Italian physical OTC day-ahead market likely to start in 2015

Regulatory changes linked a new way of auctioning capacity on electricity links in central south Europe (CSE) in mid-February 2015 are likely to unlock liquidity in the Italian wholesale market, traders told ICIS at Wednesday’s IBWT CSE market coupling forum in Rome.

The changes will pave way for market coupling in the CSE region, which means traders can buy power and the cross-border capacity needed to deliver it into another market in one go via implicit auctions.

Physical day-ahead products on the Italian over-the-counter (OTC) market could start as two key deadlines for Italian traders change following the start of the CSE coupling, giving traders clearer visibility on demand and supply.

The deadline to present bids and offers for physical volumes for day-ahead delivery on the Italian exchange GME will move from 9:15 to 12:00 Italian time.

The deadline to register OTC bilateral deals on the PCE forward platform will close at approximately 11:30 on the day before delivery, changed from 22:00 on the second day before delivery.

Companies starting to trade physical day-ahead volumes on the OTC market would represent an important innovation in Italy and a move towards the French and German markets.

Currently, electricity volumes for next-day delivery are either exchanged on the platform set up by the Italian exchange GME or traded only as financial products on the OTC market.

Producers offering electricity and market participants bidding to buy physical volumes match up on the Italian exchange through an auction mechanism for each of Italy’s six selling zones (north, central north, central south, south, Sicily and Sardinia).

The average of the zonal prices make up the national single price, or PUN Day-ahead, which represents a major reference point for pricing prompt contracts on the OTC market and typically influences the value of shorter-term contract of the near curve, such as the front month.

Bids on the demand side of the market and nominated capacity on the supply side are currently submitted to the exchange by market participants by 9:15 Italian time, with results published by 10:45. Traded volumes typically pick up after the PUN Day-ahead price is communicated by GME.

With market coupling on the CSE region, the deadline to submit bids and offers for physical volumes on the Italian, Swiss and Slovenian exchange would be aligned at 12:00 Italian time, from 9:15 in Italy, 9:40 in Slovenia and 11:00 in Switzerland.

As a result, Italian, Swiss and Slovenian gate-closure times would also be in line with the existing French day-ahead deadline.

The deadline change for the registration of bilateral OTC trades will also be decisive.

At the moment, traders need to close and register trades by 22:00 on the second day before delivery.

“The current deadline comes too long before delivery, when too much data necessary to understand demand and offer needs on the delivery day is still imprecise. This factor kills a lot of interest in working on such deals,” one trader from a utility company told ICIS on Wednesday.

The new registration time for PCE deals is still not clear, although an 11:30 deadline was seen as possible during the market coupling forum.

With better data available to traders and the PUN Day-ahead price revealed later by GME, sources polled by ICIS agreed that a new door for OTC trading of physical day-ahead volumes was likely to open.

“I believe [all traders operating in Italy] welcome these moves in direction of a physical day-ahead market on [a par with] the likes of France of Germany. Such a change has a clear potential to boost liquidity in the Italian market,” one senior trader at a utility group said on Thursday.

The CSE market coupling scheme is targeting a start in mid-February 2015, although countries involved in the project will be coupled at different stages ( see EDEM 17 July 2014 ). Riccardo Patrian