It’s easy to say ‘gas price cap’, but harder to draft the Energy Bills Decree

The amendment to the ‘Bollette’ decree, which was due to be discussed at last Wednesday’s Cabinet meeting, has once again become bogged down between Palazzo Chigi and Mase. Environment Minister Gilberto Pichetto Fratin explained that ‘technical checks’ are currently underway regarding ‘the overall scope, the numerical estimates of the results, the procedure that ARERA must follow when intervening and, of course, the distribution of the financial burden’. In all likelihood, this is precisely the issue on which experts from the Environment Ministry and ARERA are seeking a solution. The paradox is that the solution is obvious – to follow Spain’s example, from which the entire ‘tope’ mechanism is modelled.

Let’s take it step by step. The agreement between the government and the European Commission provides for a temporary mechanism, lasting 18 months, to reduce wholesale electricity prices when gas prices exceed 58–59 euros/MWh (today they are around 100). The first misunderstanding stems from the way the measure was announced: a cap on gas prices. In reality, it is not a cap and has no effect on gas prices. If anything, it is a subsidy for thermal power producers aimed at keeping their production costs down. The idea is this: for every euro of subsidy to gas-fired power stations, the price of all electricity – including that produced from other sources – will fall by one euro. If everything works as it should, the consumer stands to gain: their savings correspond to the reduced revenues of non-gas producers (such as renewables).

For this scheme to work, it must be clearly established who is paying the subsidy. Pichetto has repeatedly emphasised that customers on fixed-price contracts should be exempt from the levy. This implies that the 40 euros should be paid, via a charge on the bill, by end customers. However, this approach is extremely complicated (because contracts can change at any time), potentially counterproductive (because excessively restricting the pool of contributors would shift the cost onto a minority) and conceptually flawed. The ‘tope’ does not operate at the retail market level, but at the wholesale level. Therefore, according to how it works, the ‘buyers’ are not end customers but upstream operators: large industries, traders and utilities. It is they who should finance it – just as in Spain. Consequently, those who purchase energy wholesale – that is, suppliers, industries and traders – pay for the energy at a discounted price, but must contribute the amount needed to fund the compensation scheme. The obligation to pay this compensation must necessarily arise here, at the upstream level. It cannot be passed on to the consumer’s bill (as proposed by ARERA through a uniform increase in the dispatching tariff applicable to all). Madrid has done exactly this, providing for only a few limited exemptions, including those for parties that have negotiated long-term wholesale purchase agreements (so-called PPAs). It would make sense to do the same.

It is on this point – which is both operational and conceptual – that everything seems to have got bogged down: the way out is the most obvious and simplest one, namely to follow the model that was emulated through to the end, by channelling the subsidy to wholesale buyers rather than to customers via their bills. At that point, any benefit reaching the customer depends on their contract. If they have a variable tariff, the supplier passes on the net saving to them, because the variable price on the bill tracks the supplier’s purchase costs. ARERA will probably have to authorise the inclusion of the compensation amount in the contractual indexation formulas (which currently refer only to the price, the so-called PUN). If, on the other hand, the customer has a fixed-price contract, their bill remains unchanged: they continue to pay the agreed amount, and the benefit remains temporarily with the supplier until the contract expires; however, as fixed-price contracts expire, suppliers will have to incorporate the effect of the mechanism if they wish to remain competitive.

There is also another, more subtle issue: will compensation to gas-fired power producers be payable only at times when their plants ‘set the price’ (that is, in industry jargon, are ‘marginal’), or during other hours as well? It is a complicated choice because the very payment of the subsidy, which affects the costs of these plants, can determine whether they will be marginal or not and influence the behaviour of competitors. In recent months, however, the percentage of hours in which this occurs has been steadily falling: in September, it was just under 30 per cent. The more this percentage falls, the less impact the mechanism has.

In short: the back-and-forth that has been going on since February is only partly linked to the standoff with the European Commission. It also stems from the objective difficulty of turning slogans into regulations: there is a world of complex technical decisions between saying ‘let’s do as Spain does’ and actually doing as Spain does.