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REF-E Scenarios Update I2022 March-April 2022

Geopolitics and economics reshape the energy market framework


The invasion of Ukraine brought a structural break requiring a review of the premises on which the energy markets long-term scenarios are based. The immeasurable humanitarian tragedy combines with economic disruption and new geopolitical scenario still to take shape, which would likely be the key determinant for the energetic future of the European continent. New gas and electricity market forecasts must now take into account the diverse geopolitical and economic hypothesis deriving from the potential war duration. How the crises may develop and eventually end and how the European Union and each single nation would react to the inevitable disruption generated from the deterioration of both diplomatic and commercial relations with Russia are also seen as key determinants of the future equilibrium of the energy markets. In this perspective, we defined three different scenarios.


Worst Case Scenario
Permanently High Prices and Energy Transition Failure

Should Russia succeed in seizing Kyiv and Ukraine, this could take four to six weeks. However, given the durability of the Ukrainian resistance and its long history of pushing Russia back, according to US and UK intelligence there is a high risk for war lasting over 10 years. This would have highly disruptive economic and commercial consequences, leading to a long lasting Second Cold War, leading to:
  • commercial relations and trade flows interruption amid cross sanctions, import-export bans and economic retaliation
  • commodities supply sharp reduction and persisting high prices
  • gas, oil and coal arrivals from Russia sharp reduction: gas long-term contracts may not be honored and the Nord Stream 2 would be definitively dismissed
  • long lasting (10 years) European negative and zero economic growth
  • investments fade
  • energy transition fails: coal, oil and gas maintain a predominant weight in the production mix
  • the ETS system is suspended
An almost complete interruption of gas supplies from Russia would prevent storages to reaching last year already below average levels, putting the system security at risk and keeping prices under upward pressure until the end of decade. A geographical redistribution of gas flows, with the Russian supplies possibly being redirected to Asia and the US LNG to Europe to which an increase of exports from North Africa may help a rebalancing of the market. However, investments in infrastructure to guarantee the efficiency of a new European distribution profile may take time and a return of coal thermoelectrical production and a quota system limiting consumptions would most likely be needed in the short-term. High gas prices would reflect on electricity prices, with a strong impact on inflation and demand, fueling a vicious circle of economic contraction, low investments, high prices, low purchasing power and demand. In such extreme conditions, the ETS CO2 system may be suspended in the attempt to limit the prices surge.


Reference Scenario
Temporarily HIGH Prices and Energy Transition Pause and Resumption

A diplomatic agreement, partially backed by the West, is reached, but diplomatic and commercial tensions remain. This would require Ukraine to sign a treaty of neutrality and may allow an economic move towards the West, supported by reconstruction aids, while most of the sanctions on Russia should be lifted. This would lead to:
  • commercial relations and trade flows progressive resumption, despite some import-export bans and sanctions possibly remaining in place
  • commodities supplies resumption and price trends progressive normalization starting from year 2023
  • gas, oil and coal arrivals from Russia resumption, long-term gas contracts related flows are guaranteed
  • gas supplies from alternative routes increase limiting prices upward potential
  • 1.5% to 2.0% economic contraction over the next two years, followed by recovery and investments coherent resumption
  • energy transition pauses over the next two years amid economic decline hitting investments, but then resumes and accelerates, favored by the willingness not to depend on supplies from Russia
  • the ETS system reforms are delayed to avoid additional pressure on energy prices
Reduced gas supplies from Russia (in this scenario assumed to stabilize at current levels) would not prevent the European storages to reach last year (below average) levels or even higher ones, should special measures be implemented by the EU Commission. A geographical redistribution of gas flows, with part of the Russian supplies possibly being redirected to Asia and the US LNG to Europe. An increase of arrivals from North Africa would be key to rebalance the market too. Investments in infrastructures to guarantee the efficiency of a new European distribution profile would be incentivized and may temporarily distract resources from the RES development. The energy transition would remain in focus though and once gas supplies are guaranteed the regulatory framework should lead to an acceleration. The ETS system reforms aimed at its reinforcement and initially supposed to be implemented starting from this year are delayed to avoid additional pressure on energy prices during the economic contraction period. The ETS key scope would be temporarily limited to the coal to gas switching consequently and other more effective measures are taken to support the transition process. Gas prices could remain under pressure till the end of the next winter season, but special measures limiting the upside may be implemented. This would reflect on electricity prices and initially weigh on demand.


Best Case Scenario
LOW Prices and Energy Transition Acceleration

A diplomatic agreement fully backed by the West and China is reached or Putin falls and a new pro-West Government is installed. Ukraine signs a treaty of neutrality and firmly moves towards the West economy, possibly being included into the EU. Reconstruction aids would be massive and all the sanctions on Russia would be lifted. This would lead to:
  • commercial relations and trade flows resuming quickly, following import-export bans and sanctions immediate and total lifting
  • commodities supplies resume and price trends revert downwards sharply
  • gas, oil and coal arrivals from Russia fully resume, long-term gas contracts related flows are guaranteed and the Nord Stream is approved before the year end
  • gas supplies from alternative routes increase adding to the overall prices downward pressure
  • the economy suffers a less than 1.5% contraction over the next two years, followed by a firm rebound led by investments quick resumption
  • energy transition accelerates supported by coordinated reforms, administrative resolutions and significant private investments
  • the ETS system key scope remains is just temporarily limited to the coal to gas switching while other more effective measures are taken to support the transition process in the short-term, but reforms are fully implemented going forward
A full resumption of gas supplies from Russia (in this scenario assumed to recover back to pre-crisis levels) would allow the European storages to reaching above last year levels, with special measures implemented by the EU Commission also supporting. This would let gas prices move quickly lower and free resources to incentivize both a geographical redistribution of gas flows and the energy transition process. The ETS system reforms which were supposed to reinforce the system may still be put on hold in favor of an administrated transition mechanisms, which would guarantee a faster transition attracting private investments into a certain regulatory framework. Its key scope would therefore be limited to the coal to gas switching going forward. A steady downtrend in gas prices would reflect on electricity prices incentivizing demand and an economic recovery.

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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.

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