Italian regulator hikes up electricity capacity market strike price

07 August 2017 18:19 Source:ICIS

The strike price of reliability option contracts at the heart of Italy’s future electricity capacity market could be as high as €250/MWh in the scheme’s first implementation phase, regulator AEEGSI said on Friday.

The move marks a clear increase from earlier strike price proposals, which were seen as too low by the European Commission, as well as a number of market participants.

Consultation documents that included the new proposal also confirmed that payments under the first rounds of auctions would be capped at €75,000/MW/year for new capacity, while introducing a bid cap of €20,000/MW/year for existing capacity.

Strike price methodology

The strike price is the price at which market participants will be required to supply volume on spot markets under Italy’s proposed scheme (click here for an ICIS briefing on Italy’s proposed capacity market).

In the first phase, which AEEGSI previously recommended should end no later than 2019, the strike price would be equal to double the variable cost of an open-cycle gas turbine (OCGT) unit as set out in the methodology published by the regulator.

However, first-stage auctions with a planning horizon higher than three years would have a strike price equal to three-halves of OCGT costs, or approximately €187/MWh.

The strike price would then drop to around €125/MWh in the full-implementation stage.

AEEGSI justified the need for a differentiated strike price because of market operators’ concerns about the results of the first auctions and a lack of competition from new capacity in the short term, especially in the first stage of the scheme’s two-stage implementation period (click here to read story).

Cost components

The components included by AEEGSI when calculating the variable costs of an OCGT at €125/MWh are:

• The cost of natural gas, including logistic costs for transportation

• The cost of emissions permits under the EU emission trading scheme

• The waste disposal costs, set at €0.006/MWh

• The electricity dispatching costs, set at the higher of €3.00/MWh or 2% of natural gas, emissions and waste disposal costs

• A flat cost component covering other costs and risks, set at €15.00/MWh

The new strike prices represent a clear increase from earlier proposals, which set the bar at the variable costs of an OCGT only – a level that was estimated by market participants to hover around €80-90/MWh.

They would also move in the direction that the EU Commission indicated to Italy’s government and regulator that it would prefer to see. The Commission reportedly criticised earlier proposals for the impact that a relatively low strike price would have on wholesale markets (click here to read story).

Such criticism from the EU is one of the main reasons behind delays that have hit the capacity market. It was initially expected to launch early in 2017 (click here to read story).

Bid cap

Payments in the first implementation phase would be capped at €75,000/MW/year for new projects and €20,000/MW/year for existing capacity in all auctions with a planning horizon below three years.

The same caps will be in place for auctions with a planning horizon above three years, but existing-capacity bidders might be awarded a higher annual premium in the case that some new-build capacity is awarded a premium that is between €20,000-75,000/MW/year.

The plan follows up on earlier proposals from the regulator (click here to read story).

Demand side response

Demand-side response would be able to take part in the capacity market but under different terms.

The regulator proposed that consumers committing to reduce their intake are not paid a premium as is the case for producers, to reflect the status as both supplier and consumer of electricity.

However, demand-side response capacity would be exempt from paying surcharges that end-users will face for capacity market payments to producers.

The consultation, which can be found here , will close on 15 September.

By Riccardo Patrian