By Sergio F. Garribba, Commissioner,
The Regulatory Authority for Electricity & Gas,
Italy

A liberalized electricity market rests on three pillars: customers with freedom of choice, a competitive supply side, and guaranteed access to networks for operators under transparent and non-discriminatory conditions.

The number of customers eligible to buy electricity on the free market in Italy will increase in the next few months. In May 2001 there were 1200, accounting for over a third of total demand. The number of eligible customers will rise to 150 000, accounting for 60 per cent of total consumption, when the threshold falls to 100 000 kWh/year. This will happen after the sale of Enel Spa’s last group of power stations.

But the expansion of potential demand on the free market in Italy has not been matched by a comparable development in supply. The supply side is highly concentrated. There are no real prospects for this to be remedied in the medium term.

Enel will continue to hold a dominant position in generation, accounting for more than 50 per cent of the total. This will be the case even after the sale of 15 000 MW of its capacity as envisaged by legislative decree 79 of March 16, 1999, which implements the European directive for the internal market in electricity.

Competition, both actual and expected, can encourage new investment in generation. For intentions to be translated into action, a new law containing urgent measures to guarantee security in the national electric system was approved by Parliament on April 9, 2002. The law foresees effective steps to streamline the authorization procedures for the construction of new power plants or for repowering existing ones.

Imports, which cover 15 per cent of demand, contribute to electricity supply and to the formation of a competitive framework. Insufficient interconnection capacity creates congestion. The prices of imported electricity are therefore close to average Italian market prices. The result is a form of rent that benefits sellers.

Electricity prices in Italy are high compared with European levels. Average domestic tariffs exceed the European average by about 20 per cent. The tariffs applied to industrial users are 25-50 per cent higher than the corresponding European averages. On the free electricity market, prices are 10-15 per cent lower than the tariffs applied to captive customers.

In many countries tariffs and prices have fallen in spite of increases in the international prices of oil and natural gas; in Italy, however, tariffs rose by an average of ten per cent between the beginning of 2000 and mid-2001 as a result of dependence on hydrocarbons for electricity generation.

In the same period Italian electricity tariffs, calculated net of fuel costs, fell by ten per cent. The Regulatory Authority’s orders, which anticipate the effects of competition, have offset weak currency and the inflationary effects of price trends in the world oil market. But the cause of high electricity prices in Italy is not only the reliance on oil. Another contributing factor is the low efficiency of partly obsolete power plants.

An essential step for free choice is that customers and their suppliers have access to the local distribution networks without unjustified restrictions. Distribution, which is subject to exclusive licensing arrangements, therefore needs to be separated from metering, electricity supply and retail activities, which are free activities carried out under competitive conditions. This is the solution which has been proposed to the Ministry of Industry, now Productive Activities, by the Regulatory Authority.

The National Transmission System Operator (Gestore della rete di trasmissione nazionale Spa) is an independent state-owned company. The legal framework in which it acts is developing to keep pace with the development of the free market. The wheeling tariff, the technical rules for the connection of generators and distributors to the national network, the energy despatching conditions and metering devices have all been defined through orders by the Regulatory Authority and adjusted to create the right conditions for the system to develop in a much more complex context than was previously the case.

The National Transmission System Operator does not own the network. These first two years have shown difficulties in the definition of financial relations and in decisions concerning necessary work on the network to remove congestion, increase interconnection capacity, and connect new plants. The possibility of bringing ownership and management of the transmission system together under a single neutral enterprise, with no interest in the production or sale of power, should be evaluated.

The Electricity Market Operator has been set up with operating conditions drawn up by the Ministry of Productive Activities. The Authority has played a part in this process to bring together in a single framework the power exchange and bilateral trading. If the Italian electricity exchange is to function properly, complex technical instruments need to be developed. Unlike some electricity exchanges operating in Europe, the Italian electricity market is closely linked to the dispatching of electricity by the network operator.

The launch of the power exchange could be undermined by the concentrated supply structure of the power industry. The Regulatory Authority, aware of the problem, is keeping a watch on market trends, and will use appropriate instruments to prevent distortions.