The Italian Gas Market: Challenges and Opportunities Anouk Honoré NG 76 June 2013 The contents of this paper are the author’s sole responsibility. They do not necessarily represent the views of the Oxford Institute for Energy Studies, of any of the Institute’s members, and/or of the author’s other affiliations. Copyright © 2013 Oxford Institute for Energy Studies (Registered Charity, No. 286084) This publication may be reproduced in part for educational or non-profit purposes without special permission from the copyright holder, provided acknowledgment of the source is made. No use of this publication may be made for resale or for any other commercial purpose whatsoever without prior permission in writing from the Oxford Institute for Energy Studies. ISBN 978-1-907555-75-6 ii ACKNOWLEDGEMENTS My grateful thanks go to my colleagues at the Oxford Institute for Energy Studies (OIES) for their help and advice, and in particular Howard Rogers, Jonathan Stern, Beatrice Petrovich and John Elkins for their careful reading, helpful comments and editorial corrections of the draft. A big thank-you to Alessandra Motz (Università della Svizzera Italiana) for reading the draft and giving me constructive comments and to the sponsors of the Natural Gas Research Programme (OIES) for their support and useful remarks. Last but not least, many thanks to Kate Teasdale who made all the arrangements for the production of this paper. The contents of this paper do not necessarily represent the views of the OIES, our sponsors or of the people I have thanked in these acknowledgments. All the opinions expressed and any remaining errors are my sole responsibility. Anouk Honore, May 2013 iii PREFACE The Italian gas market is the third largest in Europe with strong demand growth especially in the power generation sector up to the mid 2000s. But projections of demand growth from that era have not been realised. Clearly the impact of the financial crisis and subsequent recession has had a significant impact, exacerbated by the growth in wind and solar generation capacity. Market liberalisation in the 2000s failed to achieve levels of competition in the mid and downstream sectors to the extent seen in North West European markets. This resulted not only in some of the highest European end-user gas prices, but also delayed development of a liquid trading hub. Only in late 2012 did PSV prices align with the TTF and other North West European hubs after capacity availability issues in linking infrastructure were resolved. Anouk Honore concludes that outlook for gas demand in Italy is not optimistic. With no nuclear power to phase out, and only 2 GW of coal and oil plant potentially impacted by the Large Combustion Plant Directive, any upward trend in gas consumption will ultimately rely on future economic activity, tempered by the growth of renewable capacity. Italy’s contracted supply commitments considerably exceed current and envisaged gas consumption levels. Provided that sufficient export capacity can be secured, this could enable Italy to become a transit market supplying adjacent market zones. If import sources remain suitably diverse, the role of PSV will become more significant with spreads to TTF responding to trans-European fundamentals. Anouk Honore’s paper forms part of an OIES Gas Programme research theme focussing on the most important national gas markets in Europe (and elsewhere). The rationale behind these papers is that individual markets have specific characteristics which are essential to understand in order to look at future trends. Research which attempts to describe and project trends in “European” gas markets misses these essential complexities and is therefore of limited value. This paper follows our previous publications on the UK and Spain, and later this year we shall publish research on the German market. Howard Rogers, May 2013 iv TABLE OF CONTENTS ACKNOWLEDGEMENTS ..................................................................................................................... 3 PREFACE............................................................................................................................................ 4 TABLE OF CONTENTS......................................................................................................................... 5 LIST OF FIGURES ................................................................................................................................ 6 LIST OF TABLES ................................................................................................................................. 8 LIST OF MAPS ................................................................................................................................... 8 INTRODUCTION ................................................................................................................................ 1 CONTEXT AND PURPOSE OF THE PAPER .................................................................................................. 1 STRUCTURE OF THE PAPER ................................................................................................................... 3 I/ PROGRESS OF LIBERALISATION AND COMPETITION...................................................................... 4 1.1. THE DEVELOPMENT OF THE ITALIAN GAS INDUSTRY ....................................................................... 4 Early days: local production and demand ................................................................................... 4 1970s: The beginning of foreign supplies .................................................................................... 5 2000s: A major gas market highly dependent on imports ........................................................... 6 1.2. FIRST RESULTS OF THE LIBERALISATION PROCESS ......................................................................... 11 The structure of the Italian gas market before liberalisation..................................................... 11 Overview of the liberalisation process ...................................................................................... 12 First results: market structure and competition ........................................................................ 17 1.3. GAS COMPETITION AND PRICES ............................................................................................... 22 High gas prices compared to the rest of Europe........................................................................ 22 Limited impact of competition in the retail market ................................................................... 24 Wholesale market: slow development of gas trading ............................................................... 27 II/ SUPPLY OPTIONS AND CHALLENGES .......................................................................................... 34 2.1. DEPENDENCE LONG-TERM TAKE-OR-PAY CONTRACTS .................................................................. 34 Gas imports ............................................................................................................................. 34 Prices in long term contracts vs spot prices .............................................................................. 36 Renegotiation of long-term contracts....................................................................................... 37 2.2. FUTURE SUPPLIES ................................................................................................................. 43 Reserves and production .......................................................................................................... 43 Pipeline projects....................................................................................................................... 45 Additional LNG......................................................................................................................... 49 2.3. COMPETITION, FLEXIBILITY AND SECURITY OF SUPPLY .................................................................. 51 Access to import infrastructure ................................................................................................ 51 Development of commercial storage ........................................................................................ 57 Security of supply measures ..................................................................................................... 62 III/ FUTURE GAS DEMAND TRENDS ................................................................................................. 66 3.1. ENERGY AND ENVIRONMENTAL POLICIES ................................................................................... 66 Main objectives........................................................................................................................ 66 Support schemes for renewable energy .................................................................................... 69 The National Energy Strategy (2013) ........................................................................................ 71 3.2. CHALLENGES IN THE POWER GENERATION SECTOR ...................................................................... 74 Rapid changes in the installed capacity .................................................................................... 74 Fluctuations of the generation mix ........................................................................................... 77 v The future of gas-fired power plants .......................................................................................