Meloni and the cap on gas prices

Rome. Giorgia Meloni has announced that the government is close to reaching an agreement with the EU to “reduce the impact of gas-fired generation costs on the overall price of electricity”. According to Bloomberg, this involves a cap on the price of gas for power stations. The measure forms part of the negotiations on the ‘Bollette’ decree, as the Prime Minister explained to the Senate ahead of today’s European Council meeting. The details of the agreement have yet to be clarified.

According to Domenicantonio De Giorgio, a lecturer in Financial Market Economics at the Catholic University and an expert on energy markets, Italy had set out “with the best of intentions”, calling for a reform of the ETS, the EU market for CO₂ emission allowances. “The battle over the ETS was entirely legitimate, but we’ve only picked up crumbs,” he tells Il Foglio. “I wouldn’t be surprised if, in revising the system, we’ve slipped into a more modest stopgap measure, which is worse than the hole itself.” He calls it a stopgap because it reminds him of the ‘Tope’, the ‘cap’ on gas prices introduced in 2022 by Spain and Portugal, which “compensated thermal power stations for the difference between the wholesale market price of gas and the fixed cap”. The price of electricity is determined by the source of generation, and in Spain, he explains, the cap “worked to some extent” because power stations there rarely run on gas. “But in Italy, unfortunately, we have an extremely different problem,” explains De Giorgio. “Gas accounts for about half of the electricity mix, so it comes into play very frequently. A situation like this risks becoming extremely costly.”

According to Bloomberg, Italy would reimburse power stations when gas prices exceed an agreed threshold. But who pays the difference? De Giorgio points to two possible levers: “Higher system charges and public debt”, leading him to suspect that negotiations in Brussels are centred on “how much debt Italy can take on” as an exception to fiscal rules. And he warns: “It’s a burden on public finances: the EU doesn’t count it in its accounts, but you still incur the debt and it has to be paid.” He calculates: “If a cap were set at 60 euros per MWh, we could end up with an annual cost of 8 billion euros. This would reduce the PUN”—the single wholesale electricity price—“by 10–15 per cent, in an optimistic scenario”. From September to the present, the PUN has averaged above 200 euros per MWh. De Giorgio continues: “But the energy component accounts for only half of household bills, so we’re talking about a saving of 10–15 euros a month. Wouldn’t it make more sense to look at ISEE scores and offer targeted discounts to the most vulnerable?”

Davide Tabarelli, chairman of Nomisma Energia, describes the gas price cap as “a familiar formula”, and recalls the European cap of 180 euros per MWh which, in 2022, the Environment Minister, Gilberto Pichetto Fratin, “managed to impose”. However, that mechanism relating to gas derivatives never came into play because the cap was set too high and prices plummeted well below the threshold, whilst the European agencies ACER and ESMA found no effects attributable to its adoption. Tabarelli is more lenient regarding the new price cap: “It is one of the measures that a government must rightly adopt in a wartime situation, when the markets fail. The first thing this price cap does is limit the impact on inflation,” argues the expert. “The trouble is that for five years, ever since Draghi was still in office, the measures have predominantly led to increased debt. We are simply postponing the problem to the future. And yet the regasification terminals at Ravenna and Piombino, albeit for imported gas, have been built.” He concludes: “We need our own gas, and production – already a target of the Draghi government – has not been achieved. But there is a vast amount of gas underground, starting with the reserves off the coast of Chioggia and Venice. We need to extract it.”