Turning the TIDE: a new era for Italy’s short-term energy markets

Italy’s power market is getting a makeover with TIDE, short for "Testo Integrato del Dispacciamento Elettrico" (Integrated Text on Electricity Dispatching). This is a massive regulatory reform by Terna to revamp the dispatching and balancing systems in Italy. The plan includes updating network codes, introducing dynamic bidding zones and improving how ancillary services are procured through market mechanisms. The goal of TIDE is to make the grid more flexible, integrate more renewable energy and keep costs down for balancing and dispatching services.  

The TIDE project kicks off on January 1, 2025. Whilst there will be a transition period where changes to bidding zones, balancing responsibilities and ancillary services procurement will take place, the full rollout will take several years. Key milestones like the market-based Frequency Containment Reserves (FCR) procurement transition for example, are expected to be done by 2029. Additional reforms will also be phased in through consultations and updates during this time.  

As TIDE enables a shift to a more market-based dispatch of the power system, actors on the power market will have some adjusting to do. As Italy sets itself up to become part of a harmonised European power market, this process may also end some of the local Italian peculiarities. As we have seen with the recent implementation of the PICASSO mechanism for Frequency Restoration Reserves (FRR), some of these local aspects are quite far from what is usual in other regions in Europe. 

Bringing the order in merit  

In Italy, the merit order curves for the day ahead market look radically different from the countries around it. Since negative prices are not possible, there is very little generation being bid at negative prices. In terms of flexible generation, we actually see very few assets types that display real price-sensitivity. Where oil, some hydro, coal and gas assets have must run generation (and a small portion of wind bids in at negative prices) most other fuel types only enter the merit order at a price of zero. The shape of the merit order curve comes mainly from CCGT’s and coal assets, with additional flexibility from pumped storage.  

After the go-live of TIDE, negative prices will be possible in Italy. This means that there is a case to be made for offering generation capacity at negative prices to the power exchange. Non-dispatchable assets will offer at the minimum price of the power exchange (€-500) and assets that have alternative revenue streams, but need to produce or be online to incur those revenues, will bid in at negative prices as well. These alternative revenues may consist of subsidies, ancillary services, availability fees or they could just be a positive option value, making it attractive for an asset to be online during a volatile market, even if it is runs at a negative spark-spread. 

Optionality and the valuation of options will become more important in the Italian market. With market-based contracting of ancillary services and some of the auctions clearing before the day-ahead market, the sequence of markets in which an asset can participate will align more with other European markets. Having an asset allows a market participant to take an action (or not) at gate closure of each market it is qualified for. Optimising risk and revenues over multiple markets requires a more comprehensive overview of what to expect in each market. 

Swelling price volatility  

As negative prices start to emerge in Italy, this means that volatility will increase over the entire time-horizon. This provides revenue opportunities for flexible assets and storage. The extent to which we will see negative prices in Italy depends on the ratio of flexible generation versus renewables. If we look across Europe, we see that flexible generation is being pushed out of the merit order by must-run, such as nuclear and run-of-river hydro, as well as by intermittent renewable generation. Since 2015, the number of negative hours has increased massively, with a clear trend that follows solar growth.   

Italy has escaped this trend so far, but that is unlikely to continue. Sicily and Sardegna for example, have seen many hours clear at a price of zero in the day ahead market in 2024. This is very similar to what we have seen in Spain and Portugal in previous years. In 2024, Spain and Portugal saw negative prices for the first time, despite having a subsidy scheme that does not remunerate running at negative prices. 

In France, we see dynamic bidding of renewables into the day-ahead market. Up to 3 GW of solar generation does not enter the market at negative prices and this volume is increasing. We are also seeing an increasing effect on wind as well.  

The Iberian countries are not in Europe’s top 10 of countries seeing the most negative hours, but Spain is likely to reach 300 hour of negative prices by the end of the year, a number previously only fit for the leader in the ‘negative price ranking’.   

What is striking however, is the massive lead Spain and Portugal have in the ranking if we include zero prices. Both countries have seen well over 700 hours of prices at or below zero at the start of October 2024 and are on the way to reach somewhere between 800 hours of free or negatively priced power. Imagine the impact on a solar generator, that only sees around 3000 hours of production every year and with about 40-50% of the total generation in hours with negative of zero prices. Clearly, the value of solar has dropped tremendously. Obviously the hours with negative prices are the hours in which production would be highest. This trend could well transfer to Italian regions, with Sicily and Sardegna most likely to see the largest impact.   

Flexibility ebbing away  

Note that negative prices have a tendency to decrease the amount of flexibility in a power system. For Italy, with its massive CCGT-fleet, running out of flexibility is unlikely. However, you should keep in mind that a CCGT providing Frequency Containment or Restoration Reserves must be online to provide these services and run at a level that allows it to provide the service. That means a stable run-level must be compensated with an availability payment, far exceeding the value of the contracted MW of flexibility. We have seen a large impact on the amount of ‘spinning reserve’ in Germany and Netherlands over the past years, resulting in an increase in availability prices for FCR, aFRR and mFRR. 

The value of flexibility also increases thanks to this trend, resulting in incentives to invest in fast responding flexible assets, that do not have the downsides of a CCGT or coal power station. We have seen a surge in battery investment in the Netherlands and Belgium as a result of the decline in spinning reserve. Italy could see higher value for pumped storage and hydro reservoirs, alongside other storage and flexibility options, such as compressed air and batteries as a result. 

For now, Italy remains a net-importer with a large deficit of power generation. High levels of imports come from France and through its other neighbours including Switzerland and Austria, not to mention the undersea cables from the Balkans and Greece.   

The Italian government is also eyeing plans to build nuclear power to help meet its decarbonisation ambitions. It is important to realise that building nuclear power does require a good long-term view of how demand will develop and where both renewables and flexibility fit in the overall picture. Finland provides a useful example, having built Olkiluouto 3 in anticipation of a massive increase in demand. When it came online, this actually resulted in a massive oversupply. Belgium is also keeping some nuclear stations online, but is seeing its flexible assets pushed out of the market by both renewable and nuclear generation from the Netherlands and France (which has some flexibility) as well as Dutch CCGT’s (which see more run hours and can therefore provide cheaper flex).  

Dynamic zones a developer’s nightmare?  

When I first heard of dynamic bidding zones, I had to think about my colleague responsible for PPA valuation. As a bidding zone review is already a nightmare for someone trying to value assets and the power being generated from them, dynamic bidding zones are almost impossible to model. After reading through the documentation, it appears that with extensive modelling per macro-area, you could determine that under different scenarios you would see a different zonal configuration, but it will definitely not make it easier for small developers to get their renewable assets financed.   

Dynamic zones do make some sense from a system operation point of view. With large investment in grid infrastructure and differences in generation capacity between regions, keeping the volume balance may see advantages from having this flexible configuration. This flexibility does raise some questions for investment however, where flexibility is also sometimes rephrased as insecurity or unpredictability.  

Dynamic zones are more likely to reflect the zonal value of power in the market. As Italy is a narrow country, it sees large differences between regions in consumption, generation and interconnectivity. This means that we could see regions experiencing periods of volatility or stability depending on the grid conditions. These could be great incentives for investment, however if you cannot count on the situation to endure, how will you build your business case?   

Market to behave like a market  

With TIDE, we will see more information feeding into power prices and bidding strategies. We are more likely to see optimisation and strategic bidding behaviour, like we see in other European energy markets. This higher granularity makes the market more responsive to scarcity and surplus, which will help the system operator to maintain the balance. 

With additional complexity, such as dynamic zones, there are scenarios for storage assets to be built in strategic places, where their value can be optimised between dynamic bidding zones. For example, a battery might save its charging or discharging for use in a different zone. The additional complexity added by the zones also mean that we could see new arbitrage opportunities emerge, something which will be closely followed by both project developers and trading parties. 

Eventually, I would hope, that TIDE also lays the foundation for a more liquid continuous intraday market. Italy, like many other markets would benefit from a more vibrant market in which physical and non-physical traders provide liquidity on markets and drive transparency through their analyses and trading actions. We have seen asset-less traders improve liquidity in the GB and Irish markets already and similar effects are evident in both the Netherlands and France.   

The market will rarely be completely wrong and is usually more right than the people running the market. TIDE could be the first sign that the Italian energy market is turning in favour of transparency and liquidity, but it will almost certainly produce unexpected artefacts and unforeseen consequences.