With a final decision on the 2030 framework for EU climate and energy policy approaching, and a highly unstable international energy situation, the Italian Presidency of the EU should focus squarely on energy. However, the Italian energy effort is vague, focused on the short term and fails to initiate the measures the EU and Italy need to solve the energy and climate crisis, writes energy journalist and economist Lorenzo Colantoni.
Italy has never had an easy life when it comes to energy. It has had to import electricity, oil, coal and, more recently, gas throughout its history as an industrialised country. Deeply scarred by the 1973 and 1979 oil shocks, Italy’s dependence on energy imports went below the 82% threshold just once since 1990, touching the highest point in 2006 (almost 90%). Now import dependency is still around 82%.The countries from which oil, gas and coal are imported, such as Libya and Russia, are neither reliable nor stable. Diversification is possible but comes at a price. All these factors have resulted in high energy prices, in particular for industrial consumers who, on the basis of Eurostat data, paid 31% more that the EU average for electricity in the years 2008-2013.
However, this perilous situation has never been accompanied by an adequate energy policy, especially of late. The Italian position was driven by EU strategy. As a result, the country found itself involved in an overly ambitious European energy framework dominated by the development of renewable energies, which, at the time, were not produced in Italy. When the EU’s 20-20-20 package was defined, Italy did not have any of the global leaders in windmills or solar panels production that Germany had (like Nordex, SolarWorld, Fuhrländer and others), yet the two countries agreed to meet similar targets (17% of energy demand from renewable energies by 2020 for Italy, 18% for Germany). A great chance for Chinese producers, and a major expense for Italian taxpayers.
So clearly Italy has everything to gain by an effective energy framework, integrated into a wider European market and legislative framework. Its Presidency of the EU is a great opportunity to move in this direction. Unfortunately, the country seems ill-prepared to take it.
First pillar: 2030 package
So what is the Italian programme in energy for the EU? It is defined on the basis of four “closely interlinked pillars”: the framework for climate and energy beyond 2020; EU energy security; the completion of the single energy market; and external energy policy.
The first pillar of the Italian strategy concerns the finalisation of the EU’s energy and climate strategy beyond 2020 to 2030. There is a clear intention not to propose a different structure, or to go as far as to discuss an Italian model for the EU’s climate and energy policy. The strategy limits itself to: “[…] promote an approach that takes due account of the impact of the policy on energy prices and industrial competitiveness […]”
Italian companies paid up to nine times the grid fees of their German equivalents and up to 4.5 times the German expenditure in RES levies in 2012
This is a justified concern for Italy. In recent years, grid fees and RES levies contributed to an increase in already high energy prices, hampering the competitiveness of Italian companies on the EU and global level, in particular in the energy intensive sectors. A series of studies developed by the Centre for European Studies (CEPS) for the EU Commission show that Italian companies paid up to nine times the grid fees of their German equivalents and up to 4.5 times the German expenditure in RES levies in 2012. While Italian consumers generally paid less for their energy than the Germans, the difference was not significant. The Italian problem with renewable energies is more on the internal dimension than on the EU level, mostly in the lack of a renewable energy industry and of transparency in funding. Therefore, Italy should support a target that would neither hamper the current achievements nor weigh excessively on its competitiveness. A considerable task that will have to be achieved mostly through domestic measures.
The second point of the first pillar is open to a number of interpretations. The programme says: “Maximum coherence between the climate/energy framework and the energy security strategy will be ensured. In this vein, the proposed system of governance will be further defined in order to take account of the national specificities in terms of the energy mix and the degree of dependence on fossil fuels, knowing that the discussions on the framework for energy and climate policy up to 2030 will also contribute to a common European vision of the energy mix.”
This is vague and seems to propose two different and conflicting objectives: taking into account the national specificities and contributing to a common European vision of the energy mix. The Italian presidency has not defined its approach to these two positions, and it is not clear how it could. The problem here is the true definition of a coherent and effective EU energy policy, something that Member States have been striving to achieve for decades and failed. However, such a policy is needed now more than ever.
Why is it so hard to define a common, European energy policy? On the one hand, Member States are extremely heterogeneous when it comes to energy. Some of them, such as Bulgaria and Lithuania, have an almost complete dependence on Russian gas. Some, such as Spain, rely on Algeria and Northern Africa while others, such as the UK, rely on Norway and their own resources. One of the few ways to take into account this heterogeneity would be to have non-binding targets which, however, in EU terms translates into no targets at all. Countries have often proved they do not have the will to act as a Union in the energy sector. For example, Italian oil company ENI is one of the major financiers of the South Stream gas pipeline which the Commission actively opposes. Italy also signed a number of agreements that, if not detrimental to other Member States, surely did not take them into consideration, as with Libya in 2008.
The solution to this dilemma is maybe in the third point of the pillar: governance,to which the programme refers when saying that the proposed system of governance will be further defined. It is clear that the complex overlap of EU targets and institutions with national competencies and regulators has to be reshaped, defining powers and limits. However, what is of foremost importance is to act towards a proper Energy Union, a decision that entails the transfer of powers from Member States to the Commission, or to a dedicated EU institution.
The designation of a Vice-President for Energy Union and the merger of the climate and energy portfolios into one could improve coordination among commissioners and different sectors. While this could exceed the role of the Presidency, Italy should try to steer energy governance in this sense.
Second and third pillar: energy security and internal market
The paragraph on the internal energy market is probably the most interesting element of the whole programme. It notes: “The Italian Presidency will promote a debate on the realisation of new interconnection capacities towards the less interconnected European regions and of new reverse flow capacities and the development of coordinated regional emergency plans , also with the aim of improving the diversification of gas supply routes and ensuring energy security in normal and emergency situations”.
The question is: how should this be improved? A single internal market will never work if there is no interconnection among Member States. Considering gas, Italy seems committed to enhance its external energy infrastructure, mostly through the development of the Trans-Adriatic Pipeline and the enhancement of its LNG facilities. The two measures have been already largely considered in its National Strategy for Energy (SEN) and in the Law Decree Sblocca Italia, which was adopted in August 2014. What is needed now is the addition of the EU dimension, and on this the Italian Presidency could be of key importance – and not just for the sake of the internal market, but also from the perspective of energy security.
Integrated gas markets are also required in case of emergencies, such as the gas cuts in 2005 and 2009 during the Russian-Ukrainian energy crises. Italy could play a key role in delivering emergency supplies of gas to Member States whose supplies are less diversified, such as Bulgaria. The country has large storage capacity, more than 16 trillion cubic meters (tcm), the second largest in the EU-28 after Germany. What is missing is the infrastructures to deliver this capacity. Italy has no gas connection with France and only reverse flow capacity with Austria. Hungary, Romania, Bulgaria and Greece, some of the most endangered countries in the event of a cut in the supplies of Russian gas, have no reverse flow capability, impeding further integration with the Italian gas market.
In 2014, Italy was declared the second most energy efficient country in the world by the American Council for an Energy-Efficient Economy
The EU Commission estimates that € 200 billion of expenditure in infrastructure is necessary to develop these connections for gas and electricity by 2020.The planned EU contribution is around € 5 billion. Therefore, we should probably rephrase the question: who should pay for this? Some might say: the Member States. However, even assuming they have the money, it is not clear they are willing to spend it on EU projects. The failure of the EU-supported Nabucco pipeline should not be blamed only on Russia. Member States such as Italy and Bulgaria supported South Stream and the Trans Adriatic Pipeline (TAP), the latter just recently “converted” into a European project. The Commission has warned Bulgaria to stop the construction of South Stream, yet to no avail.
One way forward is to take action at the regional level, as the European Regulator’s Group for Electricity and GAS (ERGEG), now the Agency for the Cooperation of Energy Regulators (ACER) has long been pleading for. A proposal that the Forum of Florence discussed last May and is likely to discuss again at the meeting of next November, under the Italian Presidency. Regional markets require smaller investments, a simpler governance and an easier definition of objectives. Among the various options, the Italian Presidency should not undervalue the role Italy could have for a Balkan and South Eastern European gas market.This project has already been considered by the Energy Community Treaty, which applies EU energy regulation to non-Member States in the area. Italy could have a leading role thanks to the future connections to Greece and Albania through the TAP and the Ionic Adriatic Pipeline (IAP).
Fourth pillar: external dimension
Considering the external energy policy, the key word of the program is diversification. The focus is here on two areas: the Mediterranean Sea and the Caspian area.
The programme extensively considers the first: “The Presidency also intends to focus attention on Euro-Mediterranean relations. In this regard, the Presidency will organise an event focusing on the development of interconnection projects, on the exploitation of hydrocarbons in North African countries (Algeria, Tunisia, Egypt and Libya) and in the South-Eastern Mediterranean (Cyprus and Israel), and on the safety of offshore hydrocarbon prospection, exploration and production activities.”
Exploiting its favourable geographic position, it is in Italy’s interest to develop a Southern alternative to Libya. Algeria seems an interesting option, having represented 18% of Italian gas consumption in 2013, compared to the 8% of Libya and the 40% of Russia. However, Italian companies do not share the same appreciation in Algeria as they have historically had in Libya. In 2013, Saipem, ENI’s subsidiary, faced accusations of corruption that contributed to the loss of almost a quarter of its market value. A tough situation that was not eased by Algeria’s stubbornness on its expensive take or pay contracts. However, Italy tried to resume relations since early this summer, when the industry minister Federica Guidi landed in Algiers to discuss new gas supplies. The focus of the Law Decree Sblocca Italiaon gas infrastructures could also kickstart the construction of the Galsi pipeline, linking Algeria with Northern Italy and bringing supplies to the otherwise isolated Sardinia. Furthermore, Algeria and Egypt are promoting LNG infrastructures, the Algerian being developed by Saipem itself.
Where else should Italy, and the rest of Southern Europe, look to enhance their supplies? Further development on the Azeri and Turkish side could be interesting, but not necessarily convenient. The development of the Trans Adriatic Pipeline (TAP) will link the Caspian area with Italy. However, the size of the Turkish market could absorb further supplies from Azerbaijan. The Trans-Anatolian Pipeline (TANAP) should link the Caspian area with the Anatolian peninsula, but it appears more focused on Turkey, as opposed to being a supportive measure to the Europe-bound TAP.
Furthermore, the Presidency programme mentions twice the Trans Atlantic Trade and Investment Partnership (TTIP) , the still to be agreed free trade agreement between the UE and the US, with reference to energy security. Nonetheless, it is unlikely that US oil and gas exports will materially change the situation for Europe in the short term.
Italian Prime Minister Matteo Renzi appeared more interested in drilling oil in Basilicata than in energy efficiency
The programme does not mention another interesting option, namely to look at Iran as the real game changer. Italy continued having relations in the energy sector with Iran even when sanctions were placed. Emma Bonino, former Minister of Foreign Affairs, was the first foreign minister to visit Iran in ten years, in 2013. Iran showed itself keen to supply the EU market, offering gas supplies in the case of Russian gas cuts in the Ukraine crisis. Iran has vast reserves, the world’s fourth largest proved of crude oil and second of natural gas, while lacking the technology to fully exploit them. Something Italy could easily provide. Despite the refusal of Iran to support action against ISIS, the newly nominated High Representative Federica Mogherini could favour a rapprochement between Iran and the EU. And, of course, even closer energy ties between Iran and Italy.
What is missing: energy efficiency
While the programme gives a good deal of attention to the troubled (and to some extent doomed) refinery sector, the Italian Presidency seems to forget what the country can do best: energy efficiency.
In 2014, Italy was declared the second most energy efficient country in the world by the American Council for an Energy-Efficient Economy, and it is still improving at a fast speed. It has already achieved 60% of its 2016 target in 2012, having a stronger growth in renovation projects than countries such as the UK and a less energy intensive industrial sector than Germany, the most energy efficient country in the world. It was the first country in the world that introduced smart metering systems on a national scale and its power generation system widely uses energy efficient combined cycle plants. Finally, it has a well-structured national plan for energy efficiency, the Piano d’Azione per l’Efficienza Energetica 2014. This being so, we would expect a more ambitious reference to energy efficiency in the Strategy than this: “The Presidency will steer a debate on the Commission Communication on energy efficiency, on its links with the climate and energy framework and on focusing on harmonising the system for measuring national results.”
Paradoxically, far more space is dedicated to veterinary and phytosanitary issues. However, this is not surprising. Italy has always been forgetful on the importance of energy efficiency, especially at the EU level. While planning to exceed the EU target on energy efficiency (20% improvement by 2020), Italy never pushed for a binding target. When a discussion on the energy efficiency target took place this summer, several Member States, led by Germany, called for a higher, binding target, but Italy decided not to be involved. The Programme reflects this attitude, which is however hard to understand.
A country that has some of the lowest hydrocarbons reserves in the EU and is struggling to make its renewable energies work must focus on energy efficiency. Italian Prime Minister Matteo Renzi, when proposing his new law Sblocca Italia in August, appeared more interested in drilling oil in Basilicata, where some of the largest unexploited Italian reserves are meant to be located. True, hydrocarbon extraction could absorb some of the redundant workers of the refining sector and enhancing the already high level of efficiency in Italy could seem expensive. However, it is more likely instead that the Presidency is not focusing on this as it is more willing to spend its political budget on softening the impact of the crisis of the hydrocarbon sector.
What the Italian Presidency could do is focus on a high, binding target for service providers, as shaping behaviour of consumers is more difficult. Separate targets for buildings, transports and production could be considered. Of course, differences among the Member States should be taken into account. What is of foremost importance is a coherent, well-structured approach, that does not wander between the EU and the national level, the binding and the non-binding.
Since the election of Mr. Renzi, the key words of Italian politics have been “structural reforms”. Yet, rather than following this new attitude of the Italian politics, the energy programme seems to follow the tradition of previous EU energy policy. It focuses too much on the short term and appears unwilling to develop a different energy framework for 2030 that would take into consideration Italian and European needs.
What the Presidency is proposing are palliative measures, while Italy and the EU need a fundamental change in their approach to energy policy.