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Italy to risk reverse power flows with capacity scheme

2 Oct 2017, 3.28 pm GMT

Italy to risk reverse power flows with capacity scheme

London, 2 October (Argus) — The planned Italian capacity market risks reversing power flow between Italy and France, preventing correct remuneration of Italian capacity, institutional and regulatory affairs director at Swiss utility Axpo's Italian unit, Michele Governatori, said.

The Italian model is based on reliability options and aims to reach both capacity remuneration and control of market power when oligopolistic situations occur, Governatori told Argus. But in national energy market regulator AEEGSI's proposal, the strike price is expected to be set at the level of open-cycle gas turbine (OCGT) variable costs. This is too low and caps prices both in the day-ahead (MGP) and ancillary market services (MSD) markets. If the strike price in the Italian capacity market is lower than day-ahead price in France, Italy risks exporting at inefficiently low prices, Governatori said. The risk would be highest in winter, given France's high share of electric heating.

Italy is usually a net importer from France, but low French nuclear availability limited imports last winter. Net imports from France were at an average of 2.4TWh between October 2016 and March 2017, with a low of 1.3TWh in January. This was 2TWh lower than the same period of 2015-16, data from national grid operator Terna showed. Italy's North zone price averaged €59.06/MWh over the period and settled at a discount to the French spot price for 63 days. The North price was at a discount to France for just seven days in the same period of 2015-16, although the outright price averaged €12.28/MWh lower at €46.78/MWh.

Governatori also said a low cap would to some extent mean treating all providers as essential, cancelling the scarcity signal of commodity prices. The Italian model aims to maintain this signal through allowing for the possibility of a high price in capacity auctions, but Governatori said that in the short term — with excess existing capacity and a commitment by most players to accept any remuneration — he expects there to be plenty of capacity available at a very low price. This, along with what is effectively a capped day-ahead price, could create a serious missing money problem, he said.

And Italy could face also adequacy issues if a large amount of capacity was auctioned. The proposal to use the demand curve would allow Terna to buy more capacity than its system adequacy target, Governatori said. In such a scenario, there would be no power plants able to provide a scarcity signal in the market, which would bring the system to a critical situation, he said. An uncapped energy-only market with strong anti-trust surveillance and a strike price at around €500/MWh, as proposed in the mechanism adopted in Ireland, is the best solution, he said.

Italy put forward a proposal to introduce a capacity scheme in summer 2015, but the European Commission refused to authorise it because of concerns over state-aid rules. Italy presented a new proposal in November last year and was confident enough to schedule the first auctions shortly. It could be possible to hold the first auctions by February 2018, AEEGSI president Guido Bortoni said, although this remains highly uncertain. AEEGSI recently launched a public consultation about higher strike prices and different maximum caps for new and existing capacity.

AEEGSI's consultation is an important step forward, but there is still a lack of confidence in spot markets in terms of scarcity signalling, Governatori said. It assumes avoidable fixed costs should be remunerated through the auction price and not by the spot, he said. The proposal and the capacity market mechanism have been criticised by the European Federation of Energy Traders Efet.

Italy is still waiting for official approval, but Governatori said it is likely that most electricity generators have already made decisions about their portfolio and strategy for 2018 and do not expect a mechanism to apply for that year — even if the rules are finalised shortly.

Italy officially notified Brussels about its proposal at the beginning of August.


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