|Italian Prime Minister Silvio Berlusconi’s ambitions to pursue nuclear power and renewables have been set back by the Fukushima Daiichi accident in Japan and an ongoing budgetary crisis|
Italy has been moving steadily along the path towards liberalizing its power sector as part of Rome’s efforts to implement EU energy policy over the past decade. However, the challenges then facing the Italian power sector still remain today, not least the problem of providing affordable and secure power supplies to its domestic customers.
As a result of government liberalization policies that led to the introduction of an electricity trading market, power prices have declined and new entrants have entered the market. This in turn has encouraged fresh investment in new productive capacity and the implementation of one of Europe’s most advanced smart grids.
Prime Minister Silvio Berlusconi’s policy of promoting national champions has turned Italy’s Enel into Europe’s second-largest listed utility by installed capacity. The market has also seen the partially privatized incumbent’s dominance of the national market reduced from 90 per cent to 30 per cent. As a result of such improvements, the number of power cuts has been drastically reduced.
Despite progress towards liberalization, there are still problems facing the power sector, including high electricity prices and insufficient competition. The cost of Italian energy remains among the highest in Europe. Consequently, it is unsurprising that at least 5 million Italians endure fuel poverty, notes the European Partnership in Energy and the Environment (EPEE).
The International Energy Agency suggests that Italy still does not have a properly functioning market to drive down prices, despite efforts to make it more liberal. Installed generating capacity has failed to keep pace with demand, which has made Italy vulnerable to power cuts and dependent on imports, according to the Economist Intelligence Unit. Nor has it been helped by past policy decisions, such as the closure of its coalfields and nuclear power plants, which has encouraged a growing dependency on imported fossil fuels for electricity generation.
|Italy power consumption, 2010 Sources: AEEG, EIU, Eurostat|
Some investors have found the Italian planning system to be unpredictable and lengthy when it comes to constructing new power plants and infrastructure. These factors, together with insufficient competition, have conspired to increase the high wholesale power price, which stood at €70/MWh ($104/MWh) in July 2010, or €16/MWh above the French average, reports regulator AEEG.
Berlusconi’s ambition to pursue nuclear and renewable power would have supported Italy’s path to more affordable, secure power supplies and energy independence. However, the declining popularity of the incumbent government, combined with a continuing budgetary crisis and fresh fears of nuclear power brought on by the disaster at the Fukushima Daiichi nuclear plant in Japan, has put a brake on these plans.
In many ways, Italy’s electricity market resembles its British counterpart. There are generating companies, a national grid, a regulator and retail companies. Three main energy companies, the partially privatized Enel and Eni, together with the long established independent Milan-based Edison, dominate today’s Italian power sector and control at least 50 per cent of total domestic generating capacity. The rest of the market consists of small generators owned by either local or foreign investors, such as Belgium’s Electrabel.
In addition, the Italian environmental group Legambiente reports that more than 800 local municipalities have established their own microgenerators to supply residents and earn extra revenue by selling surplus power to the grid. However, private power companies usually provide the plants under contract. In addition, an increasing number of homeowners are installing solar power panels to reduce their electricity bills.
Supply and demand
Italy derives its energy from domestic power plants fuelled by natural gas (50 per cent), coal (15 per cent), oil (10 per cent), with hydropower and other renewables accounting for the remainder, according to Eurostat data from 2008. That year, Italian generating capacity had increased from 85.5 GWh in 2005 to 96.6 GWh in 2009. Consumption decreased by 4.8 per cent to 322 578 GWh from 2008 to 2009 due to the recession, while consumption increased by 1.5 per cent in 2010. AEEG forecasts demand for power will reach 379 391 GWh by 2020.
|Planned and existing interconnectors Source: TERNA|
Having experienced a series of power cuts since 2003, Italy has recently invested in the construction of 5700 MW of new generating capacity, together with the return to operation of mothballed gas turbine and hydropower plants. The Italian national grid operator, Terna, has been developing the capacity of the existing domestic network and cross-border interconnectors linking Italy to France, Switzerland, Austria, Slovenia and Greece. The Alpine interconnector with France has already had its capacity improved by 60 per cent. Terna now plans to construct a direct link via subsea interconnectors with Malta, Tunisia, Croatia, Montenegro and Albania in the future, thereby turning Italy into an electricity hub for the Mediterranean and southern Europe.
Italian energy supplies come from a variety of sources, including plants operating on combustible fuels, such as imported natural gas, coal and oil, as well as domestic hydropower and other renewable sources. Domestic generation met 86 per cent of Italy’s needs in 2009 compared to 88.2 per cent in the previous year, reports AEEG.
Like many other European countries, power generation in Italy is dominated by natural gas. Its share of the market has increased from 32 per cent in 2001 to 53 per cent in 2007, while AEEG forecasts that gas use will increase 50 per cent by 2030.
Italy imports most of its gas by pipeline from Russia and the Maghreb and by ship from Equatorial Guinea, Egypt and Oman. Recent events in Libya have demonstrated Italy’s vulnerability to its gas supplies being disrupted by events. Jonathan Stern, director of gas research at the Oxford Institute of Energy Studies, expects some Maghreb and Middle Eastern countries to cease exporting gas in order to meet home needs by the end of the decade.
Unlike their counterparts in many other European countries, Italian power utilities decided to increase coal usage, not only at domestic plants, but also those in neighbouring countries serving the Italian market. This trend has provoked strong opposition from the Italian environmental movement and will make it more difficult for the country to meet its EU emission targets.
Andrea Clavarino, chairman of Assocarboni, the association of Italian coal power station operators, calculated that in the past five years Italy has seen 4000 MW converted from oil to coal, and there are plans to convert a further 4000 MW. PEi’s Global Power Review forecasts that Italy’s investment in coal will increase the proportion used for power generation from 16 per cent to 33 per cent over the next five years. Various investors are also seeking to take advantage of friendier development climates in neighbouring countries. Enel plans to build a major coal fired plant in Albania at Porto Romano, directly linked to the Italian grid via the proposed subsea merchant interconnector linking Albania with the heel of Italy.
Among efforts to improve the environmental credentials of coal, Enel has begun several carbon capture and storage demonstration projects. The first involves retrofitting a large coal fired unit at Brindisi with CO2 capture equipment and underground storage by 2012. Enel is promoting this as part of a “European flagship programme”.
The second, also at Brindisi and due for completion by 2012, involves constructing a small (35-70 MWe) zero emission coal fired power plant, based on a pressurized oxy-combustion technology already proven at pilot scale. While Clavarino suggests the prospects are definitely positive, Pippo Ranci, professor of economic policy at the Catholic University of the Sacred Heart’s institute of economy and finance in Milan, suggests commercial viability is still a distant prospect.
Even before the current European economic crisis, Italy was unlikely to meet its EU targets for renewables by 2020 from domestic sources alone and will have to rely on imports to achieve them. Growth has been delayed due to grid congestion, complex authorization procedures, high connection costs and past allegations of local corruption.
Italian domestic power capacity (MWe) Source: AEEG, Eurostat, TERNA
Italy is the fifth-largest producer of wind energy in the world according to Enel, and it has the fourth-largest installed geothermal capacity in the world (795 MW), reports the International Geothermal Association (IGA). According to the state energy services agency GSE, the Italian potential for generating solar power is among the best in Europe with total installed capacity reaching 3400 MW by the end of 2010. In 2009, Enel opened its Archimede demonstration project, a €50 million, 5 MW concentrated solar power farm, near the Sicilian town of Syracuse. However, despite the benefits, solar power is forecast to cost users ten times more per kWh than energy from a gas fired power plant. In addition, due to the past generous feed-in tariff scheme and high power prices, many local municipalities have set up their own microgenerating schemes using biomass, water, wind and solar.
Enel is currently the leading national operator in generating electricity from both hydroelectric (56 per cent) and geothermal (100 per cent) sources. International Power is the main wind power producer, with 17.1 per cent of the market, while A2A is the dominant national electricity producer from biomass, biogas and solid wastes. In addition, Italy imports renewable power from abroad, such as from Enel’s 28 MW wind farm at Corinth in Greece.
As in other European countries, Italy has imposed drastic budget cuts to what was one of the most generous revenue support schemes for renewables in Europe. Such widespread subsidy cuts have prompted the concern of EU energy commissioner Günther Oettinger regarding the impact it will have on renewables investment.
A referendum the year after the Chernobyl disaster led to Italy’s nuclear power programme being closed in 1987, which contributed to the power shortages the country experienced in 2003. The resulting economic costs prompted Berlusconi to promise in his 2008 election campaign to draw up plans to revive the nuclear programme. The first of four new plants was proposed to begin construction in 2013, with investment from EDF and Enel. Eventually, eight plants were envisaged that would in total be providing at least 25 per cent of Italian generating capacity by 2030.
|Italian domestic power capacity (MWe) Source: AEEG, from operators’ declaration|
Immediately after the announcement, doubts were raised about the prospects for this policy being realized. Investors have consistently faced difficulties in obtaining planning approval for all types of power generation from Italy’s powerful regional governments. Several regions unsuccessfully attempted to ban nuclear power plants from their territory, which indicates the level of local hostility to the technology. There were also concerns about some of the proposed sites, which are in volcanically active regions near Mounts Etna and Vesuvius. Furthermore, finance minister Giulio Tremonti has expressed doubts about the economics of nuclear power, suggesting their eventual decommissioning had not been factored into the plants’ costs.
In response to the disaster at Japan’s Fukushima plant in April, Berlusconi’s government announced a one-year freeze on its nuclear power programme. Due to growing public opposition, Italian senators have also announced proposals to abrogate earlier legislation that would have set out a process for selecting sites and constructing nuclear power stations, but these would not abolish the new nuclear regulatory agency. Therefore, plans to revive Italy’s nuclear ambitions are likely to remain frozen until a government with the will and popular support to revive them is elected.
Italian sensitivity about the perceived dangers of nuclear power has not inhibited its energy companies and customers from enjoying its benefits. Much of the electricity the power sector imports from abroad is likely to have originated from nuclear power plants. Enel already operates several nuclear power plants in conjunction with other investors in neighbouring European countries, including France, Slovenia, the Czech Republic and Bulgaria. Since 2005, Enel has been involved with EDF in building the 1650 MWe Flamanville 3 European pressurized water reactor in Normandy, France.
What seems clear is that, even if domestic nuclear ambitions are delayed by the unpopularity of the current government and concerns over Fukushima, it is unlikely to prevent Italian operators from participating in other countries’ nuclear power programmes or halt electricity imports from such projects.
Italian market needs urgent reform
The future looks expensive for Italy’s power sector customers. Due to fervent local opposition to development, an increasing proportion of investment in new generating capacity will depend on sites abroad to avoid the lengthy delays of the Italian planning system, whether that is for new gas, coal, nuclear or renewable power plants.
The regulatory and planning systems are both clearly in need of urgent reform. The regulator requires greater powers and political independence to facilitate further competition and attract the scale of investment required to reduce power imports and improve energy security. While the planning system for projects of national interest should not be subject to local vested interests, instead it should be determined by a central planning body set up for the purpose. In addition, Italy should accelerate the process of integration of its electricity market with the rest of Europe.
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