Capacity payments significantly enhance the financial viability of energy storage projects by providing a stable and predictable revenue stream, which is critical for project financing and investment decisions.
Role of Capacity Payments in Energy Storage Financial Viability
- Stable Revenue Stream: Capacity payments are often awarded through competitive auctions or power purchase agreements (PPAs) with utilities, where the energy storage system is compensated simply for available capacity. This mechanism provides a reliable income regardless of actual energy market prices or dispatch, reducing revenue uncertainty for developers.
- Substantial Portion of Revenue: In some markets, capacity payments or similar regulated incentives can represent a substantial share of total revenues for energy storage projects—typically 20 to 30 percent, but in specific cases like Italy’s MACSE auctions, they can approach nearly 100 percent of revenue. This is because these schemes remunerate installed capacity akin to infrastructure assets, which tends to attract financing due to lower risk profiles.
- Alternative to Conventional Peaker Plants: Energy storage systems receiving capacity payments can effectively replace traditional natural gas peaker plants. Utilities benefit by paying for capacity that can rapidly ramp up and down, enabling more flexible and cleaner grid reliability solutions. This enhances the attractiveness of storage projects when utilities sign long-term contracts (e.g., 10-year PPAs in California), improving project bankability.
- Risk Mitigation: Access to capacity payments reduces dependence on volatile merchant revenues from energy arbitrage or ancillary services, which can be unpredictable due to fluctuating electricity prices and market conditions. This improves lenders’ and investors’ confidence in the financial stability of energy storage projects.
Market-Specific Impact
- Geographical Variability: The impact of capacity payments varies by region due to differences in market design, regulatory frameworks, and the maturity of capacity markets. Countries like Italy and Poland offer mature capacity payment schemes that heavily support project economics, whereas other regions are still developing or experimenting with such incentives.
- Evolving Incentive Designs: New incentive schemes are emerging globally to support energy storage deployment, including capital expenditure support and revenue guarantees (e.g., Greece’s Contract for Difference scheme). These help secure revenues and further de-risk investments in storage projects.
Summary
| Aspect | Impact of Capacity Payments on Energy Storage Projects |
|---|---|
| Revenue Stability | Provides consistent, predictable payments, reducing revenue volatility |
| Share of Total Revenue | Can represent 20–30%, or up to nearly 100% in some markets |
| Financing Appeal | Enhances bankability by lowering investment risks |
| Market Role | Enables storage to substitute for conventional peaker plants |
| Regional Variability | Effectiveness depends on local market rules and incentive structures |
| Emerging Incentives | New capacity-based schemes and revenue guarantees further support projects |
In conclusion, capacity payments improve the financial viability of energy storage projects by providing steady income that offsets market risks, thereby facilitating project financing and encouraging deployment at scale to support grid reliability and energy transition goals.
Original article by NenPower, If reposted, please credit the source: https://nenpower.com/blog/what-impact-do-capacity-payments-have-on-the-financial-viability-of-energy-storage-projects/
