The IPEX needs an IGEX in risky times Alberto Cavaliere Università di Pavia

IGEX: an Italian Market for Gas Exchanges Economic theory: welfare maximization requires competitive markets overall the economy 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 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 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

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 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 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) 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 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

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 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 Sales made even virtually with SWAPS between European Gas Exchanges Less electricity exports Less electricity exports Gas price fluctuactions HEDGED in the future mkt 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 subsidies+Cost of power produced with Heavy Fuel oil (100 milions Euros..) 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 subsidies+Cost of power produced with Heavy Fuel oil (100 milions Euros..)

The PSV is not an IGEX In Italy gas spot markets at entry points, storage and at the PSV (virtual hub) 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 PSV is an OTC market, bilateral transactions and no public prices Growing but not sufficient liquidity 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 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) Market design requires to distinguish an ISO from the Supervisor of commodity exch.(even with ownership unbundling)

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 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. 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 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 With auctions Reduced spread; More storage of fuel oil by P.P:; more interruptible contracts by gas suppliers