Hard times for the Italian gas market. In 2014, natural gas consumption dropped 12% compared to the previous year, by far the largest decrease ever recorded. In one year, 7.9 Bcm of demand went missing, roughly the size of the Austrian market.
And 2014 was not a single occurrence: Italian consumption decreased for four years in a row, from 80,7 Bcm in 2010 to barely 60 in 2014. Despite much debate at the beginning of the past decade and widespread expectations of a rapidly expanding demand, 2005 turned out to be the all-time peak of the Italian consumption, followed by a decade of almost consistent decrease, with just a short-lived rebound in 2010 (see Figure 1).
Figure 1 - Italian gas consumption (2005=100) and YoY absolute growth (2005-2014) with a gross calorific value of 39 MJ/cm. Source: Snam Rete Gas.
The impact of the financial crisis on the overall economic system was the first driver of this contraction. The Italian economy faced a double-dip recession and an enduring stagnation, which directly affected energy consumption. According to Unione Petrolifera, the oil companies’ association, in 2014 Italian primary energy consumption decreased to 157 Mtoe, -5% compared with 2013. At the same time, according to Terna, the system operator, electricity demanded by the grid totalled 309 TWh, a 3% drop from 2013.
In this context, the natural gas market made no exception and demand decreased for all major final uses: industry, power generation, and residential and commercial sector. A second driver, with an even more dramatic impact, also affected gas consumption: the effects of the environmental policies on the power generation sector.
During the past decade, reduction in carbon emissions and the market share increase of renewable energy sources became the flagship priorities of the European energy policies. In 2009, 20-20-20 targets set the framework for a strong intervention at national level, especially in the support to renewable energy sources.
In Italy, this intervention expanded rapidly, in particular attributing dispatching priority and significant direct financial backing to electricity generation from renewable sources. In 2014, subsidies to photovoltaic, wind and other renewable sources amounted to 12.1 billion euros, according to Assoelettrica, the Italian association of electricity enterprises. Renewable plants quickly expanded, eroding market share and profitability of thermoelectric plants. Since in Italy gas-fired units represent the bulk of the traditional, non-subsidized generation capacity, inevitably their final market shrank, thus reducing demand for gas as a primary source.
A third driver hit gas demand in 2014, creating something similar to a perfect storm: mild weather during the first quarter of the year. Exceptionally high temperatures reduced consumption for heating, throwing the final blow at an already critical situation.
Finally, increasing efficiency in final consumption, especially in building insulation, represents a fourth, long-term driver. Albeit its current effects are still limited, this factor is bound to have a significant impact over the next decades.
Scope and timing of those drivers are apparent in Figure 2. Impact on industrial demand was mainly concentrated in 2009, when the first dip of the recession pushed less competitive consumers out of the market, leading to a structural reduction in industrial uses.
Impact on power generation started instead at the outset of the financial crisis, then accelerated with the implementation of the energy policies favouring renewable sources. Eventually, the seasonal and quite random effect of a milder winter in 2014 is clear considering the otherwise relatively stable levels of residential and commercial consumption during the previous years.
Figure 2 - Italian gas consumption, per sector (2005-2014). Source: Snam Rete Gas.
The impact on different sectors is evident looking at the composition of demand reduction between 2010 and 2014 (Figure 3). During this time-span, the Italian market lost 20.8 Bcm, representing more than one quarter of final consumption in 2010.
Power generation was the most affected, decreasing from 29.1 to 17.2 Bcm, and now representing less than 30% of final demand. The residential and commercial sector strengthened its role as the most important sector (47%), but still demand decreased from 37.5 to 28.3 Bcm. Eventually, industry demand proved to be particularly resilient, stabilising at 13 Bcm (21%).
Figure 3 - Absolute reduction of gas consumption between 2010 and 2014, per sector. Source: Snam Rete Gas.
Concluding, the present is quite painful for the Italian market. As regards the future, the evolution of the electricity market represents the most important driver for a potential recovery over the next years, excluding random weather conditions. Besides power generation, other sectors are undergoing a steady increase in efficiency, which is bound to reduce final demand over the long term.
Gas-fired plants may instead provide a significant increase in consumption, but much will depend on the pace of the economic growth and its effects on electricity demand. Environmental and energy policies at European level will also be of particular importance, since the cost of emitting carbon and the level of subsidisation of renewable sources will play a central role in determining the competitiveness of gas-fired plants, and the future of the Italian gas demand.