Italy's government is seeking to appease public anger over high energy prices through announcing higher domestic hydrocarbon production and reduced subsidies for renewable energy, although these measures will have little if any effect in the near term on end-user retail rates.


Italian Energy Policy Shifting on All Fronts

The Italian government is poised to unveil a radical overhaul of national energy strategy, under which domestic production of oil and gas will double. Speaking at a conference on Friday (30 March), Industry Ministry Undersecretary Claudio De Vincenti told delegates that "relaunching national hydrocarbons output is one of the four main pillars of the new energy plan". The comments will heighten expectations within the industry that the government may be planning to amend Legislative Decree No. 128, which bans offshore drilling within 12 km of the coast. The government is also thought to be considering simplifying and liberalising upstream activities by clarifying definitions of potential exploration areas as well as increasing the term of exploration permits from six to eight years.

In addition to boosting oil and gas output, Quarto Conto Energia (the "Fourth Energy Bill") will impose swingeing cuts on subsidies to renewable energy providers, notably the solar photovoltaic (PV) sector, which has seen capacity addition rates soar over the past two years. IHS Global Insight understands that the proposed legislation would come into effect in July 2012, and impose a cap of EUR80 million (USD107 million) on incentives available to be spent on solar PV energy every six months, plus EUR10 million each for concentrated PV (CPV) installations and "integrated and innovative" PV systems (seeItaly: 27 March 2012:).

Conto Energia IV will contain two other key measures. The third pillar seeks to position Italy as a gas hub for the rest of Europe, in part through the unbundling of transmission system operator Snam Rete Gas from its parent IOC Eni (seeEuropean Gas: Italy: 13 March 2012:). Finally, the new rules will create a framework for more aggressive energy-efficiency savings, mainly through tougher standards for new buildings, smart meters and transposing EU requirements on energy labelling into law.

High Prices Driving Populist Energy Policies


Conto Energia IV comes in the context of mounting pressure on the Italian government to tackle rising energy prices, as households struggle with stagnant incomes and high living costs. Domestic consumers in Italy paid EUR0.142/KWh (USD0.19/KWh) at the beginning of 2012 (just over 10% above the EU average) while industrial users paid EUR0.117/KWh--fully 25% above the EU median. These rates are set to increase in the near future, with the energy authorities' announcement over the weekend (1 April) that household rates would jump nearly 9% in the second quarter. Furthermore, the regulator mooted the imposition of a carbon tax in the future--to compensate for the depressed EU-ETS--which would also push up retail rates.

End users are also feeling the pinch at the pump. Italian petroleum (gasoline) prices reached an average of EUR1.82 per litre, or USD9.17 per gallon at the beginning of April--the highest rate in Europe. The surge in prices partly a result of high crude rates (seeEurope: 29 February 2012:) but is mainly a function of higher taxation rates, imposed as part of the austerity measures aimed at controlling Italy's fiscal deficit. Fuel duties increased by around 24% last year, meaning that taxes now account for just over 54% of the total price of petrol in Italy, according got Bloomberg data. This is having a profound impact on Italy's automotive sector: car sales in the first two months of 2012 are down 18% year-on-year, while gasoline and diesel consumption fell 9.6% over the same period and toll road traffic declined 8%. Unsurprisingly, this is precipitating widespread discontent and protest.

Gesture Politics

Against this backdrop, the plans to double domestic oil and gas production and to slash subsidies to renewable energy may be seen as a gesture by the government to demonstrate to the public it understands the price pressures which high energy prices are creating, and that it is acting to alleviate those pressures. Yet there is relatively little the government can do to alleviate end-user energy price pain. The technocratic administration, led by former EU commissioner Mario Monti, is under intense pressure from other European governments to balance the books and prevent Italy from following Greece into a full-blown sovereign debt crisis. Consequently, it has little choice but to retain the high taxes on gasoline. Increasing supply can be presented as a solution but in practice this will have virtually no effect on end-user prices: offshore oil production stood at 11,817 b/d in January 2012--just under 10% of total oil production which itself accounted for just 6% of overall supply. Even if this were to double over night, the effect on end-user prices would be negligible.

Equally, the government has limited control over end-user power prices. While it is true that reducing subsidies to RES providers may provide some limited relief, Italy's high power prices are largely a function of the dominance of gas in the generation mix. Gas accounts for just over 40% of Italy's installed generation capacity. Since much of the gas it imports is price-indexed to crude oil prices, this means Italy's levelised cost of electricity (LCOE) is unusually high. So, whereas in the rest of Europe the major utilities are switching to coal-fired generation where possible, Italian CCGTs continue running even when wholesale gas costs are high (seeEurope: 2. February 2012:). Thus, with respect to power prices, there is little the government can do here either.

Outlook and Implications

Still, the fact that the state is unable to significantly affect end-user energy prices does not mean that its policies will not have a material impact on investment flows. If the moratorium on offshore drilling is indeed revoked then exploration and production activity will clearly increase. This has positive implications for several major firms involved in the region such as Eni and Total, but the overall effect on their bottom line would be negligible. It will be far more significant to the junior and mid-cap players such as Mediterranean Oil and Gas, which saw a central component in their business essentially frozen with the imposition of the moratorium in 2010 (seeItaly: 28 March 2012:). MOG's Ombrina Mare field--which holds an estimated 40 million barrels of oil and 6.5 bcf of gas--falls within the boundaries of the offshore moratorium, hence the company has been unable to develop the asset. Access to these reserves could significantly boost its position.

As for the cuts to the solar PV feed-in tariffs (FiTs), the move is already forcing the major utilities to look elsewhere for growth. Indeed, Enel has already announced that it intends to invest less than 40% of its renewable energy capital outlays in Europe this year and will instead focus on emerging markets such as South Africa, Turkey and Morocco, reflecting trends among Germany's utilities (seeGermany: 16 March 2012:). Yet even in the face of FiT cuts, solar PV capacity additions may well increase through 2012 as operators rush to exploit higher rates before the cull. Despite politicians' gestures, Italian households and businesses should get used to high prices for the foreseeable future.



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(Originally published April 2, 2012, in Global Insight.)