Promoting the role of the Italian gas market in Europe

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In recent years, the European gas market has undergone a period of change, both in terms of gas demand and gas supply. Despite some forecasts, gas demand has declined, most significantly in the power generation sector. This decline has been driven by a combination of lower electricity demand and competition from renewable and coal generation. The intermittent nature of gas demand for power generation, as a result of increased renewables, has resulted not only in a decline in the overall level of gas demand but also in an increase of the volatility of the gas demand. European gas supply has also been through a period of significant change. Indigenous production has continued to decline and has been replaced by imported gas. The source of the imported gas has varied due to a number of drivers that include the availability of resources, price dynamics and geopolitical reasons. For example, lower oil prices and the convergence of European and Asian spot gas prices have resulted in more LNG cargoes being delivered to Europe in recent months. The outlook for gas demand in Europe continues to be uncertain, although there are some positive drivers. Eurogas, for instance, expects a 7% increase in European gas demand in 2015 when compared to 2014. This is partly due to the return to economic growth that should support an increase in gas demand for the power generation sector. In addition, when the reform of the ETS takes effect, CO2 allowance prices will increase and improve the competitiveness of CCGTs as compared to coal plants. Countries relying heavily on coal or lignite, such as Poland, would possibly see increased gas consumption. Gas fired generation will also increase as nuclear power plants are phased out in Germany, and possibly in France. Electricity prices will increase in Central Europe, electricity imports to Italy will decrease and be compensated with additional gas fired generation. New uses of gas, such as CNG and LNG for land and marine transport, will further increase gas demand. The resulting greater consumption will have a positive impact on the entire gas value chain, including the retail activity. However, these positive drivers need to be balanced against ambitious decarbonization policies that are pushing the electrification of the system, to the detriment of natural gas. The gas supply outlook is based on a higher dependence on imports which has increased concerns over security of supply. Declining volumes of domestic production will be compensated with new sources of gas from the Middle East, the East Mediterranean basin and the U.S. via exported LNG. The new sources of gas supplies will, however, bring greater diversification of supply and increased upstream competition. This will, in turn, deliver security of supply benefits and a more price competitive market. We have observed that the gas market has become more volatile in terms of demand and price and this has contributed to many players taking a more short term view. There has been an unwillingness to enter into long term commitments and, unlike the start of the gas industry, there has been a reluctance to underpin investments in the upstream and midstream with long term gas supply contracts. This has led to a significant issue for the industry as long term commitments, or at least long term market signals, are necessary for gas infrastructure to develop. There are a number of elements that can be considered in the future configuration of the gas and wider energy market in Europe. Assumptions for demand and supply evolution, new uses of gas, new supply sources and infrastructure development are all elements that, combined together, can define specific market configurations. Different configurations of these elements will deliver different degrees of security of supply, affordability and sustainability, together the pillars or “trilemma” of the European single gas market. Some configurations will include greater diversification of gas supply routes and sources, and deliver a greater degree of resilience to supply shocks, unlike some solutions including the project to double the capacity of the Nord Stream. Other configurations will generate greater environmental benefits, for example by using LNG in marine transportation, and others may make gas prices more affordable, by increasing upstream competition and market integration. It is crucial, therefore, to select and promote the market configuration that can deliver the optimum combination of security, affordability and sustainability. The question regarding this ideal configuration is even more important in a situation where the market is not yet sufficiently integrated and no longer provides long term signals. The question is also timely, as the European Commission has established its Energy Union strategy in February 2015, with the task of “Making energy more secure, affordable and sustainable”. Ultimately, energy policy will be relied upon to indicate the way forward. Policy direction shall be given by European and Italian institutions. On the one hand, Europe has to promote the best market configuration to ensure that the “trilemma” is met. On the other hand, the Italian institutions need to assign a role to the Italian gas market and actively support it. Confidustria believes that the optimal market configuration in Europe is the one that assigns a primary role to the Italian gas hub, because this can offer: 1) a high supply diversity, with potentially more than 10 sources and increased domestic production; 2) a positive gas demand outlook, with new geographies, increased gas fired power generation and new gas uses; 3) an integrated market, with sufficient bidirectional capacity, European compliant market rules and market liquidity and; 4) the third largest gas market in Europe, with a strong manufacturing sector and a diversified competitive arena. With diverse and secure supply sources, a positive gas demand outlook, an integrated market and the third largest gas market in Europe, Italy has the capacity and the ambition to become one of the main gas hubs in Europe. Confindustria hopes that European and national institutions will promote the role of the Italian gas market in Europe and support it with legislative and financial measures. Confindustria urges both national and European institutions, including the Ministry for the Economic Development, the European Commission, ACER and the Italian Energy Authority, to take action and: 1) acknowledge the central role of natural gas as a clean fuel for a decarbonized economy; 2) pursue a strategy of diversification of supply routes and sources, by acknowledging and supporting the central role of the Mediterranean region and Italy in the energy policies; 3) support the further integration of the Italian system into the European one, both in terms of rules, infrastructure and hub liquidity. All these actions, taken together, shall promote the role of the Italian gas market in Europe. This would allow Italian and European businesses and citizens to benefit from higher security of supply, increased upstream competition leading to lower energy prices, and a sustainable energy mix.
Energy, Renewable Energy, Energy Regulators, Industry, Environment, Security of Gas Supply, Energy Efficiency, Internal Market
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Publication date: 
Thursday, December 3, 2015
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