Italy's Energy Decree Threatens EU Power Market

Written by Martin Lynch, European News Editor for IIR News Intelligence (Sugar Land, Texas)

Summary

Italy's proposed Energy Decree aims to cut its high energy costs for households and businesses by compensating gas-fired power producers for their carbon emissions costs but runs the risk of distorting European wholesale electricity prices and reducing investment in renewable energy projects.

Controversial State Aid

Italy's government has approved its 3 billion-euro (US$3.5 billion) Energy Decree that will attempt to lower power prices for homes and businesses by compensating gas-fired power companies for their carbon emissions costs. 

The controversial decree will subsidize natural gas by covering its emissions costs charged under the European Union's (EU's) Emissions Trading System, as well as reimburse the transportation costs of the gas used for electricity generation. The government claimed that the decree will offer "real savings for competitiveness and growth." However, by subsidizing its gas-fired power sector, Italy runs the risk of distorting electricity prices in other European countries that share electricity grid interconnections and trade power with it. It will face stiff opposition from the European Commission (EC). It may also encourage greater fossil-fuel use while hurting its renewable energy targets, which already lag behind other major European nations. 

Minister of the Environment and Energy Security Gilberto Pichetto, stated: "With this measure, worth over three billion euros, we are addressing an absolute priority: ensuring lower energy prices for families and businesses, resulting in real savings. The government has once again chosen a practical approach, for the competitiveness of the country's economy and for economic growth."

Industry Reaction

A report from ICIS found that the ETS-reimbursement measure would "distort the market, resulting in higher gas-fired generation in Italy, lower net imports from neighboring countries, and lower prices in almost all European countries--not just those that are directly connected with Italy." It also doubts that the EC will approve it, concluding that measure is "likely to have a difficult time passing EU State aid rules given the lack of precedent, the distorting market impact and the absence of a specified temporary timeline." 

Piero Vigano, partner and coordinator of the energy and infrastructure department, and Francesco Mazzocchi, counsel in competition and European Union law at law firm ADVANT Nctm, told ICIS: "The advantage being introduced is limited to a specific category of energy producers, is structural (rather than exceptional), and is essentially aimed at sterilizing ETS costs, in contradiction with the mechanisms set out in the ETS Directive, which excludes the electricity sector from the free allocation of ETS allowances." 

Italian climate and energy think tank ECCO said the decree will isolate Italy and sets the country on a collision course with the EU. "Rather than addressing Italy's specific critical situation, where its high dependence on natural gas drives higher energy prices, attention is shifting to Europe's carbon price," it stated. "The debate with the European Commission promises to be anything but straightforward, not only regarding the ETS Directive, but also regarding the rules of the European single market. Although several member states are preparing proposals to control energy prices, Italy appears isolated in supporting action to neutralize the ETS in the electricity sector, which has largely contributed to decarbonization and the phase-out of fossil fuels in Europe."

Italy's High Energy Costs

The government has been under increasing pressure to cut energy costs, which are the fourth highest in Europe. Italy relies on gas-fired power for 44% of its power and is heavily reliant on gas imports. With the setting of Italian power prices tied to volatile gas prices in Europe over recent years, the country's energy costs have been very high. The decree is attempting to decouple the price of electricity from gas by covering the emissions costs and transportation costs with which gas-fired power suppliers contend. 

Emissions Showdown

The EU Emissions Trading System (ETS) requires energy-intensive industries with high greenhouse gas (GHG) emissions to buy carbon permits to offset pollution. It is the cornerstone of the EU's drive to bring overall emissions down while generating revenues to finance the transition to renewable energy. It covers around 40% of the bloc's total emissions from electricity and heat generation, industrial manufacturing and aviation sectors. The EC is currently working on ETS2, which will extend its carbon trading system to the transport, construction and small industry sectors, creating a new European carbon market. It has been met with resistance and the EC was forced to push back its implementation to 2028. 

Italy's Anti-ETS Stance

Italy's Prime Minister Georgi Meloni said recently that the ETS is a "de facto tax imposed by Europe." At a recent meeting of economy and industry ministers in Brussels, Italy's Industry Minister Adolfo Urso echoed those remarks: "The ETS mechanism, as currently designed, is nothing more than a tax, a levy on energy-intensive companies. It is necessary to revise it substantially. To do this properly, the ETS mechanism must be suspended pending a reform." He added: "We are facing the collapse of the European chemical industry; we are facing a crisis in European steelmaking. We cannot wait for the timing of EU negotiations to find solutions." 

Emissions Unrest

Italy is not alone in attacking the ETS. In recent weeks, various industrial groups have called for ETS changes, while German Chancellor Friedrich Merz, a long-time ETS supporter, suggested that it should be revised or postponed if it undermines industrial competitiveness. Merz said: "This (ETS) system is not the system to generate new revenues.This system is implemented to reduce CO2 emissions and, at the same time, to enable the companies to come to CO2-free production lines. If this is not achievable and if this is not the right instrument, we should be very open to revise it or at least to postpone it as we did with EU ETS2." 

Key Takeaways

• Italy will compensate gas-fired power producers for their carbon emissions costs to help cut electricity costs.
• The move runs contrary to the EU's Emissions Trading System (ETS), which is used to force heavy polluters to pay for their emissions.
• Experts warn that the decree will negatively impact power trading in Europe, promote greater use of gas and undermine the country's renewable energy sector. 

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