Energy market reform: increasingly urgent and pressing

The price of wholesale energy enters the bills under the heading of raw material energy expenditure, alongside the marketing and sales costs, established discretionally by the supplier, the imbalance charges, defined by Arera and Terna and linked to system balancing, and the margin that the seller imposes on Pun. In addition to this cost, there is the cost of transport and meter management, system charges (imposed by Arera, the regulatory authority for energy networks and the environment, and by the government in order to finance general interest activities) and taxes (VAT and excise duties).

In addition, European industrial plants must have permits, which can be purchased by auction or traded on the market, under the Emission Trading System (ETS) mechanism. With increasingly stringent decarbonisation targets, the supply of such permits is steadily decreasing, driving up their value: whereas a decade ago the cost was less than €20/tonne, today it fluctuates between €70 and €80. For a producer of electricity from gas, this means almost 30 €/MWh more, as a variable cost of production. Ultimately, the combined effect with gas prices brings the cost of generation to over 100 €/MWh.

Not only that, in the electricity sector, the increasing penetration of renewables and batteries and the upgrading of grids leads to high fixed costs but almost zero variable costs, which is inconsistent with a market designed for technologies with high variable costs. The simultaneous presence of plants with low variable costs and gas-fired generation with high costs (gas plus emission permits) creates a perception of unfair remuneration for the former. While the marginal price thus set allows, in theory, to cover the fixed costs even of renewable plants, at the same time it does not allow the certainty of recovering all costs, because the sale of energy, on the exchange, may not be guaranteed. Therefore, over the years, various correctives have been introduced to the market, trying to balance the remuneration aspect based on the sale of energy, with that based on the availability of capacity (i.e. a remuneration unrelated to production). These mechanisms - such as capacity remuneration mechanisms and contracts for differences - which have the merit of reducing the risk of investments in technologies with a high initial cost and long return horizon, have often been juxtaposed with the previous market architecture.

I therefore believe that market reform appears urgent and cannot be postponed, but there is no unanimous consensus on which is the best way forward, a theme that I have also explored in my book Super! A Century of Energy in Italy (Luiss University Press). While waiting for a reduction in gas dependency and a massive installation of renewable energy plants (for which a competitive procurement will be necessary through clear and rapid authorisation paths and extensive investments in flexibility and networks), a possible evolution aims at overcoming the marginal price mechanism, through the transition to a dual price model, in which energy remuneration would be separated from capacity costs and scarcity premiums. In this way, renewables would be compensated not only for the cost of the last unit produced, but also for covering fixed costs and the risk of non-sale. Alternative solutions include the strengthening of capacity remuneration mechanisms and the introduction of long-term contracts, such as Power Purchase Agreements (PPAs) or Contracts for Difference (CfDs), which provide greater stability for investments in infrastructure and clean technologies. In this case, the spot market would become a residual market, to be supplied only in the event of sudden imbalances. The European Commission is also discussing a lowering of energy taxation based on a common maximum surcharge level across the EU and is working on a significant market reform, which could come in 2026. We shall see.

Director of Fondazione Eni Enrico Mattei and author of Super! A Century of Energy in Italy (Luiss university press).