As energy regulator Arera is expected to rule imminently on the implementation of the liquidity mechanism, market participants question if it may have less of an impact on power prices than initially envisaged, as well as how it will interact with a parallel proposal to cap gas prices for power generators.
The liquidity service is designed to flatten the spread between prices at the Dutch TTF hub and Italy's PSV by compensating selected firms for importing extra marginal volumes at Passo Gries on the border with Switzerland.
The entry point is one of Italy's main sources of marginal supply, and the accumulation of entry-exit tariffs, as well as the regulatory discontinuity caused by transit through Switzerland, has been viewed historically as the root cause of the long-established PSV premium.
The PSV everyday price has been at a €2.16/MWh premium to the TTF so far this year. Under the initial plan, presented in June by Arera, selected firms would pledge to offer to the market a certain volume of supply, within a €0.50/MWh premium cap to the TTF, or "volatility fee", set by the regulator. Participating firms would be selected in advance by a competitive auction on the basis of their requested fee for providing the service.
A final decree implementing the service is expected to be published imminently, after Arera concluded the relevant discussions on 20 October. But there could be significant changes to the mechanism's final form, according to market participants. Arera initially said it would only apply the service to unbooked capacity limiting the service to the German route through Switzerland. But some market participants reported that Arera would extend the service to the French route as well, currently fully booked, although another market participant said this was not correct.
The government has backed the scheme with €200mn, which according to Argus' estimates would be enough for the mechanism to last no longer than 6-8 months. But if the French route were included, it could exhaust the available budget more quickly, limiting the impact of the mechanism to the first quarter, one power trader said.
A reduction in the PSV-TTF spread through the liquidity service would also feed through to the power single national price (Pun), but market participants expect the effect to be limited, cutting only a few €/MWh at most on the power curve.
Under the energy decree, Italy is also planning to introduce a cap on gas prices for power generators to cut energy bills similar to the one implemented by Spain and Portugal in 2022, known as the "Iberian exception".
Italy recently reached a preliminary agreement with the European Commission to cap wholesale prices at about €60/MWh for at least one year starting in January.
The Pun has cleared at an average of €177.81/MWh so far this year, but the implementation of the gas cap could cut prices by 20-25pc compared with recent delivery prices, according to a power trader. This would bring the Pun closer to but not below last year's delivery of €133.36/MWh over 1 January-23 October.
But if the Pun falls, Italy could import less electricity and burn more gas domestically, potentially supporting the PSV-TTF spread and counteracting the desired effect of the liquidity service.
Also, if thermal generators were reimbursed against PSV, their net gas cost would remain at €60/MWh regardless of prompt gas prices. Any PSV reduction from the liquidity service would therefore cut reimbursement costs rather than lower the Pun, reducing the benefit to consumers, Banco Energia analyst Claudio Savoldelli told Argus.
If reimbursement is linked to the TTF instead, the PSV-TTF spread would remain in generators' fuel costs, and the liquidity service would continue to pressure the Pun.
"This is most relevant in the third quarter, when the spread is around €2/MWh, implying a net gas cost closer to €62/MWh than €60/MWh," Savoldelli added.
Market participants are sceptical that the liquidity service and gas cap will be implemented in January, hence why the market appears to be pricing in only a partial compression of prices. Any news of delays or potential opposition from the commission would likely trigger a repricing of the first and second quarters of 2027, according to market participants.
The PSV-TTF January basis market rose on Wednesday to +€1.40/MWh, up from +€1.23/MWh the previous day, after the conclusion of Arera's discussions on 20 October was followed by rumours of a delay to its start date, market participants told Argus. Similarly on the power curve, January gained €9.50/MWh, rising faster than November and December's respective €3.60/MWh and €3.80/MWh increases.
