How Italian electricity market manages network constraints

Rome, Turin, September 2007

- 2 -

2

• Market Structure

• Transmission limits

Agenda

- 3 -

3 Market Structure

PCEPCE

IPEXIPEX

• 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)

• A 24 hours Electronic Market, by which market players can

buy or sell electric energy

- 4 -

4 IPEX Market – a Brief description

Phase Description Assignment Price Time

• MGP

• By Day Before Market (MGP), market players make bids and offers, proposing:

– the Quantity to buy or to sell– the Maximum price /

minimum price for MWh

• Selling: Zonal price • Buying: Unique

National Price (UNP)*

• Start: T-9 dd• End: T-1 dd (9.00 am)

• MA1

• By Adjustment Market (MA1), 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 • See MSD Details

Note: T = The day in which electric energy is physically exchanged

** Society which manages Italian Electric System

By Ipex:• Market Players join to an implicit auction market to buy or sell Electric

Energy • Terna guarantees the equilibrium of Italian Electric System

* Consumers who use UCVs (Unit of virtual consumption) or Pump plants pay Zonal Price

- 5 -

5 IPEX Market – Buying and selling price

PricePrice CalculationCalculation

• Zonal Price

MWh

Eu

ro/M

Wh

Equilibrium PriceEquilibrium Quantity

D

S

• 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)

- 6 -

6 IPEX Market – MSD Details

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• Units of production admitted

by TERNA

• Players • Dispatching service players • Dispatching service players

• Price • Proposed Price • Proposed Price

• Time• Start: T-1 dd (14.30 pm)• End: T-1 dd (16.00 pm)

• Real Time

By Dispatching Services Energy Market (MSD), TERNA spa buys or sells dispatching servicesBy Dispatching Services Energy Market (MSD), TERNA spa buys or sells dispatching services

Real time MSD permits to resolve unexpected lack of balance

- 7 -

7 PCE - Overview

Acceptance /

Refusing

Transaction

proposalProgramming IPEX Market Final Result

Player:

Time:

Description:• PCE player makes a

transaction proposal,

choosing his counterpart,

the kind of transaction

(selling or buying); the

profile of transaction

(Baseload; peak…); the

account to use; the

referring period; the

bound code and the

quantity

• PCE player

• T-60 dd to T-2 dd;

with T = the day in

which the electric

energy is exchanged

physically

Commercial PhaseCommercial Phase

Price: • The price is

established by

parties privately

and it mustn’t be

specified in

transactions

• Counterpart refuses

or accepts proposal.

In case of

acceptance,

Counterpart

indicates the bound

code, his referring

account and quantity

(which must be

equal to offered/bid

one)

Physical PhasePhysical Phase

• PCE player

• The price is

established by

parties privately

and it mustn’t be

specified in

transactions• Offer/bid day to T-2

dd; with T = the day in

which the electric

energy is exchanged

physically

• PCE Player can

choose the units by

which he sells or buys

energy

• Quantity programmed

could be equal or less

to the quantity bought

or sold in commercial

phase *

• PCE Player

• The limit Price can be

indicated during

programming (only

for IPEX market

players)

• Deadline: T-1 (8,30

am); with T = the day

in which the electric

energy is exchanged

physically

• GME

• GME generates

PGM files, which

resume PCE Player

programs

• Programs are sent

to IPEX

automatically

• GME runs the day

before market

• T-1 dd; with T = the

day in which the

electric energy is

exchanged physically

• GME provides

offers or bids

results, by PGM

files and BUS files

• GME

• N/A

• T-1 dd; with T = the

day in which the

electric energy is

exchanged physically

• Zonal price

• UNP

* see details on following slide

- 8 -

8

60 MWh

40 MWh

20 MWh

20 MWh

10 MWh

CEOP1

CEOP4

CEOP5

Operatore di Mercato

PCE

PCE – Focus on transactions

• The maximum quantity

which can be loaded on an

account is equal to the

sum of margins which

compose the account

• The maximum quantity

which can be loaded on an

account is equal to the

sum of margins which

compose the account

By commercial phase, market players can act as traders

CEOP3

CEOP2

- 9 -

9

Op1 Op2 Op3 Op4 Op5

Op1 -100 +60 +40 - -

Op2 -60 +50 +10

Op3 -40 0 +20 +20

Op4 - - -20 +20 -

Op5 - -10 -20 - +30

60 MWh

40 MWh

UPOP1

UPOP1

UCAOP2

50 MWh

UCAOP5

30 MWh

UCAOP4

20 MWh

PCE – Focus on programming

All the quantity bought/sold in commercial phase can / must be nominated

on physical programs of injection or withdrawal

- 10 -

10 Agenda

• Market Structure

• Transmission limits

– Transmission limits overview

– Transmission limits and IPEX Market

– Transmission limits and PCE Market

- 11 -

11

SLOVENIA

FRANCE

AUSTRIASWITZERLAND

350

2502260

2400

300

Summer situation (Example)Summer situation (Example)

100

60

0

39002000

20002200

3100

11

00

500

GREECE

Geographical Zones with Transmission Constraints

NotesNotes

• The possibility to buy/sell electric energy

from a zone to another is bound by:

• Transaction Limits fixed by TERNA

• 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

area

- 12 -

12

Flowscompatible

with AvailableTransmission

Capacity?

Flowscompatible

with AvailableTransmission

Capacity?

Injection/WithdrawalSchedules Satisfying

AvailableTransmission Capacity

Injection/WithdrawalSchedules Satisfying

AvailableTransmission Capacity

Single National

Price

Single National

Price

Price of Importing

Zone

Price of Importing

Zone

Price ofExporting

Zone

Price ofExporting

Zone

Zonal Selling Prices

Zonal Selling Prices

>

NO

YES

Market Splitting Market Splitting

NationwideInjection/

WithdrawalSchedules

NationwideInjection/

WithdrawalSchedules

EnergyFlows

betweenZones

EnergyFlows

betweenZones

UniformPurchasing

Price

UniformPurchasing

Price

Market splitting Mechanism

Market splitting mechanism allows to manage Italian Electric System

Congestions

- 13 -

13Advantages of Market splitting system

Short time

efficiency

Short time

efficiency

Long time

efficiency

Long time

efficiency

Reduction of

electric

energy costs

Reduction of

electric

energy 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

Revenues

from

congestion

Revenues

from

congestion

• 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

Minor

congestion

costs

Minor

congestion

costs

• 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 details on following slide

- 14 -

14

0

10

20

30

40

50

60

70

80

90

100

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24

Reduction of electric energy costs – An Example

= UNP

= Unconstrained UNP

€ / Mw

HOUR

14th August14th August

= Quantity (MWh)

= Price (€/MWh)

14th August, 21° Hour *14th August, 21° Hour *

59,9159,91

93,6693,66

93,6693,66

93,6693,66

93,6693,66

93,6693,66

93,6693,66

14.09014.090

59,9159,91

3.4423.442

3.6343.634

4.9904.990

534534

2.6292.629

1.5981.598

• UNP = 78,30 € /

MWh

• Unconstrained

UNP = 92,95

• UNP = 78,30 € /

MWh

• Unconstrained

UNP = 92,95

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

- 15 -

15Revenues from congestion – An example

14th August, 21° Hour14th August, 21° Hour

SWITZERLAND

E_NW

2.500

1.180

93,6693,66

59,9159,91

= Separated Zone

= Price (€/MWh)

42,0042,00

59,9159,91

= Energy Flow

RevenuesRevenues

ΣΣ (PZ import-PZ export )X QF =

(93,66-59,91)X2.500+(59,91-

42,00)X1.180=

84.375+21.133= 105.509 €

Revenues amount to 105.509 € for the 21° hour of 14° August

- 16 -

16

DA AFRANCIA ESTERO NORDOVEST 450 (1.891) 79,6% (84,6%) 30,8% (2,5%) 6,6% (7,6%)ESTERO NORDOVEST FRANCIA ? (?) 13,8% (7,8%) - (-) - (-)SVIZZERA ESTERO NORDOVEST 1.132 (2.563) 84,9% (93,4%) 41,2% (4,7%) - (-)ESTERO NORDOVEST SVIZZERA ? (?) 15,1% (6,6%) - (-) - (-)AUSTRIA ESTERO NORDEST 104 (750) 96,7% (89,9%) 19,0% (5,1%) 1,8% (3,4%)ESTERO NORDEST AUSTRIA ? (?) 1,2% (6,5%) - (-) - (-)SLOVENIA ESTERO NORDEST 184 (862) 96,9% (95,9%) 3,8% (2,2%) - (1,1%)ESTERO NORDEST SLOVENIA ? (?) 3,1% (1,7%) - (-) - (-)ESTERO NORDOVEST NORD 7.088 (5.882) 97,1% (99,9%) - (0,1%) - (-)NORD ESTERO NORDOVEST ? (?) 2,9% (0,1%) - (-) - (-)ESTERO NORDEST NORD 760 (642) 100,0% (99,9%) - (0,9%) - (-)NORD ESTERO NORDEST ? (?) 0,0% (0,1%) - (-) - (-)MONFALCONE NORD 1.454 (948) 100,0% (100,0%) 1,4% (-) - (-)NORD MONFALCONE ? (?) - (-) - (-) - (-)TURBIGO NORD 2.102 (2.098) 53,4% (55,2%) 0,1% (0,1%) - (-)NORD TURBIGO ? (?) 29,6% (34,7%) - (-) - (-)NORD CENTRO NORD 2.738 (3.270) 89,4% (96,9%) 34,3% (17,4%) - (-)CENTRO NORD NORD 1.682 (1.802) 10,6% (3,1%) 0,7% (0,0%) - (-)CENTRO NORD CORSICA 279 (299) 64,2% (66,9%) 16,1% (15,3%) 5,6% (5,3%)CORSICA CENTRO NORD 238 (250) 30,1% (27,5%) 2,8% (0,6%) 5,6% (6,5%)CORSICA SARDEGNA ? (?) 54,9% (61,4%) - (-) 5,2% (4,1%)SARDEGNA CORSICA 301 (300) 39,9% (34,4%) 2,5% (2,0%) 5,2% (4,1%)SARDEGNA ESTERO CORSICA 38 (-) - (-) - (-) - (-)ESTERO CORSICA SARDEGNA 38 (-) - (-) - (-) - (-)ESTERO CORSICA CORSICA CA ? (?) - (-) - (-) - (-)CORSICA CA ESTERO CORSICA ? (?) - (-) - (-) - (-)CENTRO NORD CENTRO SUD 1.944 (8.554) 68,4% (87,6%) 1,4% (2,2%) - (-)CENTRO SUD CENTRO NORD 2.260 (2.243) 31,6% (12,4%) 2,0% (0,1%) - (-)CENTRO SUD SUD 2.120 (2.097) 21,4% (66,7%) 0,0% (0,3%) - (-)SUD CENTRO SUD 1.999 (2.015) 78,6% (33,3%) 0,8% (0,0%) - (-)FOGGIA SUD 868 (-) 60,8% (-) 0,1% (-) 2,6% (-)SUD FOGGIA ? (-) - (-) - (-) - (-)SUD ROSSANO ? (?) - (-) - (-) - (-)ROSSANO SUD 4.270 (4.324) 100,0% (100,0%) 17,5% (2,6%) - (-)ROSSANO CALABRIA 7.932 (814) 91,1% (77,3%) 5,3% (0,5%) 1,8% (4,6%)CALABRIA ROSSANO ? (?) 7,1% (18,1%) - (-) 2,6% (5,9%)CALABRIA SICILIA 140 (100) 58,4% (19,9%) 37,6% (13,0%) 2,9% (11,8%)SICILIA CALABRIA 462 (435) 39,1% (75,8%) 5,3% (13,6%) 3,1% (1,3%)PRIOLO SICILIA 804 (796) 95,3% (95,5%) 15,9% (5,2%) - (-)SICILIA PRIOLO 600 (600) 3,9% (4,5%) - (-) - (-)ROSSANO BRINDISI ? (?) - (-) - (-) - (-)BRINDISI ROSSANO 4.403 (4.397) 100,0% (100,0%) 4,4% (0,7%) - (-)BRINDISI ESTERO SUD 500 (501) 26,3% (11,1%) - (-) 4,7% (4,2%)ESTERO SUD BRINDISI 434 (501) 51,1% (30,5%) 0,0% (0,4%) 8,7% (4,2%)ESTERO SUD GRECIA 250 (217) 25,0% (10,9%) 1,9% (0,2%) 4,7% (1,6%)GRECIA ESTERO SUD 217 (217) 44,7% (7,5%) 0,3% (-) 8,6% (1,6%)

TRANSIT AVERAGE LIMIT USED SATURATED OUT OF ORDER

MWh % Hours % Hours % Hours

Transits management (2006)

(…) 2005 data

- 17 -

17

0

2.000

4.000

6.000

8.000

10.000

12.000

New Plants 2005 North MacrozoneNew Plants 2006

South MacrozoneNew Plants 2006

South MacrozoneClosed Plants 2006

New Plants 2005-2006

Production plants renewal

5.700

2.000

3.000

- 2.100

8.600

MW

• Inefficient Plants (high

value of merit order)

• Inefficient Plants (high

value of merit order)

Building of new plants for 8.600 MW in Italy, in the last two years

- 18 -

18 Italian Electric System – 2007 Structure vs 2004

Italian Electric System - 2007Italian Electric System - 2007

FRANCIAFRANCIA SVIZZERASVIZZERA AUSTRIAAUSTRIA SLOVENIASLOVENIA

ESTERO NORD

OVEST

ESTERO NORD

OVESTESTERO NORD ESTESTERO NORD EST

NORDNORD

CENTRO-NORDCENTRO-NORD

CENTRO-SUDCENTRO-SUD

SUDSUD

ROSSANOROSSANO

CALABRIACALABRIA

SICILIASICILIA

TURBIGO-

RONCO

TURBIGO-

RONCO

CORSICACORSICA

SARDEGNASARDEGNA

ESTERO

CORSICA

ESTERO

CORSICA

CORSICA ACCORSICA AC

PRIOLOPRIOLO

MONFALCONEMONFALCONE

BRINDISIBRINDISI

ESTERO SUDESTERO SUD

GRECIAGRECIA

FOGGIAFOGGIA

VIRTUAL ZONEVIRTUAL ZONE

PHYSICAL ZONEPHYSICAL ZONE

FRANCIAFRANCIA SVIZZERASVIZZERA AUSTRIAAUSTRIA SLOVENIASLOVENIA

ESTERO NORD

OVEST

ESTERO NORD

OVESTESTERO NORD ESTESTERO NORD EST

NORDNORD

CENTRO-NORDCENTRO-NORD

CENTRO-SUDCENTRO-SUD

SUDSUD

ROSSANOROSSANO

CALABRIACALABRIA

SICILIASICILIA

TURBIGO-

RONCO

TURBIGO-

RONCO

CORSICACORSICA

SARDEGNASARDEGNA

PRIOLOPRIOLO

MONFALCONEMONFALCONE

BRINDISIBRINDISI

GRECIAGRECIA

Italian Electric System - 2004Italian Electric System - 2004

PIOMBINOPIOMBINO

- 19 -

19 Agenda

• Market Structure

• Transmission limits

– Transmission limits overview

– Transmission limits and IPEX Market

– Transmission limits and PCE Market

- 20 -

20

0

20

40

60

80

100

120

140

160

180

200

Unconstrained UNP vs UNP – 1° Week of July, 2007

= UNP

= Unconstrained UNP

€ / MWh

- 21 -

21 Unconstrained UNP vs UNP – Delta 2007 vs Delta 2005 (1° Week of July)€ / MWh

= Delta 2007

= Delta 2005

-20

-10

0

10

20

30

40

50

60

Lower Price

zones volume <<

Higher price

zones volume

Lower Price

zones volume <<

Higher price

zones volume

- 22 -

22 Agenda

• Market Structure

• Transmission limits

– Transmission limits overview

– Transmission limits and IPEX Market

– Transmission limits and PCE Market

- 23 -

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 QzWith:– 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

* Electric consumers owners of UCV units or Pump Plant pay/receive CCT too, when they use this kind of units

- 24 -

24

-60

-40

-20

0

20

40

60

Nord CALB CNOR CSUD

SARD SICI SUD

CCT Trend example – From 11° to 20° July 2007*

€ / MWh

Congestion frequent in North and South of Italy* Italian zones only