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Italy’s gas-fired electricity generation crisis likely to last years – analysts

08 May 2012 17:18:59 | edem

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The crisis in Italy's gas-fired generation sector is becoming more and more marked and is causing electricity market distortions, analysts say.

With Italian utilities suffering from low profit margins, the country's wholesale electricity prices tend to stay high, despite the ongoing oversupply of generation. Prices are supported by the high cost of gas-fired generation, which still represents the bulk of power available in the country.

In consequence, there is not only the paradox of having sustained prices despite oversupply, but also in a more pronounced rise of wholesale power prices in the off-peak than in the Baseload hours. "This is because producers need to make profits in the only time of the day when they don't suffer from the competition of renewable sources," the source said.

Crisis causes

The low profit margins in the gas-to-power sector mainly relate to comparatively very high gas prices, which are still strongly dependent on oil and long-term supply contracts.

This is combined with the increasing load of renewable generation - particularly solar and wind - which have priority over traditional power to cover the country's demand.

According to data from Italian consulting and research firm AGICI, the total renewable production available in the country to date amounts to 41GW, while peaks demand is normally around 50GW. "This means that most of the demand is met through renewables. Gas is completely out of the market," head of research for AGICI Marco Carta said.

Another analyst suggested that the current state of affairs is the result of wrong investment decisions in the past. "We all knew that demand was not going to increase and that there was a lot of renewable production to be installed in the country, so it made no sense to build all these gas-fired plants," he said.

Impact

The effects are becoming more visible. Italian utilities have mentioned the crisis of the gas-to power sector in their Q1 financial results this year as one of the reasons for the profits declining year on year (see EDEM 23 April 2012 and EDEM 27 April 2012).

Last month, the government approved a fiscal decree to drop taxes on combined heat and power (CHP), which could further pressure gas-fired plants operators (see EDEM 27 April 2012).

Italy's total gas demand for power generation in the first four months of 2012 amounted to 8.7 billion cubic metres (Gm³) compared with 9.7Gm³ in 2011 - a year-on-year decline of 10%.

In March alone, the year-on year decline was 23%, totalling 582 million cubic metres (Mm³), according to data from gas transmission system operator Snam Rete Gas.

Outlook

Carta suggested the current situation is due to stay. "On the short term, we're close to summer, when more solar power becomes available, so the priority of renewables over gas will continue. Italian-installed solar capacity alone is now over 13GW.

"On the medium and long term, Italy is likely to represent a case similar to Spain, where solar plants are continuing to be built despite the lack of incentives. We forecast that we could reach around 30GW of solar generation in Italy by 2020," Carta added.

Also, gas prices are unlikely to fall any time soon. "On the contrary, they could quite likely go up, as Brent's spikes registered late last year are likely to impact the PSV in the next few months," another Italian analyst said.

Solutions

Market participants and producers already asked for a new capacity payment mechanism in the country (see EDEM 1 November 2011), but the debate ended with no action.

The mechanism could be one solution. However, any payment brings several other issues, as it is perceived by many as a simple form of state aid to companies. "The effectiveness of the capacity payment system depends a lot on how it is put in place," Carta said.

Italian energy regulator AEEG stressed a number of regulatory interventions to put in place to correct the current market distortion, such as forcing renewables to disconnect from the grid (see EDEM 20 April 2012).

"Another way could be to explore agreements with industrial consumers to supply power in the night, rather in the day," Carta said.

Another option is that if nothing can be done effectively to support sales at gas-fired power plants, gas prices would need to fall.

"One hope could be that some Italian utilities become more powerful in relation of the renegotiation of long-term gas supply contracts. This could be the case of Edison, for instance, which will be soon officially merged to EDF, so will have much more power in a global supply renegotiation," Carta said.

However, another analyst did not believe this would happen. MM

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