Solar Saturation & Grid Collapse: Spain's BESS Opportunity - Modo Energy

I'm your host, Ed Porter. Welcome back to transmission. Spain has nearly forty gigawatts of grid scale solar, but more generation hasn't meant better returns or a more stable grid. And solar's dominance hasn't automatically been followed by storage. Today, Pablo Martinez, Moto NG's head of Iberia, joins us to walk through what's really going on in the Spanish market, the economics, the blackout, the regulatory shifts, and where the batteries are finally about to catch up. If you want to dig into the Spanish market, Ko, Moto NG's AI analyst, is a great place to start. Link in the description. Now onto the episode. Hello, Pablo. Welcome to transmission. Happy to be here. Super to have you on. And let's dive straight in. So what's the one thing that everyone gets wrong about Spain? So Spain, I think when you look at it from the outside, most of people go like, okay, Spain, lots of sun, therefore, lots of solar. And that must mean good business for batteries. And this is not necessarily true. Like, we've got a very significant solar fleet we've built over the last six, seven years, really. But the dynamics we're seeing in power markets are very different to what we've seen to the rest of Europe. Okay. But that that like but it is true. Right? Lots of sun, lots of solar. There's thirty five gigs ish of solar, maybe more? So in terms of utility scale, it's close to forty two gigawatt of solar. And then when you add the rooftop on top of that, it goes all the way to fifty. So there is a lot of solar, but then the question mark is, okay. Well, then how does that translate to good power prices for battery storage? So where is it falling over? Let me reframe it. So what do people usually get wrong about Spain? It's not like we don't have storage. We have lots of storage through pump hydro. And I think that that's the main difference compared to most European countries in which we Spain as a country got away without having best battery energy storage for so long because of the reliability on hydro. Well, let's let's do that. Let's paint the picture for listeners in terms of how much there is of each generation technology, and then also let's also look at demand as well because that's the the other kind of part of this equation. So we've done solar, forty two gigawatts of grid scale. Let's do gas and hydro. So gas, it's a very significant fleet of gas generators, CCTs. It's close to twenty six gigawatt. Hydro assets, we've got runoff river, we've got the bigger assets that can store energy for longer periods of time. That in total, let's say, close to eighteen gigawatts of generation. K. Depending on the time of the year. Then on top of that, it's thirty two gigawatt of wind. And in terms of demand, we're talking about forty gigawatt of peak demand, which I think it's similar to GB. Is that right? Very similar to GB. I think we're probably if you're on the on the wind solar balance, we're gonna be higher on the wind, less on the solar. But, yeah, very very similar in terms of demand. So there are there are definitely parallels between the two. What what about nuclear? Nuclear so we have a few nuclear plants closing down in GB. Longer term, we'll have things like Hinkley Point C, Seizwell C, some small modular reactors. So longer term in GB, potentially, like, lower end is between seven to ten gigs. If we get more of the government's plan in terms of more SMRs, that could be adding another fifteen gigs, twenty gigs to that to that size. So so we're not actually sure what the definitive long term view looks like in in GB. But it but but quite quite a few of those nuclear sites are closing down today, and so it's a it's a bit of a handover process going on. What does it what does nuclear look like in Spain? I'd say it's completely the opposite. So we we've got seven nuclear reactors at the moment, so seven gigawatt of generation. But the idea is to close them down, or at least this is the current government's plant. Having said that, nuclear generation, it's key to grid stability. So this kind of baseload generation that runs twenty four hours a day, seven days a week, it's great for grid stability, this kind of baseload that you can rely on. And and this is especially true for when we've got periods of lower demand. So for example, during spring or during autumn, demand is lower. And and you will see, especially in spring, that nuclear reactors want to do their maintenance there. And then the grid becomes a lot less stable because of this. Well, let's let's really talk about that because the the bit the bit we didn't talk about in demand. Right? So when we're doing the Spain to Great Britain comparison, in Great Britain, all of our load really comes in winter for heating and because we get like long periods of darkness. So traditionally, a really winter driven demand system. In Spain, not quite the same. Right? Because you get big air conditioning that comes through in the summer. So do do you want us to kind of describe the dynamics of that? Yeah. So in Spain, we have these seasonal dynamics in which spring and autumn are periods of the year in which we will see less demand, much more so in spring than in autumn. And then we will see demand rise in winter because of the need of heating and in the summer because of the need of cooling down. So this is interesting because so in GB or Germany, for example, it's something that we see a lot more that demand does not rise as much in the summer. And in Spain, we're seeing is that during the summer, it's peaked solar generation. But at the same time, prices don't necessarily crash during solar hours because demand rises so much more. And we see that same thing, right, in Texas, in California, in Australia because the the solar generation is matched quite nicely with the air conditioning load. They don't get that kind of crash off in prices. So that crash off in prices in Spain happens in in spring. One of the sort of really sort of shocking stats that I've read recently is around the capture rate for solar in February for Spain was one euro thirty cents per megawatt hour. So what like for people who don't look at that all the time, does is that exceptionally low? How low is that compared to usual? What does that mean for solar projects as well? So I I think it's interesting to to compare properly is how much does it go to cost to deploy new solar. So building a solar site, you could be talking about terms of cost and the returns you would expect for it to be profitable. It would need to be in the range of thirty to thirty five euros per megawatt hour. So if if you're getting those returns from your solar asset, then it's it's reasonable business. So if you compare that thirty to thirty five to the capture price in in February, which which was just one point three euros per megawatt hour, that's extremely low. And and then what what does this mean for renewable developers? Right? What we're seeing is this kind of new dynamic, and we've been seeing this over the last two years in which the returns from solar assets during spring are extremely low because of lower demand, but also we've the last two years have been extremely wet. So lot lots of rain in in Spain and Portugal have the have made it so that hydro assets behave like any other renewable. So lots of hydro generation pushing prices down and making those, especially during solar hours, those prices very, very low. So if you are solar asset owner, you kind of got used to, okay, spring returns are very, very low, and then I need to make my business case during the rest of the year. And so and and let's just be be frank. Right? So that that sort of one euro thirty is is almost like the the low point of the year. Right? So the average capture rate for solar is slightly better than that. But it is still kind of it's quite shocking. Right? So do do you think that the forty gigs or so of solar we've got in Spain now, do you think that's kind of at the peak that it will ever be, or do you think we're gonna sort of there's still momentum in the pipeline, more is gonna be added? Because it feels like if I'm being paid one one euro thirty, I'm I probably shouldn't add more. And this is interesting, and it comes down on how these assets are really paid. Of course, we see some merchant assets that get paid from selling their electricity in the wholesale market, in the day ahead market. But, also, most of these assets will have some kind of PPA contract. So what that means is that they will get paid a fixed price regardless of the market price. And here we're seeing an interesting dynamic, and and these contracts evolve over time because, let's say, legacy contracts did not necessarily account for negative price hours. So we're seeing some contracts that during those hours do no settlement. So, basically, you go from earning your strike price, let's say, five euros per megawatt hour to zero the moment the price turns slightly negative. Okay. Yeah. And maybe within that, you're also saying that the price has also been negative at at times within Spain. Have you got a rough idea of how many times that's gone negative so far this year? I'd say it's close to two hundred, two hundred and fifty hours. Two hundred fifty Yeah. That's If compare the number of negative hours so far these years to other European countries, Spain's way ahead. But just because February, it's been very rainy month. And overall, the the month has not been as high. Okay. And it's and like, just on those PPAs. Right? Because sometimes we have this conversation and so and somebody says, oh, the wholesale rate has gone low, but I've got a PPA so I'm protected. And I think it's really interesting thing because, yes, you are protected, but you've you've passed the risk to someone else. Someone else is still getting someone is someone else out there is still buying solar at thirty five euros per megawatt hour and the value of that on the market is still one euro thirty. So they still like so you might not lose the developer who sold it, but the person who's buying that PPA, they are definitely losing. Yeah. So two years ago, capture price for solar on a yearly basis, it was close to, let's say, forty two euros per megawatt hour. Last year, twenty twenty five, the capture price was close to thirty four euros per megawatt hour. And now this year, twenty twenty six, it's likely going to close below thirty. So capture price for this technology is dropping. And what we're seeing is that PPA prices reflect that. So if you're looking to sign a new PPA contract now, it's very unlikely that you find an opportunity above thirty euros per megawatt hour. Yeah. And this is interesting because, as I mentioned earlier, when you look at the cost of deploying this technology, the the returns that you're getting, they're below the cost of deploying new solar. So if the economics make sense, we should see a a slowdown in solar deployment just because of market signals. Are we saying that? Not necessarily. So what we're seeing is so last year, twenty twenty five, we deployed eight gigawatt of new solar. So record deployment in a year. And this year, twenty twenty six, we could see another six gigs added to the system. This is not because the people that are bringing these assets online think that the business case is great. We're seeing clear saturation signals in the market. But if we've learned anything, it's that the solar industry has a lot more momentum than everyone thought. So these developments take a long time. When when you've spent so so many resources, it might be worse to stop completely than to bring this asset online. Okay. And now what we're seeing is that people that can have the ability to do so are trying to steer into collocation with storage, for example. Okay. And I think that's that's a really interesting thing. Right? So you're saying right with a pure play solar PPA, I probably couldn't get that signed today or I've ever did it sort of down towards to say the thirty euro mark. But you're then saying, okay, people are going right. I need to do something else with that site. I've got solar on it. Maybe I could add storage to it And instead of just doing the solar hours, this site could do the solar hours and some extended hours from the storage. And together, that makes a much more attractive proposition for the PPA that someone will be buying. So are you starting to see the market make that make that turn away from just like the pure play solar? Absolutely. So it's not only new new developments that we're seeing. They're they're trying to collocate with solar, existing solar assets, they're looking at battery storage as a way out of this solar profile. So at the moment, the market is flooded with solar production, solar profiles, and and you need to get creative on how do I fix my solar exposure or how could my production shape change when I add a battery on top of that. That will be only thinking about the energy generation. But when you add a battery storage to your solar side, then all of a sudden, you're onboarding more flexibility and and you are tapping into flexibility services from the for the grid. So ancillary services and other markets that the battery could participate in and and extra revenues. Okay. We're definitely gonna come back to ancillary services later on as we invariably, like, march towards talking about the Iberian blackout from last year. But we're we're we're gonna we're gonna move that slightly later to the conversation. Actually, just wanna just wanna take this kind of trend through. Right? So Spain has got a really good track record of building solar. Actually, like, I think sometimes when people think about Spain, they think about sort of slower deployment. And yet, five, six, seven, eight gigs of solar being deployed each year is a really good track record, but less of a track record installing batteries. How many batteries have we got today? And why has Spain struggled to get batteries installed? At the moment, connected to the grid, I'd say it's less than a hundred megawatt of battery storage. Compare that to GB. So at the moment in GB, Six ish? Six gigawatt. So it's completely different order of magnitude. Yet, we're seeing lots of appetite from local developers, international investors to push for battery storage in Spain. And there are a few things that so people usually look at Spain, and they're like, oh, regulation, it's not great for batteries. Should they be looking to deploy capital somewhere else? And this might have been true two years ago, but twenty twenty five, we saw lots of regulatory changes in favor of storage. So now collocating with storage and deploying battery projects should be a lot more straightforward. There are a few last things to iron out in terms of regulation, and this has to do with flexible connection and how those batteries charge from the grid. There's right now a proposal from the regulator. They're taking a look at this. Hopefully, this gets resolved within the next few months. All of the sudden, we find ourselves in a place in which it's a lot more straightforward to you forgot the solar asset. You collocated with a battery. The battery gets charged some kind of charging rights, and you're good to go. I I think it's really interesting to see the the system kind of pivot towards getting those batteries in from the regulatory point of view. On the money side, so you mentioned that sort of obviously there are international players looking at the the Spanish market. Where where is the money coming from? Is it is it sort of your traditional players in Spain, or or is it kind of starting to come as, like, one of the hot markets of Europe that people want to to to put cash into? Right now, talking with the different players in the market, I can clearly see two different types of investor. So the more aggressive investor, they're happy with the battery business case. They've they've done it in other markets. They have the experience. They have the exposure. They're looking at Spain, and they're like, oh, the fundamentals are great. Ancillary services returns look great as well. Let's deploy capital, and let's do it as quick as possible before these markets cannibalize over time. And then the local developers or or the people that did not have as much experience with batteries, they're looking at this like it's an alien. It's a completely different asset class. This is nothing like solar. Yeah. How would they optimize this? How would they earn money with such an asset? It is actually crazy. Right? So in some systems globally like California, Texas, Australia, Great Britain, and to some extent places like Germany are moving very fast on this where it's become almost second nature to think about putting battery storage in. And yet still in some markets where we're still in the early tens or hundreds of megawatts. As you say, people look at this battery project and go, what the hell is this? I still I'm not familiar with it. I understand it. You know, we it it always surprises me that the the global standard hasn't moved as fast as maybe it should do. But, hey, we'll we'll see. Now we've mentioned ancillary services a couple of times, which is around providing additional services to the grid for EG stability. To cover this topic, let's start with the Iberian blackouts. And recently, we had a report which was sort of the the complete report summarizing the like what what went wrong. So Pablo, what went wrong in Iberia? And I think maybe more interestingly for me, what can we do or or what can the system do to get more stability in the future? So the main reason behind the Iberian blackout was voltage control and voltage issues. So what triggered the blackout eventually was that voltage was getting out of control in very specific parts of the system. So we we saw oscillations moments before the blackout, but also hour hours before the blackout. And the TSO was already taking the right steps into stabilizing the grid. The blackout originally started in in the south. There was meant to be thermal generators coming online to mitigate this effect a few moments after the blackout or, let's say, a few minutes after the blackout. Right? I think this especially, there was one CCD that was meant to be scheduled and running one hour after the blackout happened. So it's not like there were no signals. Like, the grid was in a very clear unstable position, and the TSO was taking the right steps to to mitigate it. Also talking with France, talking with Portugal, like Hagor's in these oscillations. Because they're interconnected, and you can do things with your interconnections to give you more stability. Yeah. So but then all of a sudden, what what we saw is that because of voltage, some some plants started to disconnect that triggered voltage spikes on very specific zones of the of the grid. And what we saw is that generators started disconnected to protect the assets. What this creates is an effect in which voltage spikes, generators disconnect, and all of a sudden, you're losing a very significant amount of your generation in the system. So frequency drops. If there's less generation, the the grid tends to slow down, frequency drops, and then you've got also other protections in the system so that more generation and more demand disconnects. And all very quickly, find yourself in a situation in which you're missing very key parts of the of the grid and everything falls after that. So I think that's a really good explanation of what happened. I think that has been covered, and thank you for covering it. But I think that's been covered a lot in various places, including a very sort of detailed comprehensive report if you'd like to read it. But I think what's more interesting is in a system of the future and with the options available to us today, like, how do we get a system like Spain, but this can also apply to lots of other grids, how do we get those types of systems to be more secure and more stable? Yeah. So what happened right after the blackout was that the TSO started managing the grid in a very different way. So lots more of gas generators, CCTs turning online. These synchronous generators provide voltage control and inertia to the system by default. So if if you've got lots of CCTs connected and running, you are find yourself with a much more stable grid. But if you're doing that, you are displacing renewable generation from the grid in order to allocate those thermal generators. Right? And we we've been running like this for quite a while now. And the idea is, okay, how do we revert back to what we had before without compromising grid stability? And what we saw is that right now, we've had within last year, we've got a proposal, and now the market, it's up in place. It started to work last week for a voltage control market. Okay. So it used to be that assets provided voltage control services on a mandatory way. So the system operator is stepping in and telling that that plant to run? Not necessarily. So you need it to provide it, and then you trust the asset owner to have the right tools in place to do so and work within a specified range of active and reactive power as you're injecting power into the grid. And now that part remains, but they've added a market on top of that so that you can participate if you want to and earn extra remuneration for that service. And interestingly, there was before, it was not necessarily specified how if you did not comply with voltage control regulation, you would get penalized, and now they've done so. So moving forward, renewable assets will also be doing this kind of grid stability service and also get paid for it. I like this approach a lot because making it market based means that over time, the best technologies are doing so should, yeah, in a way, pull ahead, reducing their reliability on thermogenerators to be providing this kind of voltage control stability services. So in today's world, if you're not necessarily paid for it, there's no signal for it, you'd go, okay, well, I'm gonna have a type of inverter that is sort of known as a grid following and which does what it sounds like it follows the grid. You can also have a grid forming inverter, right, which is a voltage source, is kind of the key difference. And that allows you to contribute more to voltage markets like voltage control, which sounds like I've said voltage a lot, possibly way too much. But I think that is quite an exciting thing, right? Because then I I was looking at the technical restrictions or the the technical actions that are taken by the system operator in Spain. As you say, many more technical actions were taken after the back out to make sure we had thermal plant running. Wouldn't it be nice if instead of having to rely on some of the thermal plant for that, we could rely on grid forming inverters either from a battery, could be on a solar site. It doesn't really matter where it's from, but the the inverter technology needs to be there to be able to contribute to those voltage markets. Yeah. So if anything, the the only issue with this new market so the market design is great, but the remuneration, it's, let's say, on the lower side. Okay. So at the moment, you've got a service like this in GB, and maybe you can give a little bit more detail on that. The utilization for that service, it's close to three euros or pounds per volume per reactive. Yeah. In Spain, it's one. So it's three to one. Very, very low remuneration for the reactive service. So it brings the question, like, is there even a point in in participating in this market? And the interesting thing is they framed it so that if you participate in this market on the voluntary side to it, you get priority of free dispatch. So what this means is that if your solar asset is seeing lots of curtailment, especially, let's say, during the summer. So June, July, lots of solar generation, not all solar assets can inject into the grid at the same time. The TSO will step in and reduce the solar production of some of these assets. If your asset, it's one of the ones helping the grid because of voltage control, then you will get that priority of redispatch. So the value really, it's not on the reactive service itself. It's on the active energy that now you're able to produce that you would have otherwise lost. Yeah. That's that's super that's super interesting. And I suppose I imagine if you're then under like a PPA structure taking us back to the earlier part of the conversation, even if the power price is low, your PPA because you can flow volume through your PPA structure, you might still get paid. And so there's like extra value that comes out of that. That's hard to untangle. You asked for like a a sort of version from the GB side. Yeah. Absolutely. I mean, one thing that the the GB system and RTSO transmission system operator is doing extremely well is looking at each of these parts of the market, whether it's short circuit level or whether it's voltage control, and we're putting that into a market. And I think this is that then allows people to then structure products or structure sites, batteries, solar, whatever it might be to then go and try and provide these services. I think that is a it's a really good blueprint for nearly all system operators, which is to say you probably, system operator, without being rude, you you don't know all of the potential sites that are out there and all the potential technologies that come through and all of the potential configurations of inverters that you might be able to use. And in the absence of that information, make a market and then see what comes through. And then you'll get much better information about what can provide these things. So I I I I really like the approach. As you say, if you only pay sort of in the order of one euro for it, then, yeah, there's a there's a question mark whether people will actually do it. But let's see. Let let let the market run. Let the market find a level, you know, low prices secure for low prices. So we shall see. Having said that, as of today, as we're starting with this new market, I think in this first round, eighty assets complied with the requirements and started to provide this service. And then there's close to another three hundred trying to to comply and participate in this market. So there's a clear drive for from asset owners to enable and participate in this service. Okay. Okay. Which brings me on to my last question. So, Pablo, I'd like a contrarian view from you about the Iberian market or or more broadly, you could go Europe if you like. What's the contrarian view that you hold? Based on the latest geopolitical events we've seen I've seen a lot of people in Europe talk about our dependency on gas and gas prices. And usually people point at Spain as Spain has done such a good job of decoupling from gas prices. And and there's a caveat to it. Like, if you're only looking at the day ahead market and the power prices, sure, we've done a very good job at reducing our dependency on gas. And these days, you it's very rare for gas generators to be clearing their bids into the head market and therefore selling their energy into the head market. That's like five to ten percent of the time? Yeah. Very little throughout the year. But having said that, what we're seeing, it's a very significant activation from these gas generators, as we mentioned, especially after the blackout through technical restrictions and technical restriction markets. So it's not like Spain is not using gas or not running lots of gas generation. It's still very much embedded in the system and the way we we manage the grid. It's just not showing on the headlines because it's not on the the head market. Yeah. This is so interesting. Right? So this I'm I'm sorry this is getting a bit this is this will get a bit niche for people, but but, like, please do bear with it because I think it's a really interesting concept, right, which is that essentially in most markets, your gas units will get turned on in the day ahead market. So the the day before and and when when that market clears, you'll give instructions to the gas units to run. And then what that will do is it sets the sort of day ahead price at whatever the gas level is, which so then people say, oh, gas is connected. The price of gas is connected with the price of power. And if gas prices are very high as they are at the moment, then consumers end up paying more money for that. What you're saying is actually sometimes those gas units, because they're not really needed for energy, they don't clear in the day ahead market, but the system operator still needs them. And so in like a balancing market closer to delivery, they get called on, but that doesn't set the power price. That goes into a separate sort of bucket around sort of balancing costs. I actually wonder if that's a bit of a blueprint as we get sort of further away from the market exists today. I think a few systems might actually look at something like that where they where they take the technical the technically needed gas units for whatever reason they're needed, try and take them out of their head market so they have less influence in there and try and move them more into like a balancing type service. Absolutely. Yeah. In fact, so so this would be one step. Right? So you're removing this thermal gas generator from the system in the day ahead market because as you said, the energy itself is not as needed anymore. And now we're in this second phase in which they're still needed for grid stability. Then what the third phase might look like is that as as we onboard this, as we mentioned, voltage control market or balancing services such as within the European framework, we call it PICASO, so AFR, so frequency response services. As we have more renewable assets or batteries in that case providing the service, then we're displacing these thermal generators Even further. And it might be that they turn the line very little, just on very specific moments of time, which there's no renewable source, and then you really need them for for the grid to continue running. It's a big fundamental question across nearly all markets, which is what do you do with the gas units? When they go from running sort of a base loads twenty four seven shape. Sometimes they do what's called two shifting, so they kinda turn on in the mornings and evenings. And then in in the sort of Spanish world, well, maybe they only turn on a few times a year. Well, how do you make sure those units are there? It's kind of a we don't have time for this conversation today, but for the things like capacity markets or things like strategic reserves are all starting to come out as ways that we could pay for these sites. Pablo, we we are very grateful for you coming on, talking us all through Spain. We have more episodes on Spain coming up soon. So for listeners and viewers, keep an eye out for those. And if you're in Madrid and would like to catch up with Pablo and team, then do reach out because I know he'd be delighted to talk all things Spanish power with you. Thank you very much.