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REF-E Scenarios: Update of November 2020

Despite the timing of the post-COVID-19 recovery being still uncertain, planning effectively the huge European Union reconstruction funds use could lead to a sustainable growth path in line with emission reduction targets. Demand, prices and investments short-medium term recovery signals would represent the first and necessary step in this direction. We expect an overall positive outcome from the emergency measures put in place to relaunch the economy, with this study mainly focusing on the short to medium-term market dynamics closely related to the economic recovery trajectory, while our expected long-term trends remained stable compared to the previous update.

  • In Italy, notwithstanding the current new worsening of the health alert, the recession reached its peak in the second quarter of 2020. However, there is still a non-negligible risk for the pandemic second wave and related containment measures aggravating the economic decline, with a potential negative impact on next year recovery.
  • The expected normalization of the economic activities and travels supports the international demand for oil. The Chinese economy recovery is a key driver for commodities and fossil fuels, natural gas and coal prices, influencing the European reference indexes consequently.
  • The Asian demand variations are also key in determining the European inbound LNG fluxes, in tandem with the growth rate of new liquefaction capacity, which was negatively impacted by 2019 and 2020 prices sharp decline. A reduction of the LNG supplies availability to Europe, combined to the expected gas demand resumption (possibly enforced by still favourable coal-to-gas switching in the electricity sector), supports a short-term positive outlook on gas prices.
  • The CO2 price is on a recovery path, following last summer encouraging signals from the economy and the European Commission decision to rise the 2030 decarbonisation target to at least 55%, with a potential reinforcement of the ETS role as key driver of the energy transition.
  • The transition of the generation capacity towards low carbon technologies continues over the next decade, with renewable sources and high efficiency CCGTs gradually replacing coal-fired generation and coping with an expected net import fluxes decrease from central Europe.
  • Electrification and final consumptions efficiency drive the long-term electricity demand trajectory, with the decarbonisation economics dependence on consumption electrification and electricity intensity expected to decrease, in line with higher electricity efficiency performances. The development of hydrogen applications for industrial processes decarbonization, still undergoing an exploratory phase, could significantly influence the long-term demand trend.
  • Net import could decrease in the short-term due to contingent factors. From 2025, the evolution of the European energy mix will significantly impact on cross-border dynamics.
  • Gas-fired production consolidates its position in the short/medium-term thanks to favourable coal-to-gas switching conditions and the reduction of imported energy. After 2025, it will be challenged by the potential acceleration of renewables development though. The Capacity Market supports the coal phase-out from 2025: Sardinian coal-fired units will still be needed to guarantee the island system security though. After 2030, new CCGTs - expectedly retrofit of existing plants - and peakers investments will be needed to guarantee the long-term system adequacy.
  • Solar 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. Renewables perspectives are in fact promising, with decreasing technology costs and improving best practices in exploiting the potential of PPAs supporting merchant investments.
  • 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.
  • Until 2025, the PUN upward trend is mainly driven by the commodities market recovery. From 2025 onwards, the combined effect of a rising ETS price - sustaining decarbonization – and increasing market competitiveness leads to the electricity prices stability.
  • 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.
  • Tracker PV penetration could limit the spread between market prices over central hours and the evening spike in the long-term, due to a systematic solar cannibalization effect partially mitigated by the storage activity.
  • ASM market volumes could decrease in the next few years guided by fundamentals and new zonal configuration. The growth of non-programmable renewables will increase security requirements in the mid/long-term. Ancillary services could be supplied by both innovative technologies, such as electrochemical storage, and gas-fired units.

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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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