Today we are talking about a subject that is particularly close to my heart, which is my country of origin, Italy. In recent weeks, it has been the first in our continent to be the main character of the coronavirus fury. We will see how the epidemic has hit the Italian energy sector hardly, creating dynamics and scenarios of historical importance.
Effects of COVID-19 on gas and renewables
In a previous blog, we addressed the issue of energy transition in Italy, where European objectives clearly pushed the country to compromise in the renewable energy sector. We talked about PPA, self-consumption and demand aggregator, defining them as necessary tools to achieve the goals of the PNIEC.
Nevertheless, at the time, we were unaware of the situation that Italy has been facing since a month now. All the conditions in the country are well known, forced to close every production line with the exception of the pharmaceutical and food sectors, in order to face a cowardly and invisible enemy: the COVID-19. Citizens have been literally barricaded in their homes for two weeks now, according to the directives imposed by the Italian Government to contain contagions within the country, which currently number more than 59,000.
The attention of this blog is addressed to the entire Italian energy system, put to the test by the COVID-19, where the health emergency has caused a collapse in gas prices worldwide, between the invocation of force majeure to repel LNG cargoes, mild winter temperatures and the strong production of US shale gas. All of these factors have caused an oversupply of gas on the Italian market (PSV) and consequently a deep fall in prices.
According to Wood Mackenzie, annual gas demand will be 2% lower than pre-epidemic forecasts, assuming a rapid recovery in demand by April, and 4% in a more prolonged slowdown. The impact on LNG will be more intense as operators will provide domestic supplies and maintain the offset from pipeline imports. It is estimated that 3 MT-MT of LNG will be lost as demand.
The question arises at this point whether low prices will trigger a response to demand: analysts indicate that they will, but only to a limited extent. An example to follow is the last year scenario, where in Europe electricity production switched from coal to gas, utilities reduced the volumes of pipeline contracts to buy cheaper spot LNG. Storage levels have reached record highs, but currently we are already at seasonal highs, so there is much less flexibility in the system for a similar response to last year.
The situation of oversupply of gas on the market has an immediate impact on the price of electricity in Italy, both spot and shorter term future (Cal21).
The slowdown in energy prices, however, makes the market parity of renewable energy plants more difficult to achieve without incentives. With regard to the health emergency, the CEO of GSE, Roberto Moneta, said that the company has put in place some measures regarding the activities that characterize the management of GSE incentives, as it does not stop its commitment to support the sector, the territory and the Public Administration, more than ever at this time, where it will be necessary to start again to build a more sustainable and resilient future for our country. For this reason, the GSE has decided to suspend until the 30th April 2020 all the terms and deadlines in the procedures relating to renewable forms and energy efficiency measures.
It therefore seems that despite the difficulties that the country is facing in the fight against COVID-19, the Government does not intend to make any deviation from the path towards the energy transition objectives and the importance of the development of the renewable sector in Italy.
Effects of COVID on electricity demand
In terms of electricity demand, the epidemic is having a greater impact on the country than the financial crisis that occurred in 2008. In recent weeks, demand has been drastically reduced due to the blockage of industrial activities, this sector accounting for 40% of total consumption in Italy.
According to a study by Energy Quantified, a subgroup of the energy market analysis company Montel, the coronavirus effect has been clearly visible for a couple of weeks now, where consumption decreased by 8% and 15% for week 1 and 2 respectively, compared to a scenario without the virus. However, it is difficult to predict in the short term what the impact of coronavirus measures on demand will be. Nevertheless, this study indicates a possible reduction of 20%. This reduction far outweighs the 6% reduction that occurred in the financial crisis in 2008, so it appears that the measures to contain the epidemic have a much deeper, but hopefully less lasting effect.
If we go into more detail within the week 9-15 March 2020, where the most restrictive measures in Italy have been announced, we can see that with the passing of the days the demand for electricity decreases considerably due to the progressive blockage of production activities day by day. Alireza Soroudi, professor at the University of Dublin, shows in his study the difference between the average weekly demand of the last 5 years in the absence of coronavirus and the week from March 9-15 recorded under coronavirus flu. The following graphs clearly show the reduction in demand:
Moreover, if we focus on the distinction of geographical areas within the peninsula, for the Northern sector, with the highest percentage of consumption in Italy (57%) and with the highest number of infections, we identify a reduction of 75 GWh compared to the average consumption in a coronavirus-free scenario.
Nevertheless, the decrease in demand did not have a strong impact on the spot price of electricity, as prices are still set by combined cycle installations. Indeed, the spot price has already experienced a significant decrease due to the fall in gas prices due to the decrease in Chinese gas demand for coronavirus. However, low demand combined with high solar generation could contribute to break the support represented by the generation cost of gas installations.
Summarising, we are the protagonists of a historically unique event that is debunking every prefixed foundation, creating a panorama of absolute uncertainty. For the energy sector, the COVID-19 is the drop that overflows already historically unusual price levels: favourable climatic conditions, abundance of gas, excess oil supply for the price war between the world’s major oil producers. A completely bearish panorama, in an extremely weak energy complex. What’s more, the coronavirus spread adds pessimism to the panorama, together with the uncertainty of how long the quarantine for Italy, already active for more than two weeks, will be extended.
How far will gas and electricity prices go? It is difficult to predict the trend of these commodities, but it is certain that the energy system is currently subject to a great challenge. It is also inevitable to think about how Italy will face the great changes it had set itself in terms of compromises on the renewable and energy efficiency sectors. It is clear that until the enemy is defeated, everything remains a big question mark.