Electricity, how the price is formed in Italy and how much renewables count

Then comes a technical check: it is not certain that the locations of production and consumption are compatible with the conformation of the electricity grid operated by Terna. For instance, more energy could be needed than can actually be dispatched. Faced with bottlenecks, the market outcome is then reconsidered, which is economically efficient but technically not feasible. "You take the same offers and recombine them, taking care to divide the market by zones: you then create more zonal balances, with different prices. And at this point the equilibrium becomes definitive,' explains Lucia Visconti Parisio, lecturer in environmental and energy economics at the Bicocca University in Milan.

The Pun, the single national price, is precisely the average of the zonal prices of the day-ahead market, weighted by total purchases, net of purchases, pumping (electricity stored through hydroelectric storage systems) and foreign zones.

What happens with the increase, in this market architecture, of energy from clean sources? Visconti Parisio answers: 'Renewables have a special treatment: they have dispatching priority. When they are available they are dispatched first, i.e. they are called on to produce as if in the hourly auction system they had asked for zero price. So in the order of merit that the market operator goes to compose for each hour of the day, renewables push conventional units, such as gas, out of the market, as they will sell less or no energy. The desired effect of renewables is to lower prices, at least during the hours of the day when they are available. When the sun goes down, when photovoltaics are no longer available, it is necessary to call in gas-fired plants that had been idle in previous hours as a result of the market. Prices thus tend to peak in the evening hours, because at that time the competition with renewables disappears and gas plants that operate fewer hours during the day can recover the lost margins'.

Given the structure of the electricity market, why is the price of energy so high in Italy? According to Gme's latest monthly summary, average prices in September were 117.13 euros per MWh for Italy, 78.31 for Germany, 19.76 for Scandinavia, 72.62 for Spain, and 51.86 for France. Again Visconti Parisio replies: "It depends on the type of marginal technology, the last to be produced, whose price offered at auction determines the balance point in the market order of merit. In Italy, as in about 60 per cent of cases in Europe, it is gas. Thus, the price of gas drives the price of electricity. High prices therefore depend on the marginality of gas plants, which almost always determine the balance. If renewables were able to fully cover market demand, we could observe zero price values.

It was precisely on the formation of prices in the wholesale market that Arera shone a spotlight on 8 October, announcing the launch of a fact-finding investigation aimed at assessing the outcomes of the electricity auction markets with short-term delivery in the period 2023-2024, comparing them with 'appropriate price benchmarks and, if necessary, proposing lines of action to achieve these benchmarks'.

There are also further developments in the dynamics of price formation. Just after the positive opinion of Arera, the Ministry of the Environment published on 18 April the decree introducing the new zonal electricity prices instead of the Pun from 1 January 2025. Starting in the new year, the Gme will calculate the reference price of electricity traded within the market 'as the average of the zonal prices weighted by the quantities purchased for zonal portfolios in withdrawal in each geographical market zone'. "This is a very first step towards overcoming the Pun, albeit with due gradualness and equalising mechanisms," Visconti Parisio comments: "Producers already now receive zonal prices, while it has been foreseen that buyers, who now pay a single national price given by the weighted average of zonal prices, will also pay a different price for each market zone in the event of congestion. This is a signal. If electricity in an area is scarce or expensive, produced with outdated technology, they will pay more. Conversely, if in an area the penetration of renewables is high, you will pay less. The mechanism should help to incentivise, also among consumers, the development of clean sources'.