2024
Energy Storage Report
Key Regional Markets
Italy
Italy has revised its decarbonisation targets upwards per the updated National Energy and Climate Plan (“PNIEC”) submitted to the European Commission in July 2023. The latest plan envisages a 65% and 40% share of renewables in electricity production and total energy consumption, up from 55% to 30% in the 2020 plan (Reuters, 2023). The European Commission’s directive to member states triggered the revision to ensure alignment with the Fit-for-55 and REPowerEU energy packages. REPowerEU targets will require Italy to install 85GW of incremental renewable capacity by 2030, including 58GW of solar PV installed capacity. This will likely draw €6 billion in funding from the REPowerEU scheme, bolstered by an estimated €3 billion from the country’s national funding sources (Reuters, 2023).
The pickup in momentum in energy transition, revolving around a more than 3x growth in installed solar and wind capacities over the next 6-7 years, is likely to trigger further development of the energy storage market. The latter has been skewed towards residential rooftop solar-linked battery energy storage systems (“BESS”), and the market structure is expected to undergo a paradigm shift towards utility-scale storage.
GDP (Current Prices) USD (2022) | 2,012bn |
GDP Growth Forecast (constant prices) (2023-2027) | 1% |
10yr Govt Bond Yield (12-month rolling average) | 4.21% |
Country Credit Rating (S&P) | BBB |
Battery Storage Capacity | 4.89GWh/3.04GW |
Pumped Hydro Storage Capacity | >700GWh/>7GW |
RE share of Total Electricity Capacity | 49.2% |
Battery Storage Outlook | ~9GW by 2030 |
Source: IMF, Fred Economic Data, S&P Global, Energy Storage News, Digital Object Identifier, The Energy Institute
For pumped hydro storage: (Politecnico di Milano, 2018)
Energy Mix and Case for Storage
Italy’s grid capacity constraint has been a concern for the renewable power generation pipeline. Steps are underway to expand the capacity. Without systems to absorb the energy injected, the power market prices across Italy’s regional market zones may diverge to reflect the grid constraints (Reuters, 2023). Storage also assumes a critical role in capturing prices from high-demand conditions. In July 2023, Italy had the most significant increase in electricity demand on the grid due to prevalent high temperatures (REVE, 2023).
As per transmission system operator (TSO) Terna, 71GWh of grid-scale energy storage capacity, equating to ~9GW of installed capacity, will be needed to be deployed in Italy by 2030 to enable achievement of the country’s Fit-for-55 targets (Energy Storage News, 2023). The country’s nascent energy storage market could reach 800-900MW in installed capacity by 2023/24. In June 2023, Italian regulators approved new auction rules for grid-scale energy storage, enabling Terna to proceed with capacity market auctions (Energy Storage News, 2023). Other supportive measures have included reviewing and opening up new revenue streams for battery project developers in the ancillary services market.
Capacity: Status and Trend
Source: ANIE Rinnovabili
While the energy storage market has traditionally remained skewed towards the residential rooftop segment, there is growing evidence of a larger share of grid-scale capacity in new installations coming online.
Northern Italy, comprising the provinces of Lombardy, Venetia and Emilia Romagna, account for more than 50% of the storage capacity, mostly represented by small distributed systems (E3 Analytics, 2023). Utility-scale installations are concentrated in southern Italy, particularly the islands of Sardinia and Sicily. Residential buildings will continue to play a critical but declining role in battery storage capacity addition as the Superbonus Scheme continues to 2025. Per Italy’s NECP targets and subsequent revisions, 8.5 – 9.0GW of energy storage capacity will be installed by 2030 to support Italy’s decarbonisation targets, split approximately equally between residential rooftop and utility-scale installations.
Policy and Regulation
Italy has ascended to a leading position among energy storage markets in Europe in the last twelve months and is currently considered a top investment destination along with the UK. There has been a marked shift towards utility-scale installations as electricity market rules were tweaked to accommodate battery storage operators. The transition commenced in early 2022 through Legislative Decree No. 210/2021, which allowed transmission system operator (TSO) Terna to procure new energy storage capacity in advance (Energy Storage News, 2023).
In February 2022, Terna awarded a 1GW capacity contract to Enel. This was followed by a more robust showing in the capacity auctions held in late 2022, where storage projects secured over 30% of the total capacity allocated, amounting to 1,121MW (E3 Analytics, 2023). The steep decline in battery costs has helped rationalise energy storage capex, making projects competitive in auctions. In June 2023, the regulator ARERA approved new criteria and conditions for large-scale energy storage capacity auctions to be run by Terna (Energy Storage News, 2023).
The development of the energy storage market in Italy has diverged from that of its British or German counterparts. While ancillary services represent a vital constituent of the revenue stack for energy storage projects elsewhere in Europe, the capacity market (15-year contracts), along with energy arbitrage, has driven the growth of the Italian market. The last fast reserve auction was held in late 2020 and saw 250MW of BESS projects on 5-year contracts being awarded to Enel and Engie, with projects slated to come online in 2023-27.
The revenue stack would also depend on geographic parameters as those located in the South, in conjunction with the bulk of the solar PV pipeline, would focus on load shifting while the ones in the North focus on grid balancing services. Consequently, Italy is poised to move to medium discharge durations of 4-8 hours, faster than the UK or German markets at similar points of the market trajectory. Terna envisions a requirement of 9GW of battery storage, having a long duration of 8 hours or more by 2030 (LinkedIn Pulse, 2023).
A supportive policy environment has enabled the favourable evolution of the energy storage market in Italy, in turn drawing increased participation from the capital markets. Additional incentives continue to be rolled out, notably, the National Recovery and Resilience Plan’s offer to channel €2.2 billion for self-consumption of renewable electricity, including energy storage systems. Italy also plans to earmark €675 million for offshore wind projects that use energy storage (E3 Analytics, 2023). In December 2023, Italian regulators announced the introduction of a state aid package of €17.7 billion for subsidizing centralized electricity storage systems. The scheme will select beneficiaries of eligible technologies (electrochemical lithium-ion systems and pumped storage hydropower plants) through a competitive and transparent bidding process (Balkan Green Energy News, 2023). The developers will receive annual payments for investments and operating costs over the next ten years.
Market Developments and Opportunities
The Italian energy storage market is pivoting towards the utility-scale segment significantly, evident from the recent investment trends. Several gigawatts plus pipelines have emerged as a result, starting with Enel, which secured a contract from Terna in early 2022 to provide 1.6GW/6.6GWh of storage capacity slated to come online in 2024 (PV Magazine, 2022). In June 2023, UK-based Aura Power received permission to commence construction on a 200MW/800MWh BESS project in Italy, which is part of their 1GW energy storage pipeline (Aura Power, 2023). In June 2023, US-based Emeren Group (formerly ReneSola) launched a partnership with TPG Rise-backed Matrix Renewables for the development of 1.5GW of BESS projects in Italy, of which 260MW projects have already been delivered (Renewables Now, 2023). In June 2023, developer Eku Energy signed a Framework Agreement with Renera Energy to deploy 1GW battery storage projects in Italy. In December 2023, UK-based utility Octopus Energy announced entering Italy, forming a joint venture with developer Nexta Capital to deploy up to ~1.5GW of BESS (Energy Storage News, 2023). Another foreign IPP, Cubico, entered Italy through a joint venture with local developer Storaltil to develop 1GW+ of BESS (Energy Storage News, 2024).
The scope of battery-based storage in the power market could be widened in the near term, with a pilot project underway on the first distribution network-based flexibility market. As of September 2023, the Italian Distribution System Operator (DSO) E-Distribuzione was in the process of executing a pilot on the flexibility market (in partnership with platform provider Piclo) to test ancillary service procurement (Smart Energy, 2023).
The recent spate of investment announcements follows from the previous year when the likes of Innovo Group and Aquila Capital made significant investment commitments in the Italian energy storage sector. In November 2022, the newly launched Innovo Energy announced targeting a 1.5GW/9GWh Li-ion BESS portfolio in the UK and Italy. Spain-based Powertis partnered with German investment firm Aquila Capital to co-develop 421MW solar PV and 90MW energy storage projects in Italy in January 2022 (PV Tech, 2022).
Strong growth prospects for the energy storage sector have attracted institutional investors across the industry ecosystem. In July 2023, Aviva Investors picked up a 35% stake in Innovo Renewables with the option of expanding its holding to 50% over the next two years (Reuters, 2023). In the same month, Oman’s sovereign wealth fund announced an investment in Milan-based Energy Dome, which specialises in compressed air energy storage (CAES) technology (Reuters, 2023). Existing developers are also looking to capitalise on the positive market outlook. Notably, Altea Green Power announced the sale of 2GW of BESS projects in Italy, having a ready-to-build status of Q2 2025.
Tax incentives such as the Super bonus (110%) and Renovation bonus (50%) schemes have driven the residential battery storage segment since their introduction in early 2021. However, policy reorientation and high wholesale energy prices concerns have shifted the growth engine to the utility-scale detail. Policymakers tweaked regulations to accommodate energy storage projects in different segments of the electricity market, thus enabling their ambit of revenue generation across capacity markets, fast reserve and ancillary services. Efforts are also underfoot to explore the feasibility of opening new markets, such as frequency response to battery operators. A separate auction mechanism is also being developed for long-duration energy storage (LDES) projects for 6 hours or more, with contracts awarded for such assets’ entire operating life.
Outlook
The project pipeline attests to Italy’s growing stature in the European energy storage market. As per Terna’s technological evaluation, Li-ion-based BESS and pumped hydroenergy storage (PHES) are the preferred storage technologies to be leveraged to reach the target capacity of 71GWh by 2030 (Energy Storage News, 2023). Volatility in wholesale gas prices and rapidly declining storage costs have provided an impetus to adding energy storage capacity, even though the former has eased considerably from its 2022 peak.
Coal-based generation capacity in Italy is scheduled to be retired in 2025. It is estimated that 3GW of new gas generation capacity and 3GW of new energy storage capacity located in the South of Italy and on the islands will be required as replacement capacity (IEA, 2023). There is a growing realisation to shift from gas-based power generation, particularly that designated as a “must-run” capacity with flexible energy storage that would help ease curtailment of renewables-based power. Energy storage assumes added significance to enable the transition to renewables by operating, among other functions, as a peaking capacity to help cool wholesale electricity prices.
Broadening the revenue stack for battery project developers has been a critical objective of policymaking in Italy. As per Milan-based MBS Consultancy, an estimated 60-65% of a battery project’s capex is recovered by trading in the spot market, while the remaining 35-40% is sourced from ancillary services (LinkedIn Pulse, 2023). The recent uptick in capex costs has dampened investor enthusiasm, but Italian policymakers have been quick to reiterate their long-term commitment towards energy storage.
A minor slowdown in capacity addition is expected as the Superbonus incentive is progressively phased out. Still, the impact is likely to be limited to the residential and commercial & industrial (C&I) segments. This will be more than offset by the continued growth in the utility-scale segment. Overall, the fundamentals of the Italian energy storage market are robust enough to support the projection of Italy becoming Europe’s third-largest energy storage market by 2030 when the share of renewables in the country’s energy mix reaches 65% (Energy Storage News, 2023).