Reactions To The New Capacity Market In Italy

Reactions To The New Capacity Market In Italy

The rising number of renewable energy systems installed has as consequence the downfall of the bulk price of energy, while reducing the commercial value of traditional fossil power plants. In fact, in some cases earnings take such a downturn that the closure of some of these plants is now more than an option.

According to the Ministry for Economic Development (MiSE), more than 20 GW have been recently dismissed, which causes the reduction of the expected capacity available to the national electric grid and the subsequent increase in risk and instability.

The programmability of the production capacity is the key to grant the adequacy and stability of the power grid. Renewable sources, due to their unstable nature, are still not able to grant this security. In this context, the concept of capacity market is identified as an answer to the capacity challenges posed by the transition to a carbon-free system: a fixed and granted remuneration is paid to the producer upon the supply of energy at system demand.

Just recently the MiSE decree on capacity market has been approved. On June 28 Arena has given the approval to the decree, shortly before the entry into force of the EU Regulation on Internal Market. It will be then possible to conduct the first auctions by the end of 2019.

Reactions To The Decree

According to the Energy Authority, the Capacity Market is an essential tool for the phase out of carbon, with gas representing “a necessary transition vector”. The ones in favour of the introduction of the new capacity mechanism underlined that this solution will increase the efficiency of the system, maximizing security. In fact, the Capacity Market represents the correct completion of the Italian market in view of the heterogeneous and intermittent distribution of renewables throughout the country, with high imbalance costs.

According to the MiSE, the capacity mechanism will produce a EUR 1.6 billion/year net economic benefit, based on simulations for year 2022. This is because to the premium costs of EUR 1.75 billion will correspond a EUR 3.35 billion market cost savings.

The major criticisms came from associations (Italia Solare, Legambiente, WWF) and from the European Federation of Energy Traders (EFET). In their opinion, the capacity mechanism should be intended an emergency tool, the last option in face of an exhaustive cost-benefit analysis of all the other solutions.

According to Italia Solare, granted remuneration could influence the market, which in competition should optimize and lower the prices (benefiting the final consumers). Moreover, the mechanism is poorly embedded in the objectives of the planned energy transition, potentially slowing down the process. Furthermore, according to the EFET, the Italian Capacity Market “could influence the correct open formation of price on the energy market and on the balancing service market”, since prices are not free to fluctuate in reflection to the real value of the energy on the grid.

In conclusion, the main concern lays in the fact that the Capacity Market, with this structure, will not back the distributed generation with renewable energy plants, supporting the development of large-scale distributed energy storage systems. Instead, it will boost the use of natural gas plants, pacing down the achievement of the objectives expected for year 2025.