The Italian Capacity Market: An Attractive Design for Market Players?

Abstract

In many European countries, capacity remuneration mechanisms have been introduced to face the missing-money problem. In Italy, a capacity market is expected to start within the end of this year, based on sequential descending marginal price auctions, in which reliability options are exchanged between the TSO and the capacity suppliers. After discussing the potential risks of the market design, we perform an explicit simulation of the first auction: the demand curve is estimated through a stochastic simulation of the expected market scenario, based on main drivers' volatility, while some possible approaches for the estimation of the offer curve are discussed, based on the opportunity costs to participate in the capacity auctions. We conclude that the market design is characterized by strong uncertainties and only a consistent definition of economic parameters can drive a fair participation of suppliers, necessary to result in the most efficient solution for the system evolution.