May 16 2011
The European Union is in the process of forming an internal electricity market. At present, the market comprises different price zones that are not satisfactorily connected and do not allow a sufficient level of cross-border flow necessary for price harmonisation. Following the allocation of cross-border capacity and the creation of an exchange corridor between Slovenia and Italy, this situation may improve.
The regulatory basis for granting cross-border transmission capacities has been provided by EU Regulation 714/2009 on conditions for access to the network for cross-border exchanges in electricity, repealing EU Regulation 1228/2003.(1) In accordance with the respective regulation, member states are encouraged to apply coordinated allocation of cross-border capacity through non-discriminatory market-based solutions, while paying attention to the specific merits of implicit auctions for short-term allocations.(2)
The project for the merger of the Slovenian and Italian electricity markets was initiated in April 2008, following a collaboration between the Slovenian and Italian power exchanges and the Slovenian market operator. The parties signed a memorandum of understanding for the purpose of developing "a proposal [for a] market coupling mechanism for the management of the interconnector capacity, starting with [the] electrical border between Italy and Slovenia", and with the additional aim of offering a response to the challenges of a further regional integration of electricity markets within the European Union.
The memorandum of understanding was signed by the Slovenian and Italian ministries of foreign affairs on August 27 2010. On the basis of this memorandum, and under a master agreement (approved by the Slovenian and Italian energy agencies), a common regulatory framework was defined. Under the framework, the transition operators (ELES and TERNA), power exchanges (Gestore Mercati Energetici and SouthPool) and the Slovenian market operator (Borzen) will coordinate their activities related to the functioning of the day-ahead markets in order to perform the Slovenian-Italian market coupling. A decentralised price coupling will determine cross-border schedules for market coupling by adopting a common algorithm and coordinated procedures and software, fully reflecting local matching rules, local bid and offer curves and zone structure in Slovenia and Italy.
At its assembly of October 13 2010, the Energy Agency supported the project connecting the Slovenian and Italian electrical energy markets.(3) This support represented the basis for the operation of the merger from January 2011 onwards.
There are many positive implications of the merger of the Slovenian and Italian electricity markets. The cross-border interconnectors' capacities will not increase following the merger, but the available capacities will be differently allocated. Consequently, the costs and risks of all involved parties will decrease. Moreover, the implicit auctions will establish equal market conditions for all market actors and represent a mechanism for establishing a common European electricity market. Nonetheless, this market will still be divided into different price zones. The merger may also influence the opinion of the European Commission, which initiated the infringement procedures with regard to, among other things, the implementation of cross-border mechanisms for 19 member states, including Slovenia and Italy.(4)
The positive impact of the merger of the electricity markets can already be detected on the Slovenian power exchange. Based on previous experience, it might be estimated that the electricity trading in BSP SouthPool would amount to only around 20 megawatts (MW) in January. However, following the cross-border exchange, the capacity increased to between 65 MW and 100 MW. The cross-border exchange will also have an influence on exchange liquidity, and may convince owners and potential investors to continue investing in the operation of the power exchange. The liquidity of the power exchange is very much needed in the Slovenian price zone to facilitate transparency, since one of the requirements of the European Commission was to provide sufficient information on its interconnection capacity.(5) At present, the market is too dependent on the calculation of the exchange price on the other side of the border and on the price achieved for cross-border transition capacity.
The future strategic objective of the Slovenian transition operator (ELES) aims to increase trade through a market merger mechanism, focusing on the harmonisation of rules on cross-border exchanges with Austria and Croatia.
For further information on this topic please contact Helena Vranič or Tjaša Lahovnik at Odvetniki Šelih & partnerji op, doo by telephone (+386 1 300 7650), fax (+386 1 433 7098) or email (firstname.lastname@example.org or email@example.com).
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