Some 2,425 MW of German year-ahead electricity was requested by Italian players in an annual import swap auction to be held by grid operator Terna, matching the volume requested in 2015 and 2014, Terna said Tuesday.
The "virtual imports" auction allows a number of selected buyers -- usually companies with large loads such as cement and steel manufacturers -- to buy electricity at wholesale prices available in the Austrian, French, German, Slovenian and Swiss markets, which historically have had lower prices than those in Italy.
Italian market sources in recent days said they were expecting a strong focus on the German market, given the wider spread between electricity prices in that market and those in Italy and the respective spreads to other European markets.
The German Cal 17 baseload contract was assessed by Platts at Eur23.45/MWh Tuesday, compared with Eur38.80/MWh for its Italian counterpart.
The French Cal 17 baseload contract was assessed at Eur28.40/MWh Tuesday.
The average spread between the German and Italian Cal in 2015 was Eur16.16, while the Italian premium over the French Cal averaged only Eur8.94 in the same year.
The purchase works as a swap, in which shippers selected through auctions commit to deliver electricity to the Italian market, based on the price of the market selected by the buyers.
In exchange, buyers commit to buy the same volumes and deliver them to the shippers on the selected market.
The costs arising from the difference between Italian and prices elsewhere are covered in consumers' electricity bills.
"The interconnector should be a bullish factor for Italy because for the participants to cover their position they should buy Italian power and sell German power," a trader said.
However, he added that the auction held Wednesday was not necessarily a factor affecting the Italian curve.
"We have huge movements in the opening price, it is very volatile at the moment," he said.
Since the last time an auction for virtual imports was held in December 2014, the French year-ahead baseload contract fell by some 35%, Platts data showed. This however has not affected the preferences for virtual imports.
"It will not make a difference that France is now 'only' a couple of euros above Germany," another trader said.
The auction is held Wednesday and results will be disclosed within the day, a Terna spokesman told Platts.
FEB 1-DEC 31 CAPACITY
The capacity will be made available just for the period of February 1 to December 31, as opposed to the entire year, due to the fact that the process was delayed by a late parliament vote on the extension of the virtual interconnector.
The scheme, implemented in 2009, was set to expire on December 31 last year and a proposal to carry it through to December 31, 2021, tabled as an amendment to the 2016 budget bill, received the parliament's green light just days before its expiry.
The market was initially expecting a new tender to be organized by Terna in December, but a slow decision by the Parliament's Chamber of Deputies meant it was too late for that to take place in 2015.
The project aims to harness the benefits of importing cheaper electricity in advance of developing actual physical import capacity.
For the service, buyers have to pay Terna a fee, which depends on the chosen market and is aimed at financing the development of cross-border interconnections.
The extension of the virtual power import auctions to 2021 was proposed to allow companies building the actual electricity interconnectors to finance their work.
The new 2016 regulation also introduced an additional Eur1/MWh ($1.1/MWh) fee to access the interconnector service.
The Eur1/MWh fee will be collected in a fund "to guarantee the commitments made to the funding of each interconnector," according to the amendment approved in the 2016 budget law.
Market participants, however, expressed concerns regarding the extra costs brought by the additional fee.
