How Power Companies Profited From Italy’s Covid Lockdown

First, Enel kept its four-unit Brindisi Sud plant out of the day-ahead market on weekends. Then it did the same thing on weekdays, too. Soon the region had daily power shortfalls. When Terna turned to the dispatch market, Enel was there offering the same Brindisi Sud electricity for hefty sums, investigators alleged.

Less than a year later, Enel and the regulators resolved the case with no finding of wrongdoing, under the condition that Enel limit its profitability at Brindisi Sud, forgoing more than half a billion euros in anticipated revenue. As part of the settlement, ARERA placed the plant under a special set of rules for “essential” generators, whose output is singularly vital to the system and is subject to price limits. (Italy currently designates 13 plants connected to the national grid as essential.)

“From that moment on the plant was ‘regulated,’ that is, operating according to the established rules and remunerations, with no more room for anti-competitive behavior,” Rome-based ARERA said in a statement to Bloomberg.

Still, from 2018 through 2022, Enel collected far more in dispatch premiums than any other company. In a statement, Enel, a former government-run monopoly that’s now three-quarters owned by private shareholders, said “the bidding behavior of a plant should be more properly evaluated by comparing its overall revenues with the total relevant costs.” When most power generators offer in dispatch they “have no way of being certain” that they will be accepted, Enel said.

Despite the competition authority’s investigations, most power plants – those that didn’t collude with one another and those that weren’t deemed “essential” – were still allowed to freely deploy the same technique: stay out of the day-ahead market, then offer power at higher prices in the dispatch market to fill the holes they helped create.

Terna and ARERA continued looking for ways to bring costs down. But they faced a looming danger: Traditional fuel-burning plants were being decommissioned as renewables grabbed market share, leading to what Terna called a “strong reduction” in supply over the previous decade. Long-term, this threatened to put consumers at an “unacceptable” risk of blackouts and shortages, Terna said.

That’s why Terna introduced its capacity market. In it, companies would bid for lump sum payments to guarantee that they would offer supply no matter what. In exchange, their dispatch market prices could never exceed a cap determined by the cost of production. New plants coming online would get higher payments, according to Terna, which encouraged firms to build new plants in addition to keeping old ones.

In 2019, Terna held its first capacity auction to set each bidding company’s fees, though the new setup wouldn’t go into effect until the start of 2022.

“For us, the antitrust affair was, how can I say, unpleasant, but it never changed anything.”

Repower’s Teverola plant didn’t bid. Bracco said the new market seemed better suited to larger firms with more plants. Entering 2020, his firm’s trading approach hadn’t changed, he said, regardless of the decade-old collusion case. When Teverola’s prospects in the day-ahead were poor – often on Sundays and other low-demand days – he and his traders kept the plant out, and sought a premium in dispatch.

“For us, the antitrust affair was, how can I say, unpleasant, but it never changed anything,” he said. “For 10 years, until the Covid year, it was more or less the same.”

In the first weeks of March 2020, a grim and defiant nightly ritual set in across Italy. At 6 p.m., television stations broadcast the government’s announcement of daily death counts, while city dwellers leaned out their windows and balconies to sing.

Bracco and his team worked from home, joining what was becoming a worldwide trend. Because of the slowdown, Terna had to go into the dispatch market more often, Bracco said. The profits from dispatch would become “much, much stronger.”

Repower’s Average Dispatch Premium by Day

…but during lockdown,

most days averaged

more than

€800,000.

The €1.88 million haul came on a Sunday – March 22, the first day after the industrial lockdown announcement. The ensuing Monday and Tuesday were almost as lucrative, bringing in €1.6 million and €1.3 million respectively.

The three plants in the Naples cluster were all making money in the dispatch market. ARERA noticed what was going on and warned in a report that summer that clusters of “pivotal” dispatch plants in southern Italy, including the Naples trio, had collective market power that made their service areas “vulnerable” and could turn the dispatch market into “a game repeated infinite times.”

ARERA said in a statement that its 2020 findings “immediately required Terna to take prompt action to make all the procedural changes to the market system.” To encourage Terna to make fixes, ARERA offered a financial incentive. If Terna reduced dispatch costs, it would receive a percentage of those savings as a bonus payout.

In the end, 2020 had become an unexpected boon for Italian power firms. In filings and calls with investors, several pointed to dispatch income as a key reason why.

In its annual report, Tirreno Power, the owner of Napoli Levante, said it saved the company’s year: “In the face of a drastic general decrease in production, the healthy results achieved are mainly attributable to the higher volumes of sales made on the Dispatching Services Market.”

Tirreno Power said in a statement that Bloomberg’s reporting doesn’t take “account of what actually happened on the market at the time, thus driving to fundamentally flawed conclusions.” With the pandemic’s low demand being largely satisfied by renewable electricity sources, gas-fired generators were mainly needed in dispatch. “This was an unprecedented and exceptional condition,” Tirreno Power said.

Repower beat its profit expectations, too. In a first-half 2020 earnings report, the firm pointed to how Teverola provided “balancing energy on a targeted basis, once again making a substantial contribution to the good corporate results.”

Yet for Italians who lost their livelihoods, the arrangement meant their power bills didn’t drop noticeably, even if they’d kept the lights off for months in their shuttered shops. “We have all lived in a situation of crisis and enormous difficulty,” said Alessandra Durando, who manages the finances for her husband’s vintage furnishings boutique, Alain, near Rome’s Campo de’ Fiori market. “There’s someone who’s made a business out of this?”

The Teverola plant sits far off a four-lane industrial road, behind a warehouse. On a recent weekday, Francesco Gentile, the plant’s operation and maintenance manager, donned an orange hard hat to walk the grounds, which are no larger than a couple football fields.

Gas flows into the plant through a pipe that enters a hangar-like building. Inside, two turbines sit side by side making electricity. Up a set of metal stairs, a practically windowless space with an array of 14 computers, security camera monitors and light blue walls serves as the control room. One screen displays the production schedule, while another shows the plant’s output in real time.

In January 2022, after Terna launched its new capacity market, output for the dispatch market immediately crashed. “In reality, the dispatch market is practically dead,” Gentile said.

On most days in the past year, the power Teverola pumps out has been purchased in the regular day-ahead market. With the dispatch market withered, “the contribution to earnings made by Teverola was way below expectations and the results of previous years,” Repower said when announcing its 2022 results. Repower’s Italian business broke even during the first half of 2023.

ARERA said in a statement that its capacity incentives “drastically reduced” the problem of high dispatch costs, “solving problems that arose and overcoming critical issues that had arisen in previous years.”

But in 2022, the new system didn’t save consumers money.

The dispatch-related expenses that Terna charged to consumers fell by €508 million to €1.92 billion in 2022. But the new capacity market expenses went from zero to €1.2 billion. That means that in its first year of operation, the new system resulted in a net higher expense of €692 million, which Terna passed on to Italians’ power bills.

Terna noted that the new price caps are tied to the cost of gas, which increased significantly in 2022 and drove electricity prices far higher across Europe. This cut into how much money could be saved on the dispatch market, Terna said, adding that improvements to its grid and trading strategies also helped cut dispatch costs.

In future years, the savings may yet be greater. But the capacity market is not a substitute for a deeper overhaul of the Italian energy market, said Ettore Bompard, a professor of power systems at the Politecnico di Torino. “It should be temporary, the short and middle term,” Bompard said. “In the long term you need something else,” including grid upgrades that allow wind power to be stored so it can support the network during times of stress the way gas-fired plants do.

In any case, Terna has been rewarded for its efforts. Expenses fell enough for it to receive €334.7 million in bonuses last year under ARERA’s incentives for trimming dispatch-related costs. They buoyed Terna’s bottom line 13.5% to €834.1 million.

Not all that profit went back into improving Italy’s electricity system. The grid operator also boosted its dividend for shareholders by 8% to €632 million. Though the government appoints Terna’s CEO, the Italian state only owns 18% of the firm, through an indirect holding. Other investors own the remaining shares, putting them in line for the rest of the annual payout. About 10% indirectly belongs to the Chinese government.

To collect its bonus, Terna charged Italian businesses and residents on their monthly bills, just as it did for dispatch costs during lockdown.