, we're we're that's you know, it's it's a bit of self promotion, but it's the only thing I can think of. You know, we're we're we're really excited about the the projects we've been able to develop. I think the big thing that we always bang on about when we're talking about, you know, there's lots of projects and what differentiates projects in the market is is as in many markets, it's grid. We've we've been able to secure some some incredible grid positions in terms of, you know, plugging into existing substations without reinforcement works. This is another big topic we didn't touch is, like, you know, grid in Italy, which we we might, you know, wanna discuss some other time, but it's it's it's a big differentiator.

And we're also, you know, very about the work we've been doing. You know, although we're still a pretty lean developer, but we we put a ton of work into working with the supply chain, working with lenders, working with offtakers, and and and really getting ready to to transition towards our, our our our model of, you know, building, owning, and operating some of our assets. So, you know, bit of bit of self promotion there.

Of course. This is your chance. And now to the contrarian view. So what do you believe that not a lot of other people believe?

I don't know I don't know if I'd call it a contrarian view, but I think it is something that I think a lot of us in the industry often lose sight of.

I think battery storage has certain elements of very sort of short term view on it. So as a developer, you you you gotta be fast. You gotta get land. You gotta get grid.

You gotta permit quick. You know, you gotta build quick because because you're gonna, you know, maybe make big revenues at the beginning, and then these these, you know, these markets are a bit shallow. And so there there's this big, big push of about being fast and then, you know, connecting things quickly. And, you know, we're looking at objectives to twenty thirty, and and I think and and that makes sense.

It makes a lot of sense. On the other hand, I think as well, when we're stressing so much about going so fast, sometimes we should also to take a step back and and and consider that, you know, the the energy transition has just started.

The the the thirties and twenty forties will all be about decarbonization as well. Flexibility is gonna be a very long game. You know? It's not something that's gonna be solved in the next three or four years, and then we'll have nothing else to do.

It's gonna be a very long game. Technology might evolve and change. Markets might evolve and change, but it it's a very long game. And and, again, looking at from a developer asset owner point of view, I think that one thing we shouldn't lose sight of is when we're developing projects and when we're, you know, trying to figure out what value they have and what they can do is that a big part of this is that you're securing some grid positions and and also land, but but grid positions mainly, which you might be using today for batteries.

But, you know, when the battery is done in twenty years, twenty five years, thirty years, there's still gonna be crucial nodes in in our our future's electricity system, and there's gonna be a ton ton of other things we're gonna be able to do with them. So, you know, again, I think it's just this point of, every now and then stop it and taking a bit of a longer term view and not being so, you know, rush rush rush. It's flexibility is not only gonna be about that.

Yeah. I think there is. I totally agree with you. There is a chance that when I retire, which is probably thirty years' time, still the the the value accrues to the owner of the grid connect connection.

It's a bit like that Patek Philippe advert, which is like you never own a Patek Philippe. You just hold on to it for the next generation. Grid connections are a bit like that. Right?

Like, yes, right now, we're banging on about putting batteries on them. But do you really think with the this century of, like, three or four x growth in electric in electric demand, electrification, do you really think that the grid's just gonna get into gear and start building all these new transmission lines that we need? Probably not. So the grid connection the the residual value of the grid connection might end up being the most valuable asset on the balance sheet of one of these projects.

Absolutely. Fully agree there.

Now I wanna say a massive thank you for joining us on the podcast. Unfortunately well, we got about less than halfway through all the questions I had for you. So I'd love to invite you on a podcast again to talk about Italy in more detail. It really has been a privilege, and thank you for sharing so much knowledge with our listeners.

Thank you. It's been great to be here, and, yeah, look forward to hopefully being here again soon.