The IPEX needs an IGEX in risky times

1
The IPEX needs an IGEX in risky times

• Alberto Cavaliere
• Università di Pavia

2
IGEX an Italian Market for Gas Exchanges

• Economic theory welfare maximization requires
  competitive markets overall the economy
• Distortions arise from a competitive market for
  outputs interacting with a non-competitive market
  for inputs
• A well functioning power exchange requires a
  competitive market for gas exchanges ? especially
  when about 50 of power is produced with gas
  fired power plants

3
Distortions arising from gas market regulation in
Italy

• Regulation concerns not only network tariffs but
  also the price of the commodity for the household
  market and storage tariffs
• Gas supplies depend on LTC with price indexed to
  oil
• Gas is scarce due to the lack of import and
  storage capacity (low cost electricity is scarce
  too)
• Interactions with the market for power? when
  electricity prices soar in France national gas
  may be used to export electricity ? gas scarcity
  increases but is not signaled by national prices
  less supply for the IPEX More electricity
  imports

4
Electricity exports and the lack of an IGEX

• With an IGEX gas scarcity would be signaled by
  very high prices ? incentive to sell gas in Italy
  not abroad
• Sales made even virtually with SWAPS between
  European Gas Exchanges
• Less electricity exports
• Gas price fluctuactions HEDGED in the future mkt
• Without an IGEX follow the signals of foreign
  Gas exchanges (Zeebrugge) AND power exchanges ?
  National suppliers sell gas and electricity
  abroad and industries get returns from
  interruptions at a high collective cost due to
  auctioned subsidiesCost of power produced with
  Heavy Fuel oil (100 milions Euros..)

5
The PSV is not an IGEX

• In Italy gas spot markets at entry points,
  storage and at the PSV (virtual hub)
• PSV is an OTC market, bilateral transactions and
  no public prices
• Growing but not sufficient liquidity
• From an OTC to a OCM market? introduce a clearing
  house, i.e. an independent market manager like
  GME for electricity to further increase exchanges
  and get public information on prices
• Market design requires to distinguish an ISO
  from the Supervisor of commodity exch.(even with
  ownership unbundling)

6
The Summer-Winter spread ant the regulated
storage tariff

• Regulated tariffs for gas storage tariff are low
  and contribute to increase the spread due to the
  summer-winter differential in the commodity
  prices
• Effects 1)use gas in storage to produce
  electricity for exports 2) Power producers reduce
  storage of light fuel oil 3) Gas suppliers are
  not lead to offer interruptible contracts and to
  invest flexibility.
• Inefficient use of storage capacity due to
  inefficient allocation mechanisms
• With auctions ? Reduced spread More storage of
  fuel oil by P.P more interruptible contracts by
  gas suppliers