Italy's LNG deal with Qatar shows how hard it is to quit gas

(Reuters) - Italy's ENI SpA signed a deal this week to purchase up to 1 million tons of LNG annually from QatarEnergy for the next 27 years, locking in gas flows to Southern Europe's largest economy until at least 2050.

Gas accounted for around 51% of Italy's total electricity generation in 2022, making the country the most gas-reliant among Europe's largest economies, data from Ember shows.

Italy is also overwhelmingly dependent on imports for gas supplies, with over 95% of the country's gas shipped in from overseas in 2022, according to the Energy Institute.

Its high dependence on gas imports has spurred Italy to accelerate electricity capacity construction from renewable sources such as solar and wind, which expanded by 11% and 5% respectively in 2022 to exceed the growth of other sources.

Increased renewable capacity in turn boosted Italy's electricity generated from clean sources by over 11% in the first nine months of 2023 to account for a record 45.2% of electricity output, Ember data shows.

However, even with record gains in clean electricity output, natural gas has remained Italy's dominant source of electricity this year and looks set to remain the bedrock of the country's power system for decades longer despite expected further increases in renewable power over the coming years.

INDUSTRIAL BASE

Key to natural gas' staying power in Italy's generation mix is the country's high level of industrial energy demand.

Italy is the second largest manufacturing economy in Europe, and notable for the production of machinery, fashion products, food items, automotive parts and pharmaceuticals, according to the United States' Department of Commerce.

The country is also a large producer and exporter of cars, furniture and stoneware, and so possesses a wide-ranging industrial landscape with round-the-clock power needs.

However, Italy's power costs have climbed sharply since Russia's invasion of Ukraine in 2022 cut natural gas supplies to Western Europe and sent regional power costs soaring.

So far in 2023, Italy's average wholesale power costs are roughly 147% above where they averaged in 2019, according to data compiled by LSEG.

That scale of price increase is similar to Germany's, Europe's largest manufacturing hub, over the same period.

But on top of that, Italy's power prices have widened their longstanding premium over German power prices, and on a monthly basis are currently around 50 Euros per megawatt hour higher than average power prices in Germany, according to LSEG.

That premium compares to an average premium of 17 Euros/MWh from 2019 through 2021 and indicates that large power users in Italy may have been hit even harder than those in Germany by the regional power price rally seen over the past year or so.

GAS SHIELD

To help support Italian industry, the government unveiled a 9-billion-euro package of measures last year, ranging from lifting gas output and boosting gas inventories to allowing businesses to settle energy bills in up to 36 instalments.

This week's ENI deal offers additional protection for consumers by further reducing Italy's reliance on Russia for natural gas supplies, even as it cements Qatar's position as Italy's top LNG supplier.

The United States and Algeria are other major LNG suppliers to Italy and are helping put Italy's LNG imports on track to surpass last year's record of 24.5 million cubic meters this year, according to ship tracking data from Kpler.

Alongside nearly full gas storage inventories - tanks are at 98% capacity, according to LSEG - these higher volumes of natural gas imports should ensure that Italy's energy consumers have adequate power supplies throughout the coming winter, when heating demand peaks.

Over the longer term, the higher volumes of natural gas also ensure power supply stability even as greater volumes of intermittent generation from renewable power sources are added to the country's grid. Power firms can use gas-fired plants to top up system supplies when generation from solar and wind facilities drops off.

Higher gas supplies may also help reduce overall power costs, and in turn should help boost the competitiveness of Italy-based businesses relative to regional rivals.

In all, the ENI-Qatar deal looks let to sustain Italy's strong ties to the gas market for several more years, even as the country also continues to develop more renewable generation capacity as part of longer-term energy transition goals.

The opinions expressed here are those of the author, a columnist for Reuters.

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