Capacity market in Italy

The capacity market is a mechanism by which Terna (the national transmission system operator) obtains electricity capacity through long-term supply contracts awarded through a competitive bidding procedure. Through these contracts, electricity producers undertake to produce energy when dispatched (i.e. "called to produce"), in exchange for a fixed annual remuneration.

Operators who own production units (programmable and non-programmable) can participate in the auctions, organised by Terna, and can offer a certain capacity for a certain period of time and in a certain geographical area. Renewables plants, which are also admitted to the auctions, if they already benefit from incentives, are obliged to waive them.

Plants using fossil fuels shall not produce emissions exceeding the limits set forth in the capacity market operating rules.

Consumption units (demand-response) and foreign resources may also participate in the auctions with specific obligations and rights.

With regard to existing plants, the contract with Terna provides for a delivery period of 1 year, while for new plants this period can be up to 15 years at the producer's request, provided that the plant complies with the minimum investment threshold set out by the ARERA (i.e. the Italian Regulatory Authority for Energy, Networks and Environment).

Obligations of the capacity providers

The operators selected as a result of the auction will have: 

• the right to receive from Terna a fixed annual premium (€/MW/year) for the capacity made available for a determined period (measured in MW/year), to the extent offered at the auction;
• the obligation to offer on the Day Ahead Market (DAM) / Intraday Market (IM) the committed capacity and on the Dispatching Service Market (DSM) the committed capacity not accepted on the two previous markets.
• the obligation to pay Terna any positive difference between the price obtained on the DAM/IM/DSM and the so-called "strike price", determined by the ARERA.

In other words, the plants participating in the capacity market auctions receive, in addition to the fixed annual premium, the remuneration deriving from the sale of energy on the DAM/IM/DSM markets, albeit at a maximum price imposed ("strike price").

How the Capacity Market works

The rules for auctions are defined in the Regulation and related annexes approved by means of a Decree of the Ministry of Economic Development on 28 June 2019.

The Capacity Market is organised by Terna as follows:

• Main Auction: main bidding procedure;
• Adjustment Auction: bidding procedure aimed at adjusting the adequacy targets (obiettivi di adeguatezza) as the delivery period approaches and allowing the renegotiation of positions taken by Market Participants;
• Secondary Market: market based on continuous trading on a monthly basis, aimed at allowing the renegotiation of positions taken by Market Participants.

Competitors are required to submit a first demand guarantee (fideiussione) issued by a bank to guarantee the fulfilment of their obligations.

Financial parameters for the first two auctions held in 2019 (with delivery years 2022 and 2023)

For the auctions concerning the delivery years from 2022 to 2023, the ARERA approved the criteria for determining the "strike price" and established the maximum value of the premium, for new production capacity, equal to 75,000 €/MW/year and for existing capacity equal to 33,000 €/MW/year, with Resolution no. 363/2019 of 3 September 2019.

Results of the first auctions

The first auctions were held on 6 November (with delivery year in 2022) and 28 November 2019 (with delivery year in 2023) and in relation to both the capacity offered by the operators was entirely awarded - new and existing - to the maximum premium, defined by the ARERA, equal respectively, to 33,000 €/MW/year and 75,000 €/MW/year.

For the auction for the year 2022 the non-programmable renewable sources (wind, photovoltaic and flowing water hydro) were awarded 1 GW of capacity, while for the year 2032 the capacity increased to 1.3 GW.

The successful bidders of the aforementioned first auctions are listed in Annex 1 below.

Annex A

Auction for delivery year in 2022

1. "LAC": likely available capacity (capacità disponibile in probabilità)

Auction for delivery year in 2023

2. "LAC": likely available capacity (capacità disponibile in probabilità)