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Italian government calls meeting to assess electricity market priorities

01 Nov 2011 18:22:39 | edem

The Italian electricity market could soon be reformed, as participants call for structural changes, and the government has opened talks with the industry to identify priorities.

The meeting, to be held on Wednesday, was called by Stefano Saglia, undersecretary for energy at the Ministry of Economic Development (MSE). He said changing market conditions have made a review of priorities necessary.

"It's time to provide clarity on responsibilities and transparency issues," Saglia said.

Priorities

The government's focus has shifted from launching a new price system towards how to integrate green energy into the grid and speed up plant authorisations, a state official told ICIS Heren. This will include a network code for green energy storage facilities.

But the meeting will also address whether to implement a new price system in the country.

Market participants polled by ICIS Heren wanted the priorities to be:

n getting rid of grid constraints, so there will be no need for zonal prices

n scrapping a plan to replace the marginal price system with a pay-as-bid system

n boosting grid investments to limit the impact of renewable generation on prices, particularly on peakload products

n designing a new capacity payment mechanism.

Pay-as-bid versus marginal price

The Italian power market is set to launch a pay-as-bid system on 1 April 2012, in an attempt to cut prices for end-consumers. But most market participants believed this could make prices soar even higher.

This was backed by Italian regulator AEEG in a report recently sent to the government.

Planned grid improvements and a new capacity system would make the pay-as-bid system not only unnecessary, "but also counterproductive", AEEG said.

The new system could slow down integration with neighbouring markets, such as the harmonised allocation of cross-border capacity through market coupling, according to the regulator.

"Pay-as-bid is not in place in any [other] country in Europe - it doesn't make any sense to use it in Italy," an official from industry association Assoelettrica said.

"With the current tight margins, everyone will make very high offers, so the final price will tend to be higher than what it would have been under the marginal price system."

Grid connections

Traders say the lack of a uniform price across Italy is a key issue.

The market is currently split into six geographical zones, setting different Day-ahead prices on the basis of generation costs and congestion.

Sicilian and Sardinian prices are typically the most expensive because of the islands' poor interconnection with the mainland.

The ministry official said that data provided to the MSE showed the problem was almost solved in Sardinia, and only persisted in Sicily where the Sorgente-Rizziconi interconnection to the mainland was still not ready.

But market participants said grid constraints on both islands still pose major problems, and could only be solved by more grid investment.

Investment was also needed to help the network deal with a higher load from renewable production sources, they added.

Capacity payment

Traders also want a new capacity payment system (see EDEM 26 September 2011).

The current system, dating from 2004, compensates producers according to the tightness of supply for each hour of the day. But, as the compensation is set in advance, it relies on forecasts, rather than the actual supply/demand balance (see EDEM 6 July 2011).

Earlier this year, AEEG proposed that a new scheme should start in 2017. Several industry players would like an interim measure in place before that date, however.

"With the increasing amount of intermittent renewables capacity, the electricity system needs some back-up, in terms of reserve capacity. Gas- and oil-fired plants can do that, but with generation margins being so thin at the moment − due to the current oversupply in the market and huge amount of [subsidised renewable] energy − they may need to be supported," said Simone Mori, the head of regulatory affairs at Italian electricity incumbent Enel (see EDEM 26 September 2011).

Outcome of the meeting

The regulator, industry representatives and associations will be at Wednesday's meeting with the government.

The MSE official said more meetings would follow, leading to a monitoring report on the Italian power market early next year. MM

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