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PICASSO and its problems: Italian Imbalance Issues

March 13th, 2024

With issues across European balancing markets caused by the PICASSO project now well documented, Jean-Paul Harreman, Market Expert at Montel Analytics takes a deeper look into the impacts on the Italian energy market and explains why the algorithm is producing unexpected outcomes.

On July 19th 2023, Terna, the Italian TSO, joined the pan-European PICASSO project, a Platform for the International Coordination of Automated Frequency Restoration and Stable System Operation.

Currently, the platform is used by Germany, Austria, Italy and Czech Republic. According to the latest PICASSO Implementation Roadmap, most European countries are expected to join by the end of 2024.

Different countries display massive differences in bidding behaviour around activation prices. This has been causing unexpected effects in some countries.

As a result, quite a few countries have chosen to postpone that date they join by several months, or even several years.

Several Transmission System Operators have already submitted proposals for changes to the algorithm. These are aimed at avoiding extreme prices in markets that only have slight domestic imbalances.

These proposals will be reviewed in Q2-2024.

Italy is the country that has seen the most 'unexpected' events. In fact, they would have never been possible if it were running its aFRR operations alone.

Many market participants have also complained to the regulator (ARERA) about a lack of transparency, as well as the unpredictability of PICASSO Cross-Border Marginal Prices (CBMP).

In our webinar about European balancing harmonisation in November 2021, we had already suggested this could become a problem.

Italy as a case study:

The graph below shows the trend of the positive and negative imbalance prices for both macrozones (North and South) from January 2023 onwards.

Since last August, Italy has frequently seen negative imbalance prices that cannot be explained by aFRR bids within the Italian market. This is because they never go below zero.

Figure 1 - Italian imbalance prices

The Italian Authority ARERA opened an investigation in September 2023 about the formation of very negative imbalance prices.

The conclusions of this investigation have recently been published.

We have been closely following the dynamics of PICASSO and the impact it has on national imbalance prices.

In the following analysis, we will explain the imbalance prices observed between 3rd - 5th February 2024.

Imbalance prices in both North and South Macrozones dropped to record negative levels (at that time). In the quarter hour beginning 23.45 on the 4th February, they hit -8.952,7 EUR/MWh.

Figure 2 - Extreme Italian imbalance prices

Zooming into the price formation for this period of time, we can observe the following:

Austria and Italy form an uncongested area. This means that the region is optimised in PICASSO as one block based upon the pricing merit order, ignoring the country of origin.

The overall position of the uncongested area is long (negative) with Italy exporting active power toward Austria. This is equivalent to an import of negative aFRR by Italy.

In this instance, Austria has a slightly long position (-76 MW on average) that requires downregulation of aFRR.

The import of power from Italy pushed Austria to further downregulate, crossing the merit order in its minimum offer at -9200 EUR/MWh. All available aFRR to downregulate was used.

Figure 3 - Austrian PICASSO Pricing

The graph below shows the aFRR merit order of the Austrian market in the period between 23.45 and 00:00.

The total available volume for down regulation was 200 MW, the marginal volume offered at a price of -9200 euro/MWh.

Figure 4 - Austrian aFRR

As both markets ran out of downward aFRR capacity offered in the Picasso mechanism, the most extreme price in the merit order was reached. This marginal price fed into the Italian balancing price calculation, resulting in a balancing price of nearly -9.000 EUR/MWh.

However, if we look at domestic aFRR availability in Italy, the numbers show quite large volume of available aFRR.

Therefore, we can see that this extreme market event happened due to two things: Italy offering only a part of its volume in Picasso and the border being uncongested.

Austrian balancing prices were also affected, but that country is more used to extreme balancing prices as a general rule.

We will be releasing further analysis on volumes offered into PICASSO by different countries in the next few weeks, which will allow you to further analyse these extreme circumstances.

In the mean time we will wait and see what other TSO's and regulators decide to do with Picasso implementation. Will they go as planned, or will we first see changes to the mechanism, before other countries join?

Take a look at our market data visualisations. Talk to Montel Analytics.