Renewables and the free market: an advantageous choice for consumers

Published on Monday, 17 January 2022

The increase in electricity prices we’ve seen in Italy since the last quarter is mostly due to the rise in the cost of natural gas internationally. As the economy restarts, production cycles have surged and gas demand has increased to levels the system is still not prepared to meet, even considering the fact that Italy imports over 90% of this resource from abroad. Since more than half of the electricity in Italy is generated using gas, there is an even stronger connection between the two. And two additional factors come into play: the cost of CO2 emission allowances recording a steep increase; and the effects of climate change, which have noticeably increased energy consumption by end users.

These factors cause the cost of energy production to rise significantly.

This dynamic, however, can be interrupted thanks to renewables, which have already proven to be able to provide greater stability in the market. Between 2009 and 2019, the cost of gas generation in Italy remained relatively unchanged, while the price of wholesale electricity decreased by approximately 19% thanks to the growth of renewables.

So even if the share of electricity generated using renewable energy sources were higher, there would be no significant increase in prices for end users. In fact, as Nicola Lanzetta, our Head of Country Italy, explained in an interview with MF-Milano Finanza, “With production from renewable sources near 70%, which is the target for 2030, the cost of energy would be more than 30% lower. But already today, with the green energy quota in Italy at less than 50%, renewables have contained current prices rises by at least 10%.” In other words, electricity prices are increasing today because the share generated from renewable sources is still marginal.

“As a country, the more we produce from renewable sources, the more the price of electric energy will come down.”

– Nicola Lanzetta, Head of Country Italy

The competitive advantage of renewables lies first and foremost in technological innovation and, in particular, in research on materials – which has made it possible to lower production costs in wind and solar plants. But an important role is also played by internal factors and market instruments like PPAs (Power Purchase Agreements), which grant a long-term electricity supply at set rates. As Tamburi explains, “with renewables, it’s easier to enter into long-term supply agreements with PPA contracts. Now that we’re seeing a sharp rise in wholesale prices, there’s obviously an increased interest in fixing prices for the medium-long term.” So, this is another way in which renewables contribute to price stability.

In the future, the financial advantages of renewable sources for end consumers will be even more striking. This is mainly because generation costs for wind and solar plants are destined to fall even further, but it’s also due to renewables’ intrinsic characteristics: they don’t involve any costs for extraction or for transportation infrastructure.

Furthermore, a country like Italy – endowed with scarce deposits of raw materials, yet rich in natural resources provided by the sun and wind – would decrease its import expenditure, its dependency on countries that produce fossil fuels, and market competition from other nations.

Finally, from an energy transition perspective, fossil fuels will be increasingly impacted by the costs of greenhouse gas emission allowances – making clean energy sources even more competitive.

So how can consumers protect themselves from rising prices in the short term? “In order to curb increases in the cost of energy bills, people should start entering into multi-year long-term contracts, with solutions that offer a fixed price for electricity, for up to 24 months, while for companies prices can be blocked for up to 10 years,” Lanzetta says. In addition, thanks to cheaper and more efficient new technologies, electricity can be used for different purposes and roles than those we’re used to, such as home heating and mobility.

If we expand our vision even further, a cleaner energy mix at the global level can counteract the effects of climate change and therefore reduce the huge financial – not to mention social – costs caused by weather events that unavoidably lead to an increased demand for energy, recording consumption peaks when temperatures fall below average in spring and rise above average in summer. Ultimately, the benefits of renewables for Italy, even in purely economic terms, are not limited to our individual energy bills but impact the entire country as a whole.

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