Italy is traditionally a big consumer of natural gas and it represents the third largest gas market in Europe, preceded only by Germany and the UK. In 2013 Italian final consumption amounted to 68 billion cubic meters (Bcm), 15% of the whole EU market. And with more than 34.500 km of pipelines, 16 Bcm of storage capacity and 350 million cubic meters per day of import capacity, the Italian natural gas system lies at the core of the EU system.
No wonder, then, that the crisis of the European gas consumption painfully concerned the Italian market: between 2010 and 2012, 8 Bcm of final demand simply disappeared. A bad performance, but in line with the 10% contraction at EU level. 2013 showed instead a diverging trend: the Italian market lost further 5 Bcm, while German and French consumptions resumed to grow and the British market remained stable.
Even worse, the Italian crisis has been continuing in 2014. According to Snam Rete Gas' figures, final consumption during the first six months of the year amounted to 32 Bcm: 5 Bcm lower than same period of 2013. To understand the causes of this apparently endless downfall, we need to focus on the structure of the Italian final demand.
In 2013, residential consumption amounted to 33 Bcm, a value close to the average of the past decade and only 3 Bcm lower than 2010, a relatively cold year. At the same time, industrial consumption remained stable at 13 Bcm. On the contrary, power plants' consumption plummeted from 29 to 20 Bcm, i.e. -31% in a three-year span.
In fact, the crisis of the Italian gas market is essentially a crisis of the power generation sector. 2013 consumption was so low that in order to find a lower level, we have to come back to 1999. Looking at the output, gas-fired plants gross production decreased from 153 TWh in 2010 to 110 TWh in 2013: -28%.
This massive contraction has a two-pronged explanation. Firstly, the overall reduction in electricity demand, mainly due to the effects of the economic crisis. Gas-fired plants, mainly built during the past fifteen years, represent the bulk of the Italian generation. Inevitably, the 5% reduction of the final demand affected the size of potential market for gas-fired plants.
A second, more important driver is the increasing competition by renewable energy sources. Their share in the power generation grew from 22% in 2010 to 32% in 2013. In particular, two sources eroded the market share of gas-fired plants: wind generation, which increased from 3 to 5%, and photovoltaic generation, which increased from 1 to 8%.
Wind and photovoltaic received indeed a strong political support as a part of the Italian effort to meet 2020 European targets in terms of renewables’ penetration in the energy mix. In particular, wind and photovoltaic producers enjoy a despatching priority, i.e. their output is sold before any other output. Even more importantly, they have been increasingly subsidized, with a total expenditure which grew from 3,4 billion euros in 2010 to 13,2 billion euros in 2013.
While coal-fired plants could stand this uneven competition due to very low coal prices on the international markets, gas-fired plants lost much of their market share, decreasing from 51 to 38%. This contraction is likely to continue in 2014, as renewables subsidisation is reaching its apex.
Looking at the future, the Italian gas consumption will continue to be linked to the dynamics of the power sector. As for the crisis, power generation sector is the key for the recovery. Short-term forecasts are particularly difficult to make, since the timing of the Italian economic recovery is still uncertain.
However, medium term outlook is mildly positive. According to Terna, electricity demand is bound to increase by the end of this decade and the beginning of the next one. Then, the size of the power market is set to increase, creating new demand. Moreover, the government has already made clear that the subsidization for renewable sources won't expand any further. On the contrary, there may also be a reduction of existing measures. At the same time, coal-fired plants could lose their edge due to an increasing focus on carbon emissions at EU-level, which could benefit less-polluting gas-fired plants.
Indeed, according to Snam Rete Gas' forecasts, gas demand for power generation will slowly recover, reaching 24 Bcm in 2017 and 27 Bcm in 2023. As a consequence, overall natural gas consumption is expected grow again, reaching 71 Bcm in 2017 and 73 Bcm in 2023. Hardly a bright prospect, but enough to say that 2014 may end to be the lowest point of the crisis for the Italian gas market.
This paper has already been published for the Caspian Strategy Institute on Hazar.org
Matteo Verda, ISPI Associate Research Fellow