It was due for January, 1st 2001, but it arrived only in October 2002, and took off at the beginning of 2003. The Italian power exchange is one of the key elements created according to the reform introduced with decree 79 of March 1999 that implemented  the European energy directive.

 

Now all hopes of Italian small and large consumers to see at last their prices reduced are  confined in this new instrument to be used for the negotiation of electricity. Three years into the start of the reform, there was widespread disappointment among Italian operators about the possibility that a true competition, with downward pressures on prices, could really emerge. No surprise therefore that all the players were looking with interest to the launch of the power exchange.

 

The power exchange is operated by the Gestore del Mercato (GM) a company directly owned by the system operator, the Gestore della Rete di Trasmissione Nazionale (GRTN).  GRTN is a stock company under control of the ministry of Treasury and, according to decree 79/99,  it has the commitment of the management of the grid.

 

The Italian power exchange follows to some extend the example of the old pool market of England and Wales, being all the Italian reform inspired to the UK experience. Similarities in the electricity supply industry are in fact numerous, starting from the dominant position of ENEL, like that at the end of the ‘80s of Central Electricity Generating Board, then divided in National Power and Powergen.  The power generation capacity is predominantly from large fossil fuel power stations disseminated all over the market.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Besides, the regulator and the debate in Italy concerning the reform have  always taken the England experience as meaningful for the rules to be applied also in Italy. This in fact creates also the first problem, since at the beginning of 2001 the pool mechanism was abandoned in England for NETA, a system based on bilateral contracts that is more resembling to what a large part of the Italian existing traders and producers would like to have in place. The law 79/99 at article 6 is quite clear on the subject when it says that bilateral contracts are possible, but should be authorised by the energy authority, letting understand that any contract done outside the exchange are to be considered as an exemption and not a rule.  Instead the market operators are insisting for rules that should allow quite easily to have bilateral contracts done outside the official mechanism.

 

Their concern is related to the possibility to sign toll agreements with power producers in new projects under development with related finance structure that depends on these kind of contract. The key point in the debate is that of having a system that will permit enough liquidity in order to give an efficient pricing to the market. The price of the power exchange, if efficient, will be taken as reference also for the bilateral contracts, no matter their dimension of the total market. The risk of avoiding a obliged power exchange is that of diverting liquidity to a bilateral market that will reduce the possibility to have an efficient price reporting system undermining from the very beginning the result of the reform. The ministry, more willing to listen to the requests of the operators, is likely to cede to the intention of the energy authority and of GM to follow strictly the rules already set in decree 79/99 that want  a structure where all, or the majority, of the deals done are passing through the power exchange. The system therefore should be as that designed by GM in figure 1, with the bulk of electricity passing through the exchange and with bilateral contracts that will be possible only after authorisation from the energy authority. Differently from the English experience, Italy will still have a final market divided in two parts, that of eligible clients and that of franchised clients, still supplied by the same distributors, for more than 90% by ENEL, the former integrated monopolist.

 

The threshold for eligibility has been constantly lowered in the last few years and it will be, from 2003, at 50,000 kWh of consumption per year. Probably the limit will be fully eliminated towards 2005 when a similar decision will be taken by the European commission. In the mean time, the Italian reform set up  a new entity, the Single Buyer, to operate on the market for account of distributors to smaller customers, mostly in the residential sector. The debate in Italy has been quite fierce recently concerning the real need to have a Single Buyer, when the limits will probably be eliminated for franchise clients and with the distributors already existing, in particular ENEL Distributione, that could do the same job the Single Buyer is supposed to carry out. This operator is going to have an extraordinary market power on the demand side: even after the introduction of lower threshold for eligibility, it will still buy around 90 TWh, out of a total market of 285 TWh. It is a  market share on the demand side of 40% that scares any potential participant to the market, especially  if it is a producer. However, even the elimination of the Single Buyer will leave to ENEL Distribuzione, the company with the highest number of final clients, a monopsonistic position.

 

 

 

This is a problem that mirrors that of the supply side, where, again differently from the UK experience, the reduction of the dominant position of the former monopolist has been too mild. The decree 79/99 imposed just a reduction of Enel’s grip on the market to a level not distant form 50%, giving so a legal approval to such a high market share. The three companies under divestment by Enel have a combined  production of less than 50 TWh, while Enel is exceeding 130 TWh. The largest of the three, Eurogen with a production in 2001 of around 20 TWh, was bought last March by the consortium led by Edison, now part of Italenergia, the company jointly owned by Fiat, the Italian auto maker, and EdF.  Summing also the capacity coming from Edison, the total production with Eurogen will slightly exceed 50 TWh. 

 

According to the rules designed by the GM and already approved by the government the new electricity power exchange will be made of five  different type of transactions or markets (figure 2).

 

The first two, the most important for electricity prices, will be the day ahead market and the adjustment market, both for power to be delivered in each of the 24 hours of the next day. The other three markets are related to resources needed to provide dispatching services. They are the congestion service, the reserve capacity and the balancing service. The important point, differently form the old English pool, is that the consumers will take part in the price formation, participating directly in drawing  a demand curve that will cross the supply curve  at a specific point where the clearing price is set. As always in this kind of markets, it is a system that in theory is easy to make work but that in reality is likely to face some troubles.

 

Besides the already mentioned issue of dominant players both on the supply and demand side, an important aspect is that of the geographical dimension of the market that is stretching all over Italy, a long county with huge differences among the different regions and with transport connections that are always difficult. In UK the decision of the regulator was to create a unique market in a region quite homogeneous, that of England and Wales, excluding the more distant Scotland. In Italy, instead, the intention is to proceed with a whole market all over the country, despite  relevant barriers. Almost two thirds of total  Italian electricity consumption is concentrated in the North, with a strong dependence on imports. The centre depends on imports from other regions, the Adriatic side on the South has an excess of capacity, like the two islands Sardinia and Sicily.

 

The consumption area of Naples and Rome have problems of lack of capacity. These unbalances reflects a more delicate problem of inadequacy of transmission lines and a not  perfect distribution of power generation capacity, which construction in the past was also decided for political reasons. The GM has already designed a system with six different zones and with a pricing mechanism that should give a premium where there is a shortage of capacity and a discount where there is excess capacity. This should also help the new investors to decide correctly where to build new capacity. Again it is a mechanism easy to apply in theory. Other problems could stem from the large amount of electricity imported from  abroad at low prices. It is not yet clear how it will participate to the market. Difficulties could also emerge for hydro and renewable production, around 50 TWh each year and for the incentivated capacity under CIP 6/92.

 

Despite all the expectations, the Italian operators are quite aware that the high prices of their market will not disappear automatically with the new power exchange. This is disappointing for consumers, but it is a good news for potential new entrants. The main peculiarity of the Italian electricity markets remains its extraordinary high level of prices. In July 2002  in Europe wholesale prices were falling below 20 Euro per MWh, while in Italy the producers were receiving 52 Euro/MWh, through a kind of tariff, the so called PG, that remains the best estimate of the price once the power exchange will be operative. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The main reason is related to the high dependency on fuel oil and gas in power generation with a share of around 70%. Coal accounts for just 11% while the remaining 19% is hydro production. Considering that gas prices are linked to oil product prices, any change in crude quotations affects immediately the tariff. For the eligible market the power available not from imports has prices that are more or less aligned to this PG. Until recently this was due to the fact that ENEL was the only supplier of additional supplies, for which it had no incentive at all to sell at lower prices. After the sale of the first and second Gencos in July 2001 and in March 2002 more competition could have emerged, but so far  there is no sign of it.

A possible reduction due to more competition between Enel  and the new owners of the Gencos is quite unlikely, both because the new entrants have just started to operate and because the structure of their cost is more or less the same of Enel, with a high influence of the fuel component. Taking also into consideration the fact that both Endesa, owner of  Eurogen, and Italenergia, owner of  Elettrogen, paid prices per MW that were relatively high, they are to some extend forced to avoid any kind of price competition, let alone price war.

 

By the end of this summer it is likely that also the third Gencos, Interpower, will be sold. Judging from the high interest expressed for it and considering the fact that it has a better mix of different plants compared to the previous Gencos, the price per MW that will be paid is likely to be high. Foreign companies after the first enthusiasm are more sceptical about an easy entry into the Italian market. Electrabel seems very determined to buy the third Gencos Interpower. Last May 2002 it signed an agreement with the municipality of Rome, Acea, that seems to pave the way for the best offer to Enel for Interpower. RWE, after some small activity on imports,  decided only recently to enter officially into the Italian market.

 

Last March it reached an agreement with the Lucchini group to acquire a 25% stake in Elettra GGL that has 200 MW of CCGT capacity  under CIP 6/92 and several other projects for new CCGT. Other producers with new merchant plants are still on the paper. The Gestore della Rete (the ISO) has received demand for new capacity for 115 GW, an astonishing amount to be compared to the existing thermal capacity of 55 GW. This huge amount is again explainable with the high electricity prices. The real impediment is that of getting permission from local authorities. Realistically not more than 10-15 GW of this  new capacity will be built and it will take a lot of time to be completed. In the mean time the number of players on the new power exchange will be quite limited.IJ