Developments for the Italian Power Exchange Alberto Pototschnig, CEO Gestore del Mercato Elettrico Spa (Italian Electricity Market Operator) 8th APEx Annual Conference Cartagena de Indias – Colombia October 14th & 15th, 2003

Presentation Outline Regulatory Framework About GME Main Features of the Italian Power Exchange Market Development Prospective Market Participants and Liquidity

Regulatory Framework The Legal framework Directive 96/92/EC of the European Parliament and of the Council of 19 December 1996 concerning common rules for the internal market in electricity Law no. 128 of 24 April 1998 concerning provisions deriving from Italian membership of the European Communities: art. 36 empowering Government to enact one or more legislative decrees for implementing Directive 96/92/EC and for redefining all relevant aspects of the Italian electricity supply industry Legislative Decree no. 79 of 16 March 1999, implementing Directive 96/92/EC

Regulatory Framework The Legal framework and the Market Concept Directive 96/92/EC of the European Parliament and of the Council of 19 December 1996 concerning common rules for the internal market in electricity (no Market Concept) Law no. 128 of 24 April 1998 concerning provisions deriving from Italian membership of the European Communities: art. 36 empowering Government to enact one or more legislative decrees for implementing Directive 96/92/EC and for redefining all relevant aspects of the Italian electricity supply industry (no Market Concept) Legislative Decree no. 79 of 16 March 1999, implementing Directive 96/92/EC

Regulatory Framework Legislative Decree n. 79/99: The economic management of the electricity market (electricity and ancillary services) shall be entrusted to a Market Operator The Market Operator shall be a company to be set up by GRTN (the Transmission System Operator) The Market Rules are drafted by the Market Operator and are approved by the Minister of Industry (now Minister for Productive Activities), having sought the opinion of the Energy Regulator The Market Operator shall be responsible for managing supply offers and demand bids related to energy and all ancillary services The Regulator may authorise bilateral electricity trading outside the Electricity Market The authorisation may be denied or conditioned … whenever the contracts jeopardise competition or security and efficiency of the electricity supply system A Draft Bill currently being read in Parliament may abolish the authorisation requirement for Physical Bilateral Contracts outside the Electricity Market

Minister of the Economy About GME Minister of the Economy Shareholder’s rights exercised in conjunction with the Minister for Productive Activities GRTN Gestore della Rete di Trasmissione Nazionale SpA (Transmission System Operator) GME Gestore del Mercato Elettrico SpA (Market Operator) AU Acquirente Unico SpA (Single Buyer) GRTN Group

About GME GME was established by GRTN on June 27th, 2000 GME is responsible for organising: A Power Exchange (Leg. Decree n. 79/99) A facility for Green Certificates trading (the Green Certificates Market) (Min. Decree 11 Nov 99): Became operational on March 26th, 2003. Volume traded so far: 23,428 certificates = € 236 million A facility for Energy Efficiency Certificates trading (the Energy Efficiency Certificates Market) (Min. Decrees 21 Apr 01) GME is also responsible for promoting: Electricity Derivatives trading (Electricity Market Rules approved by Min. Decree 9 May 2001)

Electricity Market Structure Main Features of the Italian Power Exchange Electricity Market Structure Electricity Trading Markets Ancillary Services Markets

Electricity Market Structure Main Features of the Italian Power Exchange Electricity Market Structure Electricity Trading Markets Day-Ahead Energy Market (MGP) Adjustment Market (MA) Ancillary Services Markets

Electricity Market Structure Main Features of the Italian Power Exchange Electricity Market Structure Electricity Trading Markets Day-Ahead Energy Market (MGP) Adjustment Market (MA) Ancillary Services Markets Congestion Management Market (MRC) Reserve Market (MR) Balancing Market (MB)

Ancillary Services Markets Main Features of the Italian Power Exchange , Electricity Trading Markets Active Demand and Supply Participation No Inter-temporal constraints on Bids and Offers Energy traded at Market Equilibrium Price(s) Inter-zonal Congestion Management by Market Splitting When Congestion occurs in the Day-Ahead Energy Market, Producers/Sellers are paid the Zonal Equilibrium Prices, while Consumers/Buyers pay a National Average Price Ancillary Services Markets Energy and Capacity paid at the offered price (Pay-as-Bid)

Market Development Working Towards the Electricity Market: the Rules 27.06.2000 Gestore del mercato elettrico (GME) is established by the TSO 2000 21.11.2000 GME submits the Electricity Market and Green Certificates Trading Rules to the Minister of Industry 6.03.2001 Preliminary feedback by the Regulator on the Rules 27.03.2001 GME submits a new version of the Electricity Market Rules 30.04.2001 The Regulator issues its opinion on the Electricity Market Rules 2001 8.05.2001 GME submits a final version of the Electricity Market Rules taking into account the Regulator’s opinion 9.05.2001 The Electricity Market Rules are approved by the Minister 4.10.2001 GME publishes a draft of the Instructions (implementation and procedural provisions) for consultation of interested parties 18.01.2002 GME submits the Instructions to the Minister for approval 2002 3.07.2002 GME receives the Regulator’s opinion on the Instructions 18.07.2002 GME submits a revised version of the Instructions taking into account the Regulator’s opinion 2003 31.07.2003 The Minister of Industry issues Guidelines for “Sistema Italia 2003” 13.10.2003 GME publishes a revision of the Electricity Market Rules, incorporating the Instructions, for consultation of interested parties

Market Development Working Towards the Electricity Market: the Information System for the Electricity Market 2001 5.12.2001 GME assigns the contract for the development of the Information System for the Electricity Market (ISEM) 31.01.2002 A prototype of ISEM is deployed at GME’s Control Centre 22.04.2002 The first release of the ISEM is deployed at GME. Internal testing begins 2002 20.05.2002 The ISEM is presented to prospective market participants 20.06.2002 First trial session of ISEM with prospective market participants 23.07.2002 Second trial session of ISEM with prospective market participants 5.08 to 6.09.2002 First set of Daily Trial Sessions with approx. 30 prospective market participants 28.10 to 20.12.2002 Second set of Daily Trial Sessions with approx. 50 prospective market participants 8.01.2003... Third set of Daily Trial Sessions begins 2003

Information System Characteristics Market Development Information System Characteristics Developed by a group of companies led by ELSAG and comprising EXCELERGY CORP. and GETRONICS Derived from a software used for electricity trading by American Electric Power (Columbus, Ohio) Allows access independently of market participant’s platform: bids and other relevant information can be submitted using web-forms or XML files all market information can be down-loaded in numeric format compatible with widely-used application software Modular structure ensures flexibility

of the Electricity Market Market Development As of October 10th, 2003, GME has completed Daily Trial Sessions of the Electricity Market

of the Electricity Market Market Development As of October 10th, 2003, GME has completed 204 Daily Trial Sessions of the Electricity Market

Set Electricity Market launch date to January 1st, 2004 Market Development , Ministerial Guidelines of July 31st, 2003 for the “Sistema Italia 2004” The Guidelines: Envisage an organised system of bids and offers for electricity (and ancillary services) Confirm the Power Exchange model developed by GME. Only one Ancillary Services Market Set Electricity Market launch date to January 1st, 2004 Describe activities to be performed by the Ministry, the Regulator, the TSO and the Market Operator to meet this launch target date Work is under way to implement the Guidelines (in Regulation, Systems, …)

GME’s Original Proposal Ministerial Guidelines Market Development Electricity Market Structure GME’s Original Proposal Ministerial Guidelines Electricity Trading Markets Day-Ahead Energy Market (MGP)  Adjustment Market (MA) Ancillary Services Markets Congestion Management Market (MRC) Reserve Market (MR) Balancing Market (MB)

GME’s Original Proposal Ministerial Guidelines Market Development Electricity Market Structure GME’s Original Proposal Ministerial Guidelines Electricity Trading Markets Day-Ahead Energy Market (MGP)  Adjustment Market (MA) Ancillary Services Markets Congestion Management Market (MRC) Reserve Market (MR) Balancing Market (MB) Dispatching Services Energy Market (MSD)

Prospective Market Participants Prospective Market Participants and Liquidity Prospective Market Participants Participants to the Trial Sessions Eligible final consumers 10 Producers 15 Traders, Wholesalers, Distributors 63 Others 40 Total 128 136 users attended the training courses organised by GME

Prospective Market Participants Prospective Market Participants Prospective Market Participants and Liquidity Prospective Market Participants Participants to the Trial Sessions Eligible final consumers 10 Producers 15 Traders, Wholesalers, Distributors 63 Others 40 Total 128 136 users attended the training courses organised by GME Prospective Market Participants 88

Liquidity in the Italian Power Exchange (I) Prospective Market Participants and Liquidity Liquidity in the Italian Power Exchange (I) Total electricity demand in Italy exceeds 300 TWh/year The annual consumption of eligible clients exceeds 120 TWh (April 2003) Further reduction of the annual consumption threshold for eligibility since April 2003 By July 1st, 2004, all non residential clients will be eligible Residential demand accounts for approximately 20% of total final demand

Liquidity in the Italian Power Exchange (II) Prospective Market Participants and Liquidity Liquidity in the Italian Power Exchange (II) According to the “Guidelines”: On the supply side The subsidised renewable energy (under the CIP6 regime) will be offered in the PX by the TSO (who buys this energy at subsidised prices) Energy from embedded generators will be sold in the PX Energy imported using interconnection capacity assigned (autonomously or jointly) by the Italian TSO can be sold in the PX according to criteria defined by the Regulator Producers are required to sell into the PX the energy generated by the available capacity and not committed to physical bilateral contracts

Liquidity in the Italian Power Exchange (II) Prospective Market Participants and Liquidity Liquidity in the Italian Power Exchange (II) According to the “Guidelines”: On the supply side The subsidised renewable energy (under the CIP6 regime) will be offered in the PX by the TSO (who buys this energy at subsidised prices) 50 TWh/y Energy from embedded generators will be sold in the PX 5 TWh/y Energy imported using interconnection capacity assigned (autonomously or jointly) by the Italian TSO can be sold in the PX according to criteria defined by the Regulator ? Producers are required to sell into the PX the energy generated by the available capacity and not committed to physical bilateral contracts ?

Liquidity in the Italian Power Exchange (III) Prospective Market Participants and Liquidity Liquidity in the Italian Power Exchange (III) According to the “Guidelines”: On the demand side The Single Buyer buys on the PX (or through dedicated import contracts) 75% of the energy required to serve the demand of franchise customers Eligible Clients (including Wholesalers) may choose to buy from the PX, or through Physical Bilateral Contracts (subject to the Regulator’s authorisation?)

Liquidity in the Italian Power Exchange (III) Prospective Market Participants and Liquidity Liquidity in the Italian Power Exchange (III) According to the “Guidelines”: On the demand side The Single Buyer buys on the PX (or through dedicated import contracts) 75% of the energy required to serve the demand of franchise customers 35–40 TWh/y Eligible Clients (including Wholesalers) may choose to buy from the PX, or through Physical Bilateral Contracts ?% of 170 TWh

Liquidity in the Italian Power Exchange (III) Prospective Market Participants and Liquidity Liquidity in the Italian Power Exchange (III) The Choice between Trading on the PX and Trading through Physical Bilateral Contracts depends on: Regulator’s Authorisation Requirement/Policy for Physical Bilateral Contracts Availability of Price-Volatility Hedging Instruments (Financial Derivatives)

Thank you for your attention! Gestore del Mercato Elettrico SpA Viale Maresciallo Pilsudski, 92 - 00197 Roma tel. + 39 06 8012.1 www.mercatoelettrico.org