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Gas generation boosts Italian spot electricity prices – AEEG

20 Apr 2012 18:18:19 | edem

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Italian spot prices have been boosted by gas-fired electricity generation plants' low profit margins, as operators tend to recover most of their variable costs by concentrating on a few hours of the day, according to Italian regulator AEEG.

The regulator also announced that it is studying measures to support gas-fired plant operators now struggling to cover generation costs.

AEEG made the observations in a report sent to the government and published on Thursday, which aims to support the finalisation of the government's national energy strategy.

High early evening prices

The Italian Day-ahead price, the PUN, is generally much higher in the hours from 17:00 to 21:00 hours than in every other hour in the day according to data from market operator GME. The average value for the spot price in those hours is also substantially higher than it was in 2011 (see graph).

The price rise is caused by lower solar generation but still considerable demand in early evening hours, allowing gas-fired plants to make the largest profits.

Gas-fired plants often have to be kept switched on during the rest of the day, despite low profit margins, because of "technical functioning obligations", the regulator said in its report.

This leads gas-fired plant operators to concentrate most of their production costs' recovery in the later part of the day, when their share of the generation mix rises as solar production tails off.

Regulatory interventions

The regulator has previously said that a number of regulatory interventions should be put in place in Italy before this summer to avoid market distortions when solar generation is set to reach a record peak (see EDEM 27 January 2012).

Among the interventions considered, AEEG mentioned the possibility of forcing renewable plants to disconnect from the grid to reduce supply in critical times, and improving methods to forecast renewable production so the grid can manage additional generation better.

Late last year, the Ministry for Economic Development (MSE) also required AEEG to push forward market coupling plans on some borders, in a bid to align Italian wholesale power prices to those of neighbouring markets (see EDEM 14 November 2012).

The market itself also previously asked for reform, as a number of stakeholders singled out resolving bottlenecks and a new capacity payment mechanism as the main priorities (see EDEM 1 November 2011).

However, the regulator did not disclose any details on plans to be implemented, as the report only states that some measures are now being studied.

Solar generation rising

With solar generation now exceeding 13GW of installed capacity - compared with 8GW installed last summer - traders expect that the effect of the upcoming green power load will be particularly visible this summer, leading to a further squeeze of the Baseload-Peaks spread beyond that seen in 2011 (see EDEM 10 August 2011).

The government has recently unveiled a new incentive regime for the solar sector, which cuts subsidies for the coming years. However solar production is still expected to rise until 2030 (see EDEM 12 April 2012). MM

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