Sunday, July 2, 2017

Italy’s energy strategy - IN CYPRUS / CYPRUS WEEKLY

July 2, 2017
Charles Ellinas

After going through an extensive public consultation process, Italy published its Energy Strategy earlier this month. It provides a framework for future energy developments in Italy with four key goals as follows:

  • Reduce energy costs and spending
  • Achieve environmental goals in line with COP21 and EU targets
  • Improve security of supply and system flexibility
  • Develop the energy sector.
It covers the period to 2030 and is expected to bring Italy’s Energy Strategy in line with the latest climate and energy plans and objectives approved at the European and international level.

Given Italy’s interest in East Med gas and its importance to the regions energy future,
I cover its new Energy Strategy in detail in this article.

Reduction of energy costs

A key goal is reduction of energy costs and diversification of sources and gas supply routes.

Economic Development Minister 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 64.5bcm gas in 2016, 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.

Long-term contracts with Algerian Sonatrach, which Italy considers to be risky, will end between 2018-2022.

After that, Italy expects Algeria to reduce exports to the country due to increasing domestic demand, but also because it may diversify gas to more lucrative LNG exports.

Italy also has long-term gas contracts with the Netherlands, which expires in 2020, and Norway, expiring 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 company responsibility, 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.

Gas imports

Any gas import reductions could be partly replaced by gas from Azerbaijan through the TAP pipeline, expected to be providing 8.8bcm by 2020.

At a meeting in Baku in April, Minister Calenda said that he expects TAP gas to meet 13% of Italian gas demand.

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. Zohr 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. Another option is the EastMed pipeline, but this faces major commercial challenges.

Minister 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.

Italy produces about 40% of its electricity from gas-fired power plants. As a result, the Energy Strategy recognizes the pivotal role of gas, with the hope that cheaper gas will help reduce electricity and energy costs.

An end to coal power generation

Coal provided only 8.2% of Italy’s total primary energy (TPES) in 2015, but 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, the target proposed by the European Commission for Italy for 2030 is more challenging, to reduce GHG emissions by 33% from 2005 levels.

In order to achieve this new target, the Energy Strategy calls for an end to coal power generation. In May, Minister Calenda said that a total stop to coal power in Italy was possible by 2025-30.

In May, Enel, Italy’s and Europe’s biggest utility, announced 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 EU competitors.

Ending coal-fired power generation not only will satisfy Energy Strategy 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 come into force 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.

Renewables now provide 17.5% of Italy’s power, exceeding its 2020 target of 17%.

In May Minister Calenda said that the new target is to achieve 27% of energy consumption from renewable sources by 2030, similar to new EU targets.

In line with the expected growth in renewables, electricity balancing costs will be at the centre of the Energy Strategy following the launch of an electricity 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 increase in power generation from intermittent renewable sources.

The Minister expects the integration of renewables, modernisation 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.

Other measures

The Energy Strategy 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.

It also 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.

The Energy Strategy also calls for the evolution of networks to allow development of distributed generation and to improve resilience to extraordinary weather events.

More investment is required in the electrical sector to support energy transition and to strengthen international interconnections required for European integration.

Minister 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 reduction…Italy is already committed to a thorough job of restructuring its national energy strategy.”

Dr Charles Ellinas, @CharlesEllinas, Nonresident Senior Fellow, Eurasian Energy Futures Initiative, Atlantic Council