Italian “Energy Release” Mechanism: Opportunity or Not

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In 2001, the European Community adopted Directive No. 77 with the aim of promoting a greater contribution of renewable energy sources for electricity production in each country's internal market. The purpose of the legislation is to create a basis for the development of a Community framework in this area.

Based on this Directive, Member States have adopted measures to pursue these objectives. In Italy, the Decree of the Ministry of Economic Transition of September 16, 2022 enshrined relevant reference legislation through the "Energy Release" mechanism - a tool also developed to counter price increases triggered by the energy crisis.

What is the Energy Release?

This is the establishment of a two-way financial contract, independent of the existing supply contract, stipulated with GSE (Gestore dei Servizi); the term being three years.

This contract provides for assignment of electricity from renewable sources at a "capped" price - currently set at 210€/MWh.

Beneficiaries of this option are companies defined as "priority," i.e., industrial, energy-intensive or interruptible end customers, and SMEs.

Interested parties participate in auctions for the allocation of quantities made available by the GSE. The maximum volume requested cannot exceed 30 per cent of consumption in the last three years, or 3 percent of the Supervisor’s offer.

How Two-Way Financial Contracts Work

A Contract for Difference (CFD) refers to a contract that enables two parties to enter into an agreement to trade on financial instruments based on the price difference between the "capped" prices and closing market prices.

If the closing trade price is higher than the “capped” price, then the seller will pay the buyer the difference, and that will be the buyer’s profit. The opposite is also true. That is, if the current asset price is lower at the capped price than the value at the contract’s opening, then the seller, rather than the buyer, will benefit from the difference.

Critical Issues in Implementation

The bearish trend has been in place for a month now, with the Italian Prezzo Unico Nazionale (PUN) traveling well below €210/MWh. Recent declines are raising concerns among energy release participants: capped energy is currently more expensive than the market and risks penalizing companies that decided to participate when the price was sky-rocketing. The average Italian PUN for the month of January 2023 is 174.49€/MWh, 35.51€/MWh lower than the transfer price established by the mechanism under consideration.

At this market juncture, for the month of January, companies will therefore find themselves having to pay liquidity to GSE, and energy release, which was supposed to support productive enterprises. This may turn out to be an additional burden, if there is a need to reformulate the mechanism so as to keep unchanged the original rationale of providing aid to companies.

It should be noted that the volatility prevailing in the markets does not allow to rule out a new reversal of the trend and thus a surge in prices in the coming months.

How NUS Can Help

Uncertainty in markets is triggered by concerns about gas reserves for remainder of the winter season and developments from ongoing conflict in Ukraine. NUS will continue to monitor markets and price drivers to keep customers who participated in the energy release constantly updated, with a view to providing a comprehensive overview of opportunities and/or impacts that will arise.

More: Energy Market Commentary, Electricity, Energy Regulation, Renewable Energy

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Chiara Sedini