[NGW Magazine] Italy Energy Strategy 2017
This article is featured in NGW Magazine Volume 2, Issue 13.
Italy puts more weight on renewables, energy supply diversification and competitive trading as it seeks to lower wholesale energy prices.
Italy’s long-awaited Energy Strategy 2017 (Strategia Energetica Nazionale 2017, or SEN), was published on June 12 for final consultation.
This was preceded by a presentation to the Italian parliament on 10 May by the minister for economic development Carlo Calenda, and for the environment, Gianluca Galletti, after it was signed off by the minister for economic development, infrastructure and transport, Corrado Passera, and former environment minister in the Monti government, Corrado Clini.
The final document is scheduled for public release by July 12 but SEN has undergone an extensive public consultation process, which began in mid-October 2016.
Similarly to the 2013 SEN, it provides a framework for future energy developments in Italy with four key goals.
• Lower energy costs and spending;
• Meeting environmental targets under the Paris Agreement and EU rules;
• Better security of supply and system flexibility;
• Development of the energy sector.
SEN 2017 covers the period to 2030 and is expected to bring Italy’s energy strategy into line with the latest climate and energy plans and objectives approved at the European and international level. The next update will be in 2020.
Lower energy costs
A key goal in SEN is lower energy costs and diversification of sources and gas supply routes. Italy produces about 40% of its electricity from gas-fired power plants. SEN recognises the pivotal role of gas, with the hope that cheaper gas will help reduce electricity and energy costs. Calenda said in March that Italy should reconsider its gas supply mix, by taking advantage of long-term contracts coming to an end, starting next year, to change the current import set-up.
Italy is the third largest gas consumer in the EU, consuming 64.5bn m³ in 2016, up 3bn m³ on 2015, with an expected growth in demand in the future as coal plants are closed. This is needed to complement and act as back-up to the variability of increasing renewable power generation.
Power demand is also forecast to increase steadily over the next ten years. In addition, the Italian gas system has a margin of safety of only 5% when compared to the maximum daily winter peak demand.
It is noted in SEN that Russian gas covers 46% of annual imports and two-thirds of winter peak demand. Diversification of sources of supply is essential to increase negotiating power with suppliers and ensure security of supplies. In addition, increasing flexibility of import sources allows Italy a greater role in the European context, through the possibility of reverse flow.
Long-term contracts with Sonatrach, which Italy considers to be risky, will end between 2018 and 2022. After that, Italy expects Algeria to reduce exports to the country as its own needs grow or because it sees more value in liquefaction for sale further abroad. But so far in 2017 Algeria has actually increased its exports significantly and has provided 34% of all of Italy’s gas imports.
Italy also has a long-term gas contract with the Netherlands which expires in 2020 – and is being disputed – and with Norway, which expires in 2026. The minister expects reductions in future gas imports from these countries as a result of declining domestic production.
Renewal of these contracts is the responsibility of the buyers such as Edison, such as Enel and Eni, who might expect changes in terms and hub-indexation. As a result, there must be sufficient diversification of supply in case they are not renewed or there is a shortfall.
Any gas import reductions could be partly replaced by gas from Azerbaijan through the TransAdriatic Pipeline (TAP), expected to be providing 8.8bn m³/yr by 2020. At a meeting in Baku in April, Calenda said that he expects TAP gas to meet 13% of Italian gas demand. Figure 1 shows Italy’s gas import/export infrastructure as it will look after 2020 with the addition of TAP.
In addition, Eni has the option to import more gas from Libya, but also LNG from Egypt as the country resumes gas exports after 2020. The giant Zohr field has been granted a quota for export once the Egyptian domestic gas demand is satisfied. Eni and Edison are also in discussions with Gazprom about the possibility of importing gas from a southern route, as an extension of Turk Stream. At a meeting with Russia’s energy minister Alexander Novak June 2, Calenda confirmed that Italy and Russia are working closely together for energy security.
He said: “We feel it is important to have South Stream which you know was somehow halted, but which should be re-launched soon.” Another option is the EastMed pipeline, but this faces major commercial challenges. Calenda is concerned that as a result of rising gas demand in Asia and Africa in the coming years, there could be a supply risk for Italy, where gas demand is forecast to increase.
He is also concerned about bottlenecks and inefficiencies in gas flows through Switzerland, which add a premium at the Italian virtual hub, PSV, in comparison with the Dutch TTF. The price differential between TTF and PSV is about €2/MWh, which is higher than just the cost of transport.
As a result, as part of SEN, Italy plans to create a ‘liquidity corridor’. This provides for the creation of a ‘regulated buyer’ of gas transportation capacity from north European markets towards Italy, allowing Italian players to access unused capacity in those routes. The minister hopes that these new measures and imports, combined with a new floating storage and regasification unit, will help increase PSV hub liquidity and bring domestic gas prices down, in line with the Dutch TTF hub.
An end to coal power generation
Coal provided 8.2% of Italy’s total primary energy (TPES) in 2015 (Figure 2) and contributed about 16% to Italy’s greenhouse gas (GHG) emissions. Fossil fuels accounted for 79.1% of TPES in 2015, with natural gas providing 36.7% and oil 34.2%. In line with the rest of the EU, by 2015 TPES declined 19.1% from its peak in 2005.
Italy’s goal is to reduce GHG emissions by 13% from 2005 levels. So far it has exceeded this, achieving 17%. However, that is only half the 2030 target proposed by the European Commission: it wants Italy to reduce GHG emissions by 33% by that year.
In order to achieve this new target, SEN calls for an end to coal power generation. In May, Calenda said that a total stop to coal power in Italy was possible by 2025-30. This is within the timetables set up by other G7 countries, except the US and Germany, to phase-out coal-fired power generation. However, this could cost between €2.3bn and €2.7bn and would require new infrastructure.
Enel, Italy’s and Europe’s biggest utility, announced in May the closure of two large coal power plants by 2018 and a plan to close all its coal and lignite generation by around 2030. Enel has already positioned itself as a clean energy champion, ahead of its competitors.
Enel’s CEO, Francesco Starace, has committed to making the company the world’s first “truly green energy giant” and to be carbon neutral by 2050.
Ending coal-fired power generation not only will satisfy SEN goals, but will also comply with the new European regulations agreed in April to limit power plant air pollutants such as nitrogen oxide, sulphur dioxide, mercury and particulate matter. These regulations are expected to be implemented by 2021.
Boosting renewables
The closure of coal plants and growth in power demand are expected to boost renewable power generation, which between 2009 and 2015 increased rapidly, by more than five times (Figure 3). Renewables now provide 17.5% of Italy’s power, exceeding its 2020 target of 17%.
In May Calenda said that the new target in SEN is to achieve 27% of energy consumption from renewable sources by 2030. This is identical to the target set by the European Commission in its November 2016 Winter Package, still awaiting ratification by member states.
Going further, the 2030 target in SEN requires 48% to 50% of electricity production to be provided through renewable sources. In line with EU regulations, Italy has already adopted an auction mechanism to award renewable subsidies.
As part of the SEN new energy strategy, the Italian government is planning to support utility-scale photovoltaic projects through long-term power purchase agreements starting in 2020.
By the end of the first quarter in 2017, Italy had over 19 GW installed PV capacity, and has been installing between 300 MW and 400 MW annually over the past three years. In 2016 solar PV installations covered 7.2% of Italy’s electricity demand.In line with the expected growth in renewables, balancing costs will be at the centre of the SEN strategy following the launch of a capacity market, possibly in 2018. This is expected to bring energy costs down.
The introduction of a capacity market is considered essential given the increasing risk to security of energy supply as a result of the retirement of flexible coal power generation capacity and the increase in power generation from intermittent renewable sources.
Calenda expects the integration of renewables, modernization of the grid and the introduction of a capacity market for electricity to lead to significant reductions in carbon emissions and energy costs, helping Italy achieve its targets.
Boosting LNG imports
SEN calls for increasing LNG imports to boost Italy’s security of energy supply and flexibility, and exploit the opportunity of low prices due to an oversupply in the global LNG market until mid-2020s. This was confirmed by Calanda at a parliamentary hearing in May when he talked about the possibility of Italy constructing a new, ‘strategic’, floating LNG terminal (FSRU) to import 4bn m³/yr.
At the same meeting the minister said that Italy intends to change the remuneration mechanism for regasification services from a tariff-based to an auction-based system before the end of 2017.
The new FSRU is also intended to increase supply diversification, storage capacity and liquidity of the PSV hub.
Three proposed LNG import terminals have already received full authorisation. One option is that one of these could be defined ‘strategic infrastructure’.
However, as in the rest of Europe, Italy’s existing LNG import terminals are under-used. In addition, pipeline imports are in general cheaper than LNG imports. This could be an incentive to renew existing long-term pipeline contracts, putting even more pressure on LNG terminals.
Other measures
SEN 2017 provides for incentives and new regulations to be introduced to reduce energy consumption, increase electric mobility, improve energy efficiency and invest in new technology and systems to accelerate the clean energy revolution. Italy has committed to doubling the value of investments in research and development in the field of clean energy. It has also assumed a co-leadership role in the development of technologies for smart grids.
SEN also calls for the evolution of networks to allow development of distributed generation and to improve resilience to extraordinary weather events. There is provision for the expansion of the electricity transmission networks from south to north Italy. More investment is required in the electrical sector to support energy transition and to strengthen international interconnections required for European integration.
In the transport sector SEN promotes the concept of sustainable and smart mobility aiming, through support of more use of electric cars, biogas and biofuels, to reduce pollution from transport.
SEN also calls for supply of LNG to Sardinia by 2021, including development of the necessary infrastructure. The island has no access to gas at present and relies on LPG. LNG would be economically and environmentally more sustainable.
Calenda has called for European countries to develop a common energy strategy and to share ways to work with challenges in the energy sector, looking beyond their individual needs. He said: “Europe needs to think of alternative scenarios from the point of view of energy, facing the new challenges from security to supply to emissions reductions… Italy is already committed to a thorough job of restructuring its national energy strategy.”
He also cited market integration and regulations oriented towards a single energy market, and said he hopes to see an energy hub in the Mediterranean for the transport of electricity and natural gas “that’s not just a pipe dream” – possibly a reference to the EastMed pipeline.
Charles Ellinas