How Italian electricity market manages network constraints Rome

How Italian electricity market manages network constraints Rome, Turin, September 2007

2 Agenda • Market Structure • Transmission limits -2 -

3 Market Structure IPEX • A 24 hours Electronic Market, by which market players can buy or sell electric energy PCE • Electronic Platform by which market players register commercial transactions and related programs of consumption or production, after the conclusion of private contract agreement (OTC agreements) -3 -

4 IPEX Market – a Brief description * Consumers who use UCVs (Unit of virtual consumption) or Pump plants pay Zonal Price Phase Description • By Day Before Market (MGP), market players make bids and offers, proposing: ** Society which manages Italian Electric System Assignment Price Time • Selling: Zonal price • Buying: Unique National Price (UNP)* • Start: T-9 dd • End: T-1 dd (9. 00 am) • MA 1 • By Adjustment Market (MA 1), market players are able to modify programs defined during MGP • Selling: Zonal price • Buying: Zonal price • Start: T-1 dd (10. 30 am) • End: T-1 dd (14. 00 pm) • MSD • By Dispatching Services Energy Market (MSD), TERNA spa **, buys or sells dispatching services • See MSD Details • MGP – the Quantity to buy or to sell – the Maximum price / minimum price for MWh By Ipex: • Market Players join to an implicit auction market to buy or sell Electric Energy • Terna guarantees the equilibrium of Italian Electric System -4 Note: T = The day in which electric energy is physically exchanged

IPEX Market – Buying and selling price Price • Zonal Price Calculation Equilibrium Quantity Euro/MWh 5 Equilibrium Price S D MWh • UNP • For each hour UNP is: weighted average of Geographic zonal prices (weight = Consumed quantity): Σ(Pi X Qi) Σ Qi with: i= referring zone ; Q = Bought Quantity; P= Zonal Price • If there isn’t zonal congestion, there is only one zonal price which coincides with UNP • UNCONSTRAINED UNP • Unconstrained UNP is calculated intercepting national demand curve and national offer curve (hypothesis of no transmission limits) -5 -

6 IPEX Market – MSD Details By Dispatching Services Energy Market (MSD), TERNA spa buys or sells dispatching services Day Before MSD Real time MSD • Dispatching services • To Resolve System congestions • To Guarantee storage margin • To Balance Italian Electric Energy System in real time • Plants • Units of production admitted by TERNA • Players • Dispatching service players • Price • Proposed Price • Time • Start: T-1 dd (14. 30 pm) • End: T-1 dd (16. 00 pm) • Real Time Real time MSD permits to resolve unexpected lack of balance -6 -

7 PCE - Overview Commercial Phase Transaction proposal Physical Phase Acceptance / Refusing Programming IPEX Market Final Result • PCE player makes a • Counterpart refuses • PCE Player can • GME generates transaction proposal, or accepts proposal. choose the units by PGM files, which choosing his counterpart, In case of which he sells or buys resume PCE Player the kind of transaction acceptance, energy programs (selling or buying); the Counterpart • Quantity programmed • Programs are sent profile of transaction indicates the bound could be equal or less to IPEX (Baseload; peak…); the code, his referring to the quantity bought automatically account to use; the account and quantity or sold in commercial • GME runs the day referring period; the (which must be phase * before market bound code and the equal to offered/bid quantity one) • GME provides offers or bids results, by PGM files and BUS files Player: • PCE player • GME Price: • The price is established by parties privately and it mustn’t be specified in transactions • T-60 dd to T-2 dd; with T = the day in which the electric energy is exchanged physically • The price is • The limit Price can be • Zonal price established by indicated during • UNP parties privately and programming (only it mustn’t be for IPEX market specified in players) transactions • Offer/bid day to T-2 • Deadline: T-1 (8, 30 • T-1 dd; with T = the day in am); with T = the day in which the electric energy is exchanged physically Description: Time: * see details on following slide • PCE Player -7 - • GME • N/A • T-1 dd; with T = the day in which the electric energy is exchanged physically

8 PCE – Focus on transactions PCE • The maximum quantity which can be loaded on an account is equal to the sum of margins which compose the account 40 MWh 20 MWh CEOP 3 20 MWh CEOP 1 60 MWh CEOP 4 CEOP 2 CEOP 5 10 MWh Operatore di Mercato By commercial phase, market players can act as traders -8 -

9 PCE – Focus on programming UPOP 1 UCAOP 2 Op 1 Op 2 Op 3 Op 4 Op 5 60 MWh UPOP 1 40 MWh Op 1 -100 +60 Op 2 +50 -60 Op 3 -40 Op 4 - Op 5 - +40 - 50 MWh +10 0 +20 - -20 +20 - +30 20 MWh - -10 UCAOP 4 UCAOP 5 30 MWh All the quantity bought/sold in commercial phase can / must be nominated on physical programs of injection or withdrawal -9 -

10 Agenda • Market Structure • Transmission limits – Transmission limits overview – Transmission limits and IPEX Market – Transmission limits and PCE Market - 10 -

Geographical Zones with Transmission Constraints Summer situation (Example) SWITZERLAND 250 2260 AUSTRIA 350 FRANCE 2400 Notes • The possibility to buy/sell electric energy from a zone to another is bound by: SLOVENIA 3100 1100 00 2 2 00 39 00 2 0 500 0 60 0 30 - 11 - Transaction Limits fixed by TERNA • 20 • 10 11 Physical limits connected whit units capacity (units margin) fixed by TERNA • Generalized limits, a composing of transaction limits which exist actually, could help to manage congestion in critical GREECE area

12 Market splitting Mechanism Flows compatible with Available Transmission Capacity? YES Single National Price NO Energy Flows between Zones Nationwide Injection/ Withdrawal Schedules Price of Importing Zone Market Splitting Injection/Withdrawal Schedules Satisfying Available Transmission Capacity > Price of Exporting Zone Zonal Selling Prices Uniform Purchasing Price Market splitting mechanism allows to manage Italian Electric System Congestions - 12 -

13 Advantages of Market splitting system Short time efficiency Long time efficiency Reduction of electric energy costs Revenues from congestion Minor congestion costs • Market chooses the best available plants, in respect of the existing limits, minimizing the costs of production and allowing an efficient use of Electric Italian Network • Electric energy flows from lower price zones to higher price ones • New investments are attracted by the highest costs of electric energy supply. Consequently: § Prices difference between different zones is going to be reduced § Power difference between different zones is going to be reduced • UNP is lower than unconstrained UNP if: § The Price reduction of exporting zones is higher than the price rising in importing zones § The price reduction involves higher volumes than price rising (Italian case**) • Reduction of electric energy cost can be calculated as (UNP unconstrained – UNP ) X Q, where Q is the electric energy exchanged hourly • Implicit revenues: in the spot market, revenues from congestion are given from the gap between the two zonal price (Pz import – Pz export) X QF, where Pz Import > Pz export and QF is the maximum interconnection capacity from the exporting zone to the importing one • Explicit revenues: in the OTC programs, revenues from congestion are called CCT (Corrispettivo Capacità di Transito) and are paid by producers explicitly*. They are calculated as the delta between zonal price in which the production plant is situated and UNP • Inter-zonal congestions are resolved in MGP market, with a reduction of cost in Dispatching Service Market (where electric energy price is the offered one; pay as bid) * CCT are paid by consumers who uses UCV Units or Pump Plants too **see - 13 - on following slide details

14 Reduction of electric energy costs – An Example 14 th August, 21° Hour * • • € / Mw 59, 91 UNP = 78, 30 € / MWh Unconstrained UNP = 92, 95 14. 090 93, 66 3. 442 93, 66 1. 598 3. 634 93, 66 4. 990 93, 66 534 93, 66 HOUR 2. 629 = Unconstrained UNP = Price (€/MWh) = Quantity (MWh) UNP lower than Unconstrained UNP in 21° Hour is a consequence of Market splitting between North and the rest of Italy * Price and quantity only for zones which determinate UNP - 14 -

15 Revenues from congestion – An example 14 th August, 21° Hour Revenues SWITZERLAND 42, 00 1. 18 0 ΣΣ (PZ import-PZ export )X QF = 59, 91 E_NW 59, 91 00 2. 5 (93, 66 -59, 91)X 2. 500+(59, 9193, 66 42, 00)X 1. 180= 84. 375+21. 133= 105. 509 € = Price (€/MWh) = Energy Flow = Separated Zone Revenues amount to 105. 509 € for the 21° hour of 14° August - 15 -

16 Transits management (2006) (…) 2005 data - 16 -

17 Production plants renewal 3. 000 MW 8. 600 2. 000 - 2. 100 5. 700 • Inefficient Plants (high value of merit order) Building of new plants for 8. 600 MW in Italy, in the last two years - 17 -

18 Italian Electric System – 2007 Structure vs 2004 Italian Electric System - 2007 FRANCIA SVIZZERA AUSTRIA ESTERO NORD OVEST Italian Electric System - 2004 SLOVENIA FRANCIA SVIZZERA AUSTRIA ESTERO NORD OVEST ESTERO NORD EST SLOVENIA ESTERO NORD EST TURBIGORONCO NORD CORSICA CENTRO-NORD SARDEGNA CENTRO-SUD ESTERO CORSICA SUD FOGGIA CORSICA AC ROSSANO BRINDISI SUD CALABRIA ESTERO SUD ROSSANO BRINDISI SICILIA GRECIA CALABRIA GRECIA PRIOLO MONFALCONE NORD MONFALCONE CENTRO-NORD CORSICA PIOMBINO SARDEGNA VIRTUAL ZONE PHYSICAL ZONE TURBIGORONCO CENTRO-SUD PRIOLO - 18 - SICILIA

19 Agenda • Market Structure • Transmission limits – Transmission limits overview – Transmission limits and IPEX Market – Transmission limits and PCE Market - 19 -

20 Unconstrained UNP vs UNP – 1° Week of July, 2007 € / MWh = Unconstrained UNP = UNP - 20 -

21 Unconstrained UNP vs UNP – Delta 2007 vs Delta 2005 (1° Week of July) € / MWh = Delta 2005 = Delta 2007 Lower Price zones volume << Higher price zones volume - 21 -

22 Agenda • Market Structure • Transmission limits – Transmission limits overview – Transmission limits and IPEX Market – Transmission limits and PCE Market - 22 -

23 CCT assumptions • Electric Producers* when act on PCE pay or receive CCT (Corrispettivo Capacità di Transito) in case of congestion • CCT is calculate, for each hour and zone, as: (Pz-UNP) X Qz With: – Q the OTC programmed quantity accepted on IPEX after MGP running – z the referring zone • Electricity moves from lows to high price zones: – If Zonal Price is minor than UNP, a producer is contributing to congestion and he pays CCT – If Zonal Price is major than UNP, a producer isn’t contributing to congestion ad he receives CCT - 23 * Electric consumers owners of UCV units or Pump Plant pay/receive CCT too, when they use this kind of units

24 CCT Trend example – From 11° to 20° July 2007* € / MWh Congestion frequent in North and South of Italy * Italian zones only - 24 -