Azeri gas key to lower Italian gas, power prices, new strategy says

The Italian national energy strategy will focus on bringing domestic PSV gas prices in line with the Dutch TTF hub and redefining import profiles, the minister of economic development has said in a joint parliamentary audit with the environment ministry.

Speaking to parliament this week, minister Carlo Calenda said Italy should reconsider its gas supply mix, as the end of long-term contracts in the next year will necessarily change the current import set-up.

According to a document released by the ministry, long-term contracts with Algerian producer Sonatrach will end between 2018-22. After that, the government expects Algeria to reduce exports to Italy on the back of rising internal domestic demand, stable production and more profitable LNG markets. Algeria is currently Italy’s second source of gas, accounting for 34% of all imports in 2017 so far.

Long term contracts will also expire with the Netherlands in 2020 and Norway in 2026. The ministry expects a reduction in imports from both countries in line with declining domestic production.

The expected decrease in imports from Algeria and north Europe will be compensated by new sources of supply. The most important new source will be Azerbaijan through the TAP pipeline by 2020.

Italy currently imports gas from north Europe, Algeria, Libya and Russia, which accounted for 43% of the 2017 total to date. Italy also has three LNG terminals.

According to the ministry, imports from Azerbaijan will allow Italian gas prices to align to the TTF. This will also be an effect of the better use of flexible resources such as stored gas and LNG and the reduction of transmission costs for gas imported through Switzerland, which currently makes up about 50% of the spread to the TTF, Calenda said.

Power developments

The opening of a new import route for gas will also be key for reducing Italy’s typical wholesale electricity price premium to its northern neighbours, Calenda said.

Italy produces around 40% of its electricity from gas-fired plants, compared with 12% in Germany and just 4% in France. Cheaper gas through the new Azeri import route will therefore reduce the cost of the energy mix more than in other countries.

The second direction in which the government will move to reduce the Italian premium could be by adopting more aggressive mechanisms for pricing carbon emissions.

“If the EU emissions trading system mechanism doesn’t work, I believe we should have more aggressive carbon-pricing strategies even at national level,” Calenda said, adding this would be in line with a more competitive gas market.

Other priorities for the government should be reducing overall system costs. According to the minister, this can also be achieved through the launch of the capacity market. The capacity market, expected to start this year, will allow system operator Terna to call programmable plants into operation when day-ahead, intra-day and balancing prices move above a set price threshold reflecting the cost of an open-cycle gas turbine plant ( see ICIS briefing on Italy’s capacity market ).

Balancing costs will be at the centre of the new energy strategy, in line with the expected growth of renewables in the system.

The scheme for future renewable subsidy decrees will also have to change, the minister specified, pointing to new EU regulation requiring subsidies to be awarded through technology-neutral auctions. Italy adopted an auction mechanism for subsidies in 2012, renewing it in 2016, but establishing quotas by technology (see EDEM 30 August 2016).

The government intends to publically consult on the energy strategy paper in April. alice.casagni@icis.com and riccardo.patrian@icis.com