AEEGSI mulls raising Italy’s power capacity market strike price

Italian regulator AEEGSI is considering raising the price at which power producers participating in its proposed capacity market will be required to supply volumes on spot markets, ICIS can reveal.

ICIS understands that the new level would be around the highest hourly settlement price seen on the MGP day-ahead market of Italian exchange GME in July 2015 – the last time in which Italy dealt with squeezed supply margins due to strong internal demand, which peaked at the all-time high of 60.5GW.

According to GME data, MGP prices peaked at €144.57/MWh in hour 19 on 23 July 2015. On that day the PUN Day-ahead reached €127.46/MWh, the highest value since 2012. The average day-ahead price in July 2015 was €67.77/MWh, and €94.86/MWh between 20-24 July – the most expensive working week of the month.

This would be considerably higher than the reference price originally proposed by AEEGSI in a consultation document in December, which would reflect the variable production costs of Italy’s marginal power generation source. According to calculations by transmission system operator (TSO) Terna submitted to AEEGSI, this would be an open-cycle gas turbine plant. Most market participants consider the level to hover around €80-90/MWh.

The chosen level will be a key element of Italy’s capacity market – the strike price embedded in the reliability call option contracts that Terna would put on auction.

Power producers winning the right to sign the contract with Terna would be paid a premium in exchange for committing to provide the contracted production volumes to the MGP and ancillary-services MSD markets every time spot prices hit the strike price ( click here to read the ICIS briefing on Italy’s proposed capacity market ).

EU criticism

The new price proposed by the regulator aims to address one of the main issues raised by the European Commission in discussing Italy’s capacity market draft, which faces new delays despite the government targeting a 2018 start ( click here to read the story ).

It is unclear whether this new level would be sufficient to fend off criticism from the commission’s competition directorate-general, which is holding regular meetings with Italy’s ministry of economic development, AEEGSI and Terna ahead of Italy’s formal notification to the commission on the plan.

The notification is required by EU procedures on state aid measures, as the commission needs to check the scheme’s compatibility with EU rules and the magnitude of its distortive effects on markets.

AEEGSI was unable to comment on the issue by time of publication. riccardo.patrian@icis.com