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Renewable Energy and Fossil Fuels in 2020 and
Beyond: friends or foes?
The Italian case
Matteo Di Castelnuovo
IEFE and MaGER
Bocconi University, Milan, 21st January 2014
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Intro
• In the early 2000s, the focus was mostly on CCGTs,
which were considered crucial for liberalization.
• Today’s electricity scenarios were not seriously
considered in the mainstream literature, let alone in most
parts of the business community.
• Ex-post: was there any sign in the energy policy and
regulation that something similar to the current situation
could have happened?
• Ex-ante: will RES and fossil fuels be friends or foes?
•What does the evidence in the Italian case tell us?
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1996‐1999
1998‐2000
First EU Electricity Directive (96/92/EC)
First EU Gas Directive (98/30/EC)
1999: Bersani
Decree
Legislative Decree no. 164/2000 (Letta
decree)
Legislative milestones
in the Italian case
2002
Legislative Decree n. 7, Feb 2002: “Sblocca‐
centrali”
2009‐2011
Third EU Electricity Directive (2009/72/EC)
2009‐2012
EU Renewable Energy Directive (2009/28/EC) Legislative Decree No. 28/2011 Legislative Decree No. 93/2011
Ministerial Decree of 5 Jul. 2012 (Quinto
Conto Energia) 3
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The Italian case
A look at energy data
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The Italian case
Energy data
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At the end of 2013 the total installed capacity was 132 GW, i.e. 50% higher
than in 2005.
Installed capacity evolution (in GW)
80
70
60
50
40
30
20
10
0
2005
2006
2007
2008
TOTAL ‐ Fossil Fuels
2009
2010
TOTAL ‐ RES
2011
2012
2013
TOTAL ‐ Hydro
5
The Italian case
Energy data
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Between 2010 and 2013 the reserve margin increased from 29% to 39%.
Installed capacity evolution (in GW)
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
80
70
60
50
40
30
20
10
0
2010
TOTAL ‐ Fossil Fuels
2011
TOTAL ‐ RES
2012
TOTAL ‐ Hydro
2013
Reserve margin
6
The Italian case
Energy data
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In the period 2005-2013, 17.5GW of solar capacity have been installed
(9GW of additional capacity in 2011).
Installed RES (w/o hydro) capacity evolution (in GW)
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V «Conto energia»
25
20
15
I «Conto energia»
10
5
0
2005
2006
2007
2008
2009
Wind
Solar
Biomass
2010
2011
TOTAL ‐ RES
2012
2013
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The Italian case
Energy data
In the period 2000-2011, 35GW of CCGTs, including repowering (ca 15GW),
have been installed (+440%).
Installed capacity (in MW) ‐ Combined Cycle in Italy
45.000
40.000
35.000
«Sbloccacentrali»
30.000
25.000
20.000
15.000
10.000
5.000
0
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
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The Italian case
Energy data
In spite of this evolution in capacity, import still represents 14% of electricity
demand, making Italy the largest electricity importer in Europe.
Production volumes (in GWh) 35.000
30.000
25.000
Import
20.000
Solar
15.000
Wind
10.000
Thermal
5.000
Hydro
Jan 08
May 08
Sep 08
Jan 09
May 09
Sep 09
Jan 10
May 10
Sep 10
Jan 11
May 11
Sep 11
Jan 12
May 12
Sep 12
Jan 13
May 13
Sep 13
0
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The Italian case
Energy data
Production volumes (in GWh) ‐ w/o Thermal 16.000
14.000
12.000
10.000
Import
8.000
Solar
6.000
Wind
4.000
Geothermal
Hydro
2.000
Jan 08
May 08
Sep 08
Jan 09
May 09
Sep 09
Jan 10
May 10
Sep 10
Jan 11
May 11
Sep 11
Jan 12
May 12
Sep 12
Jan 13
May 13
Sep 13
0
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The Italian case
Energy data
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RES actual production has already overshot the targets included in Italy’s
NREAP, in compliance with 2009 Directive.
% of RES over total electricity production
30%
25%
18,7%
20%
19,6% 20,2%
15%
23,1% 23,8%
22,4%
21,0% 21,7%
24,6%
25,5%
26,4%
27,7%
23,5%
10%
16,3% 15,9% 16,0% 16,6%
18,8% 20,1%
5%
0%
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Actual capacity
PAN
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The Italian case
Energy data
Electricity demand has not recovered from 2008 levels and yet more
generating capacity has been added in the meantime.
GDP growth vs electricity demand growth
6%
4%
2%
0%
‐2%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
‐4%
‐6%
‐8%
Demand growth
GDP growth
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The Italian case
Energy data
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A similar argument may be applied to the evolution of peak demand (from 55
GW in 2008 down to 53 GW in 2013).
Peak demand evolution (in GW)
60
55
50
45
40
35
30
Jan
Feb
Mar
2008
Apr
2009
May
Jun
2010
Jul
Aug
2011
Sep
2012
Oct
Nov
Dec
2013
13
The Italian case
Energy data
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Natural gas demand has been decreasing since 2008, especially in the
generation sector. Load factors of CCGTs: from 5,000h p.a. in 2008 down
to less than 2,500 h p.a. in 2012
Natural gas demand (in bcm)
Natural gas demand per sector (in bcm) 40,0
12
35,0
10
30,0
25,0
8
20,0
6
15,0
10,0
4
5,0
2
0,0
2008
0
2008
2009
2010
2011
2012
2013
2009
2010
2011
2012
2013
RESIDENTIAL DEMAND
INDUSTRIAL DEMAND
GENERATION DEMAND
Trend in Generation Demand
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The Italian case
Energy data
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On the other hand, another fossil fuel, coal, has been able to capture part of
the volumes lost by gas, thanks to favourable market conditions (e.g.
€4/tonne of CO2). However, in 2013 this trend has reversed (-18.5% of coal
used in the generation mix).
Coal vs gas consumption in generation
thousand of tonnes
20.000
15.000
10.000
5.000
0
2008
2009
2010
Coal (thousands of tonnes)
2011
bcm
40
35
30
25
20
15
10
5
0
25.000
2012
Gas (bcm)
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The Italian case
A look at economic data
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The Italian case
Economic data
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Italian power prices are still higher than in the rest of Europe (->import).
However this gap has recently been slowly shrinking.
Prices at Power Exchanges in Europe (in €/MWh)
IPEX
EPEX Germany
Nord Pool
OMEL
EPEX France
Nov 2013
Sep 2013
Jul 2013
May 2013
Mar 2013
Jan 2013
Nov 2012
Sep 2012
Jul 2012
May 2012
Mar 2012
Jan 2012
Nov 2011
Sep 2011
Jul 2011
May 2011
Mar 2011
Jan 2011
100
90
80
70
60
50
40
30
20
10
0
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The Italian case
Economic data
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Italy’s gas prices have been remarkably higher than the rest of Europe, due to
the weight of oil-indexed contracts. After the introduction of common rules for
market-based balancing and unbundling, prices of EU hubs are increasingly
converging.
Daily wholesale gas prices on gas hubs (in €/MWh)
45
40
35
30
25
20
15
10
PSV (I)
TTF (NE)
NCG (DE)
PEG (FR)
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The Italian case
Economic data
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Similarly to what is happening in Europe, also the spread between peak and
baseload prices is decreasing.
One‐year Forward Power Prices (in €/MWh) 95
90
85
80
75
70
65
60
55
50
12
10
8
6
4
2
0
Baseload
Peak
Peak vs Base
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The Italian case
Economic data
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The shape of wholesale price curve is now significantly different. Prices are
higher at off-peak than they used to be but volumes are still lower. How can
all plant types recover their cost from current market-based pricing?
Hourly wholesale prices comparison
January 2013 vs 2008, working day (in €/MWh)
Hourly wholesale prices comparison June 2013 vs 2008, working day (in €/MWh)
150
200
150
100
100
50
50
0
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
PUN JAN 2013
PUN JAN 2008
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
PUN JUN 2013
PUN JUN 2008
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The Italian case
Economic data
As in other European markets, coal-fired generation has been constantly
more profitable (e.g. + €30/MWh) than gas-fired in recent years.
Clean spark (gas) and dark (coal) spread (in €/MWh)
40
35
30
25
20
15
10
5
0
Clean Spark
Clean Dark
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The Italian case
Economic data
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Zonal price differentials indicate the presence of congestion. The case of
Sicily still stands out. Occasionally, due to a larger availability of renewable
production, prices dropped to zero in single zones. Note that in Italy negative
prices are not allowed ( Market design?)
Zonal Prices for Friday Jan, 17 2014 (in €/MWh)
Zonal prices for Sunday May, 18 2013 (in €/MWh)
160
160
140
140
120
120
100
100
80
80
60
60
40
40
20
20
0
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Italia
Centro Nord
Centro Sud
Sardegna
Sicilia
Sud
Nord
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Italia
Centro Nord
Centro Sud
Sardegna
Sicilia
Sud
Nord
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The Italian case
Economic data
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However, last June prices dropped to zero in all zones, including Sicily.
Moreover, there were no zonal price differentials, except with Sicily.
Zonal prices for Sunday June, 16 2013 (in €/MWh)
160
140
120
100
80
60
40
20
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
Italia
Centro Nord
Centro Sud
Nord
Sardegna
Sicilia
Sud
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The Italian case
Economic data
I conto energia: Power (GW): 0.2
Annual cost (bn €): 0.95
II conto energia
Power (GW): 6.8
Annual cost (bn €): 3.3
III conto energia
Power (GW): 1.6
Annual cost (bn €): 0.65
IV conto energia
Power (GW): 7.6
Annual cost (bn €): 2.5
V conto energia
Power (GW): 2.1
Annual cost (bn €): 0.2
TOTAL: Power (GW): 17.1
Annual cost (bn €): 6.7
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The Italian case
Economic data
The cost of renewable incentives (= 86% of A3 tariff component) for LV
customers has increased by almost 300% in just over three years (€92/year
or 18% of final utility bill in January 2014).
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The Italian case
Final remarks
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The Italian case
Final remarks
•The Italian case clearly indicates some of the criticalities
in the relationship between RES and hydrocarbons.
•It also emphasizes similarities (e.g. lack of remuneration
for CCGTs) and differences (e.g. overcapacity) with the
four markets we have considered in this event.
•Such complex relationship is probably the biggest issue
arising from the deployment of RES but it is far from being
the only one.
•Therefore we believe a more «holistic» approach would
be advisable.
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Technology
policy
The Italian case
Final remarks
• Storage
• Smart grids
• New generation capacity
•…
Market
design
• Coordination with gas markets
• Time flexibility (e.g. 15 min blocks)
• Space flexibility (e.g. nodal pricing)
• Remuneration of ancillary services
• Long-term adequacy (e.g. capacity mechanism)
• Demand side management
• Market access for RES producers (e.g. prosumers)
• ……..
Social
welfare
• Impact on domestic users
• Impact on energy-intensive users
• Job displacement (i.e. green jobs)
• ………
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The Italian case
Final remarks
• “Electricity must be treated as a commodity which can
be traded taking into account its TIME- and SPACEvarying values and costs” (Schweppe et al., 1988).
• “The problem of market design is not to invent clever
new prices but to design a market that will reliably
discover the same prices Economics has been suggesting
since Adam Smith” (Stoft, 2002).
• “It is probably better to choose and stick with a market
design that will perform well in most circumstances, than
to adopt a less robust design that happens to be better
suited to the industry’s current situation” (Green, 2005).
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Thank you!
matteo.dicastelnuovo@unibocconi.it
Sources: Terna, GSE, GME, Eurostat, AEEG, EC, Bloomberg.
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Appendix
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The Italian case
Energy data
In 2012 52% of the total renewable capacity was represented by intermittent
technologies; that corresponded to 35% of total renewable generation.
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