Italy Power Review

20 June 2010
Written by: Nicholas Newman

Is Italy’s Power Sector Facing a Risorgimento?

 

 

The Italian power sector faces six main issues:

  1. high electricity prices
  2. slow pace of market reform
  3. insufficient investment in capacity
  4. dependence on imports
  5. a lack of domestic nuclear power
  6. until recently a lack of a comprehensive energy policy

 

Part 1 - The Problems Facing Italy's Power Sector
Italy has the most expensive electricity prices in Europe!

 

Italian consumers today, pay amongst the highest electricity prices in Europe reports Italy’s AEEG (Anti-trust Authority for Electricity and Gas). This is due, in part, to the high usage of natural gas and weak competition in the market.

There are several reasons for this situation including the dominance of gas as a fuel supply, the slow pace in fully implementing market reforms under previous Italian governments, the lack of domestic nuclear power and insufficient local investment in generating and distribution capacity.

All these factors have led to making Italy one of the world’s largest importers of electricity. Consequently, it is not surprising that at least 5 million Italians endure fuel poverty, notes EPEE (European Partnership in Energy and the Environment). The UK Statistics Authority defines fuel poverty where at least 10% of household income is required for paying for household power bills. However, it is perhaps ironic that there are Italian consumers campaigning against measures that will not only tackle country’s power market problems, but could also lead to reduced electricity prices in the future.


Part 2 - Italy's Dash For Gas Continues
Why lack of nuclear power is proving costly for Italy

‘Dash for Gas’ Continues

 

Eurostat reports that Italy is the twelfth largest electricity consumer in the world and fourth in the EU accounting for about 2% of global annual electricity consumption. Italy’s installed generating capacity, at the end of 2007, was 93.6 GWe. Since 2001, Italy’s power sector has experienced a ‘dash for gas’ and gas dependency in the Italian power sector has grown from 32% in 2001 to 53% today. This has resulted in the country' s power supplies becoming incresingly vulnerable to severe disruption, as highlighted by the recent series of disputes between Russia and the Ukraine that interupted Siberian gas supplies to Italy on several occasions in the past decade. AEEG estimates that total gas usage for power generation is likely to increase from 33.5 G(m3) in 2007 to 49.4 G(m3) by 2030.

 

 

Italy's Electricity Generation by Fuel Source, 2007

Gas

53%

Coal

16%

Oil

12%

Hydro power

12%

Wind, solar & geothermal

7%

Source: Pennwell Global Review 2010

Since 2001, Italy’s power sector has experienced a ‘dash for gas’ and gas dependency in the Italian power sector has grown from 32% in 2001 to 53% today. AEEG estimates that total gas usage for power generation is likely to increase from 33.5 G(m3) in 2007 to 49.4 G(m3) by 2030. Italy's main sources of gas are via pipelines from Russia and Algeria. However, due to the opening in 2009 of the new Edison North Adriatic LNG gas import terminal near Venice, other world gas producers including Oman and Equatorial Guinea are starting to supply the Italian gas market with alternative sources of natural gas.

Part 3 - Italy sees its future in Nuclear power
The reasons for atomic policy U-turn

Lack of nuclear power is costing Italy dear

 

In May 2010, the operator of Italy’s national grid Terna SpA reported that electricity demand in Italy, was equal to 26 billion kWh, it had increased by 0.7% in comparison to May 2009. In addition, 86.3% of electricity demand was met from domestic sources and the 13.7% was imported with the balance of electricity exchanged with neighbouring countries.

 

For the power sector, the increasing dominance of natural gas has made it more difficult for operators to maintain affordable consumer power prices, due to the traditional linkage of gas prices with oil prices on the long-term contracts that power generator’s use to purchase their gas. As a result, this year’s gas prices have risen 5% in Italy, whilst EU wholesale prices, on short-term contracts, have sharply fallen, notes AEEG. The high oil and gas price volatility experienced in recent years have resulted in Industry Minister Claudio Scagola observing that: “Italy needs a power sector that can deliver competitive electricity prices, in sufficient quantities and under guaranteed conditions.”

 

Italy Realises it was mistake closing its nuclear power stations

 

In fact, the 1987 ban on the operation of domestic atomic power stations did not stop Italian power utilities from selling electricity derived from nuclear power. Instead, Italian utilities imported such electricity from abroad, though increasing Italian investors have become active partners in a number of operating atomic power schemes throughout Europe.

Since 2005, Italian power utilities have taken on a more proactive role. For example, power utility Enel obtained a 12.5% share (some 200 MWe) from the Flamanville 3 EPR atomic reactor (1650 MWe), currently under construction in France, and an option for the same stake in the next five such units to be built. In fact, Enel aims to be actively involved in the design, construction and operation of such plants, thereby helping to rebuild Italy's atomic skills and competence. The expected investment in the construction of Enel's share of Flamanville 3 is approximately €500 million, and the Italian power utility is also responsible for its pro quota share of operation costs.

Part 4 - The Decline and Fall of The Green Lobby?
Clearly, it appears that Italy’s environmental movement is experiencing declining public support


Greenpeace declares war!

However, anti-nuclear lobby groups such as Italy’s ‘Greenpeace’ have not welcomed such proposals. Italy’s Greenpeace’s CEO Giuseppe Onofrio, has called such a proposal: “a declaration of war.”

In fact, Italian Greenpeace has greeted such proposals as ‘a dangerous waste of time’ and as a ‘false Solution’, because the first nuclear plants will not be on-stream until the 2020s, meaning that the country will miss its EU target to reduce CO2 emissions 17% by 2020.

The decline of the environmental lobby

Clearly, it appears that Italy’s environmental movement is experiencing declining public support. In the general election results of April 2008, environmentalists saw a steep decline in parliamentary representation, while Prime Minister’s Berlusconi government won on a manifesto that included policies to build new nuclear plants and permit the ongoing investment by the power sector in coal power stations. A similar voting trend was demonstrated in this March’s 2010 regional elections, despite the spate of alleged scandals that surrounded PM. Berlusconi at the time.

Part 5 - Italy's Power Policy Options

 


Italy looks how to fill its power generation gap as it awaits for its first nuclear power stations to come on line in the 2020s

As Italy awaits its new generation of nuclear power stations, which are due to, come on line in the 2020s providing at least 25% of current demand. Berlusconi’s government is promoting other forms of electricity generation including renewables and coal to meet its EU energy policy obligations and reduce the county's dependence on imported oil, gas and electricity. However, achieving such ambitions are not without its difficulties, especially with the unknown impact that the growth in demand for electric cars will have on additional demand for power in the Italian market. Roland Berger Strategy Consultants have suggested it, up to 25% of new car purchases in the EU market by 2020, could be for electric cars.

 

Italy unlikely to reach its renewables target

As part of Berlusconi’s government ambitions to increase the country’s generating capacity, reduce its reliance on oil-fired plants, and decrease its carbon dioxide emissions the government is promoting the contribution that renewable energy can make.

Italy has a wide range of renewable energy technologies in play; these include wind, geothermal and solar. Berlusconi’s energy policies aim to promote growth in renewables as a way to reduce Italy’s reliance on oil-fired plants, and decrease its carbon dioxide emissions. According to Enel, Italy is the fifth-largest producer of wind energy in the world, and reports the International Geothermal Association (IGA), Italy has the fourth-largest installed geo-thermal capacity in the world (795 MW). Analysts estimate that Italy could have the biggest per-capita geothermal potential in the world. Currently, Italy does have one of the best solar energy potentials for generating power; its current installed capacity is 1,500 MW.


This summer Enel’s SpA opens its Archimedes’s demonstration project, it is a €50 million 5 MW concentrated solar power farm, near the Sicilian town of Syracuse. It is named after the famous ancient local scientist Archimedes, who used mirror to destroy the roman fleet. However, as a rough rule of thumb solar power despite its environmental benefits cost users ten times more per kilowatt-hour than from a gas-fired power plant, suggests Liam Moloney at the Wall Street Journal.


Nevertheless, current trends suggest that Italy is unlikely to meet the EU Renewable Energy Directive targets for Italy of 17% by 2020. Eurostat reports that in 2005 renewables accounted for 5% of total Italian energy use, now it is 7%. Growth has been hampered in this sector despite a generous subsidy regime, by delays in energy policy reforms, grid congestion issues, complex authorization procedures, high connection costs and past allegations of local corruption.


It has been reported in the March newsletter of Gestore Mercato Elettrico (the company that manages the country’s electricity market), that Italy is unlikely to meet the EU target. Instead, Luciano Barra, a senior energy department official at Italy’s Economic Development Ministry suggests: “…that Italy will have to make up the target shortfall, by importing renewable electricity from abroad, through the new inter connectors the power sector has planned with states to the North, East and South of Italy.”

Italy aims to import renewable power

 

One such possible renewable scheme that could be supplying Italy by 2050 is the proposed Desertec scheme to build a network of wind and solar farms in the Sahara. Italy’s Enel is part of the consortium behind the Desertec scheme.

The first of these planned inter connectors is likely to be in operation by 2014 and such power lines are designed to meet at least 25% of electricity demand from renewable sources by 2018. Unfortunately, this failure to meet EU renewable targets from domestic sources will do little to reduce Italy’s energy import bill, in fact, it could actually increase its dependency on foreign energy sources!

Part 6 - Italy's Switch to Coal
Why the future looks bright for Italy' coal power stations

 

Italy’s power utilities have increasingly become interested in coal as an alternative fuel source to gas. In Europe 33% of the electricity is derived from coal generation. The main suppliers of power station coal to Italy are from South Africa, Colombia and the United States. Amongst the reasons for the power sector's interest in coal is its relative low cost as a fuel as against oil or natural gas, plus its price stability.

For Italy’s power companies, concerned about a repeat of past disruption of gas supplies to the country, coal has several in built advantages for Italian power utilities. Coal is cheaper than both oil and gas. Natural gas is supplied to Italy from a few countries, coal is produced commercially in more than a hundred countries, and thus it is easy for Italy to switch suppliers when it is both politically and economically advantageous. Imported coal can be directly delivered to the majority of Italy’s 13 existing or planned coal-burning power stations, as most are located on the coast. Furthermore, unlike oil and natural gas, coal does not suffer from major polluting issues as the recent oil leak in the Gulf of Mexico.



 

The dash to coal continues

Andrea Clavarino, Chairman of Assocarboni (Italy’s coal power station operators Association) said:” …in Italy, in the last 5 years, 4,000 MW have been converted from oil to coal, and we are confident that the next 4,000 MW, that is now in the pipeline, will be a success too.” It is reported in Pennwell Global Power Review 2010 that such investment in coal power will increase the proportion of coal used for power generation from 14% to 33%. Though, this will make it harder for Italy to meet its EU emission targets. Further, if achieved According to Manfred Hafner at Italy’s think tank Fondazione Eni Enrico Mattei the following projects, presently ongoing in Italy are:

  • The first at Torrevaldaliga Nord near Rome(here 4x660 MW oil units have been dismantled and 3 x 660 WM coal fired units are being built. The first two units are finished, for the third construction is ongoing).
  • The second Enel’s Fiume Santo scheme in Sandinia: new project by E.On of 340 MW coal fired. Fully approved and will probably be built.
  • The third at Port Tolle near Venice (3x660 MW coal fired) by Enel. Most authorizations have been given, but not yet all. Therefore, this project is awaiting final approval.

In relation to other projects, like the Salina Ionica scheme in Calabria, there are still ongoing discussions with local authorities. Therefore, there much debate that such a scheme will get the go ahead.

In addition, Enel has initiated Carbon Dioxide Capture and Storage demonstration projects. Both are at Brindisi, the first, involves retrofitting one large size coal fired unit with CO2 capture equipment and is due to start CO2 underground storage by 2012. Enel is promoting this project to be part of the “European Flagship Programme”. The second, also at Brindisi, involves constructing, by 2012, a small (35-70 MWe) zero emission coal fired power plant based on a pressurized oxy-combustion technology already proved at pilot scale. Andrea Clavarino suggests about the technology: “The prospects are definitely positive. Italy boasts one of the most well-advanced projects in Europe.” Andrea continues:” Total funding estimated for the installation of the new CCS technology on a 660 MW coal unit is Euro 100 million. The capture system will be able to treat emissions corresponding to 250 MW of electricity generation,” though, Pippo Ranci suggests that achieving commercial viability is still a distant prospect.


As for the impact of the country’s atomic program on the countries newly created coal power capacity, Andrea Clavarino observes that: “The two energy sources are not competing against each other's: the coal plants and the new nuclear plants will follow their own path. Italy is trying to follow the European mix that on coal and nuclear is producing more than 60% of its
electricity needs".

Part 7 - The Green's Alone Cannot Stop Investment in Coal!

Italian Investment in new coal plant

As to be expected, Italy’s Greenpeace has demanded the closure of all coal power stations and the cancellation of any new coal plant schemes in the country. Nevertheless despite Greenpeace's opposition to such investment policies by Assocarboni members, Francesco Tedesco Italy’s Greenpeace’s energy expert has admitted that:”… in recent years, Greenpeace has not been able to stop the conversion of Enel’s conversion project at Civitavecchia near Rome.” It has also been mounting a legal campaign against the conversion of Porto Tolle near Venice. Andre Clavarino suggests that the power sector has the upper hand when he comments about the Green’s protests: “They will certainly try, as they did in the past. However, there is an element that makes us confident of a successful outcome. Today the local populations, located near coal power stations, are much better informed on the latest clean coal technologies, and they are truly supporting them.”

However, Pippo Ranci at Milan’s Università Cattolica Istituto di Economia e Finanza suggests: “The Greens alone cannot stop investment. Opposition becomes powerful when the green component finds allies in local administrators (who may have ideal reasons for opposing coal or simply an interest in raising the price of their consent) and in central government (as in the case of green environment ministers in past administrations).”


As for Italy’s planning authorities, Andrea comments: “We don’t expect to have much opposition from the regional authorities: the oil to coal conversion has been deeply discussed with the local planning regulator, and in most of the cases already approved. However, Pippo Ranci observes that existing “…planning procedures are cumbersome and make opposition easier. They are being simplified and centralized by Rome.” Though, Pippo Ranci continues: “Government is inclined to change the constitution and deprive regional governments of any power in the field of energy: this will not be easy and may prove too ambitious a strategy for being successful.”

Part 8 - What next for Italy's power sector
Italy is turning itself into an electricity hub for Southern Europe.

What next?

New electricity interconnections between Italy and the Balkans

 

As for the next decade in my view, Italy’s power sector will continue the practice of importing power. Italian investors are actively involved in several new coal power schemes proposed in the Balkans designed to supply the Italian market via undersea inter connectors.

Enel plans to build a major coal fuelled plant in Albania at Porto Romano. It will be located like its Italian compatriots on the coast, with its own dedicated coal jetty to facilitate unloading from coal ships. The planned plant is designed to use clean coal technology, designed with a capacity of 800 MW, which can be further upgraded. A 500 kV under sea power line, that will directly directly plant to electricity consumers in Italy. In addition, there will be a 400 kV overhead power line, from this plant, to the Albanian grid.

Terna SpA (Italy's national grid operator) has proposals to construct a further four cross border submarine high voltage cables under the Adriatic to Croatia, Montenegro, Albania and the Mediterranean to Tunisia. There are also plans, by private investors to construct two new inter connectors to Switzerland. At home, Terna SpA is constructing two new sub sea new links across the sea bed of Tyreanean sea in orderto improve power supplies to the Italian islands of Sardinia and Sicily.

Overall, a sense of purpose and direction about the future of Italy’s energy policies has been initiated since the Prime Minister Berlusconi latest administration came to power. This is illustrated by the momentous decision to start a program of building new nuclear power stations. In my view, until these nuclear power plants are completed Italy is likely to continue to remain one of the world’s largest importers of electricity. I would forecast that domestic investment in new coal plant will enable operators to better balance its energy mix against the vagaries of fuel price fluctuations in the energy market. However, further progress in renewables will be dependent on how quickly Rome can remove strategic planning energy issues from the remit of regional governments, and the extent and duration of the worldwide recession.


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