Italy: The Italian implementation of Directive 96/92/CEE and the liberalisation of the internal electricity market

Last Updated: 16 July 1999

By Marco Nicolini and Antonio Cuppone - Studio Legale Tonucci - Rome

Within the European Union, Italy is one of the countries which have imposed greater constraints to the economic freedom in the area of public utilities. Consequently, also with respect to the electricity market, the Italian Legislator has provided for a public exclusivity on the relevant services and established a legal monopoly; as a matter of fact, through Law no. 1643 of 1962 (i.e. the law which nationalised the electricity companies) an exclusivity in favour of the State was introduced. Such exclusivity concerned all the electricity activities (i.e. production, import/export, transmission, distribution and sale) and was granted to a public entity (E.N.E.L.) created ad hoc by the above-mentioned Law.

Today, after around 30 years of activity, we can argue that some of the scopes for which E.N.E.L. was incorporated have been achieved: the electricity service is now generally available and such availability of electricity is guaranteed, while prices do not represent an obstacle to the balanced economic development of the nation. On the other hand, however, the results concerning the cost minimisation as well as those regarding public infrastructures planning may not be considered satisfactory.

This being the situation, the Italian Government has been gradually oriented to introduce a liberalisation of the electricity market aimed at reducing the prices and ameliorate the quality of the electricity service through the introduction of free competition.

The Italian reform is part of the broader European process of liberalisation started by EC Directive no. 96/92 (hereinafter the "Directive"). In this respect, the general principle established by the EU Institutions in such liberalisation process has been the same followed in other energy markets, such as the gas market: to create a market in which the customers, starting from the larger ones (the so-called Eligible Customers), are free to negotiate with the suppliers terms, conditions and price of electricity.

The implementation of the Directive has represented, for the Italian Government, the necessary instrument to liberalise a specific production area in which the monopoly of E.N.E.L. has substantially hindered the development of the private sector and the competition in both the internal and the international markets.

Therefore, the liberalisation provided by the Directive constitutes the trigger for the realisation of a free competition market and for a better allotment of public and private financial resources. As a matter of fact, it is expected that once the liberalisation of the Italian electricity market will produce the typical positive effects which characterise open and free competition markets, electricity consumers and businesses will benefit from such reform process.

It is nonetheless clear that each country must take into consideration its own specific characteristics, as allowed by the Directive, in order to obtain the maximum benefits from the liberalisation and avoid any possible penalization. With this in mind, the Italian Parliament, by way of Law no. 128/1998, has mandated the Government to implement the Directive, such implementation to be performed in compliance with the criteria of universality, quality and safety of the public utility, environmental protection and neutrality of the transmission network operator.

Moreover, according to Law no. 128/1998 such implementation must also provide for specific guarantees in favour of the small customers, the so-called "Bound Customers", who do not actively participate in the liberalisation as a consequence of their reduced consumption levels. In this respect, such guarantees may result in (a) the introduction of one tariff to be applied in the entire national territory and (b) the introduction of a single buyer aimed at guaranteeing the necessary productive capacity.

According to the principles contained in the Directive, the Italian implementation Legislative Decree (approved by the Italian Parliament but not published as yet - hereinafter the "Decree") provides for an organisation of the relevant market which is intended to gradually achieve the following results:

  • to create benefits deriving from the open market not only in favour of the largest companies but also for small- and medium-size businesses organised in consortia;
  • to facilitate a gradual reduction of electricity prices applied to Eligible Customers and of tariffs applied to the Bound Customers;
  • to avoid economic obstacles to E.N.E.L., which, on the contrary, should be fostered to further improve its entrepreneurial efficiency in order to actively compete both in the internal and in the international markets;
  • to guarantee a correct use of the public powers regulating the market and, consequently, to guarantee a "par condicio" to all the competitors;
  • to plan relevant financial investments aimed at renovating the electricity production facilities, thus increasing the employment levels and improving energy performances;
  • to increase the environmental quality of electricity production both through increased efficiencies and through the growth in the use of renewable sources.

The main principle contained in the Decree is that electricity is not a State-owned good anymore; as a matter of fact, production, import/export, electricity purchasing and selling are liberalised. However, the State will maintain exclusive rights on the management of long-distance transport of energy on the high-voltage interconnected network, to be performed by a specific entity which will acquire from E.N.E.L. the management (but not the property) of the long distance power lines.

The larger customers will benefit from the introduction of competition amongst the electricity suppliers operating both in the internal and in the international markets, mainly through the possibility of aiming for the best conditions available. On the other hand, however, the small and medium customers (the consumption thresholds will gradually decrease) will be bound to purchase electricity exclusively from local suppliers.

Having thus completed a general overview of the discipline to be implemented, it is worthwhile to examine the essential aspects of the Decree.

Production of electricity and E.N.E.L.’s position.

According to Article 1 of the Decree, production of electricity is fully liberalised, even though the Ministry of Industry’s authorisation will still be necessary for the construction of electric power stations, principally to ensure compliance with environmental constraints.

In order to establish free competition, the Decree provides that as from January 1, 2003 the following preliminary requirements are to be met:

  1. no operator may produce or import, directly or indirectly, more than 50% of the total amount of the electricity produced or imported in Italy; in case such thresholds (calculated on a triennial basis) are exceeded, the Decree provides for the intervention of the Italian Antitrust Authority;
  2. E.N.E.L. shall divest at least 15,000 MW of its capacity.

The E.N.E.L. divestment plan must be accomplished within 6 months from the effective date of the Decree. According to the same, E.N.E.L. will become an holding whose activities are subdivided among five to-be-incorporated subsidiaries, whose purpose shall respectively be (a) electricity production, (b) distribution and sale of electricity to Bound Clients, (c) sale to Eligible Clients, (d) management and ownership of the transmission network and (e) nuclear power stations.

The Transmission Network Operator.

Transmission and dispatch activities will still be performed exclusively by the State through a Transmission Network Operator (namely a Società per Azioni - corporation - controlled by the Ministry of Treasury). The Transmission Network Operator shall be responsible for the dispatch of electricity and will be entitled to grant to private operators the necessary authorisations for the interconnection to the electricity transmission network.

Finally, the Transmission Network Operator shall also be responsible for the development and the maintenance of the transmission network and, to this aim, it shall enter into agreements with the companies owning other transmission networks. In this respect, the tariffs to be paid for the connection to the transmission network, as well as for the use of the latter, will be determined by the Electricity and Gas Authority (i.e. the agency appointed by law to regulate and control the electricity market), which shall apply objective and non-discriminatory criteria without taking into account the specific geographical position of the electric power stations.

The Market Operator.

The Market Operator shall be established within nine months from the effective date of the Decree. It will be appointed to organise the electricity market on the basis of competition criteria and in order to minimise the costs related to the generation phase.

The Decree initially provides for a feedthrough dispatch; as a consequence, the Market Operator shall admit to the production activities all the electricity producers who have entered into bilateral agreement with the Sole Buyer (i.e. the so-called Acquirente Unico, see below) and/or with Eligible Customers.

Within January 1, 2001 at the latest, the dispatch shall be performed on an economic merit basis and, as a consequence, the Market Operator will admit electricity producers to the generation activities based upon an economic classification of the offers addressed to the same.

Finally, as from January 1, 2001, the Market Operator will become the entity responsible for the management of the energy purchase and sale offers, in order to guarantee the balance between demand and supply

Renewable sources.

Among the activities of electricity production, a specific priority is given by the Decree to renewable sources, pursuant to the principles set forth by the Legislator, to be followed by the Government.

In this respect, as to the dispatch, the Transmission Network Operator gives priority to (a) renewable sources power stations, (b) energy co-generation systems and (c) national sources of primary combustible energy.

As from 2001, both the producers and the importers of electricity shall introduce in the transmission network a quota of electricity generated from renewable sources equal to the 2% of the global production exceeding 100 GW/h. According to the Decree, the above-mentioned energy can also be purchased from other energy producers.

In practical terms, with reference to the current situation of the Italian market, new volumes of energy deriving from renewable sources, in an amount equal to 3,9 billions of KW/h (resulting from new "ecological" plants of 1,200-1,500 MW) will have to be added to the 193 billions of KW/h already produced.

The Acquirente Unico and the Bound Customers.

In compliance with the Directive, Italy has chosen to divide the electricity market into two parts, both using the same production plants. In fact, two categories of final customers (i.e. the customers buying electricity for their own use) must be distinguished:

  1. the Bound Customers;
  2. the Eligible Customers or Free Customers (see below).

The Bound Customers are supplied by the distribution network operator of the area in which they are resident. The local distribution network operators purchase from the Acquirente Unico the quantity of electricity which is necessary to fulfil their supply obligations towards the Bound Customers.

The Acquirente Unico is the entity called to guarantee the availability of a capacity proportionate, in terms of quality and quantity, to the Bound Customers’ demand of electricity, namely the demand of the small customers calculated in the short and long term. In order to fulfil the above supply obligations, the Acquirente Unico will enter into long term supply agreements with the electricity producers, based upon the Bound Customers’ estimated demand over a five-year period. The Acquirente Unico will then execute energy sale agreements with the distributors, whose terms and conditions must not be discriminatory, at the same time providing for a sole national energy purchase tariff to be applied to the Bound Customers.

The Acquirente Unico will be a company incorporated by the Transmission Network Operator, the corporate capital of which could be owned by the distributors (within the limit of 10% for each shareholder), subject to the majority remaining within the public control, i.e. owned by the Transmission Network Operator.

Eligible Customers.

Eligible Customers are free to negotiate terms and conditions of electricity supply agreements with any producer or distributor, either Italian or foreigner, and with the Acquirente Unico (in this case the term has to be limited to two years, renewable only once).

The Eligible or Free Customers are:

  1. distributors, only with respect to electricity sold to other Eligible Customers connected to their transmission network;
  2. wholesale customers (i.e., as defined in the Directive, any natural or legal person, if the member State recognises their existence, who purchase or sell electricity and who do not carry out transmission, generation or distribution functions inside or outside the system where they are established), limited to the electricity consumed by other Eligible Customers with whom electricity sale agreements are in force;
  3. other entities which are vested by other States with the powers to execute electricity purchase and supply agreements choosing the supplier or the distributor, limited to the energy consumed outside the national boundaries.

In addition to the above, any final customer exceeding a certain consumption threshold must also be considered Eligible Customer. Initially, such threshold is set at 30 millions KWh per year (in this respect, it has to be noted that the Directive provided a different limit of 40gwh), but it will be decreased to 20 millions Kwh in 2000, and further decreases are planned for 2002. Consortia of companies operating in the same municipality territory or in neighbouring municipality territories may be created in order to meet the thresholds and be considered Eligible Client.

The Electricity and Gas Authority.

Law no. 481/1995 has granted the Electricity and Gas Authority the power to:

  • issue directives aimed at regulating the free access to the transmission network to all the users on a non-discriminatory basis;
  • set forth the technical rules aimed at ensuring the correct functioning of the electricity system;
  • indicate the consideration which the producers, the importers and the ancillary services suppliers shall pay to the Transmission Network Operator or to the electricity distributors;
  • decide any dispute concerning the access to the interconnection network or regarding the import/export electricity agreements;
  • define the rules governing import activities;
  • define the criteria for the priority dispatch of renewable energy;
  • define the criteria and requirements necessary to be qualified as Eligible Customer.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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