Italy began liberalising its electricity sector in 1999, initially allowing only large customers to choose their own power supplier. The energy market was further liberalised in 2007, with the introduction of a system giving consumers the choice between picking a private supplier and continuing to get electricity under tariffs set by the state energy regulator rather than the market. A law passed in August 2017 that mandated the complete liberalisation of the retail market from July 1 2019. Under the new system, users are mandated to pick a private retail power provider, or being reverted to a last-resort supplier, which will reportedly charge higher tariffs than a private provider.
Gradual Liberalisation Process Approaching Conclusion
Italy began liberalising its electricity sector in 1999, initially allowing only large customers to choose their own power supplier. As part of this liberalisation, the Italian government began to privatise Enel, the state-owned former power monopoly that previously controlled all aspects of the electricity sector. In 2000, the Italian government forced Enel to sell 27% of its generating capacity, and - to that end - Enel created three new, independent generating companies: Elettrogen, Eurogen and Interpower. Along with removing Enel's monopoly on electricity generation, transmission and distribution, the Italian government began divesting its holdings in the company.
From July 2007, households have been able to choose their electricity suppliers. This milestone completed the opening up of the Italian power market, although users were free to stay out of the free market. Concentration has generally been high, although it has fallen following the divestment of the three companies previously controlled by Enel. While Terna is liberalised in terms of ownership, the functional unbundling of distribution system operators has not yet been fully addressed.
Under the system established in 2007, known as maggior tutela (greater protection), the Italian retail market is split into two segments: the free market and the regulated market. Over the years, the regulated market has lost share. However, due to the competitive price offered by Acquirente Unico (AU), the single wholesale buyer for the electricity supplied to the regulated market, it is still the predominant choice for households, and small-and-medium enterprises. AU is part of Gestore dei Servizi Energetici (a company controlled by Italy's Ministry of Economy and Finances), which is in charge of allocating financial incentives to renewable power generators. In February 2015, the government approved a regulation to scrap the standard price for households by 2018, though this date was later pushed to July 1 2019.
Under the law passed in August 2017, the maggior tutela system ended on July 1 2019. Following that, under the mercato libero system, consumers have to choose a retail power (and gas) supplier and pay tariffs set by the market rather than by the regulator AEEGSI. Consumers that do not choose a private supplier default to a system under which they are allocated power from a last-resort provider.
Regulation To Support Efficiency Gains
A number of norms adopted by Italy's relevant regulatory bodies in January 2016 regulate the organisation of green certificates (Certificati Verdi), the remuneration and charges of electricity distributors and the remuneration mechanisms in the day-ahead market. Moreover, also in January 2016, the Italian parliament adopted a bill that (among other provisions) includes a reorganisation of the charges for the use of the transmission system, in a way that would reportedly discourage the adoption of self-generation systems (Decreto Milleproroghe).|
In January 2017, the Italian Government announced the introduction of a new decree that revamps the White Certificates mechanism (also known as Energy Efficiency Certificates). The new regulation introduced, among other schemes, new energy-savings targets for electricity distributors for the 2017-2020 period.
National Energy And Climate Plan Supersedes The SEN2017
In November 2017, the Italian Ministry of Economic Development (MiSE) and the Ministry of Environment, Land and Sea adopted the finalised version of Italy's new National Energy Strategy to 2030 (SEN 2017). The strategy became part of Italy's drafting of the EU 2020 Climate & Energy package.
The SEN was intended to ensure Italy's energy strategy reflects contemporary commodity price dynamics and the targets set by the 2015 UN Paris Agreement and the EU's Clean Energy Package. The main goals of SEN 2017 are the following:
- Reducing Italy's energy prices and bringing them at the same level as the EU average (thus fostering Italy's economic competitiveness)
- Establishing the conditions to achieve Italy's decarbonisation targets by 2030, which go beyond the targets set by the EU's 20-20-20 strategy for energy and the environment. The new targets to 2030 focus on a 27% share of renewables in the country's total energy consumption, with renewables (including hydropower) to account for 55% of electricity consumption by 2030.
- Improving Italy's energy security in terms of flexible and secure access to energy sources and fuels
Though the strategy was formally adopted under the former prime minister's, Paolo Gentiloni, government, the regulations and legislation through which it will be concretely implemented had not been finalised by the time a new government came to power in June 2018. However, many of the elements included in the SEN 2017 were included in the country's energy strategy to 2030, which the incoming government, led by the Five-Start Movement (5SM) and the League, finalised in late 2018.
This new document is the National Energy And Climate Plan (NECP), which the MiSE sent to the European Commission (EC) on January 8 2019. The NECP represents the country's strategy to meet the Union's energy and environmental integrated targets to 2030. The NECP and its implications for Italy's planned coal-power phase out by 2025 is covered in greater details in the Forecast Scenario section of this report. Following a revision and approval from the EC, the plan was adopted in December 2019.
Timeline For Introduction Of Capacity Market Remains Unclear
The SEN 2017, adopted by the government in November 2017, indicated the introduction of a capacity market in 2018 as a priority to support flexible gas-fired power generators. This measure was identified as necessary to guarantee Italy's energy security, together with boosting power storage capacity and the role of renewables in the mix, and strengthening power grid interconnections.
AEEGSI has long recommended to the MiSE that a capacity market for power generators be introduced. This mechanism would provide a remuneration to thermal power plants able to supply power during periods of peak demand, or which would be able to step in when wind and solar power plants are not supplying electricity.
The introduction of a capacity market in Italy has already suffered from numerous push backs, with the delays resulting from the negotiation process between the Italian government and the EC over the design of the scheme. As for capacity market mechanisms planned by other member states, the EC needed to verify that the scheme would not introduce illegal state support for Italian thermal power generators.
The Italian capacity market was approved at the level of the EU in February 2018. According to the report published by the MiSE in late May 2018 in preparation to the handover to the incoming administration, the EU review process has introduced a numbers of changes to the capacity market plan originally submitted to the EU by the Italian Government in 2015. The capacity market system is expected to work through the yearly organisation of auctions for contracts, depending on the power demand forecast produced by Terna. Auctions are expected to be open to all sources that are able to qualify, including those located outside of Italy.
In September 2018, the 5SM-League government decided to withdraw Italy's support to the capacity market scheme previously agreed with the EU, in order to review its appropriateness in relation to its energy goals. The government said that it needed time to evaluate whether alternative mechanisms, such as a 'strategic reserve' like the one adopted in Germany, would be preferable to the capacity market. The governments of Italy and other European countries were scheduled to discuss the subject of capacity markets with the EC in December 2018.
Any successive modification to the capacity market design already approved would require a new approval from the EU. The government was reportedly supporting the modification of the carbon emission limits on the power plants that would take advantage of the capacity market. At the time of writing, it appears that the capacity market mechanism was re-confirmed by the EU, but it was unclear whether the government would introduce any modifications.
The proposed NECP that Italy submitted to the EC in January 2019 also projects the introduction of a capacity mechanism. In particular, the plan states that attracting investing in 3GW of new natural gas-fired power capacity, which is listed among the required steps to phase coal power generation out by 2025, will need to happen via a capacity mechanism. It also said that this and other actions will need to be carried out between 2020 and 2025.
Regulations On Incentives To Renewables
In July 2019, the Italian MiSE signed a decree for the implementation of a new auction and incentive scheme for solar renewable projects. The EC approved the EUR5.4bn (USD6.1bn) scheme in mid-June.
The decree outlined the initial auction schedule, which lists a total of seven tenders by 2021. The first tender was opened for a capacity of 500MW on September 30 2019. In 2020, three tenders were held in January, May and September, with another three auctions held over the same months in 2021 followed by an eighth in early 2022. Each of the first two tenders were to assign around 500MW of capacity, while the third, fourth and fifth tender were to allocate 700MW each. The final two tenders were be for a contracted capacity of up to 800MW each.
Only projects with a capacity of more than 1MW will be able to participate in the auction. Projects proposed to be built on agricultural land will not be allowed to participate to ensure that developers plan their facilities in unused urban and industrial areas. The signed decree also includes smaller tenders for renewable energy projects under 1MW in size, totalling 650MW for solar and wind, and 700MW is earmarked for PV projects linked to the removal of asbestos covers.
With regard to the incentive scheme, renewables installations will benefit from support received in the form of a premium on top of the market price, to be no higher than the difference between the average cost of generating the energy and its market price. The scheme also includes a clawback mechanism, whereby if the market price were to move above the average production cost for each renewable technology in the future, the selected installations would no longer receive a premium. Instead, they would have to give back the additional revenue to the Italian authorities, thus ensuring that the state support is limited to the minimum necessary. Larger projects - defined as energy production above one megawatt - will be subject to a competitive bidding process open to all types of installations, irrespective of the renewable technology used, while smaller projects will be selected based on a combination of environmental and economic criteria. The scheme, with an estimated total budget of EUR5.4bn, was applicable until 2021.
In response to the Covid-19 breakout, over 2020 the Italian government introduced 110% tax breaks for rooftop solar installations. This is driven a large growth in rooftop solar and we expect it to continue to pose an upside risks to our outlook moving forwards.