Key View: Over the forecast period between 2022 and 2031 the Italian power market will see non-hydropower renewables emerge as the leading net capacity sector with 15GW of additions. In contrast, thermal power will see a 4.8GW decline as the market phases out coal. We highlight that the dominance of the gas fired power segment faces deep risks as the market looks at how to rapidly diversify away from imported fuels. That said we expect the segment to retain overall dominance as the largest individual power provider with an average of 48% share of total generation over the decade.
- The Italian power market will see net growth of 10GW over the coming decade. This will be dominated by 15GW of new non-hydropower renewables capacity which we expect to come online at an accelerating rate. Despite the dominance of the gas segment in the market, comprising just under 50% over 2022, we expect to see minimal growth with 4.6GW of coal being phased out by 2026.
- Exposure to Russian gas imports will drive a sizeable shift in energy policy for major gas power markets like Italy, eroding support for new growth as the market seeks to diversify the energy mix to lessen natural gas consumption.
- In response to the evolving crisis in Ukraine, the EU and Italy in particular are looking at new policy reform and funding support to speed up diversification efforts away from gas-fired power. This will be targeted primarily at easing the deployment of renewable technologies and unlocking capacity frozen in legislative deadlock.
- This has led us to revise our outlook for the segment in which we now expect to see 15GW of new capacity come online between 2022 and 2031. Despite this recent shift we continue to see non-hydropower renewable growth stunted by deep structural challenges in the Italian power market.
Despite Italian gas power operators seeking to deploy 14GW of new capacity over the decade we expect that this will be focused at modernising the markets fleet and will not pose a large upside for generation. Hydropower growth remains static in the market leaving power storage in the form of battery technology and non-hydropower renewables as the growth driver for power sector development.
Even though the Italian renewables market will see continued growth over the long term, it will heavily underperform against government set targets for 2030 due to development issues, as outlined in our previous analysis. We forecast that the market will only reach 30GW of cumulative installed capacity by 2030, a long way off from the government’s planned 50GW.
However, investor sentiment remains positive in the market with vast amounts of capacity being proposed by developers. Italian transmission operator Terna outlined that there had been 150GW of grid connection requests over 2021, which highlights that issues with growth does not stem from a lack of developer interest but structural market issues.
The solar sector faces the biggest challenge, and pressure on the government to take steps to ensure its goals can be reached will bring about mounting upside risks to our forecasts. With elevated fuel prices hitting many Italian consumers, the development of self-generation systems and distributed storage systems have risen in popularity.
Thermal power generation will account for an annual average of 48% of total power output in Italy over our 10-year forecast period. During this time, gas-fired power generation will see its dominance increase from 88.8% of thermal generation to 96.5% by 2031 as coal is phased out. We do not expect to see wide spread growth in thermal capacity with a net decline of 4.8GW over the decade.
Over the past several years the Italian power sector has been in a condition of overcapacity, which has led to a reduction in wholesale power prices and prompted some utilities to retire a significant number of unprofitable thermal power plants. We expect retirements to continue and forecast a y-o-y decrease in thermal capacity of 1.1%.
We also expect that continued growth in non-hydropower renewables capacity will crowd out any net additions of thermal power capacity through to 2030. In this context, we believe the role of the thermal power sector in Italy will be focused on guaranteeing the reliability of the country's electricity system, by balancing intermittent power supply from wind and solar plants, and making up for seasonal fluctuations in hydropower supply.
Since mid-2020, we have factored Italy's goal of achieving a coal power phase-out by 2025 into our forecasts. As a result, within the medium term (2022-2025), we expect coal-fired power generation to decrease by an average of 38.4% y-o-y before completely shutting down.
The 2025 target was first included in the National Energy Strategy (SEN 2017) that the Italian government finalised in 2017, and was reiterated in the proposed National Energy And Climate Plan (NECP) that the Italian Ministry of Economic Development sent to the 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 includes a number of measures that the government considers necessary for the phase-out to happen in a manner that is secure and reliable for the Italian power infrastructure, which we include in the table below.
As part of the Italian Government's plans to shutdown all of the country's coal-fired power plants by 2025, Enel plans to close its coal power plans in Fusina (Venice) and La Spezia in 2023, and those in Civitavecchia and Brindisi before 2025.
These ambitious steps will need to take place or get started between 2020 and 2025, and will require substantial investment over the next few years. In particular, the NECP estimates that the total cost of the power sector investment needed to achieve the plan's objectives - which extend beyond the coal power phase-out - will be EUR129bn between 2017 and 2030. The cost is divided between investment into new power generation (EUR83bn) and investment into grid and storage infrastructure (EUR46bn).