Italian energy sector faces possible huge carbon taxes

Italy's energy sector is the latest in Europe to face a possible massive "carbon tax" designed to cope with postulated catastrophic global warming.

Late last year, the Italian ministers of industry and the environment announced at a summit on energy a 5-year, 100 trillion lira ($57 billion) program to implement a carbon tax and revamp the energy sector. This is in accordance with the Kyoto climate change agreement, under which Italy is to cut emissions of greenhouse gases by 6.5% from 1990 levels.

That underpins projections of a dramatic switch in power generation fuel in Italy to natural gas from oil. According to Chicco Testa, general manager of state power utility ENEL, by 2010, 60% of electricity in Italy will be generated from gas and only 10% from oil, reversing the current respective market shares. Today, most Italian electricity is produced by power stations fueled by gas oil. What complicates this outlook is the fact that both the gas and electricity sectors in Italy are to be deregulated under a standing European Union antitrust directive.

New taxes

The Italian government plans to introduce differential taxes on hydrocarbons to limit emissions of CO2.

During 1999-2004, the tax on natural gas for industrial use will increase by only 7%, by 2% for residential use, and by 4% for electricity generation. On the other hand, the tax on low-sulfur fuel oil for industrial use will rocket by 33%, and by 52% in residential use. The tax on high-sulfur fuel oil for industrial use will soar by 61%. The tax on unleaded gasoline would be hiked by 7%, while the tax on vehicular natural gas will fall by 23%. The tax on coal burned in power stations will jump by 42%.

Other changes

Of the $57 billion program to comply with Kyoto, half will be spent "flexibly" during 2000-12 to revamp the electric power sector, enabling most power plants to burn natural gas instead of gas oil and coal. This works out to an investment of almost $1/kw of power produced, an amount many analysts have criticized as excessive.

The total expected reduction in Italy's CO2 emissions during 1999-2004 is 95-112 million tons, against a base case scenario of 620 million tons. Revamping power stations would account for 20-23 million tons of those reductions, mainly by favoring high-efficiency natural gas cogeneration plants. Another 18-21 million tons in emissions cuts are expected in the transportation sector by encouraging low-emission cars and by promoting the use of trains.

Subsidies for efficient new ways of producing electricity, such as the use of Texaco Inc.'s gasification technology in tandem with combined-cycle power generation, to convert low-value feedstocks to electric power at refineries, will be maintained. Isab Energy is testing such a plant at its Priolo refinery at Siracusa, worth 2 trillion lira, that will be owned 51% by Italian firm Erg SpA and 49% by U.S. firm Edison Mission Energy. It will have capacity of 512 MW and will go on stream in 2000, covering 2% of domestic demand, or 4 billion kw-hr/year.

"A 20% profit is expected from the operation of the Priolo plant," said Pierantonio Nebuloni, Erg general manager. This is calculated by adding to a guaranteed price of 72 lira/kw-hr, which Italian ENEL pays the power supplier, another 45 lira as an incentive for an environmentally friendly, high-efficiency power generation scheme.

There are two other such refinery power plants in Italy using Texaco gasification technology: one operated by Saras SpA at Sarroch and one operated by API SpA at Falconara.

Deregulation

With the partial deregulation of the electric sector, ENEL will have to surrender 50% of its power stations to the private sector, thus inviting new players in the field of power generation. But it has also promised to invest, by 2010, 15-20 trillion lira to convert its power stations to combined-cycle turbine gas technology, resulting in 22,000 MW of power generation capacity being fueled by natural gas.

The EU directive requires Italian gas market deregulation in stages: 30% of the sector by 2000, 38% by 2003, and 43% by 2008.

This will hit the Italian gas utility SNAM's quasi-monopoly (90% market share) in Italy's gas market. Analysts estimate that this will open a new market of 25 trillion lira ($14 billion) for gas producers and importers.

The Italian antitrust-oriented Authority for Electrical Energy and Gas is already asking the government to open for third-party access the domestic high-pressure gas pipeline network owned by SNAM. It also wants to be able to regulate gas prices, which currently are privately negotiated between SNAM and its customers.