IEA Commends Italy’s Progress in Energy Market Reform, but Sees Danger in Reducing Energy Diversification

"Italy’s remarkable progress in electricity and natural gas market reform will help it to develop a more efficient and secure energy sector," said Claude Mandil, Executive Director of the International Energy Agency (IEA), today at the launch in Rome of Energy Policies of IEA Countries – Italy 2003 Review. He added that "the recent improvements resulting in meeting the 90-day oil stock obligation are a positive step in the country’s efforts to guarantee permanent compliance."

The Italian gas market is now fully open to competition and the electricity market is following suit. The government has reduced its stakes in ENEL and Eni, while new market institutions, such as a transmission system operator, are now operational. Italy ratified the Kyoto Protocol in June 2002 and launched a national action plan to mitigate climate change in December 2002.

"But the country faces a number of challenges: securing a reliable and less expensive electricity supply, preserving national energy policy goals under decentralisation, securing effective competition, diversifying energy sources and mitigating climate change," said Mr. Mandil. Encouraging the regional authorities to develop regional energy plans consistent with the national energy strategy is required. Confronting simultaneously those multiple challenges will require a strong attention to energy policy in the years to come.

The recent blackouts that occurred in several OECD countries have highlighted the vulnerability of national electricity supplies to national and regional infrastructure failures, and the need for adequate investments and effective coordination, particularly of system operation, to efficiently prevent and manage such disruptions. "Perhaps more general lessons could also be drawn about the need for effective coordination of other regulatory activities that affect the development of energy markets" Mr. Mandil added. Italy has the opportunity to play an active role in the debate on such coordination, which could provide a useful input for other countries facing similar challenges.

Preserving national energy policy goals in the face of devolution to the regional authorities
To secure supply and achieve greater competition, timely investments in energy production, transportation and interconnection are essential. Under the devolution of powers to local authorities, Italy suffers from a high level of local resistance to new projects such as oil and gas exploration and the construction of new electricity generating plants. This has tightened energy supplies and led to temporary electricity disconnections, even before the September blackout, such as the one experienced in June 2003. In 2002, the central government introduced specific fast track procedures to streamline the decision-making process. The recent framework law on energy (the Marzano Bill) further addresses this problem. The Report welcomes this step but notes that it is essential that the national government, together with the Regional Authorities, retain the ability to give on time, the necessary clearances for the energy investment which is needed to achieve the national energy strategy. Local communities should be fully informed of the national energy situation and its challenges, so that their decisions fully reflect national as well as local interests. This is becoming particularly important in view of the investments that could become necessary in the electricity transmission sector to reinforce the reliability of the electricity system on a national scale.

Securing competition in the gas and electricity sector
While the Italian gas market is now fully open from a legal viewpoint, the incumbent company Eni remains in a dominant position by default. New entrants face some obstacles and access to external supply is not easy for small companies. The partial saturation of the existing import pipelines creates an additional entry barrier. Only competitors with the capacity to establish their own import facilities (LNG terminals) will be able to compete on an equal basis with Eni.

Italy has continued to liberalise its electricity market. ENEL has been partially privatised. The government introduced an ambitious measure to cap the incumbent's market share to less than 50%, forcing the company to divest part of its generation. This has enabled the entry of a number of new market participants. The electricity market has been liberalised up to 70% in several phases, with full liberalisation planned for 2007. Transmission networks have been legally unbundled and a Transmission System Operator established. To facilitate competition in the wholesale electricity market, a Market Operator has been also created. Reforms have been implemented quite rapidly compared with other IEA countries. It is considered to be one of the European countries where the most rigorous conditions for network unbundling prevail. Reforms have enabled the market to develop, and the obligation for the incumbent company to divest part of its generation capacity certainly helped. Italy deserves praise for that. There is still a risk however that the incumbent could take advantage of its dominant position. ENEL retains a large portfolio of power plants able to satisfy peak requirements and is therefore able to influence prices.

The government and the regulatory authority must be vigilant in ensuring that newcomers to the gas and electricity markets compete on a fair and equal basis with the incumbents. The independence of the energy sector regulator should be confirmed.

Avoiding over-dependency on natural gas
Italy's energy mix is shifting from oil towards gas, but the country is highly dependent on external sources for these two fuels. This creates concern about security of supply and increased price volatility. There are limited options for energy diversification, partly due to the lack of a nuclear option.
The government and ENEL envisage an increased role for coal in the electricity sector. However, this could make it challenging to balance between energy security and climate change mitigation.

The government will need to keep all options open to ensure diversification of energy sources, as well as their supply sources. Although Italy is among the few European Countries that have started a market mechanism to stimulate renewable sources of energy, further increase in the use of cost-effective renewables is indispensable.

Achieving Italy’s target under the Kyoto Protocol
Meeting its climate change mitigation goal is a challenging task for Italy. Despite the target to reduce GHG emissions by 6.5% between 1990 and 2008-12, energy related CO2 emissions have been growing and were already 6.5 % above the 1990 level in 2000. While Italy’s carbon intensity, measured as CO2 emissions per unit of GDP, is relatively low, it can be attributed to high energy prices, low energy intensive industry structure and a mild climate. This advantage may be eroded by lower prices due to market liberalisation and a growing demand for energy in the transport sector.

To reduce emissions, the government is considering the possibility to transform the existing carbon tax into a tax on actual emissions. The government also approved the "Revised guidelines for national policies and measures regarding the reduction of greenhouse gas emissions" on 19 December 2002, identifying specific policies already decided and exploiting flexible mechanisms as foreseen by the Kyoto protocol. It established a Technical Committee for greenhouse gas Emissions (CTE) to monitor progress and to identify and evaluate additional measures. A number of mitigation measures, either domestic or based on the use of the Kyoto flexible mechanisms, remain to be defined, however, if Italy wants to achieve this goal. It is also a challenge to define the role of coal in the electricity sector, to strike a balance between climate change mitigation and the energy security need for more diversification. More investment in cleaner coal technologies would be necessary. The government’s projection to stabilise energy demand in the transport sector between 2005 and 2020 also seems to be over optimistic.

The Report recommends that the government should implement the action plan with least cost measures, without delay and with adequate monitoring. Every available policy tool must be mobilised to meet the Kyoto target, including the tax on CO2 emissions and external projects carried out under the flexibility mechanisms of the Kyoto Protocol.