The Energy Regulation and Markets Review: Italy

Overview

The energy market in Italy is a sector that is constantly and rapidly growing throughout the country, both in terms of the regulatory aspects and from the point of view of investments.

For this reason, also driven by European Union initiatives, domestic government policies have embraced the need to prepare legislation that could adequately incentivise the energy sector and, in particular, the renewable energy sector.

The general principle that guides the energy sales segment, as well as the transport sector, is liberalisation modulated by the possibility for the regulatory authorities to exercise prudential control over the markets to monitor their correct development.

From the point of view of the construction of new plants and the management of existing ones, there has been an important effort to simplify authorisation procedures, without forgetting the need to protect opposing interests, including protection of the environment, the landscape and the cultural heritage.

The drive to simplify authorisation procedures is particularly strong with reference to plants for the production of energy from renewable sources which, also because of the objectives identified at supranational and international level, have been the subject of specific incentives. This indicates a clear preference, acknowledged at the European level, for these methods of energy supply.

In the following chapter, therefore, an attempt will be made to provide a brief overview of the national panorama of this sector, examining some of its most important components.

Regulation

i The regulators

The Italian sectoral system attributes the power to regulate energy to a single body called the Regulatory Authority for Energy Networks and the Environment (ARERA).

As the name suggests, this is the regulatory authority that acts in the widest range of energy sub-sectors. ARERA regulates and controls electricity, natural gas, water services, waste cycle and district heating. It was established by Law No. 481 of 1995 and is an independent administrative authority that operates to ensure the promotion of competition and efficiency in public utility services and to protect the interests of users and consumers.

These functions are carried out with a view to harmonising the economic and financial objectives of the subjects performing the services with general objectives of a social nature, the protection of the environment and the promotion of an efficient use of resources.

It is, therefore, a body responsible for encouraging the development of competitive markets for electricity, natural gas and drinking water, district heating, district cooling and urban and assimilated waste sectors, mainly through the regulation of tariffs, access to networks, service quality standards, market operation and protection of customers and end users.

ARERA's regulatory activities are expressed in the form of resolutions, with which the authority regulates individual matters such as electricity and gas.

ARERA is also able to use other different instruments such as, for example, consultations, through which it provides guidelines, decisions and sanctions.

ii Regulated activities

Licences to operate in matters regulated by ARERA are required in almost all sectors: electricity, gas, water and waste. In these sectors, licences are essentially required to access and use energy networks.

The processes required to be able to access the networks and use the tariffs determined by ARERA are structured differently depending on the sector. Generally, an application must be submitted to the competent authority. This application is examined during a preliminary investigation after which, if necessary, a given activity is authorised. Consent is conditional on operators meeting technical and economic conditions.

iii Ownership and market access restrictions

Regulation implies restrictions that affect the positions of the operators, acting in the energy sector. More specifically, these restrictions manifest, mainly, in the form of constraints on fixing prices, which must necessarily conform to the tariff indications determined by ARERA, and on the possibility of constructing and managing energy plants and assets outside the boundaries drawn up by the competent authorities.

iv Transfers of control and assignments

The transfer of ownership of energy installations is subject to authorisation regulations. Authorisations are obtained by submitting applications to the competent authorities.

In general, the procedure is carried out online. The person taking over is required to register on the online portal and submit the variation request.

It is necessary to attach all the documentation proving the transfer of the availability of the plant to this form.

The procedure may take several months.

Transmission/transportation and distribution services

i Vertical integration and unbundling

The current configuration of the transport system for methane gas produced by domestic plants or imported from abroad is through the National Gas Pipeline Network (RNG).

In addition to transferring the quantities of gas up to the interconnection points with the Regional Transport Network (RRT), the local distribution networks and the storage plants, the RNG supplies large industries and thermoelectric power plants.

The system that is created can be qualified in terms of vertical integration, with different operators acting within a wider chain that is divided into different phases: production, import, transport, storage and distribution.

There are two methods of transporting gas in Italy: the first is through methane pipelines, in which the methane is transported in a gaseous state and at high pressure; the second is through transport by ship, using methane ships that transport the methane in a liquid state (liquefied natural gas (LNG)).

The import pipeline is followed by primary and secondary transport pipelines, local transport pipelines and connections.

The gas is transported in methane pipelines that make up an articulated network that extends throughout Italy. This national network is managed by Snam, an integrated company set up to guarantee the regulated activities of the gas sector, and is then divided into other smaller secondary and local networks that allow distribution to users by different operators.

Recently, the directorial decree of 6 December 2018, updating the national gas pipeline network, was adopted.

With regards to electricity, the transmission of electricity and dispatching functions are carried out under a natural monopoly regime and within a regulated market.

Since 1999 the electricity market has been progressively liberalised and consists of four distinct segments. At the source, electricity is generated from fossil or renewable sources in a deregulated market. Then, individual companies distribute the electricity through local networks and market it to end users.

In this context, Terna occupies the central position in the chain, as the entity in charge of transmission (i.e., the management, maintenance and development of the national high-voltage electricity grid) and of dispatching, which consists in managing the flow of electricity on the grid at all times.

Terna operates in a natural monopoly regime within a market regulated by ARERA.

ii Transmission/transportation and distribution access

In the national gas network, despite the fact that the market is, theoretically, a 'free' market, there is still only one operator. This is mainly due to the high costs involved in the construction and operation of large international pipelines.

As far as the local distribution phase is concerned, on the other hand, there are several companies offering the service.

In the electricity sector, as mentioned above, Terna operates in a natural monopoly context, even though the market is subject to regulation by ARERA.

Since the operators act in a natural monopoly, as we have seen, there are no exclusive rights for energy transmission and transport activities.

In recent years there has been a progressive attempt by regulators to increase the level of competition between operators. This objective, however, is currently not easy to put into action, owing to high entry costs.

iii Rates

The rates and terms for transport and distribution are regulated by ARERA.

Instead, remuneration of transmission and dispatch services is guaranteed by Terna and is based on a tariff system established by ARERA through the adoption of specific resolutions.

Total energy expenditure is made up of the following items: energy procurement, retail marketing, taxes, system charges, transport and meter management expenditure and transmission.

iv Security and technology restrictions

The only limitations determined by regulation in terms of national interests and internal security (also relevant in terms of infrastructure protection) are related to the need for the entire transport and distribution chain to comply with the minimum requirements and quality standards set.

In this context, the problem of cybersecurity is also increasingly important. This problem arises, in particular, with reference to the protection of increasingly cutting-edge technologies used in infrastructures. It is therefore necessary to apply a holistic approach to the security of critical infrastructures that takes into account the aspects of cyber and physical security, as a whole, to ensure the resilience of the organisation in its operational capacity and the rapidity of restoring operations in case of cyberattacks on the infrastructures.

Energy markets

i Development of energy markets

The system of energy sales has developed in our country especially in recent years.

There are different markets depending on the type of energy being sold.

Gestore dei mercati energetici (GME) is the company responsible for organising and managing the electricity and gas markets in Italy, as well as ensuring the economic management of adequate availability of power reserves.

The electricity market, also known as the Italian 'electricity exchange' allows producers, consumers and wholesalers to enter into hourly contracts for the purchase and sale of electricity.

Transactions take place on a telematic platform, which is accessible to operators via the internet. The electricity market is essentially divided into two main types of trading, defined as 'forward' or 'spot'.

Lastly, the Ministry of Economic Development manages the list of parties authorised to sell natural gas to end customers.

ii Energy market rules and regulation

The Italian electricity market is managed by the GME, a subsidiary of the Gestore dei Servizi Energetici (GSE), on the basis of specific regulations that establish the rules for the functioning of the market and the participation of operators. These rules are prepared by the GME and approved by the Ministry of Economic Development, after consulting the Authority for Electricity, Gas and Water.

The rules are different for each market, but the general principles underlying the discipline are largely the same.

These principles and the rules that constitute the aim of their application guarantee equality in the access to the market and high-quality standards in the services provided to users.

iii Contracts for sale of energy

As mentioned above, there are two different contractual schemes for the sale of electricity.

The Forward Market consists of bilateral agreements between operators of the sector, in which the products traded tend to be standardised and at a fixed price. These transactions usually take place on trading platforms provided, for a fee, by certain brokers of the sector, such as GFI, TFS and ICAP. There is also a platform made available by the GME, the MTE platform, but, due to the high guarantees required by the GME to participate, it is currently not very liquid. It should be noted that, since energy is a fungible commodity, all exchanges only take place virtually. The platform on which these exchanges take place is called the Energy Registration Platform and is also managed by the GME.

The spot market, which can essentially be traced back to the 'electricity exchange', does not provide for the meeting of two parties, but each operator has the market itself as a counterpart, which provides for the classic meeting between supply and demand and is based on the marginal price system.

Finally, there is a market for dispatching services, which does not involve the formation of a marginal price but uses the 'pay as bid' form and is used by Terna to provide dispatching services relating to the management and control of the electricity system.

Moreover, the GME is also responsible for organising the trading venues for green certificates, energy efficiency certificates (white certificates) and emission trading units.

iv Market developments

In 2000, Legislative Decree 164/00 (the Letta Decree), implemented European Directive 1998/30/EC on the deregulation of supply and demand and on free access to transmission networks for the natural gas sector.

Unlike the electricity sector, the natural gas sector started from a position that was not characterised by legal monopolies at any level of the chain (production, import, transport and consumption).

In practice, however, the deregulation process was following in the footsteps of a de facto monopoly situation that still exists today. The underlying reasons for this situation were that the size of the company needed to enable it to enter into long-term take-or-pay contracts with exporting countries, and to undertake the investments and skills to participate in energy cultivation, transport and storage (i.e., that companies needed to be big enough to be able to operate in this market).

The Letta Decree was introduced in this context with the aim of progressively removing monopolies and creating a level playing field for both supply and demand by guaranteeing free access to transmission networks.

On the basis of these assumptions, the intention of the legislator seems to be to continue to implement further deregulation of the market.

Renewable energy and conservation

i Development of renewable energy

From the point of view of the diffusion of energy production plants from renewable sources and in line with the supranational regulatory framework of an EU matrix, Italy has recently implemented numerous measures to incentivise these methods of energy supply.

At national and international level, in fact, ambitious goals have been set to reduce emissions and improve energy efficiency through the implementation of the most modern technologies available.

The sector is therefore one of the sectors that is most rapidly and constantly evolving.

The main critical issues that have occupied and continue to occupy the national legislator are represented, on the one hand, by the need to simplify and accelerate the procedures for the authorisation of these plants and, on the other, by the need to balance the conflicting interests of environmental, landscape and cultural protection, which these plants, due to their intrinsic constructional characteristics (size, impact on the landscape, noise emissions, etc.), are inevitably destined to affect.

In view of these critical aspects, a number of reforms have been launched, particularly since 2010, aimed both at encouraging the proper integration of plants in the landscape and at preventing local authorities from arbitrarily hindering the installation of such plants in their territories (known as the 'not in my back yard' phenomenon).

From the point of view of economic incentives, the GSE, a public company wholly controlled by the Ministry of Economy and Finance, through which the state implements its policies of direct incentives for renewable energy plants, is of primary importance.

Incentives are regulated according to different procedures depending on the size of the plant. Their disbursement is generally based on selective procedures, after which an economic incentive is granted in proportion to the energy fed into the grid, which is disbursed directly by the manager upon payment of each invoice issued by the plant operator.

Numerous other activities are delegated to the GSE in the field of renewable energy implementation and energy efficiency.

ii Energy efficiency and conservation

Attention to the environment and energy efficiency with a view to safeguarding it has always been a topic of great public interest in the national debate, pursued through the most varied regulatory policies.

To cite just a few of the most recent examples, within the framework of the emergency regulations adopted to deal with the covid-19 pandemic crisis, the legislator adopted a series of measures to support the economy through broad incentives (by means of strong tax breaks and benefits) for energy efficiency and environmental protection, both for individuals and companies, with a view to the more widespread adoption of efficient organisational models for transport, energy distribution and environmental protection, including at the level of local authorities.

For example, tax bonuses of up to 110 per cent of the value of the contract have been provided for the construction and upgrading of buildings to comply with the most advanced energy efficiency standards (thermal insulation, installation of electric vehicle charging stations, etc.). In addition, for the same purpose, measures have been introduced to implement environmentally friendly transport models in local authorities, both public and private, through economic incentives and simplification of authorisation procedures.

iii Technological developments

There are numerous and varied technological development projects for renewable energy and environmental protection.

Of particular interest are the initiatives aimed at disseminating the 'smart-grid'.

Within the framework of the 2014–2020 National Operational Programme for Enterprise and Competitiveness aimed at strengthening national enterprises and increasing investment in key sectors and with a budget of around €3.3 billion, one of the four general thematic objectives is to 'support the transition to a low-carbon economy in all sectors'.

In line with this approach, the Ministry of Economic Development has therefore launched a project aimed at promoting – through direct subsidies – the modernisation and improvement of the efficiency of the electricity grid in various regions of southern Italy (the 'smart-grid call for tenders'). It seeks to provide incentives for the construction, adaptation, upgrading and improvement of smart grids to distribute electricity generated from renewable sources.

The initiative has met with considerable success, particularly among electricity distribution service concessionaires: at the close of the call for tenders (21 August 2020), 35 projects had been proposed, for a total investment value of €224 million. The competent ministry will now assess all the projects and publish the relevant ranking list.

The year in review

The entire energy sector is now influenced by pressure from an increasingly 'eco-sensitive' society and the need to combat climate change that can no longer be postponed.

The concept of ecological transition is now at the heart of European policies, with knock-on effects also in Italian law.

One example is the very recent creation of the Ministry for Ecological Transition (MiTE), following the approval on 26 February of the Decree-law by which the ministries were reorganised. The new institution is undoubtedly the main innovation in this field over the last year.

The MiTE has replaced the Ministry for the Environment and the Protection of Land and Sea and has an increased range of action that absorbs, in addition to all the competences of the former Ministry for the Environment, some of the key competences in the process of ecological transition, mainly related to the energy sector.

The MiTE will focus on three distinct areas:

  1. the protection of nature, land and sea;
  2. ecological transition;
  3. and the interdependence of climate and energy challenges.

From this point of view, the concepts of ecological transition and environmental sustainability certainly represent the macro trends that will characterise the global social, political and economic scenario in the coming decades.

Conclusions and outlook

The energy sector has always been a sector in continuous evolution. It is, pre-eminently, the sector in which the legislator is called upon to keep pace with technological innovations able to impact on energy sources and energy supply methods.

This characteristic is particularly marked nowadays, as we witness profound changes in the scientific field and the declared objective of European states and the rest of the world to openly declare war on climate change.

In the current pandemic context, the focus of the plan for the funds allocated at EU level through the Next Generation EU is precisely environmental sustainability, to which more than 30 per cent of the resources will be allocated.

These resources will have to cover costs related to the implementation of renewable energy sources such as wind, solar and hydrogen, and the transition to a production system with zero carbon dioxide emissions by 2050.

It is likely that this process will produce significant changes in the institutions examined here, such as regulation, electricity and gas markets and the world of renewable energy.

Footnotes

1 Federico Freni is a partner at Quorum Studio Legale e Tributario Associato. The author gives special thanks to Andrea Sterlicchio de Carli and Gianluca Favaro.

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