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ITALIAN ELECTRICITY MARKET

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					                           ITALIAN ELECTRICITY MARKET
The Italian Energy Sector is governed by several Institutions, in particular the following are
relevant for what concern the Electricity Market: the Ministry of Productive Activities, the
Regulatory Authority for Electricity and Gas, the Transmission System Operator (GRTN – Gestore
della Rete di Trasmissione Nazionale), the Single Buyer (AU-Acquirente Unico) and the Market
Operator (GME- Gestore Mercato Elettrico).

The Italian Power Exchange (IPEX) started on April the 1st 2004, up to Dec. 31st 2004 demand will
be admitted only with a passive (non elastic) role. Tests with active demand-side participation in the
Power Exchange started on July 1st, the testing stage, which precedes full demand-side participation
by year’s end, is targeted to fine-tune all the electronic procedures required for the operation of the
market and to enable participants to familiarize with them. To date, GME has registered about 30
candidates for the tests; among them, AU (Acquirente Unico – the Single Buyer - the company
which serves the captive market), national-scale wholesalers and associations. Beginning on 1
January 2005, these consumers will be able to procure electricity by direct access to Power
Exchange transactions.
At present, Italian customers are divided in two classes: eligible customers(all non-domestic), that
are allowed to chose their electricity supplier, and captive customers that are served by the local
distributor, it is expected that all customers will become eligible by July 1st 2007.


1. Scope and operation

The IPEX presents the following features:

1) Energy Markets.
The Market Operator (GME) defines the production plans for the generation units on the basis of
the market solution, that meets the selling offers made by the producer and the acquiring offers
submitted by the consumers. The offers are ranked by price, for each hour of the day and for each
geographical zone, in order to meet both the demand at the lowest possible price and the transport
limits for the grid.
It’s worth noting that, differing from other European Electricity Markets as Powernext in France
and EEX in Germany, the Italian market is not only a purely financial market but it is a physical
market by which the physical programmes for production and consumption are defined.

2) Bilateral Contracts (physical)
Producer and eligible customers are allowed to buy and sell electricity not only through the Market,
but also by drawing up bilateral contracts. In this case, the consequent production and consuming
plans are defined by the parties on the basis of the agreement. However, these contracts are subject
to the grid limits checks, therefore the relevant energy quantities are included by GME in the
market sessions in the form of offers with highest priority, that means at zero price for energy
selling and without upper price limit for buying.

3) The Ancillary Services and Balancing Market
The reserve is purchased by GRTN through the selection of appropriate offers of program variation
presented by the market operators. This market is managed by GME for what concerns offers
collection and communication of the results, and by GRTN for offers acceptance. The reserve will
be used by GRTN in his balancing action if necessary on real time.

4) Discipline of unbalancing behavior
The discipline promotes a correct behavior for producers and customer with respect to the plans
emerged from the market sessions and from bilateral contracts.

2. Aspects of electric system relevant to the electricity market

Some definition and identification set by the regulator are relevant for the market model. In
particular:
    a) the grid limits that are fundamental in defining energy production and withdrawal plans
    b) the minimum amount of energy to be considered for production and consumption plans
    c) the identification of the operators to be considered responsible for programs execution and
        lack of observance.

1) Geographical and virtual zones. GME uses a simplified grid representation in order to verify
transmission plans and remove possible congestions caused by the programs or by bilateral
contracts. The simplified grid scheme points out only the principal transmission limits, i.e. the ones
among geographical zones, international connections and limited production poles. In particular, the
grid is composed by:
- 6 national geographical zones (North, Centre-north, Centre, South, Sicily, Sardinia);
- 6 foreign virtual zones (France, Switzerland, Austria, Slovenia, Corse and Greece);
- several Limited Production Poles, i.e. zones constituted by production units only, which
    interconnection capacity toward the grid is below the power installed in the same units.

The shaping of these zones is determined by GRTN on the basis of the criteria adopted in the
management of transmission along the peninsula and the characteristics a communicated to GME
along with the transmission limit among neighbouring zones.

Fig. 1 Geographical and virtual zones of the Italian National Transmission Grid with maximum
transmission capacity between neighbouring zones, for the winter period in 2003.




2) Points of Offer. Each zone (both geographical or virtual) is a collection of Points of Offer. These
are the minimum units with respect to which the hourly injection or withdrawal programs must be
defined, either in case of bilateral contracts, or as agreed in the market following the acceptance of
sell and buy offers.

In the case of injection programs, the Offers Points generally coincide with the individual injection
points, i.e. individual production units1. This depends on the capability of the production units to
instantaneously monitor their current injections, therefore they are individually and directly
dispatched in order to guarantee the system balancing. Moreover, as the units present different
physical and dynamic properties, their productions plans are to be defined individually, in order to
allow GRTN to select which unit can contribute to the reserve services.

In the case of withdrawal plans, the relevant Points of Offer correspond to individual consumer
units or to consumer unit aggregates. The aggregation of withdrawal points in a single Point of
Offer is important for the unbalances discipline, and therefore it must underlay precise aggregation
conditions. In facts, it is possible to aggregate withdrawal points that lay in the same geographical
zone, in order to control the transfers between the zones. Moreover it is necessary that the points are
connected to the same voltage level (High, medium or low) in order to calculate and invoice the
pertinent transport losses, and finally, they must underlay the same fiscal regime (with respect to the
TVA) for invoice calculations.

3) Ancillary services user. An ancillary services user is defined for each Point of Offer, and it is
responsible towards GRTN for the execution of the injection plans as determined by the Market or
by bilateral contracts. It is also responsible for the execution of the balancing orders forecast by
GRTN in real time for the grid security, and moreover it is responsible for the unbalancing charge
payments to GRTN.


3. Electricity Market Organisation And Operation

The Electricity Market is composed by 3 markets.

The Day Ahead Market (MGP) is devoted to the wholesale energy exchange among producer and
traders (or eligible customers), to the setting of injection and withdrawal plans for each hour of the
following day and to the allocation of the transport capacity available, for each pair of zones, to
market operators and to bilateral contracts. This market is held in the morning of the day ahead, all
the operators and Points of Offer are admitted to participate.

The Adjustment Market allows all operators to modify production and withdrawal plans as
defined in the day ahead market presenting further selling or buying offers. This market is held
immediately after the day ahead market is closed, typically in the first hours of the afternoon, and
all the operators and Offer Points are admitted.

The Ancillary Services and Balancing Market in which operators presents hourly offers for their
availability to increase or decrease the power injected or withdrew. These offers are considered by
GRTN in order to:
   a) correct the plans that violate the grid transport limit and create reserve margins for the
       following day;
   b) in the real time, to balance the system in the event of variation from plans. Only ancillary
       services users of the Points of Offer qualified by GRTN are allowed to participate in this
       market.

1
    Production plans with nominal capacity below 10 MW can be aggregated.
                       Day Ahead           Balancing          Ancillary Services and Balancing
                         Market              Market                         Market
Exchanged           Energy              Energy              Energy for           Energy for real
commodity                                                   congestion relief time balancing
                                                            and for reserve
Offer Points        All Points of Offer for injection +     All Points of Offer qualified by GRTN
admitted            All Points of Offer for withdrawal      for provision of dispatching services
Operators           Market Operators Market Operators       ancillary services ancillary services
admitted                                                    users                users
Price               Equilibrium price   Equilibrium price   Price as bid         Price as bid



4. Markets common features

The following elements are common to all the markets.
Offers. The operators participate in the market by submitting selling or buying offers. The offers
are composed by a couple of “energy quantity” and “unit energy price” (MWh; €/MWh), meaning
that they can sell (or buy) an energy amount not exceeding the one declared at a price not lower
(higher) than the one specified in the offer. In case of offers submitted to the Dispatching Service
Market, the price is intended “as bid”. Offers are referred to each Point of Offer and to each hour,
being each offer independent from the others.

Operators. Each operator can submit offers relevant to several Points of Offer, and at the same
time many operators can submit offers for the same Point of Offer. Therefore the operators not
necessarily coincide with the ancillary services users. On the Ancillary Services and Balancing
Market, however, offers must be referred only to technically qualified Points of Offer and must be
submitted by the respective ancillary services users. On the other markets, on the contrary, any
operator can submit offers referred to any Point of Offer, provided he can show a written agreement
with the ancillary services user responsible for the Offer Point.
5. More details on markets

    5.1. The Day Ahead Market (MGP)
The MGP is a market for wholesale energy exchanges among operators, into which not only prices
and quantities are defined but also the input/output programs to and from the grid for the next day,
that GME (the Market Operator) communicates to GRTN (the Transmission System Operator) for
verifying the compatibility with the grid configuration and to determine the needed amount of
supply. All qualified Operators can (must not) participate in the MGP, the central counterpart being
GME for all buy and sale operations.
1) Types of Offer and related constraints. In the MGP sale and buy offers can be made according
to three types:
     simple offers – a single pair quantity-unit price (MWh, €/MWh);
     multiple offers – up to four pairs quantity-unit price;
     predefined offers – that are either simple or multiple offers which any operator can make
        once and for all and that GME uses in all sessions when, for the hour and unit to which the
        predefined offer is referred, no current offers has been received.
Sale offers can be referred only to input offer points, while buy offers can be referred only to output
offer points: this means that multiple offers can be represented either by sale only offers or by buy
only offers. Moreover there are offer points to which both sale and buy offer can be referred. These
are the mixed offer points which are groups of both virtual or physical points, such as for example
production and pumping plants, that use energy when they pump water into the reservoirs and
produce energy when water is released. Multiple offers that are referred to mixed offer points can
be jointly made of sale and buy offers.2


                Multiple Offer                         Simple Offer
               (max four pairs)




                                             Multiple Offer
                                              Multiple offer          Simple Offer
                                                                       Simple offer




2) Preliminary Information. Before the MGP session begins, GRTN sends to MGE a set of
preliminary information that GME makes available to operators on the public access section of its
web site (www.mercatotoelettrico.org). This information regards: the energy demand expected for
every hour and zone, the production programme of every plant under GRTN control for every hour
and zone, the maximum transit power allowed between neighbouring zone for every hour and pair
of zones. To this set GME adds, for every hour and zone, the conventional reference price, that is
the price which GME applies to buy offers without price indication, to evaluate the adequacy of the
financial guarantees produced by the operator.


2
 By specifying a multiple offer with buy prices below sale prices, a mixed unit can be selected to generate when high
prices make it convenient and to consume when prices are low.
                        Demand                 Supply




                                                                   Equilibrium
                                                                   quantity
                                  Equilibrium price



           P*




3) Offers acceptance. For every hour of the next day the market algorithm accepts offers to
maximize the value of transactions, in observance of the limits on maximum transits among zones.
The acceptance process can be summarized in this way:
    all valid and consistent sale offers are ordered according to increasing price to form an
       aggregated supply curve, valid and consistent buy offers are ordered according to decreasing
       price to form an aggregated demand curve. The intersection between the two curves
       determines the total quantity exchanged, the equilibrium price and the
       production/withdrawal programmes obtained as sum of the offers for the same time and
       offer point.
    if the resulting energy flows don’t violate any transit limit, the equilibrium price is unique
       and equal to P*: the offers accepted are those with sale price not exceeding P* and buy price
       not less then P*.
    if at least one limit is violated, the algorithm separates the market into two market zones, an
       exporting zone that includes all zones upstream of the constraint and an importing zone
       including all downstream zones, and repeats the “market splitting” process until a result
       compatible with the network can be found

4) Bilateral contracts. The energy exchanged under bilateral contracts participates in the process
described above, both because it engages a fraction of the available transportation capacity and
because it contributes to determine the weights for averaging zone prices to obtain the single
national price. To this aim GRTN communicates to GME the programmes related to bilateral
contracts under virtual sale offers at price equal to zero and buy offers without price indication.


    5.2. The Adjustment Market (MA)
Also MA is a market for the wholesale energy exchange among operators, into which prices and
quantities are determined and where input/output programmes resulting from the MGP are
modified. Also these programmes are communicated by GME to GRTN, for verifying the
sustainability for the grid ad to determine the supply needed. The need for an adjustment market
after the day ahead market is due to the use of simple offers: as the 24 hourly programmes of
input/output for each point of offer are determined independently one from each other, there is no
guarantee that they are globally consistent with the dynamic constrains of the production plants
located at these points. The MA allows operators to make suited sale or buy offers so to
accommodate their programmes. All qualified operators can (must not) participate in the MA, the
central counterpart being GME.
1) Types of Offer and related constraints. At MA can be made sale and buy offers according to
three types:
     simple offers – a single pair quantity-unit price (MWh, €/MWh);
     multiple offers – up to four pairs quantity-unit price;
     balanced offers – sets of offers made by one or more operators and having a particular
        priority at equal price.
Both sale and buy offers can be referred to points of offer in input, in output, and mixed. This
means that all multiple offers can be represented jointly by sale offers and buy offers independently
from the type of point of offer to which they are referred.


    5.3. The Ancillary Services and Balancing Market (MSD)
The MSD is a market on which GRTN procures the resources needed for the ancillary services.
Though also the MSD session ends the day ahead, the acceptance process of the offers develops in
two times:
- just after the session closure, that is according to programme, when offers are accepted to
    modify the input/output programmes determined by MGP and MA, so to solve possible residual
    congestions and establish the reserve margins needed for the security of the system;
- in the real time, when offers are accepted to balance the system .
The whole architecture is different from the MGP and MA ones. The operators’ counterpart is
GRTN which acts as the single buyer/seller. All ancillary services users can participate in the MSD
market, but limited to the input/output points of offer qualified by GRTN, as the production units
located at these points can provide suited dynamic response. The ancillary services users are to offer
to MSD all available capacity, both ramp up and ramp down.

1) Types of Offer and related constraints. On the MSD both sale and buy offers can be made, but
only as simple offers: for every point of offer both a sale offer, meant as the availability to increase
input (or to reduce withdrawal), and a buy offer, availability to reduce input (or increase
withdrawal) must be specified.

2) Offers acceptance. The offer acceptance process on the MSD is performed by GRTN, that
receives from GME the offers made by operators and gives back to GME the offers accepted in two
phases, as said above. Differently from the energy markets (MGP and MA) offers are not paid at the
equilibrium price but as bid.

				
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