The Impact of RES in the Italian Day-Ahead and Balancing Markets.

• Author: Gianfreda, Angelica

1. INTRODUCTION AND BACKGROUND

   Electricity generation from renewable resources (RES) has become a significant factor affecting the Italian market. More specifically, the electricity production from RES increased from 59.5 TWh in 2010 to 91.4 TWh by the end of 2013 (+ 53.6%). Following the Renewable Energy Directive 2009/28/EC, this has become a common trend in the EU context. The Directive established a European framework for the promotion of renewable energy, setting mandatory national renewable energy targets to a 20% share of renewable energy in final consumption and a 10% share of RES for transportation by 2020. The Renewable Energy Progress Report issued in 2013 (COM (2013) 175 final) states that EU countries have shown a solid start in the implementation of the Directive; however, the difficulty of removing key barriers in renewable energy growth has decelerated the progress toward these targets. On the one hand, generous support schemes and priority dispatch in power exchange eased the introduction of RES, while on the other hand, the spontaneous growth of RES led to a significant increase in subsidy costs and technical problems in grid management. Power generated by some RES, such as wind or photovoltaics (PV), is volatile, and thus, further measures are needed to allow stable network operations. Therefore, it seems that the progressive RES penetration requires investments and time to refurbish distribution and transmission grids, allowing flexibility within physical and technical limits.

   The high share of RES penetration has also challenged the functioning of power exchanges, since the presence of intermittent generation requires the availability of regulating power supplied by flexible production plants such as gas-fired units. In the Italian day-ahead market, the GSE (Gestore dei Servizi Energetici) submits zero-price bids for a quantity equal to the forecast of nonprogrammable RES generation. These quantities shift to the right the aggregate supply function and more expensive conventional plants are displaced in the merit order. As the delivery time approaches, uncertainty about the actual availability of intermittent RES is resolved and flexible conventional plants are requested to provide up- or down-regulation. Therefore, an electricity market with a high share of RES and priority dispatch heavily relies on balancing and regulation markets that take place and close near to the real time. RES units can place bids in the day-ahead market and use intra-day sessions to adjust their production program on the basis of more accurate forecasts of sun irradiation or wind speed. Conventional production units may bid in all market sessions; however, the presence of RES in spot market sessions has significantly relocated conventional supply in regulation markets, where high premia can be realized for the available flexibility. Thus, conventional generators might partially compensate the profits foregone in day-ahead market sessions.

   The management of reserve and power regulation services differs by EU country. We observe markets with continuous trading and organized auctions. In Italy, there are a total of 10 auction sessions with six prices for electricity that start from the day-ahead to a time close to actual delivery. From a policy perspective, it is interesting to analyze whether this market structure is an efficient and economical answer to the presence of increasing RES penetration in the market.

   The analysis of the relationship among prices formed in different market sessions mainly refers to methods for a successful RES integration in electricity markets. Klessmann et al. (2008) examine how renewable electricity producers are integrated in wholesale markets in Germany, Spain, and the United Kingdom and focus on wind power as the main intermittent source. They find that the three approaches expose RES producers differently to the market risks of forward electricity markets, balancing markets, and system planning requirements. Furthermore, they show that higher financial support is required to stimulate RES development when RES face high market risks; the opposite holds true in a low-risk environment. However, the exposure to market risks may also provide an incentive to efficiently use all available market sessions, thus limiting or reducing indirect costs for society. Vandezande et al. (2010) also share the same view: they show that full-balancing exposure for intermittent technologies is feasible only conditionally in well-functioning balancing markets. Weber (2010) concentrates on the need for adequate intra-day market sessions to have sufficient liquidity. The issue of intra-day market participation is further investigated by Chaves-Avila and Fernandes (2015), who analyze the organized auction approach implemented in Spain, showing that it has effectively contributed to balance renewable generation. Despite this, market distortions have stimulated some RES generators to arbitrate between day-ahead and intra-daily markets, hence inducing higher system costs. Bigerna and Bollino (2016) introduce a new design for the electricity market that aims at solving the problems arising from RES priority dispatch and associated market interactions between renewable and conventional technologies. The pattern of spot and regulation prices is analyzed in Skytte (1999), who finds that up-regulation prices are less correlated to spot prices than down-regulation prices. On the other hand, the amount of regulation power contracted during the balancing session influences price more for up- than down-regulation.

   In sum, previous studies emphasize that well-integrated spot, intra-day, and balancing sessions can help the market adapt to stochastic RES. Therefore, we empirically investigate the effect of RES generation on the Italian spot and regulation prices by examining price dynamics from 2012 to 2014 in day-ahead, intra-daily and balancing market sessions. We also account for physical constraints between zones, which may influence the value of regulating power. This is done by analyzing zonal prices, not the single national price (prezzo unico nazionale, PUN). (1) Moreover, RES are not evenly spread across Italian zones. Flexible hydro generation is mainly placed in the North, whereas the highest shares of variable wind and photovoltaic generation are in the South and islands. We select a number of hours to analyze intra-daily profiles for load, wind, and solar generation in all physical zones. First, spot, intra-day, and regulation price series are analyzed by examining common dynamics in the long run. Then, the short-run relationship between spot and regulation prices is observed, disentangling between situations of up- and down-regulation and accounting for traded quantities. In addition, we provide empirical evidence on premia of readiness obtained from production units responsible for regulating services in different zones. Finally, we verify the relationship between these premia and the amount of RES generation.

   The paper is organized as follows. Section 2 describes the structure of the Italian market with respect to the spot and regulation markets and the evolution of RES production in Italy. Section 3 presents the data and preliminary analysis. Section 4 and its subsections are devoted to the empirical analysis. Section 5 presents policy evaluations and conclusions.

2. STRUCTURE OF ITALIAN ELECTRICITY WHOLESALE MARKET

   The Italian wholesale electricity market (IPEX) was launched in April 2004. Throughout 2004, only suppliers were allowed to submit offer bids, whereas demand bids were submitted by a publicly owned operator (Acquirente Unico) in charge of procuring electricity for the whole retail market. However, since 2005, eligible consumers have been allowed to bid on the demand side, and by July 1, 2007, the eligibility threshold was lowered, leading to an open market. The Italian wholesale market soon attracted a significant portion of demand and supply. It showed a liquidity rate of 71.5% in 2013, with 206.9 TWh against a total of 289.2 TWh exchanged in the system.

   IPEX is managed by an independent system operator named Gestore dei Mercati Energetici (GME). The exchange of electricity is organized in a spot (mercato a pronti, MPE) and forward market (mercato a termine, MTE). In this study, we focus on the spot markets and in particular, on the relationship emerging from the various sessions which take place from the day-ahead through the real time. Indeed, MPE is organized into three markets: the day-ahead (mercato del giorno prima, MGP), intra-daily (mercato intragiornaliero, MI), and ancillary services (mercato del servizio di dispacciamento, MSD) market.

   In MGP, hourly energy quantities are traded for the next day. Participants submit offers/bids in which they specify the quantity and minimum/maximum price at which they are willing to sell/purchase electricity. Considering a delivery on date T, MGP opens on day T-9 and closes at 9:15 a.m. on day T-1. Results are made known by 10:45 a.m. of day T-1. Bids/offers submitted are accepted under the economic merit-order criterion and account for transmission capacity limits between zones. Therefore, MGP can be described by a series of 24 auction markets and not as a continuous-trading market. (2) For each hour, the equilibrium price is determined by the intersection of the demand and supply curves and it differs across zones when transmission capacity limits are saturated.

   Figure 1: RES Penetration in Italy--Source data: ENTSO-E 2005 2006 2007 2008 2009 2010 2011 2012 2013 HYDRO 14.01 13.55 12.12 14.61 17.96 17.58 15.01 13.42 16.76 WIND 0.77 1.01 1.29 1.52 2.20 2.96 2.39 4.14 4.70 SOLAR 0.00 0.00 0.00 0.00 0.23 0.61 3.11 5.78 6.98 2014 HYDRO 21.56 WIND 5.60 SOLAR 8.66 Note: Table made from line graph. The accepted demand bids pertaining to consuming units belonging to Italian geographical zones are valued at the PUN; this price equals the...