Italy Power Report Q2 2016
BMI View: Non-hydropower renewables and transmission networks will see most investment within Italy's power sector over the coming years, due to planned incentives for non-PV renewables and a growing focus on the development of new cross-border power interconnections. Amid falling wholesale power prices and stagnant power consumption growth, continued delays in the introduction of a capacity market will encourage thermal power utilities to retire unprofitable assets and consolidate.
Latest Updates And Structural Trends
Cheaper natural gas will boost Italy's spark spread in 2016, but will reinforce the problems facing the country's thermal power sector in 2017 as the lower price of gas is pushing forward power prices lower. Faced with this challenging operating environment - which will be compounded by contracting power consumption and delays to the introduction of a capacity market - utilities will continue to retire excess thermal power capacity and consolidate, to cut costs and improve efficiency. The European Commission (EC) is reviewing capacity markets mechanism in Europe, with guidelines on the scheme's implementation reportedly scheduled to be released by end-2016.
Utility A2A has been most active in the consolidation trend. In January 2016 it acquired utility Linea Group Holding, and in November 2015 it reached an agreement with Sorgenia on the shared management of two combined-cycle gas turbine (CCGT) power plants for five years. We expect the company to continue with the acquisition of smaller municipal utilities in the north of Italy, in line with its plan to create a new company that will integrate its CCGT assets with those of all its subsidiaries.
Data released by Terna on Italy's power consumption showed power demand in the country grew 1.5% in 2015, in line with our estimate. It is the first time that power consumption in Italy expands since 2011, but we believe this will not be the start of a trend. Growth in power demand in 2015 was due to unseasonably hot weather, while structural dynamics in the Italian economy and power sector suggest consumption of electricity in Italy will resume its slow contraction over the next few years.
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