Strike price for Italy’s draft power capacity market 'still too low'

28 June 2017 17:21 Source:ICIS

A reference price in the region of €140-150/MWh for Italy’s capacity market would be better than earlier proposals but would still impact the functioning of Italy’s wholesale electricity market too heavily, a number of stakeholders have told ICIS.

Sources highlighted how such a threshold would curb price signals especially for producers active on the ancillary services market.

The reference price is a key component of Italy’s capacity market, which will be based on reliability call option contracts between transmission system operator (TSO) Terna and market participants selected through an auction.

The auction will decide the annual premium that Terna will pay bidders for supplying their full capacity each time spot prices on the day-ahead, intra-day and ancillary services market hit a reference value, called a strike price (click here to read the ICIS briefing on Italy’s capacity market).

ICIS understands that energy regulator AEEGSI has recently proposed to the EU Commission a strike price in the region of the spikes seen on the day-ahead market in July 2015, when hourly prices reached €144.57/MWh ( click here to read story ).

This would be higher than the first proposal of setting the strike price at the production costs of an open-cycle gas turbine, which the market estimated to be around €80-90/MWh. The move aimed to address criticism from the EU Commission, which is concerned with the impact that the initial strike price would have on wholesale markets ( click here to read story ).

Lack of scarcity price signals

Many stakeholders reached by ICIS blasted both strike price levels proposed by AEEGSI as too low, claiming that they would eliminate scarcity price signals.

“There’s such an issue of missing money in the market that we expect the first capacity market auctions to be very successful, to the point that there will always be enough capacity signed to the new scheme to swiftly cover demand spikes,” said Michele Governatori, head of regulatory affairs at Swiss-owned energy company Axpo Italia.

“This will cross out all scarcity price signals, hence making the system even more dependent on the capacity market for future investments.”

The impact would be especially strong for the ancillary services market, where prices rose as high as €999.00/MWh in a number of hours in 2016.

The day-ahead market would be less affected. Hourly prices for day-ahead deliveries crossed the €80.00/MWh mark only 1.7% of the time in 2016 and went above €145.00/MWh just 0.05% of instances, data from Italian exchange GME showed.

The death of volatility?

“A strike price at €80.00/MWh would kill all volatility in the market … €150.00/MWh would be better than €80.00/MWh, but it’s still not very good,” a member of Italian energy lobby group AIGET commented.

According to Governatori a solution could be to apply the capacity market only to day-ahead prices, thus excluding the more spike-prone ancillary services market.

“Alternatively the strike price could be raised at €400.00/MWh, which is the level the TSO is applying in its pilot project opening the balancing market to demand-side response,” he added.

The head of regulation at another market participant, who wished to maintain anonymity, also criticised the strike price levels proposed by AEEGSI to the Commission.

“Even in the case it’s €150.00/MWh it’d be too low, especially when comparing the €400.00/MWh used by Terna for demand-side response. Even more importantly, it’s hard to fully understand the logic behind the levels at which any of these strike prices are set,” the source commented.

By Riccardo Patrian