By Gero Di Piazza
The Italian electricity market is facing one of its most exciting periods. Unprecedented change is putting strong downward pressure on margins, but players are still lining up for a piece of the action.
A new dawn has started in Italian energy reform
Over the last 18 months (ten years in the case of the UK), deregulation of electricity markets has been taking place in Europe. This has resulted in a tremendous price drop in electricity (up to 40 per cent in Germany). As the competition heats up, investor eyes focus on Italy.
It is impossible to speak about the Italian energy market without mentioning the dominant power supplier Enel. In 1999, the Bersani decree introduced supply market share caps as one of its chief credentials. This means that from next year no player can account for more than 50 per cent of imports or supply. The decree spells out that Enel must shed 15 000 MW and there are debates going on that a further 5500 MW will need to be sold off to further limit the dominance of Enel in the generation market. The fourth block, if approved, will be called Valgen.
Enel, which was 100 per cent owned by the Italian government until November 1999, produces about 70 per cent of Italy’s electricity usage. Since the EU measures on liberalization were announced, Italy’s former monopoly saw the government float 32 per cent of the company in 1999 in what was Europe’s largest initial public offering. The capital was sold for g18 billion ($15 billion) on the Milan and New York stock exchange. The government has been discussing plans to sell off the main Italian electricity grid to the operator GRTN, as this will be easier to do while the government still has a majority share.
The country’s latest developments in trying to ease along this process saw the Italian energy ministry using a delaying tactic to sweep aside a decision to sell a further 5500 MW of generation capacity. In response, an Enel spokesman stressed: “This was not an Enel decision. Enel does not have that kind of authority. The original extra sell-off decree will be reintroduced [this month].” It is still not clear whether a fourth genco sale will be introduced or if the proposed 5500 MW will be added to the third genco sell-off.
The Italian energy sector has for some time been looking forward to a power exchange project that will see changes in the way electricity is traded. Many suggestions of emulating the UK model have been rubbished by advisors blaming the complexity and unsuitability of implementation. Other discussions, which have held more credibility, is a mixture of copying the UK, Spanish and the zonal Scandinavian pool system. Zone prices could therefore be introduced in Italy, but the decision on this has not been concluded 16 months after the January 2001 deadline, which now eyes a November target.
The Italian energy advisory body, Unapace, claims that the introduction of zonal prices is not a good idea, as poorer regions would end up paying more. Giulio Cicoletti, Unapace executive, Rome, said: “There is talk about Italy introducing five, possibly six zonal prices to cover the country costs. A similar model would be to look at the Nord Pool, where you currently have Sweden, Finland, Denmark and Norway. Norway itself can be split into two or three zones as the southern region is where the majority of power is held. The pricing in each country is different due to the transmission constraints. This is how it would work in Italy.
“Pricing will be worked out by a US professor who will figure out the equilibrium between supply and demand and the physical constraints importing power to other parts of Italy.” He adds: “Unapace believes that the zonal prices is not a good system because it increases the ability of big players to play the market, especially if they have certain knowledge of the rules and system laws. For example, Enel would have this advantage since they held the entire system until three years ago.”
So far, Enel has sold two of the three gencos with a total capacity of 12 400 MW. The first 5400 MW genco was sold last year to Spain’s largest utility, Endesa for g2.63 billion. The second and biggest genco was sold earlier this year to Edison for g3.7 billion, a subsidiary of Montedison, which is co-owned by Fiat and Electricité de France (EDF) with a majority overall stake belonging to Italenergia.
Italian households can, from next year, expect cheaper energy bills
Montedison itself is undergoing a great deal of change. This month it will merge together its three main energy subsidiaries – Edison, Fiat Energia and Sondel – into a new group to be known as Edison. Edison will concentrate on power ventures, while Montedison’s other industrial holdings will be sold off.
The ownership pattern can be a little confusing to those who are not aware of the last year’s fiasco concerning foreign control laws. In a nutshell, EDF acquired a 20 per cent share of Montedison, a move which is still under investigation by the Italian regulatory authorities. EDF and Fiat then formed a consortium called Italenergia that received permission from the EU antitrust authority to take over Montedison in August 2001. Italenergia took over Montedison and 95.7 per cent in its subsidiary, Edison. In order to reduce its $11.9 billion debt, Italenergia unveiled a plan in October 2001 to sell Montedison’s seven non-energy companies and merge the group’s three companies with Italenergia to form Edison.
Once fully liberalized, Enel is sure to lose its dominant tag in Italy and Europe
Enel is targeting year-end for the final genco sell-off. Players in the running include Germany’s RWE Energie and EnBW with a possible joint venture bid, according to Cicoletti. Many industry insiders are tipping RWE to take the final 2600 MW genco called Interpower.
Although Enel has to sell a specified amount of gencos, it will not look to sell its best performing assets. Lawyers recognize that Enel will, and has already, sold assets that are in need of refurbishing. This means that the new owners of its assets will already have some burden of debt before starting out in the market. This will help to reinforce Enel’s dominant stance for many years after liberalization, but does not put off Enel’s major competitors, such as Edison.
Umberto Quadrino, executive vice president of Edison, earlier this year gave details at a Siemens conference held in Orlando. He spoke about selling off other non-power assets, such as its communication arm Infostrada to concentrate on power. The plan, he notes, is part of a bigger picture that will enable the group to make a real impact into the Italian and European power sector, which was partially demonstrated in March with the acquisiton of Eurogen.
Edison wants to achieve in an ambitious five-year plan the installation of 2 GW of wind power, build additional CCGT plants and increase its current 6 GW capacity to 14 GW by 2007, giving it a 20 per cent market share of electricity. With this in mind, the overall feeling is that the Italian electricity market is experiencing unprecedented change with strong downward pressure on margins, but the gas sector tells a different story.
Many law firms over recent years have been tied up in the power privatization process and although the feeling of optimism surrounds the power scene, the gas market does, according to one partner, not look too promising. Top global law firm, Allen & Overy, is one of Italy’s most relied-upon energy advisors. Franco Vigiliano, head of projects group in Rome, claims to have advised on 95 per cent of the energy projects that have taken place in Italy since 1992.
He said: “It is envisaged that the Italian market will open by October next year. I see things happening by the beginning of next year. So [Italy] is very optimistic. Among the reform, new power plants will be built, for which there is an extreme need. If these are not built now, we run the risk of experiencing California-like blackouts.”
This is backed with comments from the Italian Industry minister, Antonio Marzano, who earlier this year warned that Italy risked energy blackouts in three years if it does not urgently move to strengthen its electricity and gas grids. In a parliamentary meeting he was reported to have said the Italian government must urgently intervene in the energy sector process because of the long duration it takes to build up new infrastructure.
He predicted a similar scenario with the gas sector. He said: “The gas sector is experiencing a strong growth in demand while internal production is decreasing due to difficulties in gaining authorization to exploit existing sources. Without new investment, our import structures won’t be able to satisfy demand in four to five years time.” Vigiliano adds: “The transportation of gas from the Italian grid, with the transport agreements and prices is discouraging and slowing down the [gas liberalization] process.”
The two major players in the gas market are state-owned Eni and its supply subsidiary Snam. Eni is trying to build up links with Greece with a new pipeline. But the quickest way to speed up opening the gas market and consequently the whole energy market, according to Vigiliano is: “If local gas utility suppliers combine availability of gas with the opportunity of new power generation capacity. With this, there might be some scope for immediate competition, but otherwise the liberalization of gas would be a slow exercise.”
Although time consuming, the gas sector is not as slow forthcoming as Vigiliano thinks, for Rete gas, a subsidiary of Snam launched a g1.7 billion initial public offering last December, the largest in Europe at the time.
More deals are expected due to a decree set in May 2000 that will allow gas users with a consumption greater than 200 000 m3 annually to choose their supplier and by next year all consumers will have the option to follow suit. Eni’s Italian gas supply market share is currently capped at 75 per cent, which reduces by two per cent a year to 61 per cent, while its share of sales to end-users is capped at 50 per cent and the responsibility for tariff setting is placed firmly in the hands of the AAEG, Italy’s gas and electricity regulator.
Rival law firm, Norton Rose, which represented US power developer AES’ failed bid for Elettrogen, is unsure how the market will pan out. Michael Taylor, head of the company’s energy group, said: “The success of the Italian reform programme depends on the bilateral contracts. You have to ask how much of the pool will represent electricity generation. If its 20 per cent and the rest is traded bilaterally then who knows?”
Two items of reform that concern Taylor are the plans for new generation and refurbishments set out as part of the energy liberalization programme. He stated: “It has been said that 34 GW of new generation is needed in Italy, but I think that is far too much and as for its existing plants, Italy has no indigenous sources. It has no nuclear power and little gas. There are plans to update existing oil-fired plants to combined cycle gas turbines (See Table 1). Even after the sell offs, Enel would have to replace some of these assets too.”
Overall, Enel will convert 18 of its plants to CCGT by 2006. CCGT will account for 79 per cent of output in 2008. In 1999 it was zero. Over the same period, fuel oil/coal will fall to 19 per cent from 46 per cent and fuel oil/gas will fall to zero from 52 per cent.
Italy has had no experience in setting up a power exchange, so it is only natural that it is currently experiencing some teething problems on setting a date it can adhere to.
Vigiliano noted: “From a system where power producers were selling to Enel at a fixed price to switching to a fully liberalized market where the actual prices are made on the market on the day is not going to be easy, as Italian power companies do not have a history and that holds a real question mark.”