Rules of the electric power market
from Nationalization to an Electric Power Market
The first step in reforming the electric power industry, which was nationalized in the 1960s (ENEL was established on December 6, 1962), was the approval in 1988 of a National Energy Plan designed to address Italy’s growing demand for energy.
The next step (Law No. 9/91) was to totally deregulate production of electric power from renewable energy sources and deregulate in part production from conventional sources. However, the law did not change the existing sales monopoly, requiring producers to sell to ENEL any energy generated in excess of their internal needs.
In 1992, ENEL became a corporation and its status changed from that of exclusive operator of the electric power services to that of a licensee. Subsequently, in 1995, the Electric Power and Natural Gas Authority (abbreviated as AEEG in Italian) was established for the purpose of regulating and overseeing the electric power market.
The decisive step that ushered in deregulation and the opening of the Italian market was the approval of Directive 96/92/CE of the European Parliament on December 19, 1996, which established common rules for domestic electric power markets.
The purpose of this directive was to create an open and competitive market, governed by the laws of supply and demand, in which, following a gradual deregulation process, all energy users would be free to choose their own supplier.
The Bersani Decree (Legislative Decree No. 79 of March 16, 1999), which incorporated the abovementioned directive into the Italian legal system, introduced radical innovations in the rules governing the different areas of activity that make up the electric power industry, consistent with the aim of gradually deregulating the Italian electric power market and bringing tangible benefits to end users.
Another important step forward on the path toward a new energy market occurred in January 2000, with the enactment of a government decree ordering the sale of the so-called GenCo ENEL companies, which included Eurogen, purchased in May 2002 by the shareholders of Edipower SpA.
On June 26, 2003, the European Parliament approved legislation that provided fresh momentum for the deregulation of domestic markets for electric power and natural gas (Directives 2003/54/CE and 2003/55/CE, respectively): in the electric power industry, access to a deregulated market would have to be provided to commercial users as of July 1, 2004 and to all users as of July 1, 2007.
While these two directives have not yet been officially incorporated into the Italian legal system, their most important provisions have been included in several industry regulations enacted subsequently.
The Bersani Decree called for the establishment, on January 1, 2001, of an electric power “Exchange,” which would provide a venue where electric power could be freely traded by producers/sellers and consumers/buyers. The aim was to create a tool that would provide liquidity and transparency to the developing deregulated market. The Power Exchange began to operate on April 1, 2004, limited to offer-side operators. Demand-side participants were allowed to join on January 1, 2005.
An ideally structured electric power market, as envisioned by the AEEG in Resolution No. 168/2003, includes both a spot market (the Power Exchange), for short-term buying and selling of electric power, and a medium-/long-term market, where buyers and sellers negotiate bilateral transactions.
The Italian Power Exchange (also known as IPEX) includes the Day-Ahead Market (abbreviated as MPG in Italian), where operators offer to sell or buy energy for production/consumption the next day, and an Adjustment Market (abbreviated as MA in Italian), where operators can adjust their output (producers) and usage (users) plans based on outcomes on the MGP. The spot market is completed by the Dispatching Services Market (abbreviated as MSD in Italian), which is structured into two phases: during the first phase (the ex-ante MSD), which ends the evening of the day before, Terna (the company that operates Italy’s power grid) secures from the producers the resources it needs for the power reserve and to resolve any network congestion situation; during the second phase (the ex-post MSD), which takes place on the day the dispatching occurs, Terna buys/sells from/to producers the quantities of energy it requires to physically balance in real time the volumes of energy fed into and withdrawn from the system.
AEEG Resolution No. 111/2006 introduced important changes in the architecture of the electric power market. Since April 2007, the availability of a new computerized platform that can be used to record in special accounts (Forward Energy Accounts, abbreviated as CET in Italian) the commercial buy/sell positions of individual market operators has made it possible to develop one or more venues for forward trading, thereby improving price-risk management opportunities and providing greater flexibility in the way operators can use their portfolios of buy/sell positions relative to their usage/production requirements.
Subsequently, the AEEG introduced new regulations designed to increase competition in the Dispatching Services Market: Resolution No. 314/2006 allows Terna to use forward contracts to secure the dispatching resources it needs; Resolution No. 289/2006, which went into effect on January 1, 2008, enables some categories of energy withdrawing operators (Consumption Units) known as “advance-notice interruptibles” to operate in the MSD in direct competition with producers.
The information provided above refers to the wholesale electric power market, which is the market where energy supplied by the producers is bought by large industrial users or by electric power traders (wholesalers).
These wholesalers, in turn, can resell the energy they purchased either to end users or to other businesses that operate in the retail market.
As of July 1, 2007, all users, including those in the residential market, can buy electric power from the supplier (distribution company) that offers them the most advantageous contract in terms of service quality and price of energy.