The price taker

Europe’s third-largest gas consumer, Italy, is still stuck in legacy patterns of supply and transport that hinder real price competition. Will the TAP pipeline and updated regulation usher in change? By Silvia Favasuli.

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Italy has no shortage of natural gas infrastructure, from major pipelines coming from Europe and North Africa to LNG terminals.

How, then, can the country still have some of the highest wholesale gas prices in Europe, rivalling even Spain, with its notorious lack of interconnections?

Solving the Italian gas market puzzle is not an easy task. But it is possible to identify factors that, taken together, create a unique and enduring ecosystem where no new big players have ever emerged to push down prices through a market share strategy.

Rather, these factors have made Italy an attractive place for gas price takers – companies interested in holding a small share of the market and taking advantage of the high price scenario, with no apparent intention to change it.

While EU rules and some changes in Italian gas markets in the past have attempted to rein in dominant shippers, this work is far from being completed.

Illiquidity and control over supply routes are the main factors that kept the premium of the Italian gas spot contract to the Dutch TTF equivalent at an average of Eur2.70/MWh during 2019.

Large shares of Italy’s gas market are in the hands of a few big players and Eni, the biggest, is also in control of Italy’s major import routes, including Italy’s most expensive and the market price maker – the Swiss Transitgas pipeline.

With 38 Bcm of gas sold in Italy in 2019 out of total Italian consumption of 70 Bcm (54%), Eni is Italy’s largest supplier. Edison is second, with 20 Bcm sold in 2019 and a 28% share, followed by Enel, with 4.7 Bcm sold (6.7%).

On the wholesale market, Eni holds a 14% share and another 10% is in the hands of the major’s trading arm, Eni Trading & Shipping. Engie Global Markets follows with a 10.3% market share and Enel comes next with an 8% share, according to the latest annual report from ARERA, the Italian energy regulator, published July 21.

In 2019, Eni was responsible for 47% of Italy’s gas imports, according to the same report. Most of the gas that Eni supplies to Italy comes from long-term gas supply agreements signed with all of Italy’s main suppliers: Russia’s Gazprom, Algeria’s Sonatrach, Norway’s Equinor, and its own Libyan subsidiary, Mellitah Oil and Gas, an Eni-NOC joint venture.

According to the ARERA report, Italy’s PSV gas hub has seen its churn rate increase over the past 10 years, reaching 3.3 in 2019 from about 2.5 in 2015. Churn rate indicates the number of times a commodity is exchanged on the hub before being physically delivered.

ARERA said the 2019 increase was mostly due to increased LNG deliveries at the PSV, and the creation of a balancing market in 2016. But Italy is still far from a churn rate of 10, at which a gas market is considered liquid and mature.

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