How Power Companies Profited From Italy’s Covid Lockdown

Low demand for electricity usually means lower prices, but traders turned that dynamic upside down during the pandemic. They used a technique that has cost consumers billions over the years.

By Vernon Silver, Eric Fan and Sam Dodge

November 9, 2023, 7:01 PM EST

On March 21, 2020, Italy halted all non-essential industry as it navigated the first major outbreak of Covid-19 outside of China. With demand for electricity – and its wholesale price – already slumping, it looked like a lean moment for the energy business.

But Roberto Bracco and his power-trading team at Repower AG, a Swiss electricity company, had spent more than a decade deploying a trading pattern that raked in large sums even on the slowest days.

Bracco knew his company’s gas-powered generating plant might lose money if it sold electricity into Italy’s regular power market – known as the “day-ahead” because it’s settled a day in advance. But he also knew the plant could stay out of that market entirely and perhaps do far better.

Whenever day-ahead trading fails to yield enough electricity for any particular area, Italy’s grid manager, a company called Terna SpA, must fill the gap by buying power in an ancillary market that’s almost always more expensive. In that so-called “dispatch” market, Repower’s plant at Teverola, a town known for its buffalo mozzarella, had long held strong market power: It’s one of three power plants near Naples that are together crucial for keeping the region’s lights on.

To Bracco, there was only one choice. Teverola disappeared from the day-ahead but offered electricity in the dispatch market at €490 per megawatt hour – roughly 18 times the average day-ahead price on that day. Terna accepted Teverola’s offer for 24 hours straight, and Repower brought in €1.88 million instead of the €100,840 available in day-ahead, according to a Bloomberg News analysis of Italian electricity records. What would have been a losing day in the regular market, according to Bracco, turned into a huge gain. Terna then billed Italian businesses and consumers for all of it.

For years, more than a dozen Italian power companies – including state-controlled Enel SpA, the nation’s largest – deployed the same technique to get the same sort of premiums in the dispatch market.

There’s nothing illegal about this practice – and Repower and other producers defended it, saying they had to avoid losses in the often-volatile and low-paying day-ahead market. The day-ahead “has always been the primary market for the sale of the plant’s production,” Bracco said in a statement responding to a detailed list of questions sent to Repower. “If and when the production was not sold on the energy market it was only because the margins would have been negative with insufficient revenues to cover the production costs.”

Bloomberg’s analysis shows that roughly half of the time when companies collected a dispatch premium, the day-ahead market would have been unprofitable – based on a widely accepted industry formula used to determine gas-fired power plants’ hourly generation costs. The firms told Bloomberg that the cost-of-production formula doesn’t account for other expenses they face, such as transporting gas or using fuel to warm up their plants, which aren’t always turned on. In a statement, Enel said its “total relevant costs” include “both variable and fixed management costs (for example operation, maintenance, depreciation and amortization as well as return on capital).”

Note: These totals exclude times when the wholesale price was lower than the hourly cost-of-production, as measured by a widely accepted formula. For more information, see the methodology at the bottom.

Power company responses: The firms said Bloomberg’s cost calculations underestimated their total expenses by not counting items such as fixed operating costs. Axpo declined to comment.

Source: Bloomberg analysis of Italian energy market records

Even so, it’s clear – from executives’ celebratory comments during earnings calls as well as simple mathematics – that the dispatch market’s higher prices helped companies do far better than merely avoiding losses. In 2020 alone, dispatch premiums totaled €1.2 billion – or 238% more than companies would have received at the day-ahead price.

Bracco said he expected to do well in dispatch during lockdown, but the magnitude of Repower’s 2020 profits surprised even him. “It went above estimates,” the 53-year-old, wearing a navy blue Lacoste tennis shirt and white-soled boat shoes, said in an interview at Repower’s Milan offices, one of several he gave for this story. “That year, it was striking.”

Source: Bloomberg analysis of Italian energy market records

Last year, Italian power authorities introduced an attempt at reform. Terna now pays many producers an annual fee to guarantee supply while capping dispatch prices at levels linked to production costs. The bad news? Terna spent hundreds of millions more in 2022 via this new “capacity market” than it saved.

A yearlong Bloomberg News investigation has found that as Europe suffered from sky-high energy inflation, multiple power companies found ways to generate additional revenue at consumers’ expense. In Britain, while some people were choosing between heating their homes and buying groceries, some companies made millions by engaging in what traders described as supply-gaming; another enhanced its bottom line through what a key policymaker described as subsidy-gaming. Italy’s experience – as reflected in the glimpse Repower provided into the rarely seen world of power trading – shows that such money-making maneuvers are neither new nor easy to fix.

Read more from Power Plays, a series about the ways consumers lose on energy bills

Long before Russia’s 2022 invasion of Ukraine sent energy prices soaring, Italy’s dispatch market left consumers vulnerable to what regulators have called an electricity “game” that benefits firms with strong market power. Created two decades ago, the dispatch market was intended to apply a competitive free market to the problem of providing enough electricity to fill all of Italy’s needs.

But the design was flawed. If traders can choose between one option that offers them tight margins and another that can make them huge sums, it’s a sign that the market isn’t perfectly competitive, experts said.

In some ways, Europe has failed to learn the Enron lesson. In the US, Enron Corp. infamously helped trigger rolling blackouts in California by manipulating its electricity market in 2000, which led to a series of regulatory changes. Now, in most regions of the US, prices and grid stability are hashed out simultaneously as part of the regular market, and companies with few competitors face strict limits on what they can ask for, said Lion Hirth, a professor of energy policy at the Hertie School in Berlin. But European regulators often still use two-step systems that separate the regular market from the tools that grid operators use to secure enough electricity to meet demand, such as Italy’s dispatch market.

In such side markets, power firms can charge whatever the grid operator will pay. And the grid operator will pay ever higher prices if the plant has too few competitors. “You create perverse incentives for gaming” when these markets don’t operate on a “cost-based regulated basis,” Hirth said.

Bloomberg News is examining energy markets in Europe and elsewhere.
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In interviews, more than a dozen Italian market participants, including traders, schedulers and their counterparts at grid operator Terna, described a system that provides lopsided advantages to energy suppliers. Traders are like chess players who face the same, inflexible opponent over and over. When certain conditions arise – low demand, bad weather, maintenance issues – they can easily predict what Terna will do.

“There’s someone who’s made a business out of this?”

Bracco said “there has never been any arbitrage strategy” and noted that Terna decides whether the dispatch market is needed. Dispatch is very different from the day-ahead “in terms of size and purpose, and it is natural that very different prices can arise between the two.”

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Terna said in a statement that rising gas prices hampered its efforts to save consumers money via its new capacity market. Without the new system – which also provides an incentive for companies to keep power plants online to maintain the network’s security – electricity inflation in Italy would have been even worse, Terna said. “The capacity market prevented the costs of the energy market from rising further.”

These changes have taken years to accomplish. By the time lockdown arrived, Italian regulators had been expressing concerns about power companies’ use of the dispatch market for at least a decade.

Competition authorities investigated multiple firms over alleged abuses during that time. One of the first was Repower and Roberto Bracco.

View of blocks of apartments in Naples during the twilight. The sky is a dark blue color. Some apartment windows are lighted and some aren't. — Lights shine in homes in Naples on a spring evening. *Photographer: Roberto Salomone/Bloomberg*

Energy supply in Italy flows freely in the north, where power lines connect in every direction from Turin to Milan to Venice. But the rest of the country follows narrow stretches of coast along either side of the mountains that run the length of the “boot,” with fewer generators to call upon. Naples is one of those exposed regions.

Note: Displaying fuel-burning plants with a capacity over 10MW.

Sources: BloombergNEF; Terna and Italy’s power regulator, ARERA

In May 2010, a whistleblower wrote to Italy’s competition authority alleging that the firms running Naples’ three major power plants had formed “a cartel aimed at keeping the prices offered for electricity dispatching services high.”

Starting that April, none of the three plants had been offering any energy in the day-ahead on Sundays, documents from the competition authority’s investigation show. That created a need for dispatch power — and in that market, like clockwork, the three plants would rotate who made the winning offer. One Sunday it was Sparanise, the next Napoli Levante and the one after that Teverola.

Note: Data shows Sundays and national holidays when the plants were accepted in the dispatch market.

Source: Italian Competition Authority

The whistleblower alleged that the organizer of the “cartel” was the head of trading at Repower Italia. Since 2002, that had been Roberto Bracco. Public documents don’t name any of the employees implicated in the probe, but Bracco spoke openly about it with Bloomberg. “It started with an anonymous letter,” he said. “Whoever sent it mentioned my name, and therefore it was probably someone inside Repower who sent the anonymous letter.”

He denies colluding with competitors – though he acknowledges Repower became a frequent participant in the dispatch market under his leadership. After opening the Teverola plant in 2006, Repower initially sold its electricity almost exclusively in the day-ahead during hours of peak demand, he said. But margins tightened during the Great Recession in 2008 and 2009, and on weekends, with factories closed, demand dropped low enough to set prices below Teverola’s costs. So Bracco’s team began dropping out of the day-ahead and offering only in dispatch. “We kept the plant out if the plant was going to lose money,” he said.

Around the same time, Italy’s grid first began hooking up wind and solar plants, which could undercut gas generators’ prices in the day-ahead, Bracco said. But because wind and solar couldn’t turn on and off on command, they couldn’t offer their power in dispatch. Soon Repower was “principally” earning its money from dispatch, rather than day-ahead, Bracco recalled. “It completely shifted.”

During the probe, investigators dug through emails and found references to contacts among the three companies. After one meeting, a Repower employee emailed to ask Bracco what he had learned from the competitor, according to the competition authority’s findings. Bracco jokingly replied: “If we told you, we would then have to kill you! (We’ll talk about it…).”

In June 2012, the competition authority delivered a ruling: The Naples trio had indeed operated as a cartel between April and August 2010. The authority called their Sunday trading pattern the “hat trick,” a reference to scoring three goals in a soccer match. It fined Repower €106,156, Napoli Levante’s owner Tirreno Power €116,097 and the company running Sparanise €80,389.

In a statement, Tirreno Power called the fine “a minor ‘symbolic’ penalty” and added that Italian regulators did not start “any further investigation” into the matter, “therefore recognizing that it was not necessary to modify the market rules.” Sparanise’s owner, Axpo Holding AG, declined to comment.

Bracco said there had been no cartel, and that Repower filed an ultimately fruitless appeal as an expression of its innocence. Additionally, the penalty was small compared with the damages that had been originally alleged, Bracco said. He called the fine “peanuts.”

Aerial view of a coast-side power plant. In the foreground, a small-scale dam controls the flow of water. — Federico II coal-fired power plant in Brindisi, Italy. *Photographer: Roberto Salomone/Bloomberg*

Under Italian and European Union law, when any company’s market power is especially large, regulators can investigate whether it has engaged in “abuse of dominant position,” including by charging excessive prices. The Italian Competition Authority has wielded the law against drug makers and tech companies such as Alphabet Inc.’s Google.

In 2016, the competition authority and the power regulator, known as ARERA, used it on Enel, Italy’s largest energy company.

Investigators found that Enel and its competitors had helped spike the cost of dispatch in an isolated region in the heel of Italy’s boot that relies heavily on one of its power plants. In the first six months of 2016, investigators found, dispatch charges for the area around Brindisi were about €320 million higher than in the year before.

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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.”

A woman walks in cobbled-stone street between stone buildings. It's a sunny morning but the sun is blocked by the buildings. — A woman wearing a protective mask walking along an empty street in Bergamo. *Photographer: Miguel Medina/AFP*

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.”

Note: “Before lockdown” is Jan. 1, 2018 – March 9, 2020. “During lockdown” is March 10, 2020 – June 3, 2020.

Source: Bloomberg analysis of Italian energy market records

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?”

Aerial view of the hills of Naples. The sky is getting dark and the clouds have a pink colour. — Naples at night. *Photographer: Roberto Salomone/Bloomberg*

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.

Additional design and development: Demetrios Pogkas

With assistance by: Gavin Finch, Todd Gillespie, Hayley Warren and Taimoor Sobhan

Edited by: Alex Campbell, John Voskuhl, Michael Ovaska and Jason Grotto

Methodology

Bloomberg analyzed public data from Gestore dei Mercati Energetici, an Italian state-owned company that operates the country’s power markets. The GME publishes hourly transaction records across markets where electricity is offered and bid, including a regular day-ahead market (MGP) that meets most of the country’s power demand and an ancillary market (MSD) that helps Terna, the Italian grid operator, handle congestion on the grid and ensure supply and demand are balanced.

In both markets, hourly energy blocks are traded for the day before the power is delivered. The MGP market opens on the ninth day before the day of delivery and closes at 12pm the day before delivery. The MSD market then opens the day before delivery at 12:55pm and closes at 5:00pm.

The MGP is an auction market, where power producers submit the price and quantity at which they are willing to generate electricity, and consuming units submit the price and quantity at which they are willing to buy. For each settlement hour and each zone of the grid, a clearing price is determined by the intersection of demand and supply curves. All the producers who offer a price at or below where the curves intersect, are awarded the zonal price.

In the MSD, however, Terna acts as the central counterparty and accepts offers directly from producers at the prices offered. Prices in the MSD are often multiple times higher than in the MGP when there is congestion or insufficient power on the grid, which can occur if producers oversupply or withhold power. Terna, a publicly-traded company with both governmental and private shareholders, then passes the MSD cost to consumers via a special “uplift” fee on their energy bills.

By comparing the prices and quantities electricity producers offered at each market, going back to January 2018, Bloomberg found a pattern of withholding capacity in MGP and reaping multiple-times-higher prices in MSD. To arrive at an estimate of the dispatch premium, Bloomberg included only instances when a given producer sold zero power in MGP but then, for the same settlement hour on the same delivery day, sold for higher prices in MSD. In each such instance, Bloomberg subtracted the zonal MGP price from the MSD price awarded, and then multiplied the difference by the quantity of energy awarded.

Bloomberg’s analysis did not include some other, more sophisticated forms of gaming, such as when generators buy back MGP commitments in the Intra-Day Market, which takes place between MGP and MSD, to create additional scarcity in MSD.

Although rare, in some cases generators sold power below market prices in the MSD for technical reasons. Bloomberg subtracted any potential losses in the MSD market from overall figures to arrive at a conservative estimate of dispatch premium.

To estimate a typical gas-powered generator’s marginal cost of production, Bloomberg considered the historical prices of natural gas and the cost of the European Union’s CO2 emission allowance, using Italian PSV Natural Gas Futures and EUA Futures data provided by the Intercontinental Exchange. In consultation with traders and expert researchers in the field, we arrived at the following formula that assumes production efficiency of 50% and a CO2 factor of 0.19 for natural-gas burning:

Estimated Marginal Cost of Production = ((European Carbon Emission Allowance Futures) * 0.19 + Italian PSV Natural Gas Futures) * 2

How Power Companies Profited From Italy’s Covid Lockdown

Low demand for electricity usually means lower prices, but traders turned that dynamic upside down during the pandemic. They used a technique that has cost consumers billions over the years.

Premiums Received From 2018 Through 2022

When Covid Broke Out, Dispatch Premiums Soared

Repower’s Average Dispatch Premium by Day

Methodology