How Italian electricity market manages network constraints

1. How Italian electricity market manages network constraints Rome, Turin, September 2007

2. Agenda • Market Structure • Transmission limits

3. Market Structure • A 24 hours Electronic Market, by which market players can buy or sell electric energy IPEX • Electronic Platform by which market players register commercial transactions and related programs of consumption or production, after the conclusion of private contract agreement (OTC agreements) PCE

4. IPEX Market – a Brief description * Consumers who use UCVs (Unit of virtual consumption) or Pump plants pay Zonal Price ** Society which manages Italian Electric System • By Ipex: • Market Players join to an implicit auction market to buy or sell Electric Energy • Terna guarantees the equilibrium of Italian Electric System Note: T = The day in which electric energy is physically exchanged

5. Equilibrium Quantity Equilibrium Price Euro/MWh S D MWh IPEX Market – Buying and selling price Price Calculation • Zonal Price • For each hour UNP is: weighted average of Geographic zonal prices (weight = Consumed quantity): Σ(Pi X Qi) Σ Qiwith: i= referring zone ; Q = Bought Quantity; P= Zonal Price • UNP • If there isn’t zonal congestion, there is only one zonal price which coincides with UNP • UNCONSTRAINED UNP • Unconstrained UNP is calculated intercepting national demand curve and national offer curve (hypothesis of no transmission limits)

6. IPEX Market – MSD Details By Dispatching Services Energy Market (MSD), TERNA spa buys or sells dispatching services Real time MSD permits to resolve unexpected lack of balance

7. PCE - Overview Commercial Phase Physical Phase Transaction proposal Acceptance / Refusing Programming IPEX Market Final Result • PCE player makes a transaction proposal, choosing his counterpart, the kind of transaction (selling or buying); the profile of transaction (Baseload; peak…); the account to use; the referring period; the bound code and the quantity • Counterpart refuses or accepts proposal. In case of acceptance, Counterpart indicates the bound code, his referring account and quantity (which must be equal to offered/bid one) • PCE Player can choose the units by which he sells or buys energy • Quantity programmed could be equal or less to the quantity bought or sold in commercial phase * • GME generates PGM files, which resume PCE Player programs • Programs are sent to IPEX automatically • GME runs the day before market • GME provides offers or bids results, by PGM files and BUS files Description: Player: • PCE player • PCE player • PCE Player • GME • GME Price: • The price is established by parties privately and it mustn’t be specified in transactions • The price is established by parties privately and it mustn’t be specified in transactions • The limit Price can be indicated during programming (only for IPEX market players) • Zonal price • UNP • N/A Time: • T-60 dd to T-2 dd; with T = the day in which the electric energy is exchanged physically • Offer/bid day to T-2 dd; with T = the day in which the electric energy is exchanged physically • Deadline: T-1 (8,30 am); with T = the day in which the electric energy is exchanged physically • T-1 dd; with T = the day in which the electric energy is exchanged physically • T-1 dd; with T = the day in which the electric energy is exchanged physically * see details on following slide

8. PCE Operatore di Mercato CEOP5 CEOP2 CEOP1 CEOP4 CEOP3 PCE – Focus on transactions • The maximum quantity which can be loaded on an account is equal to the sum of margins which compose the account 20MWh 40MWh 20MWh 10MWh 60MWh By commercial phase, market players can act as traders

9. 60 MWh 50MWh 40MWh 20MWh UPOP1 UPOP1 UCAOP2 UCAOP5 UCAOP4 PCE – Focus on programming 30MWh All the quantity bought/sold in commercial phase can / must be nominated on physical programs of injection or withdrawal

10. Agenda • Market Structure • Transmission limits • Transmission limits overview • Transmission limits and IPEX Market • Transmission limits and PCE Market

11. Geographical Zones with Transmission Constraints Summer situation (Example) Notes 250 AUSTRIA 2260 SWITZERLAND • The possibility to buy/sell electric energy from a zone to another is bound by: • Transaction Limits fixed by TERNA • Physical limits connected whit units capacity (units margin) fixed by TERNA • Generalized limits, a composing of transaction limits which exist actually, could help to manage congestion in critical area 350 SLOVENIA FRANCE 2400 31001100 20002200 300 39002000 500 GREECE 100600

12. Market splitting Mechanism Flowscompatiblewith AvailableTransmissionCapacity? Single National Price YES NO Energy Flows between Zones Market Splitting Price of Importing Zone Price of Exporting Zone > Zonal Selling Prices Nationwide Injection/Withdrawal Schedules Injection/WithdrawalSchedules SatisfyingAvailable Transmission Capacity UniformPurchasingPrice Market splitting mechanism allows to manage Italian Electric System Congestions

13. Advantages of Market splitting system Short time efficiency • Market chooses the best available plants, in respect of the existing limits, minimizing the costs of production and allowing an efficient use of Electric Italian Network • Electric energy flows from lower price zones to higher price ones • New investments are attracted by the highest costs of electric energy supply. Consequently: • Prices difference between different zones is going to be reduced • Power difference between different zones is going to be reduced Long time efficiency • UNP is lower than unconstrained UNP if: • The Price reduction of exporting zones is higher than the price rising in importing zones • The price reduction involves higher volumes than price rising (Italian case**) • Reduction of electric energy cost can be calculated as (UNP unconstrained – UNP ) X Q, where Q is the electric energy exchanged hourly Reduction of electric energy costs • Implicit revenues: in the spot market, revenues from congestion are given from the gap between the two zonal price (Pz import – Pz export) X QF, where Pz Import > Pz export and QF is the maximum interconnection capacity from the exporting zone to the importing one • Explicit revenues: in the OTC programs, revenues from congestion are called CCT (Corrispettivo Capacità di Transito) and are paid by producers explicitly*. They are calculated as the delta between zonal price in which the production plant is situated and UNP Revenues from congestion • Inter-zonal congestions are resolved in MGP market, with a reduction of cost in Dispatching Service Market (where electric energy price is the offered one; pay as bid) Minor congestion costs * CCT are paid by consumers who uses UCV Units or Pump Plants too **see details on following slide

14. Reduction of electric energy costs – An Example 14th August 14th August, 21° Hour * • UNP = 78,30 € / MWh • Unconstrained UNP = 92,95 € / Mw 59,91 59,91 14.090 93,66 3.442 93,66 3.634 1.598 93,66 93,66 4.990 534 93,66 93,66 HOUR = Unconstrained UNP 2.629 = UNP = Price (€/MWh) = Quantity (MWh) UNP lower than Unconstrained UNP in 21° Hour is a consequence of Market splitting between North and the rest of Italy * Price and quantity only for zones which determinate UNP

15. Revenues from congestion – An example 14th August, 21° Hour Revenues SWITZERLAND ΣΣ (PZ import-PZ export )X QF = (93,66-59,91)X2.500+(59,91-42,00)X1.180= 84.375+21.133= 105.509€ 42,00 1.180 59,91 E_NW 2.500 59,91 93,66 = Price (€/MWh) = Energy Flow = Separated Zone Revenues amount to 105.509 € for the 21° hour of 14° August

16. Transits management (2006) (…) 2005 data

17. Production plants renewal 3.000 MW 8.600 2.000 - 2.100 5.700 • Inefficient Plants (high value of merit order) Building of new plants for 8.600 MW in Italy, in the last two years

18. Italian Electric System – 2007 Structure vs 2004 Italian Electric System - 2007 Italian Electric System - 2004 FRANCIA SVIZZERA AUSTRIA SLOVENIA FRANCIA SVIZZERA AUSTRIA SLOVENIA ESTERO NORD OVEST ESTERO NORD EST ESTERO NORD OVEST ESTERO NORD EST TURBIGO-RONCO NORD MONFALCONE TURBIGO-RONCO NORD MONFALCONE CORSICA CENTRO-NORD CENTRO-NORD SARDEGNA CENTRO-SUD CORSICA PIOMBINO ESTERO CORSICA SUD FOGGIA SARDEGNA CENTRO-SUD CORSICA AC ROSSANO BRINDISI SUD CALABRIA ESTERO SUD ROSSANO BRINDISI PRIOLO SICILIA GRECIA CALABRIA GRECIA VIRTUAL ZONE PRIOLO SICILIA PHYSICAL ZONE

19. Agenda • Market Structure • Transmission limits • Transmission limits overview • Transmission limits and IPEX Market • Transmission limits and PCE Market

20. Unconstrained UNP vs UNP – 1° Week of July, 2007 € / MWh = Unconstrained UNP = UNP

21. Unconstrained UNP vs UNP – Delta 2007 vs Delta 2005 (1° Week of July) € / MWh = Delta 2005 = Delta 2007 Lower Price zones volume << Higher price zones volume

22. Agenda • Market Structure • Transmission limits • Transmission limits overview • Transmission limits and IPEX Market • Transmission limits and PCE Market

23. CCT assumptions • Electric Producers* when act on PCE pay or receive CCT (Corrispettivo Capacità di Transito) in case of congestion • CCT is calculate, for each hour and zone, as: (Pz-UNP) X Qz With: • Qthe OTC programmed quantity accepted on IPEX after MGP running • z the referring zone • Electricity moves from lows to high price zones: • If Zonal Price is minor than UNP, a producer is contributing to congestion and he pays CCT • If Zonal Price is major than UNP, a producer isn’t contributing to congestion ad he receives CCT * Electric consumers owners of UCV units or Pump Plant pay/receive CCT too, when they use this kind of units

24. CCT Trend example – From 11° to 20° July 2007* € / MWh Congestion frequent in North and South of Italy * Italian zones only