The cap on energy bills under the decree, explained clearly. Minimal benefits

The government has reached an agreement with the European Commission on the energy bills decree: when gas prices exceed a threshold of around 60 euros/MWh, a mechanism similar to the ‘Iberian exception’ – adopted in 2022–23 to cap electricity prices – will be triggered. According to Minister Gilberto Pichetto Fratin, interviewed yesterday by Il Messaggero, “the impact will be at least 10 per cent on the current price of over 200 euros/MWh”. To get a clear picture, we will need to wait for the operational details.

In the meantime, four issues can be addressed: the differences compared with the original proposal, how the mechanism works, the outstanding issues and the expected benefits.

The energy bills decree dates back to 20 February, eight days before the outbreak of the conflict in Iran. It provided for a structural and permanent measure to neutralise the ETS, the European Emissions Trading Scheme. Brussels imposed substantial changes: the removal of all references to the ETS, a limited duration (eighteen months) and a link to an emergency framework and, therefore, to gas prices. Politically, Palazzo Chigi has refrained from using the decree to undermine the ETS and, above all, has accepted a measure that applies only when markets are under strain: should they stabilise, its impact would automatically diminish. On the other hand, the new wording puts the Democratic Party in a difficult position, as it has for years been calling for the Spanish system to be adopted in Italy too: it will be difficult for Elly Schlein to maintain an opposing stance in Parliament.

And as for the substance? The mechanism replicates, with some significant modifications, the ‘gas price cap’ devised by Teresa Ribera – now a European Commissioner – when she was Minister for Energy Transition in Madrid. In wholesale electricity markets, the principle of marginal pricing applies: it is the most expensive power station required to meet demand at any given moment that determines the price of all the electricity traded at that instant.

If the production cost of that plant rises – for example, because the price of natural gas increases – the rise is passed on to the price of all electricity, including that generated from other sources, even when gas accounts for only a small proportion of total production. The Spanish approach was to subsidise gas-fired generators, thereby reducing their effective cost and driving down the wholesale price. In this way, the price of electricity falls across all traded volumes, whilst the subsidy is granted only to gas-fired producers.

To finance the subsidy, an additional charge is applied directly to end customers’ bills. An example helps to illustrate the logic. In Spain, gas accounts for just under 20 per cent of electricity generation on average. Let us suppose that a subsidy of one euro to gas-fired power stations, during the hours when they determine the price, reduces the wholesale price by one euro. If total demand is 100 MWh, the gross saving for consumers is 100 euros (one euro for each of the 100 MWh). Assuming that the subsidies are roughly proportional to the share of gas-fired generation, their cost is 20 euros. The net benefit is therefore 80 euros, four times the cost of the subsidy. Since gas accounts for around 40 per cent of electricity generation in Italy, the theoretical benefit would be lower: against a gross benefit of 100 euros, the rebates would cost 40 euros, resulting in a net benefit of 60 euros, equivalent to 1.5 euros for every euro spent. This is, of course, an illustrative calculation: the actual result must be verified empirically.

If it’s that simple, why has Spain abandoned it for years? Firstly, because it encourages the use of gas, to the detriment of clean energy sources. But the main problem – and the Commission’s greatest concern – is that unilateral action risks driving domestic prices down too far, bringing them below those of neighbouring countries and distorting trade flows. If electricity in one country becomes artificially cheaper, whilst it remains expensive abroad, the result is that more is produced and exported, transferring elsewhere a portion of the benefits funded by consumers through their electricity bills. This is exactly what happened in Spain. A study by economists Manuel Hidalgo-Pérez, Natalia Collado, Jorge Galindo and Ramón Mateo shows that the price cap reduced Iberian prices by 20–28 per cent, but also increased the use of gas to generate electricity and, consequently, emissions. An 80 per cent rise in exports to France contributed to this. The impact was limited only because the interconnections between the two countries are limited.

In Italy, the picture is different. Our country is closely interconnected with Central Europe, including markets such as Germany, where wholesale prices are often similar to ours. A fall in Italian prices could therefore push them below those levels and lead to an increase in exports, or a decrease in imports. This would have three consequences. The first is an increase in demand for gas for electricity generation in Italy, resulting in higher emissions and greater expenditure on CO₂ allowances. Secondly, the rise in foreign demand would push up Italian prices. Finally, domestic consumers would end up financing, through the transfer to gas-fired producers, part of the electricity consumed by their neighbours as well. This is why it is important to examine the ratio between the net benefit and the cost (in Spain, approximately four to one; in Italy, 1.5 to one): this illustrates how sensitive the net benefit is to an increase in the share of gas-fired generation.

Preventing this from happening, or at least limiting its effects, is a non-negotiable priority for Brussels. The Commission may accept emergency measures, even drastic ones, but it must safeguard the functioning of the internal market and trade between Member States. For this reason, the mechanism cannot take the form of a fixed, unconditional cap: it must be calibrated in such a way as to contain the Italian price without unduly altering the direction of cross-border flows. In other words, the scope for lowering the price will be limited by the price differential with interconnected countries. ARERA had already taken steps in this direction, having outlined the main features in a consultation document published in June: “The reimbursement paid to thermal power generators must be such as to result in a reduction in the wholesale price of electricity at national level not exceeding the price differential that would arise with neighbouring countries in the absence of such reimbursement”.

There are still two issues to be resolved.

The first issue concerns who pays the bill. The Commission insists on the principle that costs must be borne by those who benefit from the measure. A restrictive interpretation could exclude end customers with fixed-price contracts. But this is not necessarily the correct solution: a contract entered into after the mechanism has come into force incorporates expectations which, in turn, factor in the new rules. Furthermore, applying a tariff component based on contracts that can change at any time would entail a considerable administrative burden. And what about hybrid contracts, with a fixed price up to a certain consumption threshold and a variable price beyond that?

The second issue, acknowledged by ARERA itself, concerns the timing of the announcement of the subsidy amount. As this also depends on prices in neighbouring markets, it cannot be determined well in advance. However, the shorter the notice period, the lower the predictability. This uncertainty risks destabilising the forward markets, where traders enter into contracts with time horizons that can extend to months or years. If it becomes more difficult to predict the actual price of electricity, it also becomes more complicated to purchase energy on a forward basis or to enter into equivalent financial hedges. One possible consequence is that operators will place greater emphasis on spot purchases. But this makes it more difficult to lock in favourable prices and protect consumers from any future price rises.

The fundamental question remains: what will the concrete benefits be? Without knowing the final plan and the future direction of the markets, it is difficult to make precise predictions. Some indications, however, can be gleaned. First of all, the benefit is unlikely to be in the region of several tens of euros per MWh, as has been reported in the newspapers in recent days. Such a significant drop would have far-reaching effects on cross-border flows, with the risk that Italian consumers would end up subsidising their foreign counterparts. Furthermore, a significant fall in the wholesale price would make it more cost-effective to generate electricity from gas. The more this share increases, the more the net benefit is eroded. If, hypothetically, all electricity were generated from gas, the reduction in the wholesale price would be entirely offset by reimbursements to producers: the benefit to consumers would be nullified.

A useful reference comes from the estimates relating to the first version of the energy bills decree. The mechanism is different and is no longer linked to the ETS, but the constraint imposed by prices in neighbouring countries still limits the room for manoeuvre. The technical report had projected a net benefit of around 9 euros/MWh. The ICIS research centre, based on more pessimistic assumptions, has lowered the bar to just 3 euros/MWh. Meanwhile, yesterday, in an interview with Il Messaggero, Pichetto put forward a more optimistic forecast of around 20 euros/MWh. It is reasonable to expect that the outcome will fall within that range: the price reduction is unlikely to be less than 3 euros per MWh, nor is it likely to exceed around 20 euros or slightly more (assuming that the value of the subsidy is passed on in full to final prices). For a household, therefore, we are talking about a sum ranging from a few euros to a few tens of euros a year. For a business, the savings could be significantly higher, depending on consumption levels. Certainly, the €60/MWh threshold is not a genuine cap on the price of gas (or electricity): it corresponds to the level above which the mechanism is triggered. It is not a cap but a trigger; it does not specify how much the discount will be, but only when it will apply.