The actions that need to be implemented to define an effective Italian energy strategy can be divided into three main areas:
At the national level, action is needed on three fronts: diversification of the fuel mix, construction of new gas transportation and storage infrastructure, and completion of the competitive market structure.
- Fuel mix diversification, development of renewables and energy efficiency.
As we know, the liberalisation process led to a large-scale investment programme in new gas-fuelled combined cycle power stations which, in a competitive context where investments are made by profit-driven private companies, are the most rational choice. The main consequence of this trend is that the old dependency on fuel oil, which was typical of Italy’s energy sector from the end of the 1980s, has given way to a new dependency on gas. Therefore, to limit the risk of energy crises due to interruptions or limitations in supplies of this primary resource, the first key action we need to take is to review and adjust the mix used for electricity generation. In the light of the concerns over climate change, this needs to be achieved first and foremost by investing in renewable sources, especially those with the greatest potential in terms of efficiency and production costs. We should bear in mind, however, that at least in the medium-term these will not in themselves be sufficient to replace fossil fuels completely.
Secondly, we need to ensure that research into carbon sequestration technologies, such as Carbon Capture and Storage (CCS), continues. There are, of course, environmental arguments against the use of coal, as it is more polluting than gas, although modern technologies have already significantly reduced the level of CO2 emissions. However, research in this sector, which is still only at the experimental stage, promises further significant developments. To abandon this technology at this early stage would therefore create the risk of penalising our country, and for no good reason. Moreover, since fossil fuels cannot be completely replaced in the short term, the European Union too, in its recent Energy Package, considers the development of research into “clean coal” as an important factor in increasing Europe’s energy security, and one that will encourage the transition to a low-carbon economy.
Finally, it is interesting to note that early adopters of effective technologies to use coal in more environmentally-friendly ways will in turn be able to help many transition or recently industrialised countries whose economies depend strongly on the use of coal, such as China and India, to make the technological “leap” that is needed if we are to avoid repeating the most polluting phases of industrial development, as experienced by the western world during the last century.
The politically sensitive issue of nuclear power should be considered separately. As we know, in Italy this source has been banned for many years now. Today, however, we need to consider the fact that it is the only thermal source that does not produce carbon dioxide emissions. Therefore, in light of the new environmental priorities of security of supply and the technological developments that have made nuclear power much safer and cheaper to exploit even compared with just a few years ago Italy is once again considering nuclear power.
Finally, significant investment is needed to increase energy efficiency, on both the production and consumption sides. As the European Commission pointed out in its recent Energy Package, and as confirmed in the G8’s final declaration also, energy efficiency is the most immediate measure we have at our disposal to effectively combine security of supply, energy cost-containment and environmental sustainability. From this perspective, it is a strategic and essential instrument to help us successfully address the question of energy needs. We therefore need to adopt an energy efficiency programme that includes both binding goals and adequate incentives, to enable a reduction in energy demand that has been quantified by some studies at between 10% and 15% of current demand.
- Transport and storage infrastructure
The recent gas crises showed that our gas transport and storage system cannot cope with increasingly volatile demand. Even though our country is, in proportional terms, one of the biggest gas consumers in Europe, our infrastructure system has not kept pace. As a comparison, we need only consider that while Italy has just one regassification terminal in operation, and with a fairly modest capacity at that, Spain, which is less dependent on gas than Italy, began work recently on building the seventh.
We need to move rapidly to the point where we have at least three or four regassifiers, with an overall capacity of 25-30 billion cubic metres/year, under construction. But although this is a priority goal if we are to reduce our dependency on imports by gas pipeline, it is still not enough. We also need to increase the transportation capacity of the existing pipelines, build new ones – such as the GALSI from Algeria and the IGI from Greece and Turkey – and significantly increase the capacity of our storage facilities (infrastructure that is technically more complex than that used for oil and its derivatives).
Moves to increase the transport capacity of pipeline infrastructure often clash with long-term gas import contracts, typically in the form of take or pay agreements. These represent a guaranteed return on investment in transport infrastructure and contribute to the overall security of the system. In actual fact, however, they nearly always result in saturation of available pipeline capacity, thus preventing the market from being truly opened up. In view of these characteristics, commentators frequently object that such agreements are exploited by dominant operators to prevent new operators from entering the system, and slow down the increase in market liquidity.
This problem, which the European Commission has been aware of for some time now, needs to be resolved by tying increasing amounts of transport capacity to contracts of varying duration. This would take into account both operators’ legitimate expectations of a fair return on risky, complex investments, and the need for efficiency and competitiveness in the gas market. In this context, the clauses preventing operators from exporting gas originally destined for a given country to some other destination (Final Destination Clauses) could progressively be eliminated. Such clauses strongly restrict the development of market liquidity in both transit and end-destination countries.
- Competitive structure of the energy market.
As regards the structure of the electricity market, we need to complete the liberalisation process, bearing in mind the new needs of security and sustainability. This process needs to be translated into a strong push to integrate the national electricity and gas markets in a single continental market. If a true European energy market were created, Italy could obtain further significant advantages in terms of price and system security. After the black-out of 4 November 2006, where a fault on the German high voltage grid led to repercussions in various European regions, from Paris to Puglia, the need for improved coordination between network operators and for the harmonisation of the national regulatory and security frameworks was made very clear.
Finally, the unusual structure of the gas market (gas is often produced in countries very distant to where it is consumed and requires transport across many other countries to get there) means that any liberalisation process conceived solely at the national level will be ineffective. The entire process of liberalising the gas networks should therefore be reviewed from a truly Community perspective, and no longer left solely to national sensitivities.
National energy policies cannot exist in a vacuum, divorced from the European context. The European institutions have for some years now viewed the energy question as one of the continent’s priority issues. As proof of this, the European Commission published its 2nd Strategic Energy Review, which contains guidelines to tackle the climate and energy emergency and draw up a joint European policy on this issue.
In actual fact, in Europe the debate on the energy question has always been torn between member states’ determination not to delegate, even in part, their freedom to decide on such a strategic issue, and the need to address global challenges, such as energy security and global warming, along with the other partners. Such challenges most certainly cannot be won by nations acting on their own. In an attempt to draw up a supra-national energy policy, in their most recent papers the EU institutions have set out common goals in an attempt to supersede and draw together the national initiatives, at least on certain specific issues such as energy efficiency, the development of renewables and CO2 emission targets.
In this framework, the initiatives adopted in our country must be matched with and supported by further initiatives at the European level in support of the Commission position, because in the medium term the creation of a true continental energy market and the definition of a common energy policy are the best defence for consumers and European enterprises against energy challenges. These actions have in part been set out in the recently published documents, and should obviously be taken into consideration, and in part are additional to those already proposed in the Energy Package, for example on climate change and energy efficiency. They concern:
• the integration of national energy markets;
• the true opening of the gas market;
• investment in priority infrastructure;
• an external EU policy on energy issues.
In the case of the electricity market, as the Commission itself has recognised, many positive steps have been taken since the start of the liberalisation process in the 1990s. However, certain situations still prevail that are preventing the process from being completed, partly as a result of the attitude taken by countries which, based on considerations of national interest, to which should be added the recent service failures, refuse to open their domestic markets to true competition. Giving security issues as their reasons, they are preventing integration at the European level.
In actual fact, the recent black-outs showed that their reasons simply do not hold up: greater coordination between the national systems is needed, along with a sufficient level of integration to prevent the situation arising where a fault in northern Germany is transformed into a black-out in Paris or Rome. We need to take prompt action to integrate the national electricity markets and harmonise the national regulators’ powers and the operating procedures prevailing in the individual national markets. In so doing, regulated tariffs should gradually be abolished, especially those pitched lower than market prices, which in effect prevent new operators from entering the market. We need to encourage closer integration between system operators (TSOs), starting with the effective, transparent management of cross-border energy flows and network congestions.
The situation of the gas sector, partly because of its unusual structure, differs in some respects from that of the electricity market and is influenced by the still very limited degree of market opening. The gas market is composed – in most cases – of the upstream production stage in a third country, often outside the European Union, followed by the pipeline transportation stage, which may include a number of transit countries, and then by the storage and consumption stages, typically at the national level in the destination country.
In this context, the Community’s strategy of liberalising the individual national markets while leaving ample freedom for the Member States to define the timescale and arrangements for liberalisation, has not been entirely effective, because the conditions and degrees of market opening have varied widely from one country to another.
It is important, therefore, to rethink part of the process, bearing these industry characteristics in mind. The minimum accessibility requirements for transport networks and storage facilities should be clearly established at Community level. This first level of market opening should focus on the networks, starting with closer coordination and integration of existing network operators. This should take place, if possible, at the same time in all the member states. Only in this way will it be possible to foster true competition among operators, rather than the crossed trading, often disguised as free competition, which is currently widespread and frequent in Europe.
Once again, long-term contracts and investment in transport infrastructure play a vital role. Gas pipeline infrastructure requires many years and huge amounts of capital investments to build. Companies taking on this task usually protect the return on their investment through long-term supply contracts with the producer country: the sale of the gas in the destination country provides them with a guaranteed return, but at the same time prevents the infrastructure from being used by other operators.
As already noted, this problem needs to be resolved gradually and cautiously. Security of supply requirements and the role played by long-term contracts in this respect should not be under-estimated, but at the same time a truly liquid and transparent market, characterised by efficient and appropriately sized companies operating under competitive conditions, is, in the long-term, the best guarantee for consumers. To encourage the opening of the market, new rules could be imposed with respect to the allocation of any additional capacity being built on the existing transport networks. One possibility would be to oblige the dominant operator to surrender a portion of its long-term contracts to facilitate the entry of new operators, as has already happened, in part, in the electricity sector.
A second initiative that should be adopted to liberalise transport capacity concerns the return on infrastructure investment. In this case, one possible solution, in addition to innovative rules on amortisation, might be to remunerate at least part of the risk borne for the investment through a special – and appropriately pitched – transport tariff set at the Community level. This would free up part of the capacity of the new pipelines for new operators, since the return on the investment would be uncoupled, at least in part, from sales of the raw material. As a result, the operator building the infrastructure would no longer need to ensure a return on the pipeline investment purely through sales on the final market that were made possible by long-term import contracts that saturate the capacity of the infrastructure in question.
The essential condition for these measures to be effective is to agree on and apply the same rules contemporaneously at the Community level; if the opening of the gas market is to be effective we need to move on from the national dimension and enter that of the single continental market.
A final consideration regarding the opening and integration of the markets is the proposed European regulator. It seems fairly obvious that a series of national regulators, whose powers derive from different national rules that are often out of step with each other, is not the most effective way to create a single continental market. A higher regulatory level than the national one therefore seems to be needed. This regulator would deal mainly with European integration and would be able to impose binding decisions on all the member states, as well as reliable timescales for implementation. In actual fact, many countries are opposed to the idea of a European regulator, for reasons that include a fear that this new body might complicate and further slow down the decision-making process. A form of binding coordination and harmonisation of the regulatory authorities, network operators and their powers, which at the outset could, if necessary, deal with just a small number of technical questions such as network operating procedures, congestion management, regulated tariffs, and subsidies, is needed to ensure that the integration process is achieved in full. If entrusted solely to the national institutions, as has happened thus far, this process is unlikely to be completed in the short term.
A third area for action derives from the need to define and implement a priority energy infrastructure plan, the Trans-European Energy Network (TEN-E). Much of Europe’s energy infrastructure bears the signs of recent national policies. It is, in other words, the result of autonomous decisions by member states, which have always operated in an almost total absence of coordination and scant attention to market integration. If we are to create a European energy market, while fully respecting the decision-making autonomy of the national states, it is important to overcome this fragmented approach and introduce closer forms of coordination by drawing up a Community infrastructure plan that produces a greater degree of market opening and integration in the energy sector and increases the security of European consumers.
The Energy Package of January 2007 did actually introduce a Community infrastructure plan, but the approach used and the initiatives identified as priorities in the original document – three electricity interconnection lines and the “Nabucco” gas pipeline (from the Caspian Sea area to central Europe) – hardly provide the whole solution.
Lastly, the creation of a true single European energy market is the underlying prerequisite for a common external policy on energy questions. The European Commission has been focusing on this need for some time now and has pointed out that a far more effective long-term strategy for the member states is to address key energy issues, such as supplies from the major producer countries or strategies to limit climate change, from a single standpoint, rather than acting in an uncoordinated or even contradictory fashion.
Once again, if we consider the resistance shown by a number of European countries to handing over part of their decision-making autonomy to Community bodies on questions of strategic interest, to implement this policy in practical terms the best approach would initially be to identify just a few issues of common interest. These areas would, however, need to show clearly and if possible in quantifiable terms the advantages to be gained from adopting an agreed, as opposed to separate, approach. In other words a clear, uniform position should be established at the outset on a small number of specific questions that have been well analysed and thought through. This policy could then be expanded as the single European market became better established; a market which, at least in theory, could act as a catalyst and bring countries to see their national interests as coinciding with the European interest.
The creation of the single European market and the definition of a common external European policy on energy questions are key measures to ensure security of supply and competitiveness in the medium term for Italy also. However, they do not solve our current problems, which require immediate solutions and a bilateral approach.
In the case of energy imports, Italy’s problems are in some ways similar to those already noted for the fuel mix: the country depends on a small number of producer countries and needs an effective diversification plan that exploits the potential offered by new investment in import infrastructure.
In the case of gas, for example, Italy largely depends on Russian and Algerian imports.
Trade relations between our country and Russia have been stable for many years and, at least until a few years ago, Russia has always been a completely reliable trading partner. The recent tensions between Russia and a number of former Soviet Union countries have changed this situation to some degree and highlighted the significant risks our country could face. These risks have been amplified by Italy’s growing dependence on gas and Russia’s failure to invest in production and transport infrastructure.
On this point, we need to bear in mind that Russia today is not actually a pure exporter: to meet its own domestic demand and exports to Europe, it acts as a trader by importing gas from the countries of Central Asia and selling it on to Europe. The main reason for this paradoxical situation, given the immense Russian deposits, is, essentially, the lack of investment in the exploration, exploitation and transportation of gas, sectors where the plant and installations still date, for the most part, from the Soviet era.
While gas consumption is growing steadily in our country and in the rest of Europe, the monopolist Gazprom is investing enormous resources purchasing assets abroad in order to enter the markets of Western Europe. This combination of growing Russian and European demand, new opportunities in the Chinese market and the age and shortcomings of the Russian facilities, creates a very real risk that in the medium term Russia will no longer be able to honour its existing contracts with its European partners. The countries most at risk from this situation will be those most dependent on imports, such as our own.
To this should be added the fact that European policy vis-à-vis Russia is at times ambiguous, partly as a result of the clear hostility shown by some former Soviet Union countries, now EU member states, who tend to hold back any initiative, and partly as a result of the member states’ inability to agree on a common position. As things stand, in spite of the repeated declarations by both sides of mutual interest in cooperating, it is hard to discern any concrete initiatives to link the Russian economy more closely to the European one. On the contrary, signals of reciprocal mistrust (for example Moscow’s hostility to the Nabucco pipeline) are multiplying.
This framework encourages autonomous initiatives by individual European countries and companies, and to some extent makes them inevitable. Examples are Germany, with its Baltic pipeline which bypasses Poland, or ENI, which recently renewed its supply contract with Gazprom against the Russians’ entry to our market. These initiatives have the undoubted advantage of making supplies more stable and secure while at the same time bringing Russia closer. But they could also put the last nail in the coffin of market liberalisation and the definition of a clear, common European position.
Certainly, where energy supplies are concerned no country can allow itself the luxury of waiting for the European Union to achieve the objectives it has set itself. At the same time, however, it is to be hoped that these – much-needed – initiatives are implemented in a context of greater transparency and closer coordination. Otherwise, the extremely fragmented approach would end up merely by encouraging Gazprom’s entry to the national European markets. The advantages for western companies would be much smaller, in terms of access to Russian deposits or investment in Russian infrastructure.
What is happening, essentially, is that in the face of certain contract renewals, which are undoubtedly key elements in increasing overall security, the monopolist Gazprom is progressively entering all the national markets. The risk for European consumers is that this will limit the development of competition in the gas market and that in the near future they will also find themselves obliged to pay the inevitable cost of modernising Russia’s infrastructure.
The best way to manage the relationship with Russia is to mediate between long-term security of supply, the requirements of market efficiency and competitiveness, and the nascent common European policy, while at the same time demanding that the counterparty draws up a transparent and efficient legislative and regulatory framework and makes the necessary investments to develop a modern and efficient production and transportation infrastructure network that is able to cope with demand.
In view of its complex relationship with Russia, Italy will inevitably need to consolidate its relations with the countries of the southern shore of the Mediterranean, most notably Algeria.
Algeria is Italy’s second major supplier. Here too, with a view to diversifying risk it would be timely for our country to try to anchor the Algerian economy to Europe. This could be done by promoting investment in transport infrastructure such as the GALSI, providing support to improve Algeria’s legislative and regulatory framework, and keeping the country involved with a constant exchange of experience and expertise. In this way, the risk of Russia and Algeria establishing a gas version of OPEC – a possibility that has already been aired and which would be potentially damaging to European consumers – could be limited.
In general, at least as far as energy supplies are concerned, it is to be hoped that Italy will assume a leadership role in Europe in its relations with the countries of the southern shore of the Mediterranean, to balance the weight of Russian supplies and the Community’s focus on the new member countries, most of which are in Eastern Europe.
On this subject, finally, the prominent position occupied by Turkey should be noted. While Turkey does not have large energy reserves, it is a strategic transit point between Europe and the deposits of Iran and the Caspian Sea countries.
The strategic advantage of exploiting Turkish territory to transport gas lies in the possibility of gaining access to an area with vast deposits, as is the case of the Caspian Sea, and avoiding the need to cross Russian territory.
The difficulties encountered in defining Europe’s future strategy on Turkey and the recent debate on its entry to the EU should probably be viewed in the light of the role that it can play with respect to the continent’s energy security. This consideration is particularly relevant to countries like Italy which, as a result of an energy mix that is unevenly weighted towards hydrocarbon fuels and the fact that their suppliers are concentrated in a small number of producer countries, have a pressing need to diversify their energy supply routes.