Rising energy prices: causes, forecasts and solutions. Read the article published in the magazine ‘Gestione Energia’ – FIRE edited by our Eng. Mariani.

HOW TO TACKLE THE ENERGY CRISIS

With the ongoing war scenarios in Ukraine, which we hope will be soon resolved, the growth in electricity and natural gas prices, a phenomenon started as early as the summer of 2021, is increasingly worrying.

The economically substantial resources put in place by the government to reduce price increase, however belated considering the already ongoing crisis, have not totally offset the impact of the prices’ upswing. The most affected are both the large companies and the small/medium-sized enterprises, which are currently paying for electricity alone at least four times as much as in the first half of 2021 and about 6 % more than in France, 34 % more than in Germany, and 11 % more than in Spain (comparison of January 2022 spot prices).

The underlying causes of the rise in energy prices can be traced back to several factors that have been acting simultaneously over the last few months: one of which is the natural gas price crisis.

The one we are currently experiencing is essentially the first serious crisis in the natural gas market and in the short-term pricing system. While until the 2008-2010 period (the years of the liberalisation of the Italian energy markets) gas prices were based on long-term contracts with prices indexed on the basis of oil products and containing very strict take-or-pay clauses, over time this type of contract has been reduced in favour of pricing formulas with references to hub-tied and short-term quotations.

Until 2020, the short-term pricing system operated quite well, but since 2021 coupled with the economic recovery, it started to expose all its shortcomings. The unpreparedness of operators to face the growing demands caused prices to start their rapid ascent unabated; a process then worsened by the strong demand coming from the Asian continent.

In addition to the natural gas price crisis, the mechanism linked to carbon dioxide emission permits (EUAs) traded through the ETS (Emission Trading System) also played an important role.

In a nutshell, this type of environmental taxation, in the 2021-2030 regulatory period, has been further tightened with respect to the previous period in order to push electricity generation and production towards greater sustainability.

Such a pressure on production, and hence on emissions, has already caused prices to rise significantly since the start of Phase IV compared to the previous phase.

On the other hand, electricity generation has been affected both by the price of gas production and the price of EUAs in terms of the tonnes of CO2 emitted for electricity production.

A further reason is to be found in the current price formation mechanism, via the System Marginal Price (SMP). Despite the fact that the Antitrust Authority has recently tried to prevent its possible revision, it is now undeniable that under today’s conditions it has already shown all its weaknesses.

With a crisis scenario such as the one we are currently experiencing, the System Marginal Price amplifies a pricing problem present in the gas market by spreading it to the electricity market.

The current spot price in the natural gas market, while representing the price benchmark, does not represent the true exchange value of existing contracts.

The spot price of electricity, on the other hand, reflects the cost of thermoelectric production generally from natural gas (i.e. about 50% of the average national production).

It is therefore clear that the current prices, originating from both markets, and paid by the final consumer, generate extra profits for non-thermal producers and importers of natural gas.

Similarly, the share of ETS charges on thermoelectricity is also collected by non-obligated parties, as it is part of the marginal price defined on the exchange.

HOW TO MITIGATE ENERGY SUPPLY COSTS

There are several tools that can be used to alleviate energy supply costs and we will review some of them.

The simplest one keeps being ensuring an optimal purchase of one’s own supplies. The uncertainty associated with free market opportunities for optimising energy supply costs makes it necessary to have an appropriate strategy to protect one’s business. This must be a joint effort between a detailed analysis of the volatility of energy commodity markets and the containment of risks related to their variability. This type of strategy includes measures ranging from staggered purchasing policies, management of purchasing policies, constant monitoring of market trends, and the negotiation of favourable contractual clauses. Such policies are able to limit the potentially harmful adverse effects of today’s volatility and variability in the energy market.

Energy efficiency is another powerful tool to ensure a lower impact of energy on business costs, besides having a positive impact on the energy transition.

It often takes time to achieve important results, but certain measures take less time than others. For instance, a better insulation of buildings or the major boost that would follow the installation of heat pumps would both bring a significant reduction in consumption and costs.

Supporting small and medium-sized enterprises (SMEs) through effective programmes aimed at providing energy efficiency audits and the consultancy needed to quickly implement energy-saving solutions would be another useful tool.

This can be continued through the installation of new renewable energy plants such as photovoltaic, wind and other sources. Also, in the short term, incentivizing final electricity customers to group together to produce the electricity needed for their needs from renewable sources in the same place, could foster the ‘sharing’ of energy through energy communities. Such actions could all represent important drivers for the energy transition holding economic, social and environmental benefits.

These days, a good kick-start to some of the reforms needed to tackle the current crisis is also coming from the Energy Decree. Promoting the use of renewable energy sources, relieving them of bureaucratic regimes that have so far been very penalizing, can be a truly important starting point, both in the short and long term, in synergy with the latest proposals for energy communities.

As mentioned earlier, energy efficiency will also have to play a major role in reducing and enhancing the efficiency of both production and processing of energy use.

A revision of the price formation mechanism is also essential. Cutting extra profits to renewables is not the solution; rather, it would be far better to further limit the maximum formation price, especially during a period of crisis such as the current one.

These measures will have to be implemented with some urgency as in the short term, or rather very short term, without real effective action the compensations introduced by the last DL are likely to be wiped out quickly, and we could be back to square one in no time.