Italy: Power users pay the price for high reliance on natural gas

Rome: Italy’s power costs have climbed further above some key rival economies so far in 2024, with wholesale prices last month averaging nearly 40% above prices in France and 60% more than wholesale prices in Spain.

Such a stiff power cost premium over regional counterparts has hurt major power consumers in Italy, especially industry and large manufacturers, some of which have been forced to cut energy use and production over the past year or so to avoid racking up steep financial losses.

Italy’s relatively higher reliance on natural gas for electricity generation was a key driver behind the elevated power costs.

The share of natural gas in Italy’s electricity generation mix in 2023 was just over 45%, compared to 6% in France, 15% in Germany and 23% in Spain, data from think tank Ember shows.

Italy has the highest share of electricity generation from natural gas among major European economies

Such a high dependence on natural gas means Italy’s utilities have had little scope to dispatch other forms of power for generation, even with annual increases in renewable power production in the country.

This in turn has meant that as regional natural gas prices have soared since Russia’s invasion of Ukraine in 2022, and replacement supplies in the form of liquefied natural gas (LNG) imports and alternate pipelines have also jumped in price, Italy’s power firms have had to pass on those higher costs to consumers.

Italy cut gas-fired electricity generation to eight-year lows in 2023, but remains heavily reliant on the fossil fuel

Some large energy consumers, especially industry, have balked at paying sharply higher power bills, and instead reduced total energy use – and business output.

This in turn allowed power firms to cut electricity output from natural gas-fired power plants to the lowest since 2015 last year, and coal-fired output to the lowest in three years, while lifting the proportion of renewables in the overall generation mix.

Going forward, however, any sustained increase in total electricity generation levels will require utilities to burn more gas in power stations, exposing them to potential further hikes in power costs.

Fossil fuels have accounted for roughly 60% of total electricity generation in Italy over the past decade, with natural gas alone accounting for around 50% in recent years.

Until 2019, thermal coal had accounted for an additional 12% to 15% of electricity output, but pollution reduction efforts led to the closure of some outdated coal plants which served to push coal’s share of the electricity generation mix to a record low of 5.3% in 2023.

However, reduced coal-fired output has forced power firms to further boost their reliance on gas as the main pillar of the country’s power system, even as gas prices climbed in the wake of the Russia-Ukraine war.

Italy’s power firms have also tried to boost electricity generation from other sources, with solar generation up by 37% and wind generation up by 34% since 2018, Ember data shows.

Hydro facilities also play a key role in clean power generation in Italy, and in 2023 accounted for 15% of total electricity output.

However, hydro output levels can be volatile due to droughts, such as in 2022 when total hydro generation dropped to the lowest in over 20 years and accounted for just 10% of total electricity output.

Such unpredictable output from hydro plants, along with the intermittent generation from solar and wind farms, means that Italy’s power firms are unlikely to be able to cut their use of natural gas for baseload generation any time soon.

And that, in turn, means any further increases in regional natural gas prices may keep Italy’s power prices higher than in elsewhere in Europe.