The soaring cost of gas and electricity, of which Italy is a net importer, seems to be the first cause of an announced crisis for the Italian food supply chain and the country-system.
Shifting from natural gas (methane) to other energy sources requires billions of dollars of investment in infrastructure, the fine-tuning of which will not cover medium-term needs. Scenario and outlook.
1) Energy. Needs and supplies
Roberto Cingolani–Minister for Ecological Transition–presented a briefing to the Senate on 16.3.22 on energy cost trends and measures taken by the government. (1) On the premise of a current gas demand in Italy currently estimated at 76 billion cubic meters(bcm).
The cost of gas increased fivefold, from 0.30 to 1.50 euros, between March 2021 and March 2022. And this phenomenon drags along with it the soaring cost of electricity – from €20 to €160/MW-h in a year – and refineries, which‘struggle to produce the product at normal prices.’ The supply scenario, to follow.
1.1) Natural gas
Russia’s natural gas imports to Italy increased from 20 to 29 billion cubic meters (bcm)-that is, from 25 percent to 38 percent of national consumption-between 2011 and 2021. The flow of supply through Russia is the highest recorded in recent times and, moreover, is still constant, in Italy and Europe.
Import infrastructure in Italy is diverse, compared to other EU member states. At least in part but not enough, as investment since 1973 to the present has been focused on natural gas. Italy thus has five pipelines and threeLiquefied Natural Gas (LNG) regasifiers.
1.1.1) TAG(Trans Austria Gasleitung) pipeline.
TAG imports gas from Russia through Ukraine and Austria to connect with the national gas pipeline network in Tarvisio (UD). 29 bcm of natural gas passes through it (38% Italy consumption 2021).
1.1.2) Transmed Pipeline
Transmed (TMPC) imports gas from Algeria via Tunisia (Cape Bon) and Mazara del Vallo (TP). It carries 21 bcm (27.6 percent Italian requirements) and could reach 27 bcm (35.5 percent).
1.1.3) TAP Pipeline
TAP imports gas from Azerbaijan through Turkey and interconnects the transportation networks of Greece, Albania and Italy. In operation from November 2020, it connects to the national grid at Melendugno (LE). It carries about 7 bcm of gas (9.2 percent requirement) and ‘could reach approximately‘ 8.5 bcm (11.2 percent).
1.1.4) Greenstream Pipeline
Greenstream imports gas produced in Libya into our country by connecting to Gela (CL, Caltanissetta). It carries 3.2 bcm of gas meters (4.2%).
1.1.5) Transitgas Pipeline
Transitgas interconnects the German and French transport networks through Switzerland to the Italian transport network. Point of entry at Gries Pass (VB, Verbano-Cusio-Ossola). It imports from the Northern European market a mix of gas coming from Norway, the Netherlands, Denmark, and the United Kingdom, as well as LNG from Northern European regasification terminals.
It transports 2.2 bcm (2.9 percent consumption) of gas to Italy and only in theory-as Northern European countries will tend to ‘internalize to their own market‘-could cover 12 bcm.
1.2) Natural gas liquids
Italy has three liquid natural gas regasifiers. One onshore, in Panigaglia (SP), and two offshore off Porto Vigo (RO) and Livorno. Which today process 9.8 bcm (12.9% consumption) and could rise to about 16 bcm (21%).
2) Contingency
Ahead of next winter, according to Roberto Cingolani, 12 bcm of gas must first be stockpiled. At least €18 billion, at current prices. And the hypothesis theorized by the European Commission – achieving independence from Russian supplies – would mean that Italy would need to ‘replace’ 30 mln m3 of natural gas. With the ‘non-trivial‘ need for a minister with industrial technology expertise to support peak demand.
They thus herald ‘demand-side contingency measures and acceleration of energy efficiency, thus flexibility measures on gas consumption, interruptibility of the industrial sector, which, however, must act for short weekly periods only in case of peak demand, and on gas consumption in the thermoelectric sector, where there are also load-shedding measures in a controlled manner, and consumption-shedding measures in the other sectors‘.
3) REPower EU
REPower EU is the ambitious plan announced by Dutch Franciscus Cornelis Gerardus Maria Timmermans, v.president of the European Commission, on 8.3.22. (2) By the end of 2022, the Brussels executive assumes replacing 100 bcm of gas, about 2/3 of Russia’s imports into the EU. A ‘damn hard‘ plan, articulated on the two levels of diversification and ecological transition.
3.1) Diversification of the energy mix
60 bcm of Russian gas is expected to be replaced ‘within the next 12 months‘ with more LNG imports. Within the capacity limits of regasifiers and pipelines now available, (3) as well as at higher costs. REPower EU also provides:
– biomethane. Sustainable biomethane production by farmers should be doubled, with CAP (common agricultural policy) support, to replace 18 bcm, (4)
– Hydrogen. A Hydrogen Accelerator should develop an integrated infrastructure for the production and distribution ‘across all member states‘ of renewable hydrogen. 20 mln t of hydrogen could replace 50 bcm of Russian gas.
3.2) Clean energy transition
The REPower EU plan also plans to increase installed wind and solar power plants in the EU by 80 GW:
– PV. Frans Timmermans announces the installation of ‘millions more photovoltaic panels on the roofs of our homes, businesses and farms,’ as well as the launch of ‘large-scale solar projects. By the end of this year, nearly 25 percent of Europe’s current electricity generation could come from solar energy, (5)
– wind power. ‘We need to speed up the permitting procedures to increase our wind capacity at sea and offshore.’ Estonian Energy Commissioner Kadri Simson more clearly expresses the need for member states to define the areas where wind farms should be allowed to be installed in the name of the ‘greater public interest.’
3.3) Renewable energy in Italy
Minister Cingolani , in turn, announced ‘the acceleration of all off-shore and on-shore renewable projects; in particular, right now we have 40 gigawatts of off-shore project connection requests and numerous simplification and acceleration actions on renewables.’ Specifying that:
– 8 GW of electric power saves an average of 3 billion cubic meters of gas (bcm),
– the planned simplification will allow the installation of systems up to 200 kW on roofs and private areas for self-consumption by filling out a form, ‘without lengthy and complex permitting processes.
4) Natural gas, storage and price cap
European Commission and member state governments have agreed on the need to increase natural gas storage, by October 2022, to 90 percent of plant capacity. The Commission has said it is ready to support joint gas purchasing, and the possibility of introducing a price cap is being debated . A temporary, Europe-wide price cap on wholesale natural gas transactions would apply.
Cingolani is clear, the price cap could in any case only work now, because extraction from the fields cannot be stopped and Europe today buys 3/4 of the methane distributed around the world via pipelines. But as soon as China-as well as Pakistan, not excluding India (6,7,8)-have put in place distribution infrastructure, the top global supplier will look elsewhere.
5) Economic measures
The extraordinary costs of gas and energy supplies for industrial and domestic users will be partly mitigated through a series of measures:
– at the EU level, special exemptions to limits on state aid (which will have to enable companies to cope with high energy costs) and harmonized rules for taxing extra profits are being developed to finance support measures. Member states will also be able to devolve revenues from Emission Trading Schemes (ETS ) to these measures,
– transitional cancellation of system charges, enhancement of the social bonus, reduction of VAT on gas, and introduction of extraordinary contributions in the form of tax credits have already been planned in Italy. With interventions for the trucking sector, support for the liquidity needs of businesses, and interventions on electricity generated from renewable plants.
6) Energy price decoupling
Another intervention proposed by Minister Cingolani is the decoupling of selling prices of energy produced by renewable technologies from thermoelectric production. ‘This measure was proposed many years ago when it made sense because renewable was very expensive and gas was very cheap, so it served, through state profits, to incentivize the use of renewable‘.
‘On this thing I have been very insistent; it is really a market design problem. If I produce renewable energy that, in addition to having all the benefits we know at this time is cheaper, why do I have to pay for it by adjusting to the price of thermoelectric energy produced with gas?‘.
7) ‘Unimaginable consequences‘
‘An immediate disruption [delle importazioni di gas dalla Russia] would have unimaginable consequences for the heating supply of households,’ while ‘a prolonged supply disruption would likely cause lasting damage to the production facilities of industry and small and medium-sized enterprises.
Markus Krebber – CEO of RWE, Germany’s leading electricity supplier – reiterated to the Financial Times a simple concept that, paraphrasing Barack Obama, could translate into ‘No we can‘t.’ ‘We must realize that there is a strong dependence on Russia, especially in energy supply, in Europe and particularly in Germany‘ (9,10,11).
Dario Dongo
Notes
(1) Senate of the Italian Republic. Stenographic record of session 16.3.22, currently unavailable at https://www.senato.it/japp/bgt/showdoc/notfound
(2) European Commission. REPowerEU Communication, press conference. 8.3.22, https://bit.ly/3CTHly0
(3) Minister Cingolani reports that consideration is being given to increasing regasification capacity on floating units, to be anchored near ports (and entry points to the gas grid). The construction of these ships takes 12-18 months, the theoretical regasification capacity ranges from 16 to 24 bmc
(4) Biomethane has the added benefit of reducing exposure to volatile nitrogen fertilizer costs. Which can be replaced, at least in part, with digestate (co-product of biomethane production)
(5) 54 percent of the resources earmarked by the NRP for measure M2C1 (sustainable agriculture)-amounting to € 1.5 bn out of € 2.8 bn-have already been allocated to, among other things, the so-called ‘agrisolar park. See previous article
(6) Tyler Durden. Russia Pipeline Gas Flows To China Have Increased Since The Ukraine War. Zero Hedge. 18.3.22, https://www.zerohedge.com/economics/russia-pipeline-gas-flows-china-have-increased-ukraine-war
(7) Benjamin Parkin, Farhan Bokhari. Pakistan presses ahead with Russian-built gas pipeline. Financial Times. 16.3.22, https://www.ft.com/content/9294890a-593c-442b-bc53-13099d14d36f
(7) Ashok Sharma. India buys Russian oil despite pressure for sanctions. AP news. 18.3.22, https://apnews.com/article/russia-ukraine-business-europe-middle-east-india-ad0ad81c4e7003f62a00af842513b435
(8) Glim Plimmer, Joe Miller, Alexander Vladkov. Germany’s biggest power supplier warns against axing Russian imports. Financial Times. 15.3.22, https://www.ft.com/content/3d63d1de-2af8-41ba-b579-54b9e2643eb3
(9) RWE has expressed willingness to reactivate a disused, coal-fired thermal power plant capable of producing 3.5GW (equivalent to less than 1.5 bmc, according to the parameters given by Roberto Cingolani)
(10) More optimistic is Kerstin Andreae, director of BDEW (an association representing 1,900 utility suppliers in Germany), who says the country could replace half of the gas now imported from Russia (>50 percent of national needs) with other sources in the short term. V. Germany could replace half its imported Russian gas this year, industry group says. Reuters, 18.3.22, https://www.reuters.com/business/energy/germany-could-replace-half-its-imported-russian-gas-this-year-industry-group-2022-03-18/
Dario Dongo, lawyer and journalist, PhD in international food law, founder of WIISE (FARE - GIFT - Food Times) and Égalité.
