Capacity Market

Capacity Market is the mechanism that Italy has adopted to find a solution for resource adequacy problems and to manage properly the transition towards a low carbon system, guaranteeing that electricity demand is satisfied at all times by adequate levels of generation capacity.

As the term suggests, it is a new market: over the years we have been used to dealing with long-term markets and with the Day Ahead Market (DAM), the Intra-Day Market (IDM) and the Ancillary Service Market (ASM): the Capacity Market joins these.
  • A bit of history…
    The national blackout that left all of Italy in the dark on 28 September 2003 sparked a heated debate on the adequacy of our country's energy production capacity and led to the issuing of Legislative Decree no. 379/03 which involved the launch of a system aimed at "guaranteeing an adequate level of electricity production capacity".

    Sixteen years passed (with mountains of technical and non-technical documents exchanged between the various stakeholders involved) from that moment and that first piece of legislation before the Capacity Market saw the light.

    In the meantime, the energy sectors in both Italy and abroad underwent major transformations: in particular, the notable reduction in the installed capacity of thermal power together with the major development of non-programmable renewable energies had a chain reaction of effects at the source of the energy production capacityThe national blackout that left all of Italy in the dark on 28 September 2003 sparked a heated debate on the adequacy of our country's energy production capacity and led to the issuing of Legislative Decree no. 379/03 which involved the launch of a system aimed at "guaranteeing an adequate level of electricity production capacity". Sixteen years passed (with mountains of technical and non-technical documents exchanged between the various stakeholders involved) from that moment and that first piece of legislation before the Capacity Market saw the light.

    In the meantime, the energy sectors in both Italy and abroad underwent major transformations: in particular, the notable reduction in the installed capacity of thermal power together with the major development of non-programmable renewable energies had a chain reaction of effects at the source of the energy production capacity problem. The ensuing debate led to the adoption in Italy – and beforehand in other European countries (GB, Ireland, France, Poland) and non-European nations (USA) – of mechanisms for remunerating production capacity.

    The second half of 2019 represented a watershed: over a six months period, firstly a ministerial decree of approval was issued and then the final technical regulation was published (after years of partial versions). The mechanism then came into effect with the issuing of the first competition procedures. This burst of activity which interested the entire electricity sector and ERG in particular made the Capacity Market the topic of the year: all those that work in the energy world are very well acquainted with the term now.
     
  • What does it entail?
    The mechanism entails the announcement of capacity auctions where - on a voluntary basis - market operators (including ERG) offer their production capacity (MW) to a centralised buyer, Terna, which procures the necessary quantity of resources to guarantee the adequacy of the system.
  • Who can take part?
    In accordance with the principle of technological neutrality, the auctions are open to all technologies and existing and new power generation plants (also those undergoing approval, as long as they respect certain timeframes), as well as major consumers (demand) and international capacity.
  • How does it work?
    The market involves annual contracts (15 years for newly-built plants) drawn up between Terna and the plant owner who, under the obligation to make their production capacity available, receives a fixed payment in euro/MW/year.

    Respect for the obligation undertaken with regard to the TSO (Transmission System Operator) is guaranteed by a system of penalties applied to the operator if they are unable to deliver the capacity established in their contract. The contract concluded with Terna also obliges the operator to pay Terna a fee when the hourly price, registered on the electric market, exceeds the variable cost of production of an open-cycle gas turbine plant, as estimated by the Italian National Regulatory Authority (ARERA). The aim of this last obligation is to further motivate operators to sell their electricity at the most expensive times, which more often than not correspond with times of peak demand.

    The mechanism of obligations and penalties makes it particularly rigid, a peculiar characteristic of the Italian system which, as well as setting it apart from other European countries, also to all intents and purposes excludes the participation of wind farms and photovoltaic facilities even if these are officially included among the technologies admitted to the Capacity Market.

    This is certainly a limit that must be overcome given the increasing penetration of renewable energy sources (particularly non-programmable ones) in the electricity system, also in view of the 2030 climate-energy goals which involve a 55% quota deriving from renewable energy sources.
     
  • What approach has ERG taken to the Capacity Market?
    Two years ago a first working group was set up by Regulatory Analysis and Energy Management which, beginning with the study and interpretation of the regulation, analysed the impact of the new regulation and the related commercial opportunities.

    When the launch of the mechanism was confirmed in July 2019, an interdepartmental working group was set up with various functions involved: Energy Management, Market Analysis, Legal Affairs, Thermo & Hydro Operations and HSE, coordinated by Regulatory Analysis with the common goal of participating in the Capacity Market.

    Through dedicated weekly meetings and a packed timetable of activities (analysis of the regulation, technical feasibility study, preparation of the necessary admission documentation, definition of the auction strategy to adopt, etc.), in less than two months the working group managed to achieve its goal: successful participation in the auctions.