In a recent discussion with pv magazine, Virginia Canazza, the CEO of Italian energy consultancy REF-E, said that the outlook for the European PPA sector and the Italian renewable energy market remains unclear.
“We are still in the middle of a storm and we don’t have too much information on which to substantiate reliable forecasts,” Canazza said. “We have to be cautious and avoid an excessive pessimism or catastrophism.”
Italy was the first European country to be hit by the coronavirus pandemic. The government recently decided to suspend about 60% of all industrial and commercial activities, while imposing strict limits on travel and movement. The lockdown period was initially supposed to remain in place until April 3, but it is likely that it will be extended.
It is important to observe the macroeconomic picture and see what is happening to energy demand, Canazza said. “We are seeking to assess the extent of the different impacts of this crisis,” she added.
The variables are connected to containment measures and their potential economic consequences, which are still difficult to quantify. “We will have to understand, for example, how quick the different sectors will resume activity, and with which energy intensity,” Canazza explained. “And if and how the structure of the Italian productive system will change in view of potential measures aimed at reviving it.”
Electricity demand reached 319.6 TWh in Italy last year. The Italian government's measures will certainly trigger a significant drop in demand, but it is still difficult to precisely quantify the slowdown, as there is always a seasonal drop at this time of the year. “Even if these measures are lifted, it will be difficult to understand if we will see an immediate recovery or if demand will climb only slightly,” Canazza said.
Under a best-case scenario, which sees the Italian economy returning to normal in mid-May, total electricity demand for this year would be 5% lower than it was in 2019.
Under a more realistic scenario, which Canazza defined a possible “base scenario,” energy demand could decrease by around 7% this year. This would correspond to a 9% decline in gross domestic product in 2020, which would be greater than the impact felt after the 2009 global financial crisis, when GDP fell by 5.3%. A rebound would not occur under this scenario until 2021, when Italian GDP would grow by around 6%, with 3% growth expected in 2022.
Under a third and more pessimistic scenario, economic activity would not return to normal until late-summer 2021. In this case, the annual demand contraction for this year would be closer to a 13% decline in GDP.
Gas prices were already at low levels before the onset of the Covid-19 crisis, due to global oversupply connected to slowing demand in Asia, a growing share of coal, and the rising availability of LNG, which had already started to affect European markets last year.
Italian gas prices are now close to production-cost levels, but during the week of March 9-15, they remained stable at around $10/MWh, down 46% on the year. Throughout the March 16-22 period, gas prices fell by roughly 1 €/MWh to reach €9.6/MWh, in line with the sharp contraction of gas demand, a strong oversupply scenario, and the simultaneous decline in European prices.
Prices of CO2 certificates on the European Emissions Trading System have also fallen from €25/MWh to around €15/MWh. This is the natural consequence of the sharp decline in electricity demand.
Last year, when gas prices were particularly competitive, CO2 certificates were supported by the Market Stability Reserve (€25/ton). As coal prices were rather low compared to historical trends, thermoelectric generation was slowly replacing that based on coal. The revival of CO2 certificates will likely be limited over the next few months, in spite of the Market Stability Reserve, as many traders will start trying to buy as many as certificates as they can. Such conditions could also help coal to regain its competitiveness against gas, slowing the transition to low-carbon technologies.
REF-E's recent projections for 2020 predicted that the baseload national purchase price (PUN) of electricity – which is the weighted average of the zonal prices on zonal demand in the Day-Ahead Market (DAM) – would fall below €40. “During the last few weeks the PUN has dropped even under €30/MWh,” Canazza said, noting that this compares to an average PUN of approximately €52/MWh in 2019.
These prices mostly depend on the growing competitiveness of an electricity market in which gas-fired combined-cycle plants are the marginal technology that sets user prices throughout the year. “Under current market conditions, margins on DAM for power producers are becoming smaller,” Canazza said. “That could be compensated by the possibility of marginality recovery on the ancillary services market, considering that with persisting low demand, system security requirements for reserve and balancing services increase.”
Before the onset of the coronavirus crisis, we were in a positive phase in which the market parity scenario was favorable to investments financed via PPAs.
“Market-parity renewable energy projects will eventually see some delays,” Canazza said. “Capture prices currently do not justify investment and new entrants may prefer to wait for more stable market conditions.”
When asked if €40 is still a good reference price for PV, Canazza said that the levelized cost of electricity in Italy might already be below this threshold, depending on geographical locations and project sizes.
“Although it is not too much lower,” she said, adding that solar developers must deal with the country's complex approval process, as well as difficult conditions for cheap financing and high regulatory risks. “Which means the range of the solar LCOE in Italy can be very wide. I would say it goes from around €38/MW to approximately €52/MWh, but these are only indicative values and, as I said, location and other financial parameters should be taken into account.”
Unsubsidized PV projects may still be bankable via PPAs, but investors will probably not be willing to run the risk of dealing with such a slight competitive advantage, Canazza said.
“But all the factors affecting the Italian PPA market I mentioned before existed even before the crisis,” she added. “Market risk is not bigger now – maybe it is investors’ perceptions that are different.”
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