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ENERGY

EXPLAINED: Are Italy’s energy prices really falling from April?

Energy bills in Italy were expected to rise by as much as 20 percent from April - so why are households now set to see a 10 percent drop in prices? The Local looks at the facts.

EXPLAINED: Are Italy's energy prices really falling from April?
Photo by BARBARA SAX / AFP.

Households in Italy have watched in dismay as their gas and electricity bills soared over the last 18 months thanks to a growing energy crisis, exacerbated by the war in Ukraine.

That trend finally came to an end on April 1st, when it was announced – despite energy prices remaining sky high elsewhere in Europe – that people in Italy would see a 10 percent decrease in their energy bills for the second quarter of 2022.

But with natural gas prices recently reaching an all-time high in March, where’s this decrease coming from – and will it really translate into a reduction in household energy bills in real terms?

Is it true that Italy’s energy bills are falling in spring 2022?

Yes… for some people.

Italian consumers who are on a contratto di tutela or ‘protected contract’, whose rates are determined by the Italian energy regulator Arera, will see a 10 percent reduction in their gas bills and a 10.2 percent reduction in their electricity bills from April 1st.

It’s important to note that the decrease is for energy consumed from that date onwards – bills received in April relating to the previous quarter will be charged at the previous quarter’s rate.

Consumers on a kind of hybrid contract that isn’t technically a contratto di tutela but whose gas and electricity prices are indexed to Arera’s rates will also see a reduction in fees, according to Carlo Stagnaro, an energy economist and a former Chief of the Technical Secretariat for two Italian energy ministers between 2015 and 2018.

READ ALSO: Rising energy prices: How to save money on your bills in Italy

That leaves about 50 percent of people in Italy who are on free market contracts. These individuals can expect to see no changes to their energy bills as a result of the drop, as their rates are unaffected by Arera’s, Stagnaro tells The Local.

Some consumers prefer to sign these fixed-rate contracts, which tend to have a duration of 12 or 24 months, to avoid market fluctuations. While customers on these contracts won’t experience the 10 percent April-June price decrease, they also likely won’t have been subjected to the price hikes of previous quarters.

“You basically trade certainty over saving, at least in the long run,” says Stagnaro. “In this moment, if you have a fixed price contract that you signed before last summer, you’re saving a lot of money.”

Those consumers on contratti di tutela, meanwhile, will no doubt have breathed a sigh of relief on hearing the news of the price decrease – but it’s a drop in the ocean compared to the overall rises seen over the past 18 months.

Even with the decrease, people on these contracts in Italy will be paying as much as 131 percent more for electricity and 94 percent more for gas than they were at the start of 2021, the Italian news site Fanpage has calculated.

READ ALSO: ‘It’s a crock’: Italians outraged at 25-cent fuel discount

Italy’s National Consumers Union has reportedly called the announcement “good news but an optical illusion”, and called on the Italian government to “find structural solutions to solve the energy crisis that has broken out in our country”.

Despite a 10 percent price drop in the second quarter of 2022, energy bills in Italy have soared over the past year.
Despite a 10 percent price drop in the second quarter of 2022, energy bills in Italy have soared over the past year. Photo by JOHN MACDOUGALL / AFP

Why have energy bills in Italy been rising so steeply?

Russia’s invasion of Ukraine and the resulting market volatility has exacerbated the problem of rising energy prices.

But households and businesses in Italy and across Europe were already struggling with the soaring cost of utilities before the war.

As in many other countries, Italian consumers had been hit by a series of steep price hikes over the past year, driven by the surging cost of gas imports related to crumbling transportation networks and an increase in the global demand on gas as an energy source, as countries such as China look to transition away from coal.

READ ALSO: Why Italy’s fuel prices are among the highest in Europe – and rising

The price increases have been particularly problematic in Italy, which is more dependent on natural gas for energy than most of its European neighbours and produces very little of it within the country.

Italy is the second-largest natural gas importer in Europe after Germany, importing 90 percent of its gas supply with 45 percent of that coming from Russia – up from 27 percent ten years ago.

According to the latest estimates from Arera, the average household in Italy will have spent a total of €948 on electricity bills in the 12 month period between July 1st, 2021 and June 30th, 2022: an 83 percent increase on the same period the year before.

The average household’s gas bill, meanwhile, will total €1,652 between July 2021 and June 2022 – a 71 percent increase on the previous year.

Where is this new discount coming from?

You might assume that this new fall in prices is the result of government intervention.

In fact, the answer is simpler: “The price reduction in the next quarter is basically due to the fact that we are going into the spring and summer, and temperatures are going up,” says Stagnaro.

Arera sets its rates for the coming quarter based on the predicted market price of fuel over the next three months.

READ ALSO: How to save money on your fuel in Italy

With warmer weather on the way, “the demand for natural gas and electricity is likely to be lower than the than the past quarter, explains Stagnaro. “And therefore prices are likely to be lower as well.”

That doesn’t mean that there’s been no intervention by the Italian state; it’s just that it’s already been in place for several months.

In late September 2021, Italy put in place a five percent VAT reduction on gas and halted Arera’s general systems charges (oneri generali di sistema).

In a press release announcing rates for the April-June period, Arera’s president Stefano Besseghini confirmed that this assistance would remain in place, saying that the authority had “decided to adopt extraordinary measures in favour of consumers,” in light of “an ongoing conflict and unprecedented volatility on the energy markets”.

Stagnaro says these government discounts have also lowered energy bills by approximately 10 percent – so in effect, Italians wouldn’t be seeing any fall in prices were it not for the continued government intervention.

Arera said the measures should result in lower bills for almost 30 million households and more than six million businesses.

Italy has reduced VAT and cancelled general systems charges on energy bills since the start of October 2021
Italy has reduced VAT and cancelled general systems charges on energy bills since the start of October 2021 (Photo by JUSTIN SULLIVAN / Getty Images via AFP).

Has the government taken any further measures to assist consumers?

Yes – on Saturday, the financial news outlet Il Sole 24 Ore reported that the government has now allocated a further 102.8 million euros, on top of the 400 million set aside earlier in the year to assist low-income households, to expand its ‘energy bonus’ to a greater number of consumers.

As a consequence, the ISEE (Equivalent Economic Situation Indicator) threshold for those eligible for the scheme has been raised from €8,265 to €12,000 (it remains at €20,000 for families with four or more dependent children) – meaning an additional five million households can claim a discount on their energy bills.

READ ALSO: EXPLAINED: Who can claim a discount on energy bills in Italy?

The ISEE is a calculation based on income and other factors. Those who fall within the income bracket can benefit from the subsidy for the period between April 1st and December 31st 2022.

Find out more about the scheme here.

What can we expect for energy bills in the future?

While the contratti di tutela rates have been set for the April-June period, Stagnaro highlights that Arera’s quarterly rates are based on predictions of the future market price of fuel.

That means that if, for whatever reason, actual prices turn out to be higher than expected, the shortfall will be made up for through higher rates in the third quarter.

Then there are other unknowns for summer and autumn.

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“In principle I expect prices at least not to go dramatically up in the next two quarters unless sanctions are extended to natural gas or natural gas imports from Russia are banned,” says Stagnaro.

READ ALSO: Italy announces plan to end reliance on Russian gas by 2025

“The other main variable is how much hotter the summer will be… If the summer is very hot, then people are going to use air conditioners much, much more and so prices may may go up.”

As for what will happen when winter comes back around:

“In the most optimistic situation where the war some somehow ends and we go back to the same situation we were in, let’s say in January, then prices may come back at or slightly below the current levels,” says Stagnaro. “Especially if we are able to develop new sources of natural gas, or if during the summer more investments in renewable energies are performed.”

“Of course, if the if the mess in Ukraine becomes worse and worse, as it may well be, or if natural gas from Russia is banned, then prices may go, I mean, as high as the sky.”

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ENERGY

How long will it take Italy to wean itself off Russian gas?

Italy's government has repeatedly said it plans to end its dependence on Russia for gas supplies following the invasion of Ukraine. But as the timeline keeps changing, when and how could this happen?

How long will it take Italy to wean itself off Russian gas?

Italy is heavily dependent on Russian gas, but has been seeking new sources since Moscow’s invasion of Ukraine as part of an effort to end this reliance in the coming years.

But it remains unclear whether Italy can really end its dependence on Russia for its gas supply – or when this might be feasible.

READ ALSO: What does Italy’s Algerian gas deal mean for energy supplies?

The government has been seeking new sources since Moscow’s invasion of Ukraine, including with a recent deal to boost supplies from Algeria.

Prime Minister Mario Draghi said last week the country could be independent of Russian gas by the second half of 2024 – the latest in a series of changing estimates.

“Government estimates indicate that we can make ourselves independent from Russian gas in the second half of 2024,” Draghi told the Senate, while adding that the “first effects” of this plan would be felt by the end of this year.

He said his government was also seeking to boost its production of renewable energy, including by “destroying bureaucratic barriers” to investment, saying it was the “only way” to free Italy from having to import fossil fuels.

Explained: Why and how Italy will pay for Russian gas in rubles

In April, Italy‘s Ecological Transition Minister Roberto Cingolani estimated the country would no longer need Russian gas within 18 months, following an earlier prediction that it could take until 2025.

Italy is one of Europe’s biggest users and importers of natural gas, importing 90 percent of its gas supply with 45 percent of that coming from Russia – up from 27 percent ten years ago.

Italy now imports 29 billion cubic metres of Russian gas a year, which Cingolani said in March “must be replaced” – but he didn’t specify with what.

Analysts have said there are “a lot of questions” about how helpful Italy’s gas deal with Algeria will be.

Despite its vast natural gas reserves, Algeria is already exporting at close to full capacity.

Draghi repeated his strong support for EU sanctions on Moscow last week, including a proposed ban on imports of Russian oil, although this is currently being blocked by Hungary.

“We must continue to keep up the pressure on Russia through sanctions, because we must bring Moscow to the negotiating table,” he said.

But for now, Italian energy giant Eni says it plans to pay for Russian gas supplies in rubles, meeting a demand from Vladimir Putin.

It was not immediately clear whether the plan would fall foul of European Union sanctions, although Eni said it was “not incompatible”.

The company said its decision to open the accounts was “taken in compliance with the current international sanctions framework” and that Italian authorities had been informed.

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