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REF-E Scenarios: Update of March 2021

The post-pandemic Italian GDP recovery is on track, with the electricity demand almost back to pre-crisis levels giving ground for hope in the real economy resilience. Should an efficient planning of the huge European Union reconstruction funds be implemented, this could lead to a sustainable growth path in line with emission reduction targets. Short- to medium-term market trends are expected to be driven by the economic recovery and the commodities dynamics, while new Capacity Market auctions could be necessary to support energy transition preserving system adequacy conditions in the long-term horizon. Depending on the extent of the new capacity entering the market, this may have significant impacts on the electricity Day-Ahead Market competitive dynamics.

  • The second wave of the pandemic delayed the recovery path, weighing on 2021’s Italian economy growth potential. The resilience of the industrial sector limited Q4-2020’s GDP fall though, and the economy is now back on a growth path. The government’s handling of the over 200 billion euros of European funds (PNRR) will be key for achieving the recovery target. Should an effective financial planning be implemented, this would support a sustainable rebound of the Italian GDP back to pre-pandemic levels by year 2023 and to a stronger growth going forward. The fall of commodities and energy prices dragged the average Italian consumer price index for year 2020 to zero: the recovery of the energy sector will be key to support inflation. Both the US and the EU are putting in place massive expansionary measures to support the economy and prices. With inflation going back on a healthy track, the FED easing potential is perceived as wider than the ECB’s though, which may support the exchange rate in the short-term.
  • Saudi Arabia’s reaffirmed role as the OPEC Plus leader makes the oil market supply-driven and supports prices in the short-term, while a progressive move towards a structural rebalancing of the market is expected over the coming years. Despite an increased attention to climate change, the Chinese demand of coal is expected to keep growing in the short- to mid-term, supporting prices and influencing the European reference API2 index consequently.
  • Accumulated delays in new investments may have a mid-term impact on LNG market, with the combination of new capacity growth deceleration and demand growth resumption possibly causing winter shortness and upward pressure on prices. The recovery in gas demand supports the increase of the TTF price reference in the mid-term and the PSV consequently. Global LNG dynamics will also have a key role in leading European gas prices.
  • The change in the natural gas import mix, with the progressive increase of arrivals from the southern areas to Italy (TAP and North Africa in particular) drive our hypothesis of a gradual closure of the PSV-TTF price differential.
  • Market participants are buying CO2 permits not just to cover CO2 emissions but also for investment purposes, with the perceived commitment of EU commission to reaching 2030’s decarbonisation target supporting prices on a stable growth path.
  • PSV prices recovery pace allows for favourable coal-to-gas switching conditions in the short-term, with the CO2 price up-move helping to anticipate the economic phase-out of coal-fired capacity.
  • Switching conditions in thermoelectric merit order in Europe contain the evolution of net import flows in the short- to mid-term. From 2025 onwards, the gradual phase-out of coal-fired and nuclear capacity in continental Europe could lead to a progressive reduction of imported energy, assuming a partial achievement of 2030’s renewables targets by European countries. Gas-fired production consolidates its position in the short/medium-term After 2025, it will be challenged by the potential acceleration of renewables development though. Strong coal-to-gas switching dynamics determine the economic phase-out of coal-fired plants over the next few years, with the administrated coal phase-out bringing the electricity production from coal-fired plants in the peninsula to an end from 2025 onwards. Sardinian coal-fired units will still be needed to guarantee the island system security until proper gas and power infrastructures are realized on the island.
  • The new capacity entering the market could have relevant impact on the electricity market competitive dynamics. The potential impact of Capacity Market auctions on the electricity markets is still quite uncertain. Risks for the new projects selected in the first run of auctions are primarily related to authorization obstacles and delays in the construction phase that make impossible to respect the deadlines established by the mechanism. The outcome of the 2022-2023 CM auctions is expected to result into nearly 6.4 GW of additional installed capacity which will join the market progressively in the next years.
  • The Italian NECP (or PNIEC, Piano Nazionale Integrato Energia e Clima) renewable energy target – 55% of GDC (gross domestic demand – of electricity) in 2030 - could only be achieved through a significant turnaround in the new RES installed capacity trajectory over the next few years. Moreover, the European upward revision of 2030 targets could require a stronger effort for the Italian power system, that could be committed to reach a 65% GDC renewable energy coverage in 10 years starting from the current level of around 38%.
  • Decreasing costs of renewable technologies and efficient market signals could lead to achieving the PNIEC targets by year 2030, compensating for inadequate permitting procedures, regulatory issues and/or high market risks, which may limit RES investments.
  • Renewable market parity, jeopardized by extraordinary market conditions in 2020, consolidates during the post-pandemic recovery phase. Should the current deadlock of permitting procedures be solved, this would accelerate the new renewable capacity deployment. Market parity could be reached from 2021 for fixed-tilt PV technology driven by bullish commodity trends. Renewable overgeneration could become significant in the long-term, following the high renewable penetration in the energy mix. The development of storage technologies could mitigate the market countereffects.
  • Investments in power intensive electrochemical storages could just become in-the-money in the mid-term: revenue streams derive from the participation to the ancillary services market – and the provision of specific ancillary services to the TSO - and could be sustained by the new regulation of dispatching market that will be introduced by the TIDE reform. Energy intensive storage assets will gain market shares in the long-term when time-shifting application on the DAM could become economically attractive.
  • The Italian Market Design reform - aiming at a full revision of dispatching rules for an efficient integration of renewable sources in the system - could foster new opportunities for innovative technologies contributing to system flexibility.
  • Strong commodities upward trend and favourable import dynamics will guide electricity price increase until 2025. In the medium-long term, PUN is expected to stabilise sustained by ETS price despite the growing share and competitiveness of the renewable sources. Increasing solar penetration significantly impacts prices during central hours of the day and exacerbates daily price differentials in the long-term.
  • The new market zones perimeter could mitigate systematic congestions among zones over the next few years, especially between Sicily and Calabria, but renewables variability could impact on future price differentials. The progressive convergence of zonal prices in the mid/long-term horizon will be achieved through the realization of grid reinforcements as planned by Terna.
  • The CSS level is strictly connected to the evolution of the CCGTs market share: after the short-term bullish effect of the coal-to-gas switching, the new wave of investments brought by the Capacity Market auctions is supposed to strongly emphasize market competitiveness, amplifying potential missing money and consequent mothballing risks for existing CCGTs.
  • The cannibalization effect becomes evident on solar captured prices after 2025, especially in the market zones with a high renewable penetration and limited interconnection capacity. Wind generation is less concentrated than solar production and its greater distribution over the year and the hours of the day leads captured prices to align with – or even outperform - baseload prices. Captured prices of run-of-river hydro generation are more sensitive to seasonal natural inflows trends than to hourly variability.
  • ASM market volumes could decrease in the next few years guided by fundamentals and the new zonal configuration. The growth of non-programmable renewables will increase security requirements in the mid- and long-term. Ancillary services could be supplied by both innovative technologies, such as electrochemical storage, and gas-fired units. The resolution of grid bottlenecks and the penetration of competitive BESS are among the main drivers of the future ASM market dynamics. CM strike price could have a cap effect on ASM prices.

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    The REF-E scenarios are complete market studies, processed every four months, setting out the evolution of the Italian electricity market up to 2040. The accompanying documents put the reader in a position to investigate the methodological assumptions and knowledge of the main results presented.

    In particular, the scenarios show:

    • fuel prices
    • electricity demand
    • the development of the transmission grid
    • production capacity from renewable sources
    • thermal generation
    • marketing strategy
    • the safety and effectiveness of the system

    The REF-E scenarios arise from in-depth and accurate understanding of the needs of the people who work in the energy markets in terms of strategic vision. These rich, detailed and reliable information products are able to respond fully and efficiently to the needs of their users.

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