Insight - Terna spa

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Context and evolution of the electrical system

The power sector plays a central role in decarbonizing the whole energy system, thanks to the intrinsic efficiency of electricity and the technological maturity of renewables. Even though today electricity ranks third in final energy consumption coverage (around 1/5 of the total), it is the sector with the highest share of renewables already today (35%), much higher than the overall share of renewables in final energy consumption (18%). Despite these results, the road to decarbonisation is still long and the objectives to be achieved in the coming years remain extremely challenging.

In fact, the ambitious goals set out in the draft National Integrated Plan for Energy and Climate (NECP) include a complete phase-out of coal by 2025 and a RES coverage of more than half of gross electricity consumption (55.4%) by 2030. To this end, by 2030 it will be necessary to install approximately 40 GW of new RES capacity, relying almost exclusively on intermittent renewables such as wind and solar.

This transformation will have a substantial impact on the Electricity System and will lead to a series of challenges to be faced in order to carry out the energy transition process in a decisive and effective manner, maintaining the current high levels of service quality and, at the same time, avoiding excessive cost increases for society.

The on-going changes affecting the system (increase in RES, the decommissioning of thermoelectric plants, climate change) already cause - and will do so to a greater extent in the prospective scenarios - significant impacts on the grid management functions performed by the Transmission System Operator, which has to carry out the delicate and complex task of balancing electricity production and demand at all times, ensuring that consumers have access to a secure, constant and reliable supply of energy.

The effects of these challenges are amplified by the structural characteristics of the Italian power grid resulting from the geography of the country (e.g. the limited possibility for interconnection with the European continent, transmission constraints between Northern and Southern Italy and the islands), which will make management of the electricity system even more complex under the new conditions.

Terna takes the view that a full integration of renewables into the electricity system can only be achieved by implementing a set of essential, coordinated and coherent actions.The actions and interventions for the achievement of the national decarbonisation objectives can be grouped into four categories:

Investment in the National Transmission Grid and in Interconnections with foreign countries, planned by Terna taking into consideration the key drivers of decarbonisation, safety, quality, market efficiency and sustainability, as well as the need to boost network resilience.
Introduction of long-term price signals, fundamental to stimulate investment in new efficient capacity (thermal, RES and storage) in a market context that does not provide sufficient guarantees on returns on capital employed, especially considering that upfront investment costs prevail over operating costs for most technologies to be deployed in the coming decades.
Market evolution and integration, in order to develop new grid services needed for the energy transition and foster the participation of new flexibility resources in electricity markets, promoting their integration at European level.
Investment in digitalization and innovation for the management of an increasingly complex, integrated and distributed electricity system, characterized by a soaring number of active, grid-connected resources and exchanges between each other.

Moreover, Terna has also defined a set of short-term measures and solutions necessary to achieve the goal of completely phasing out coal by 2025, while ensuring system adequacy and security. In particular, it should be noted that the Italian electricity system,in addition to the deployment of 12 GW of new RES capacity, has a significant need for new efficient thermal capacity in order to replace the capacity which is expected to be decommissioned (primarily coal-fired). In fact, Terna's analysis shows that the power system requires around 55 GW of installed thermoelectric generation capacity to meet the adequacy criteria adopted at national and EU level. To guarantee this level of installed capacity in 2025, it will be necessary to deploy 5.4 GW of additional gas-fired power plants (in line with the NECP roadmap), driven by an increase in demand (1 GW), the decommissioning of the residual oil-fired power plants (1 GW) the coal phase-out (3 GW). Moreover, to guarantee adequacy and security of the power system it is also necessary to install 3 GW of new storage facilities, such as pumped hydro or electrochemical batteries.

In order to implement these measures by 2025, in line with the objective to phase-out coal, it will be essential to reduce the authorization time for grid infrastructure projects (also subject to the approval of the National Grid Development Plan) and of new generation capacity, particularly thermal and pumped hydro capacity.

Reduce the authorization time for grid infrastructure projects

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Distributed resources in the Italian ancillery services market: taking stock after 2 years

One characteristic of every power system is the need to guarantee continuously a real-time balance between electricity consumed (e.g. demand from households and businesses) and electricity supplied (e.g. by power plants).

Terna guarantees this balance using a highly technological control system, and by running a dedicated market where the “services” required to constantly ensure the continuity and security of the electricity supply are purchased. Today, the main suppliers of these flexibility services are large fossil-fuel power plants. With progressive decarbonisation of production facilities, in future, new, flexible resources will also be required (e.g. industrial production plants, residential water heaters and electric vehicles) to guarantee the adequacy and security of an increasingly heterogenous electricity system, far more complex than the current one. Two years ago, Terna launched “pilot projects” to start this process and to test functioning of the new resources. It’s time to take stock.

From traditional grid resources to a broader and far more complex market

The success of the pilot projects can be measured with the power of new resources enabled in the services market during these two years: we started from June 2017 with around 100MW of power enabled up to June 2019 at the peak of 830 MW, of which more than 83% qualified with a fixed-term contract that remunerates the availability of the risosrsa. In fact, the economic regulation of the pilot projects differs from that for the large power plants, since it also provides for the remuneration of resource availability (fixed price, €/MW). Terna procures this "possibility of use" through lower bid auctions, starting at 30,000 €/MW/year.

The decision to remunerate availability is motivated by the fact that the participants on the consumer side are mainly industrial production facilities, willing to reduce their energy costs. These parties, to provide flexibility in the services market, must incur fixed investment costs to install and set up the equipment necessary to develop the service and annual operating management costs (eg providing energy management rooms). Therefore, the mere remuneration of activated energy, which is affected by the volatility of the market price, is generally not sufficient to cover these costs. Experience to date confirms that (at least at this stage) a remuneration of availability represents an indispensable incentive for the participation of new resources in the services market.

These first results of the pilot projects are very encouraging when compared with other European countries. From the smartEn study on the use of new resources in European services markets, it emerges that Italy was the European country that made the most important progress coming to qualify as a major power of France or Finland, considered among the "best" experiences practice ".

In view of the promising results achieved, Terna's intention is to continue implementing other pilot projects with the objectives of encouraging competition and experimenting with the participation of resources in additional services (frequency / power regulation, voltage regulation), progressively trying to include consumers in the tertiary and / or domestic sectors.

In fact, Terna's strong will is to continue decisively with this experimentation because of the importance it has in the energy transition. These pilot projects allow Terna to test the performance of the new resources and at the same time allow to involve and incentivize the operators, from the electric world and not, to seek innovative solutions for the provision of services.

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