Italy’s new capacity market facing delays

08 June 2017 17:06 Source:ICIS

Italy’s capacity market looks certain to be delayed for several months due to EU concerns about the design, ICIS understands.

Critical points raised by the competition directorate within the European Commission in recent discussions with the Italian regulator include:

• The mechanism to determine the bidding curve at the capacity market auctions

• The modality in which demand-side response will be able to take part in the auction

• The participation of capacity located beyond Italy’s borders, which Italian transmission system operator (TSO) Terna proposed to admit to the scheme but at less favourable conditions

• The level set for the strike price of the reliability call options around which the Italian capacity market would be designed ( see ICIS briefing on Italy’s capacity market )

The strike price proposed by national regulator AEEGSI would be set using the production costs of an open-cycle gas turbine (OCGT) power plant as reference point, after an analysis from Terna indicated OCGT was the marginal production technology in the system. This would be in the region of €80-90/MWh, ICIS understands.

The level of the strike price is potentially the most contentious of the points raised by the commission, which is checking the market design against potential profiles of illegal state aid.

“The level of the strike price is key. Setting it at the costs of an OCGT would have a direct impact on the way prices are formed on the spot markets,” said Pietro Baldovin, head of the Italian task force at the European Federation of Energy Traders.

The decision to set the strike price in line with OCGT costs is largely seen by market participants as a lifebelt to Italy’s gas-fired power producers, which have seen profit margins plummet in recent years because of lower demand and competition from renewable sources.

However, AEEGSI underlined in the past that the capacity market will be technology neutral and favour the most flexible generation sources – potentially hydropower plants ( see EDEM 18 September 2014 ).

Tight deadline

Italy’s capacity market has been delayed several times since the Italian government and regulator first engaged with the EU seeking clearance for its scheme ( see EDEM 18 September 2015 ).

Although still unofficially, 2018 has often been indicated as the start year for the capacity market, most recently by the ministry of economic development when presenting the national energy strategy guidelines to the parliament in May ( see EDEM 10 May 2017 ).

Electricity incumbent Enel also said in March that it was expecting payments under the scheme to start in 2018 after a late-2017 first auction ( see EDEM 3 March 2017 ).

According to Italian wholesale electricity market participants recently reached by ICIS, a number of companies have taken positions on 2018 forward contracts taking into account the bearish effect that a capacity market geared on OCGT costs could have on spot prices.

In an annual recap of its activities published on 26 May, AEEGSI said that ironing out all differences with the commission is likely to take until the end of summer 2017.

This would leave AEEGSI and Terna with only three months to finalise auction rules and set up the first capacity market auction for a 2018 start of payments – a time horizon considered too tight by sources.

Terna and AEEGSI did not respond to requests for comment on Thursday by the time of publication.

By Riccardo Patrian