Gas Market Liberalizations in Italy and Europe
Natural Gas Europe was pleased to have the opportunity to speak with Michele Polo, Director of IEFE, Centre for Energy and Environmental Economics and Policy at Bocconi University. We spoke about Italy, Europe and energy market liberalisations.
France is increasing the share of supply indexed to the spot market from 36 to 45%, as the head of the Commission de Regulation de l’Energie said recently. Do you see a similar trend in Italy?
There is no public evidence of whether long term contracts have been updated introducing some indexation to spot prices. A couple of years ago Gazprom refused to revise a contract with Eni along these lines, claiming that the Italian hub (PSV) was still too small and unreliable to offer a price benchmark for indexation. It may be that the progresses in terms of volumes and alignment with the other European hubs in terms of prices might candidate PSV to be a price benchmark in future revisions. The Italian regulator, instead, has already used indexation to the PSV price in the mechanism that sets the price for final users.
What is the difference between Italy and other big European markets in terms of market structure, liberalization, contracts and clauses?
Italy is one of the main European markets for gas. Its demand by power stations has been until recently very large, amounting to more than one third of total demand. Small scale industrial firms, the distinctive element of the Italian industrial structure, instead do not support a strong demand from industrial users, that amount to less than one third. The supply side has been vertically unbundled, with Snam Rete Gas, the TSO, being in the process to be sold. Italy imports gas mainly through pipelines from Russia and North Africa, with an increasing share from northern Europe and the central Europe gas hubs. The domestic production (less than 10%) is falling. There are only two LNG terminals operating.
Can Italy become a Mediterranean gas hub for Europe? What are the relevant factors that could help Italy in this process? What’s the role of ENI?
In my view the geographical position of Italy and the distance from central Europe do not help, together with the fact that a liquid gas hub needs to be connected to LNG terminals and not only to pipelines. Eni, being burdened with a large portfolio of long term contracts, might have an incentive to develop a domestic gas hub that is pivotal to the entire area, and not only to the Italian gas system.
To be a hub, gas must flow liberally. Are the present contracts signed by Italy in line with this “free flow”?
Gas hubs develop when the market designs and regulation creates the conditions for trade. Then, gas hubs typically start to develop to meet balancing needs, and then, when improving in liquidity and price reliability they become also a parallel source of gas provision in alternative to long term contract. European gas hubs are converging to a common regulation about entry-exit model, standardized contracts and transparency rules.
What’s the consequence of the present situation for private users?
Europe is experiencing a wide oversupply of gas, due to the redirection of gas flows no more directed to the US market (shale gas) and to the fall in demand. Spot prices fully register this adjustments and are falling, possibly to the benefit of final users. Falling prices, however, are creating serious problems to shippers committed to long term contracts with producers burdened by take or pay clauses and oil indexed prices.
To what extent the Italian gas market is liberalized? What’s the easiest way for legislator to promote further liberalization?
The prevalence of long term contracts and the scarcity of LNG terminals have slowed down the liberalization process in the 2000’s. Recent developments, including the vertical separation of the gas transmission, and the opening of international transport capacity has improved the performances, with a substantial convergence of spot prices to the levels of the other European gas hubs. A more effective opening of storage facilities is another important step to be concluded.
Does it make any sense to speak of one European gas market? Are there any events/policies that could prompt a further integration of national gas markets?
It depends on the development of interconnections and of reverse-flow. Apparently the spot prices in the main European hubs are converging. Still, there are several differences in the development of wholesale markets and in the demand and supply conditions across member states.
Sergio Matalucci