Interview with Wolfgang Fuchs on the Italian GO market

Friday, 29 March 2019

The following interview explores auctions in the Italian GO market. There are currently two GO auctions in Italy. One is operated by the GSE, where GOs receiving support from particular schemes are auctioned by the GSE. The other is the GME Market Session, where market participants are free to buy and sell GOs with or without support schemes. All Italian GOs are EECS compatible.

Wolfgang Fuchs works as a consultant in the Renewable Energy sector in Rome, Italy, for nearly 10 years. In his role as Project and Asset Manager for RE investors in Italy, he is following the Italian GO markets closely. Wolfgang sees the mechanisms of electricity tracking mechanisms like the Guarantees of Origin as one of the pillars of the transition to a future of cleaner energy.

The latest GSE GO Auctions in Italy saw prices well above OTC prices. The median auction price of Italian Wind GOs was 77.5 Eurocents above the OTC price for EU Wind at the time of the auction, while Hydro GOs were sold for 50.5 Eurocent above generic Nordic Hydro GOs. What do you see as the main contributing factors to the higher prices in the Italian auctions?

From December 2018 prices at the GSE* GO Auctions showed a big difference to the European markets, although they regularly exceeded the Italian GME Market Session levels slightly for years.

I see the main reasons for the disparity firstly in the large volumes being offered at these auctions, which present a convenient buying opportunity for high-volume purchasers. Those might also want to avoid that buying the same amount of GOs from a number of sellers will force prices up.

Secondly, it seems likely that buying interest for certain types of GOs (e.g. GOs that qualify for CfD and FiT exemptions) from the UK has supported the higher GSE Auction prices. Historically Italian GOs made up about half of the UK’s ‘Recognised Guarantees of Origin’, in absolute terms those were 17 million Italian GOs in the fiscal year ending 31 March 2018. GOs from the GSE Auctions are playing a significant part, although not all of these GOs can be used for the UK market.

Thirdly, trading professionals have seen the big ‘traditional’ Italian energy operators active in this market.

* GSE, the ‘Gestore Servizi Energetici’, is the ‘competent body’ for Italy nominated by the AIB. The GSE is also responsible for the administration of the Feed-In-Tariff and similar support scheme registrations and payments. Depending on the type of contract with plant operators, the GOs of certain renewable energy plants go directly into the possession of the GSE.

Are there particular market players who source GOs at these auctions?

Buyers at the GSE Auctions are mainly traders or big end-costumers. The presence of ‘traditional’, big Italian energy operators have also been observed.

At the Italian GME GO Market Sessions, prices are considerably lower compared to those seen in the GSE Auctions. How large is the traded volume at the GME Market Sessions to your knowledge and why do the prices differ substantially?

During the last 12 Italian GME GO Market Sessions, a volume of 2,5 million GOs were traded for the production year 2018, a large increase in comparison to the 1,1 million GOs the year before. 

Although compared to the other Italian exchange markets, the trading volume is relatively low: the GSE Auctions reach currently more than 25 million GOs annually, the domestic Bilateral Market has a turnover of 50 million GOs a year. 

The GME Market Sessions work very differently to the GSE Auctions, which can explain the differences. At the GME Market Session:

  • No price base is set.
  • The offered volumes are not clear a priori.
  • Over the year traded volumes are about 10% of those at the GSE Auctions.
  • There are buyers and sellers.
  • On the sellers’ side are numerous smaller producers, possibly without access to other markets.
  • On the buyers’ side, you can find traders or end customers who can access alternative markets, also outside of Italy, with relative ease. 

These are strong reasons, which would make the GME Market align with the European price levels. However, together with a still relatively small number of European traders being present at the GME Sessions, the buyers are seemingly in such a strong position to sometimes ‘wait’ for prices to reach levels below the European prices, as the last session on the 21/03 has shown.

Do you know if there are different participants at the GME Market Sessions compared to the GSE Auctions?

Sellers, producers and traders alike, can only participate at the GME Market Sessions. However, currently only smaller sellers will be able to place their GOs there, larger sellers still will find the GME Market Sessions too illiquid.

Buying traders and end costumers are normally present in both markets, although large volumes will mainly be bought in the GSE Auctions or on the Bilateral Market.

Is there a preference towards the GME Market Sessions over the GSE Auctions in Italy?

From the perspective of the number of GO transactions, there is a clear preference for the GSE Auctions over the GME Market Session participation. However, to summarise what was said before, the prices are generally higher at the GSE Auctions and only the GSE can sell there.