1. 1 WHOLESALE ELECTRICITY MARKET DESIGN AND STRUCTURE Massimo Parati Market Department Italian Regulatory Authority for Electricity and Gas Milan, March 4, 2010

2. 2 Agenda 1. Wholesale Market Design a) Long term forward and derivative markets b) Short term forward markets and balancing market 2. Wholesale Market Structure a) Wholesale market prices trend b) Market Concentration and Pivotal Market Players

3. 3 Agenda 1. Wholesale Market Design a) Long term forward and derivative markets b) Short term forward markets and balancing market 2. Wholesale Market Structure a) Wholesale market prices trend b) Market Concentration and Pivotal Market Players

4. 4 Long term forward and derivative markets  Over-The-Counter (OTC) trading: free trading of customized forward electricity contracts (physical delivery)  MTE: forward market managed by Gestore dei Mercati Energetici (GME); regulated trading of yearly, quarterly and monthly standard forward contracts (physical delivery)  IDEX: future market managed by Borsa Italiana (BI); regulated trading of yearly, quarterly and monthly standard future contracts (cash settlement or physical delivery)

5. 5 Long term forward and derivative markets Central Counterparty OTCNone MTEGME IDEX CC&G (Cassa di Compensazione e Garanzia) clearing house Long term forward and derivative markets

6. 6 OTC MTE IDEX MGP Notification to GME of production and consumption schedules for physical delivery PCE Notification to GME of forward and future contractual positions to settle by physical delivery

7. 7 Agenda 1. Wholesale Market Design a) Long term forward and derivative markets b) Short term forward markets and balancing market 2. Wholesale Market Structure a) Wholesale market prices trend b) Market Concentration and Pivotal Market Players

8. 8 Short term forward markets and real-time market  MGP: Day-Ahead Market managed by GME (the Power Exchange - PX)  MI (two sessions: MI1; MI2): Intra-Day Markets managed by GME (the Power Exchange - PX)  MSD ex-ante and MB (five sessions: MB1; MB2; MB3; MB4; MB5): Ancillary Services Markets managed by TERNA (the Transmission System Operator - TSO)

9. 9 Short term forward markets and balancing market Central Counterparty MGPGME (PX) MI1 and MI2GME (PX) MSD ex-ante, MB1, MB2, MB3, MB4 e MB5 TERNA (TSO) Short term forward markets and balancing market

10. 10 Short term forward markets and balancing market Pricing rule MGP Zonal Marginal Prices (for sellers) and Single National Price (for buyers) MI1 and MI2Zonal Marginal Prices MSD ex-ante, MB1, MB2, MB3, MB4 e MB5 Pay-as-Bid Short term forward markets and balancing market

11. 11 Short term forward markets and real-time market

12. 12 MGP  In the Day-Ahead Market, hourly energy blocks are traded for the next day  Market Participants submit offers/bids where they specify the minimum/maximum price at which they are willing to sell/purchase the designated quantity  After the gate closure, supply offers/demand bids are accepted in the economic merit order and in such a way as to satisfy transmission limits between zones

13. 13 Clearing Price Supply Curve Demand Curve Equilibrium Quantity P* MGP

14. 14 MGP  Accepted supply offers are valued at the clearing price of the zone to which they belong. This price is determined, for each hour, by the intersection of the demand and supply curves and is differentiated from zone to zone in case of binding transmission limits (inter-zonal congestions -> market splitting)  Accepted demand bids are valued at the single national price (PUN), which is equal to the average of the zonal clearing prices, weighted by the amount of energy purchased in each zone

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17. 17 MI  In the Intra-day Market participants are allowed to modify the schedules resulting from the Day-Ahead Market by submitting additional demand bids or supply offers  Supply offers and demand bids are selected under the same criterion as for the Day-Ahead Market; contrary to the Day-Ahead Market, accepted demand bids are valued at the zonal price

18. 18 MSD ex ante and MB  Participation in this market is compulsory for and limited to the dispatching users only on the “production side”  Dispatching users: are required to offer all the available capacity from their units, which TERNA has authorized to provide dispatching services must submit incremental bids (in order to increase injections) and decremental bids (in order to decrease the injections) bids are differentiated for “secondary reserve” and for “other services”  TERNA procures resources required for managing, operating and controlling the system, in order to: solve intra-zonal congestions create a reserve margin balance injections and withdrawals in real time

19. 19 TERNA uses ancillary services for the security management of the national system and to assure the service quality  Congestion management  Secondary reserve (f / P control)  Tertiary reserve  Real–time balancing  Primary frequency control  Primary voltage control  Load rejection  Black start capability  Secondary voltage control Mandatory services (outside MSD) Dispatching Services Market (MSD) Regulated contracts  Interruptible customers MSD ex ante and MB

20. 20 Agenda 1. Wholesale Market Design a) Long term forward and derivative markets b) Short term forward markets and balancing market 2. Wholesale Market Structure a) Wholesale market prices trend b) Market Concentration and Pivotal Market Players

21. 21 Wholesale market prices trend

22. 22 Wholesale market prices trend

23. 23 Wholesale market prices trend

24. 24 Wholesale market prices trend

25. 25 Wholesale market prices trend

26. 26 Wholesale market prices trend

27. 27 Agenda 1. Wholesale Market Design a) Long term forward and derivative markets b) Short term forward markets and balancing market 2. Wholesale Market Structure a) Wholesale market prices trend b) Market Concentration and Pivotal Market Players

28. 28 Market Concentration and Pivotal Market Players

29. 29 Market Concentration and Pivotal Market Players  Residual demand analysis: the aim of this analysis is to measure the unilateral market power by calculating the share of hourly demand that a producer can monopolize in one or more market zones (residual demand); in other words, a so-called pivotal producer has the power to push the market clearing price as high as she wants (up to the cap) without losing that share of demand

30. 30 Market Concentration and Pivotal Market Players

31. 31 Market Concentration and Pivotal Market Players

32. 32 Market Concentration and Pivotal Market Players