The minister aims to ‘correct an anomaly' but market participants fear he might be creating one, writes Antonio Peciccia
The Italian government is determined to pursue plans to introduce new regulation aimed at artificially flattening the spread between gas prices at the country's PSV hub and the Netherlands' TTF hub, despite widespread concerns from market participants over the purpose, legality and efficacy of such a measure.
Italy's proposed new energy decree is expected to be discussed at a cabinet meeting this month, Italian energy minister Gilberto Pichetto Fratin said at news agency Il Sole 24 Ore's Italian Energy Summit in Milan on 1-2 October. The draft regulation proposes reducing or eliminating the PSV-TTF spread, either by setting negative entry tariffs at the Passo Gries entry point — the gateway for northwest European gas to the Italian market and typically the country's marginal source of supply — or by introducing a so-called liquidity service at Passo Gries that would effectively act as a spread cap. Rome hopes this will align Italian prices with northwest European hubs, in turn making gas cheaper for Italian consumers.
The change will "correct an anomaly", Pichetto Fratin says, but market participants and legal experts argue that the measure would instead distort market-based price formation in a way that could reduce the attractiveness of the Italian market, jeopardise the architecture of the European gas market, and create a situation of unfair competition that may discourage investments — without any guarantee that it will achieve the desired goal of reducing costs for consumers.
By artificially lowering PSV prices, the measure "would distort competition between entry routes and undermine price signals", wholesale traders' association Energy Traders Europe and industry body Eurogas say in a joint letter. "The PSV-TTF spread is functional to attract LNG cargoes", particularly given that some Italian terminals are more expensive than others in Europe, Energy Traders Europe says in a position paper seen by Argus. Eradicating the spread could discourage imports at other entry points, as LNG cargoes may be diverted elsewhere.
The "goal is correct", Italian energy firm Eni chief executive Claudio Descalzi said at the Italian Energy Summit, suggesting he is in favour of the government's move. Italy should be able to pay a price for gas that is "aligned" with European prices, or at least offset the differential with the large amounts of Algerian supply coming from southern Italy, Descalzi said. But he cautioned that this needs to be achieved "without penalising Italy and benefiting neighbouring countries". This echoes concerns that the measure could distort regional flows, such as by incentivising re-exports towards Austria, which would create additional import demand in Italy at the same time as reducing the financial incentive for LNG imports.
Equal entry
The proposed decree could also be vulnerable to legal challenges from several angles, legal experts say. Market participants have already raised the issue of compatibility with EU regulations on transportation tariffs, which require that the same methodology is applied to all entry points. Legal experts have expressed similar concerns, and have pointed out that there is ground to interpret the measure as unauthorised state aid, a study seen by Argus shows. And on a national level, applying a support measure to only some firms could be seen as violating Italy's constitutional principles of fairness and equality, the legal experts say. They also question the use of a government decree — meant for the urgent handling of unforeseen events — to tackle a long-standing issue.
In any event, the possibility that the resulting system costs are recouped by additional fees at withdrawal points risks undermining the very goal the government is pursuing, as this would eventually result in higher energy costs for some or all consumers.
