News of liberal victories across Europe continues to pour in. In the lead, Nord Pool is reporting mind-numbingly low prices, defying sceptics who say they must soon rise. In Germany, wholesale and top industrial power prices are sinking fast enough to prompt yet more radical cost-cutting and strategic action by the once proverbially sleepy incumbents. Swiss traders are plumbing new price depths in cross-border trade. Spanish industrial customers are opting for market solutions. Even seemingly unassailable Belgium has been penetrated by RWE, which has secured a hefty chunk of the energy business of BASF’s Antwerp site, Electrabel’s biggest customer.
Guess who is unhappy? In Italy, ironically enough, the authors or abettors of much of what is happening in Europe today – market-mad investment bankers and performance-only-please fund managers. International finance is seething at long overdue moves to reform Italy’s “CIP6” incentives system for cogeneration and renewables output. Lenders like Chase and NatWest have backed some very high capital cost and/or high debt major projects under this scheme. It is still unclear just what Italy will do about CIP6, but the bankers and foreign energy investors are preparing for the worst by plugging sharply lower prices for sales to the state utility Enel into project cashflow models. Horrified with the results, they have harassed their diplomats to lodge protests or at least register concern in Rome.
One Embassy that did write to Italy’s industry ministry and energy regulator (which is preparing the CIP6 reform at a suspiciously leisurely pace) is Britain’s. Thus we have the spectacle of at least one government that is officially vigorously committed to European market opening, and critical of backsliding, turning around at to plead for the maintenance of one of the worst of Italy’s state system legacies.
Foreign Investors in Italian Power
Backers of CIP6 projects will not have any talk of contradictions. The point, they say, is that they have valid 20 year power sales contracts with Enel, with incentive payments for new power plants over the first eight years of operation, and these must be respected. Change CIP6, they growl, and foreign investors of all types will give arbitrary Italy a miss. Meanwhile Enel, rather than just serving as a forced buyer of CIP6 output, is in on the game itself. It has used the policy to finance its renewables development, even while complaining bitterly about the policy’s overall impact on its accounts. If Italy decides it has been overgenerous and reneges on all CIP6 commitments, it will be left without a green power promotion policy.
All fine words for political corridors and courtrooms. But reformers in the real world, which doesn’t give a fig about what is happening in – or to – the energy business, should keep their wits about them. Remember that any competent risk analyst should have wondered long ago if the CIP6 party could possibly last while parties elsewhere (in the England and Wales pool, for example) were so rudely ended by angry regulators and politicians, not to mention overshadowed by the coming of the EU electricity directive. Like other follies of pre-market days, CIP6 is simply too big and too expensive to justify, and this is not news, even if it must still be reported.
How big is the problem? CIP6 project authorizations haven’t been granted since 1995, but in 1998 the licence holder queue stretched to 7290 MWe, and operating plants totalled 6510 MWe. If all the licenses are used, CIP6 plants will account for 13800 MWe, or almost a fifth of total Italian capacity, and have a bigger impact in production. The regulator calculates that CIP6 output may hit 62 TWh/year early next decade, or around a quarter of the Italian total. This power will cost the Italian generation compensation system 8400 billion lira ($4.6 billion) per year, which works out to a price per kWh of 135 lira (7.4 US cents). A price, in the price-collapse Europe of 1999, that Italian industrial generators and their allies will crush, kill and destroy for. No wonder the diplomats and bankers are busy.
Radical reform is nevertheless what every liberal not in banking or the top tiers of Italian industry should campaign for. Some market discipline could be imposed even while retaining subsidies. Spain, for example, still offers incentive payments to private cogeneration and renewables, but only on top of the pool price, which exposes private players to useful pressure instead of sending them into deep subsidised sleep for two expensive decades. The result? Private power that costs less than it does in Italy, but is still profitable, and growing.
Italy, of course, does not have a pool. Formation of a market operator to manage transactions is one of many important objectives laid out in the new electricity law, but not yet achieved. What a shame. The cheap hydro and high efficiency gas-fired capacity locked up in CIP6 contracts should, in an open and organised market, be able to bring many of Enel’s plants under severe pressure in the short term. No waiting for tremulous foreign new entrants, no long lead-time while new CCGT’s are built, no project connection hassle for plants that are already hooked up to the grid and fuel supply networks. Just instant, home-made generation competition, given important impetus by the plan to strip Enel of 15 000 MWe of existing capacity.
This is something British diplomacy should indeed be concerned about, but on the market side that its masters loudly preach, not the corporate welfare sidethat all too often creeps quietly into ‘practical’ Labour policy. If Italy is to change for the better, Britain at least must force its bankers to let this happen. It could start by reminding them that they are in what is called the risk business, and that making and losing Italian fortunes is one of the central and centuries-old foundation stones of the City of London. Let’s see some long faces on Lombard Street, and some progress for Lombardy.