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.