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1 Italian Borders TSOs/NEMOs Complementary Regional Auctions in accordance with Article 63 of the Commission Regulation (EU) 2015/1222 of 24 July 2015 establishing a Guideline on Capacity Allocation and Congestion Management EXPLANATORY NOTE February 2017 February 2017 Page 1 of 12

2 1. Table des matières 2. INTRODUCTION INTRADAY MARKET DESIGN OPTIONS Continuous Implicit Intraday Trading Complementary Regional Auctions Option A Option B IMPLEMENTATION REQUIREMENTS FOR ESTABLISHING COMPLEMENTARY REGIONAL AUCTIONS No adverse impact on the liquidity of the single intraday coupling Allocation through the capacity management module Non discrimination with market participants from adjacent regions Enable market participants to trade close to real time PUBLIC CONSULTATION Consultation feedbacks and assessment of the project parties Preference on the two option proposed Complementary regional auctions Timing of the implicit auction id D Italian Implicit auction (MI1) at 15:00 D Interruption of Continuous Trading mechanism Other remarks February 2017 Page 2 of 12

3 2. INTRODUCTION Article 63 of the Commission Regulation 2015/1222 establishing a Guideline on Capacity Allocation and Congestion Management (hereinafter referred to as CACM Regulation ) requires that by 18 months after the entry into force of this Regulation, the relevant NEMOs and TSOs on bidding zone borders may jointly submit a common proposal for the design and implementation of complementary regional intraday auctions. The proposal shall be subject to consultation in accordance with Article 12. This document is an explanatory note accompanying the common proposal developed by all Transmission System Operators (hereafter referred to as TSOs ) and Nominated Electricity Market Operator (hereafter referred to as NEMOs ) within the Italian Borders (hereafter referred to as IB ) regarding the proposal for options of intraday market design with complementary regional intraday auctions. 3. INTRADAY MARKET DESIGN OPTIONS 3.1 Continuous Implicit Intraday Trading Whereas Article 13 of CACM Regulation requires that Capacity should be allocated in the day-ahead and intraday market time-frames using implicit allocation methods, in particular methods which allocate electricity and capacity together. In the case of single day-ahead coupling, this method should be implicit auction and in the case of single intraday coupling it should be continuous implicit allocation. The method of implicit auction should rely on effective and timely interfaces between TSOs, power exchanges and a series of other parties to ensure capacity is allocated and congestion managed in an efficient manner. NEMOs proposed to NRAs in the All NEMO proposal for the MCO Plan that the delivery of the ID MCO Function, in accordance with article 36(4) of the CACM Regulation, shall be based on the solution. Adoption by NEMOs of the solution as the basis for the ID MCO Function shall be contingent on agreement with TSOs (and NRAs where relevant) for the continuation and extension of the APCA. The solution means the solution (system, procedures, contract, etc.) to be implemented by the NEMOs and TSOs within the Project for implicit cross zonal continuous intraday capacity allocation within the scope of the Single Intraday Coupling according to the principles set forth in the CACM Regulation. 3.2 Complementary Regional Auctions In order to provide an efficient allocation procedure allowing pricing of the intraday cross-zonal capacity, PXs/NEMOs and TSOs of the IB aim to design and implement a Complementary Regional Intraday Auction Mechanism, according to Article 63 of the CACM Regulation. To this end IBs Parties have developed two alternative options for the implementation of this Complementary Regional Intraday Auction Mechanism which would complement the continuous trading: - Option A, which is based on the current structure of the internal Italian Intraday Auctions (MIs) - Option B, which is not based on the current structure of the Italian MIs (foreseeing a possible simplified structure of MIs to be defined by Italian NRA). In both of these options, the efficiency of the whole allocation process is increased by performing an updated capacity calculation before each complementary regional auction. This ensures an efficient pricing of the cross-zonal capacity February 2017 Page 3 of 12

4 that reflects the market congestion with an optimal use of the transmission infrastructure. It is also consistent with the methodology defined for pricing the day-ahead cross-zonal capacity in Article 42 of CACM Regulation since through implicit auctions, the intraday cross-zonal capacity will amount to the difference between the corresponding intraday clearing prices of the bidding zones here considered. Dependencies between Intraday continuous trading and Intraday auctions timings CACM Art. 14 (1), (2) and (4) require the TSOs to recalculate capacities for the intraday timeframe not only in D-1, but also within the Intraday timeframe. Moreover, it is explicitly required to take into account the latest available information for these calculations. Furthermore, CACM Art. 55 requires the pricing of intraday capacities. As a consequence, the capacities coming from the intraday capacity calculations will be more efficiently allocated to reflect market congestion. In order not to distort the efficiency and accuracy of the capacity calculations which is dependent on the forecast of net position, the continuous trading sessions are opened for those hours which will not be auctioned anymore in the following Complementary Regional Intraday Auction. By allowing the continuous trading only to those hours not to be auctioned in the remaining Complementary Regional Intraday Auction, the level of uncertainties in the capacity calculation covering the remaining hours is lower, therefore there is a higher probability of determining additional cross-zonal capacities with a new recalculation Option A Option A has been developed considering that Italian MIs will be composed of 6 different sessions : 2 sessions operated in the day D-1 (all 24 hours of the day D are tradable); 4 sessions operated in the day D (in each session only a subset of remaining hours of the day D are tradable). Taking into account this structure of the MIs, Option A provides an opening Complementary Regional Intraday Auction in D-1 (corresponding to the second Italian MI operated in the day D-1), where all 24 hours of delivery day D are tradable and, possibly, a second Complementary Regional Intraday Auction in the morning of the day D (corresponding to one of the 4 Italian MIs operated in the day D), where only hours from 12:00 to of the day D are tradable. However, in order to perform the intraday auctions with the most updated value of the available cross border capacity, the first Complementary Regional Intraday Auction of the day D-1 (the one involving all the 24 hours of the day D) should be performed at h. 22:00, in order to allocate efficiently the cross-zonal capacity as recalculated by TSOs after the day-ahead allocation process has been terminated. No later than h. 22:30 of the day D-1 PXs/NEMOs will publish the results of the first Complementary Regional Intraday Auction. After the auction results have been published the continuous trading in can be started. In the continuous trading sessions only those hours will be tradable which will not be auctioned anymore either in the following Complementary Regional Intraday Auction or in the Italian MIs. This implies that remaining hours of the day D will be released for the continuous trading in as many steps according to the numbers of the MIs sessions which are performed in Italy during the day D. In day D, at h. 7:30, a second Complementary Regional Intraday Auction, covering delivery hours from 12:00 to 24:00 of day D, will be run. During this second Complementary Regional Intraday Auction, the continuous trading is not stopped since there is no overlapping between hours traded in and hours traded in Complementary Regional Intraday Auction. February 2017 Page 4 of 12

5 Only once the results of the second Complementary Regional Intraday Auction will be published (by h. 8:00), the continuous trading session will be progressively opened also for hours from 12:00 to 24:00 of day D as the relevant Italian MI sessions are performed. The following graph is representing the sequence of the markets during day D-1 and day D in the Option A: Day -Ahead MI1 (Italy only) Day D-1 Day D Regional Auction (coupling) corresponding to Italian MI2 MI3 (Italy only) Regional Auction (coupling) corresponding to Italian MI4 MI5 (Italy only) MI6 (Italy only) Submission of bids/offers for auction Results calculation for auctions Tradable hours in the auction Trading period in Tradable hours for Not tradable hours for Furthermore, the opening of trading period of each hour in the is defined so as to take into account the timings of the Italian MIs. Therefore, and in order not to distort the efficiency and accuracy of the capacity calculations, the continuous trading sessions are opened for those hours which will not be auctioned anymore in the following Complementary Regional Intraday Auction and in the following Italian MIs. This dependency also avoids creating market distortions among Italian bidding zones. Since the allocation takes place between bidding zones (no matter being the zones within or between countries), a fair and non-discriminatory treatment of all parties is required. This principle applies for both the bidding zones within Italy as well as the bidding zones linking Italy (Italy Nord and Italy Sud) to the bidding zones of neighbouring countries. February 2017 Page 5 of 12

6 3.2.2 Option B Option B has the following main features: The performance of two Complementary Regional Intraday Auction as in Option A: an opening Complementary Regional Intraday Auction in D-1 (corresponding to the second Italian MI operated in the day D-1), where all 24 hours of delivery day D are tradable and, possibly, a second Complementary Regional Intraday Auction in the morning of the day D, where only hours from 12:00 to of the day D are tradable. The second Complementary Regional Intraday Auction would be needed in order to efficiently allocate additional capacity resulting from a new capacity calculation during day D. The reduction Italian MIs1 to two in D-1 and one in day D: on the Italian internal bidding zones, only one auction on day D will be performed as described above. In this scenario, soon after the first Complementary Regional Intraday Auction is operated and the results are published at of the day D-1, the hours 0:00 to 12:00 of the day D are tradable in the, whilst the hours from 12:00 to 24:00 of the day D are tradable in the soon after the conclusion of the second Complementary Regional Intraday Auction and no later than 8.00 of the day D. The same principles described for option A are therefore applied: the continuous trading sessions are opened for those hours which will not be auctioned anymore in the following Complementary Regional Intraday Auction. Compared to Option A, in Option B the trading period in the of each hour is increased. By this, market parties are offered more opportunities to readjust and/optimize their positions. The following graph is representing the sequence of the markets during day D-1 and day D in the Option B: 1 Final decision of possible reduction of MIs is subject to the evaluation of Italian NRA. February 2017 Page 6 of 12

7 Day D-1 Day D Day -Ahead MI1 (Italy only) Regional Auction (coupling) corresponding to Italian MI2 Regional Auction (coupling) corresponding to Italian MI3 Submission of bids/offers for auction Results calculation for auctions Tradable hours in the auction Trading period in Tradable hours for Not tradable hours for In the following, the document focus only on the option B proposed for approval to NRAs, This decision is based on market parties stated preference during the consultation, further described in Chapter 6 of this note and common discussion between NRAs, NEMOs/PXs and TSOs in the meeting held in Rome on February, 2nd IMPLEMENTATION The implementation of the single intraday coupling mechanism and the complementary regional intraday auction mechanism is subject to the readiness of the solution and the reform of the Italian ancillary service market. The implementation of the single intraday coupling mechanism requires a period of 6-9 months of integration tests with the system in order to guarantee that the new set of communication flows from LIP14 will be compatible with the existing solution and will not endanger the functioning of the continuous trading for the countries already operational. The reform of the Ancillary Service Market in Italy that requires a design phase, consultation, Regulatory approval and several test phases, it is expected to be completed by Q February 2017 Page 7 of 12

8 The implementation of an intraday capacity calculation within the Italy North Capacity Calculation Region, consistent with the timings of the complementary regional intraday auctions here proposed, is expected to be completed by Q Therefore, due to the complexity of the above-mentioned projects, it is expected to implement the intraday allocation mechanism proposed by Q REQUIREMENTS FOR ESTABLISHING COMPLEMENTARY REGIONAL AUCTIONS According to Article 63 of the CACM Regulation the competent regulatory authorities may approve the proposal for complementary regional intraday auctions if the following conditions are met. 5.1 No adverse impact on the liquidity of the single intraday coupling Currently it is not possible to predict whether liquidity will be adversely affected. From a general economic perspective having a price mechanism based on implicit auctions could help to increase overall liquidity in the intraday timeframe by offering more transparency and reducing barriers to market entry. Besides, the proposed option B, compared to the option A, is increasing the opportunities for market parties to readjust and/or optimize their positions since there are only 2 sessions of continuous trading to cover all hours of the day. By sequencing the continuous trading as here proposed, market parties are allowed to trade during the hours closest to real time where theoretically their needs for readjustment is crucial. Under option B, the liquidity will not be split on the two mechanism since the auction are held before the gate opening of the Continuous trading and most of the liquidity in continuous is observed close to real time. Pricing the capacity through the auctions might increase efficiency of the entire mechanism and increase the interest in participating both to the auctions and to the continuous trading. 5.2 Allocation through the capacity management module According to the Article 2 of CACM Regulation ( Definition ), the capacity management module is a system containing up-to-date information on available cross-zonal capacity for the purpose of allocating intra-day cross-zonal capacity. As a consequence, the statement of Article 63 that all cross-zonal capacity shall be allocated through the capacity management module means that in the complementary regional intraday auctions all cross-zonal capacity shall be allocated through a system containing up-to-date information on available cross-zonal capacity. The allocation of capacity through a system with up-to-date information in the complementary regional auction on Italian borders relies on two elements: - Market model of the complementary auction: according to the market model (both in option A and B), the continuous trading sessions on Italian borders in the single intraday coupling are opened only for those hours which will not be auctioned anymore. Therefore, there is no need that the complementary regional auctions on Italian borders receive any information about available capacity from the system supporting the single intraday coupling (i.e. ). On the contrary, TSOs will provide the single intraday coupling () only with capacity still available after the complementary regional auction has been performed; - IT System supporting the complementary auction: the capacity management module for the complementary auctions on Italian borders would be based on the PCR infrastructure, where according to same procedures in place for the day-ahead single coupling, TSOs will upload through PXs the capacity still available after the allocation in the day-ahead and the subsequent recalculation. February 2017 Page 8 of 12

9 o PCR will optimize the process related to implicit auction since the capacity management module of PCR is already operational and has a well proven reliability and efficiency for the single day-ahead coupling that is similar to the allocation mechanism for the complementary regional auctions here proposed. In conclusion, this process is compliant with the function of capacity management module defined in the article mentioned above. 5.3 Non discrimination with market participants from adjacent regions The complementary regional intraday auctions are open for all market participants as long as they fulfil the requirements to participate in the national intraday market. 5.4 Enable market participants to trade close to real time The proposal is to perform an opening auction at 10pm in D-1 and one additional auction at 7.30am in day D. The results of these auctions will be published within 30 minutes. After these auctions, market participants can trade in the continuous mechanism very close to real time. Where an incident occurs and leads to the cancelation of these auctions, available cross-zonal capacities are transferred no later than 10:30pm in D-1 and 8:00am in day D to in order to be allocated via continuous trading. This ensures market participants can trade close to real time while benefiting from an updated calculation of cross-zonal capacities. 6. PUBLIC CONSULTATION A public consultation has been performed from 6 th December 2016 until 13 th January In this consultation NEMOs/PXs and the TSOs of the IB asked for the opinion of market participants on the two options described in paragraphs and The consultation paper has been published on the web site of the Joint Allocation Office (JAO) as well as on the web sites of the parties involved in the project. The Italian Borders in this context cover the electrical borders, for both power flow directions, between Italy and Slovenia, Italy and Switzerland, Italy and Austria, Italy and France, Italy and Greece. Furthermore, the borders between Italian internal bidding zones and the border between Austria and Slovenia are involved in this proposal. Eight (8) feedbacks have been received during the consultation from two (2) associations (EFET and Swisselectric) and six (6) companies of the energy sector (Dufenergy Trading SA, EDF, EDF Trading, Edison SpA, Enel and Ezpada sro). The main remarks contained in the feedbacks are reported in the following paragraphs. The complete feedbacks received are attached to this document. 6.1 Consultation feedbacks and assessment of the project parties Preference on the two option proposed Option B is the most preferred solution. Six (6) feedbacks (Dufenergy Trading SA, EDF, EDF Trading, Edison SpA, EFET and ENEL) expressed the preference on option B for the following main reasons: More harmonized solution for the allocation of the capacity between Italian internal bidding zones and crossborder February 2017 Page 9 of 12

10 Less fragmentation of Continuous Trading mechanism Less impact on the Continuous Trading liquidity Simpler solution While one (1) feedback (Ezpada sro) expressed the preference on option A, stating that more auctions give more flexibility. One (1) feedback (Swisselectric) did not express its preference. Following the outcome of the consultation, the project parties decided to submit to NRAs the solution described in option B Complementary regional auctions Different views have been expressed by the market participants on the introduction of the complementary regional auctions. Three (3) feedbacks (Edison SpA, Enel, Swisselectric) welcome the implicit auctions as an appropriate and efficient solution for resources optimization, while two (2) feedbacks (EDF and EFET) dislike the auctions because they could limit the trading windows for Continuous Trading and could split the liquidity on the two mechanisms. The project parties think that the hybrid solution of Continuous Trading complemented with implicit auctions could help to increase overall liquidity in the intraday timeframe. In fact, implicit auctions allow the efficient allocation of the available capacity based on a transparent price mechanism and the efficient pricing of the capacity is crucial for the overall efficiency of intraday capacity allocation. Moreover, the liquidity should not be split on the two mechanism since the auction are held before the gate opening of the Continuous trading and most of the liquidity in continuous is observed close to real time. The auctions serve different market needs Timing of the implicit auction id D-1 The timing of the implicit auction in D-1 (22:00) is considered too late to four (4) feedbacks (Dufenergy Trading SA, EDF, EFET and Swisselectric). This late timing would reduce the window to trade the first hour of the following day in the continuous mechanism (30 between 22:30 till 23:00). It is requested to have it an earlier timing, if possible during the business hours. The timing of the D-1 implicit auction has been set at 22:00 by the project parties because the results of the intraday capacity calculation will be available at 21:45 D-1. TSOs of the Italian Borders are considering the possibility to shorten the intraday capacity calculation process in order to have the results 15/30 in advance, but it is still under evaluation. The project parties consider worthwhile to perform the auction only once the results of the capacity calculation are available, for two main reasons: To maximize the capacity to be allocated in the auction. Earlier timing of the auction would affect the available capacity that would be only the residual capacity from the day-ahead process To have a more efficient capacity calculation. Performing the auction during the capacity calculation process would increase the level of uncertainty about the generation patterns and TSOs would be more conservative on the capacity calculation. Anyway, the timing of the auction should not be too far from the delivery period in order to have a better pricing of the capacity. February 2017 Page 10 of 12

11 6.1.4 Italian Implicit auction (MI1) at 15:00 D-1 Four (4) feedbacks have been received concerning Italian Implicit Auction at 15:00 D-1 (MI1). The market participants expressed their wish for a more harmonized solution for capacity allocation between Italian internal bidding zones and cross-border capacity. In particular, two (2) feedbacks (EDF and Edison SpA) proposed to extend this auction also to cross-border, while two (2) feedbacks (EDF Trading and EFET) proposed to remove this auction since it is a not harmonized among Italian and foreign market zones. The project parties evaluated the feedbacks received, however it was not possible to meet them. The implicit cross border auction at D-1 cannot be introduced on cross-border as TSOs are still performing the day-ahead processes at that time. On the other hand, it is also not possible to cancel it because from an Italian market perspective, the MI1 is important to allow the possibility to adapt the schedules resulting from the day-ahead market Interruption of Continuous Trading mechanism Three (3) feedbacks (EDF, EDF Trading and EFET) expressed their wish to avoid an interruption of the continuous trading mechanism. In particular, it is desired the possibility to trade continuously all 24 hours starting from D-1. The project parties agree to set a second auction on day D in order to price the capacity resulting from the second intraday capacity calculation process. As mentioned in Chapter , during the capacity calculation process, the allocation of capacity shall not be opened for hours covered by the capacity calculation in order to ensure an efficient calculation during day D. In this way TSOs can limit the uncertainty in the forecast of the net position which is used for capacity calculation. Moreover, opening the continuous trading before the implicit auction would not allow an efficient pricing of the capacity Other remarks The feedbacks received contain also other minor remarks. In particular: Two (2) remarks (EDF and Edison Spa) related to the Italian Ancillary Service Market. However, this topic is out of the scope of this consultation. Three (3) remarks (Dufenergy Trading SA, Edison Spa and ENEL) about the shifting to the portfolio bidding approach instead of the unit based bidding approach. This topic is out of the scope of this consultation. One (1) remark (EDF) suggested evaluating other mechanisms to allocate and price the capacity like descending clock-auctions. One (1) remark (Dufenergy Trading SA) proposed to evaluate explicit continuous allocation of capacity as it is in place today on DE-FR border. One (1) remark (Swisselectric) highlighted the importance of Switzerland s integration in the European harmonisation projects. February 2017 Page 11 of 12

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