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Energy: what should we expect from this year's energy bills when temperatures will begin to drop?

Energy & Utilities Commodities


Although the weather in recent weeks suggests something different, autumn has arrived and winter is just around the corner. The leaves are falling, the days are getting shorter and the temperatures are starting to drop. But as we prepare to enjoy the season of jumpers and hot chocolates, there is another issue central to this period: energy bills. After a year marked by a global energy crisis, many Italians are wondering what awaits them in the coming months in terms of spending on these services. Will it be higher than last year? How will it affect our daily lives? In this article, we will try to answer these questions by exploring the global and European energy landscape, and then focus on Italy. Get ready, because the answer may not be as simple as it seems.

The Evolution of Energy Prices

Before diving into forecasts for the coming months, it's essential to understand how we got here. Until the COVID-19 pandemic hit, the energy market showed signs of stability. Renewable energy sources like solar and wind were becoming increasingly competitive, fueling predictions of a long-term decline in prices. Then COVID-19 struck, causing a seismic shift in the energy market.
The pandemic and subsequent lockdown measures led to a sudden drop in energy demand, resulting in a temporary price reduction. However, this was short-lived. As the economy began to recover, demand surged, but supply struggled to keep up. This imbalance led to a sharp increase in prices, further complicated by geopolitical tensions and changes in environmental policies. To put it in perspective, electricity prices in Italy have risen by about 20-25%, while gas prices have soared between 30% and 40%.
This backdrop of fluctuations and uncertainties presents an unavoidable reality: the onset of colder weather poses a challenge for Italian households, who will face significantly higher energy bills compared to previous years.

Global Context

In an attempt to unravel what awaits us in terms of bills during the colder months, it's crucial to examine the situation from a global perspective. According to the latest "Electricity Market Report 2023" by the International Energy Agency (IEA), global demand has shown remarkable resilience, growing nearly 2% in 2022 compared to the previous year. This is particularly significant considering the average growth from 2015 to 2019 was 2.4%. So, what's driving this sustained growth?
The answer lies in the rapid electrification of our economies. Sectors like transportation and heating are undergoing a revolution, with accelerated adoption of technologies like electric vehicles and heat pumps. However, there's a silver lining to this growing demand: clean energy. Low-emission energy sources like solar, wind, and nuclear are gaining ground and, according to IEA forecasts, will cover almost all the increase in global electricity demand by 2025. In other words, while our dependence on electricity is rising, we're also making significant strides toward a more sustainable future.

European Situation and Impact on Italy

While the global energy landscape offers reasons for cautious optimism, the situation in Europe, and particularly in Italy, is more complex and warrants closer scrutiny. Europe has had a turbulent 2022, with an energy crisis that had direct and significant repercussions on citizens' bills. Electricity demand in the European Union saw a net decline of 3.5% in 2022, the second-largest percentage drop since the global financial crisis of 2009. What's behind this decline?
Firstly, wholesale energy prices have been more than double compared to 2021. This surge led to "demand destruction" among industrial consumers and put immense pressure on households, forcing many to cut back on consumption to avoid unsustainable energy costs. Moreover, Europe faced a series of challenges related to energy generation, such as historic drought conditions that had a devastating impact on hydroelectric and nuclear energy generation, about 17% less in 2022 compared to 2021.
In this context, Italy emerges as an interesting case study. After experiencing historic drought last year, water levels have returned to normal, a crucial factor for a country significantly dependent on hydroelectric power. Additionally, Italy's natural gas reserves have exceeded 90% of storage capacity, providing a "buffer" against international price fluctuations. These developments offer some relief but are not a cure-all.
In response to this crisis, several European countries, including Italy, have introduced measures like wholesale and retail price regulation, energy tax reductions, and direct subsidies. However, these are short-term solutions that don't address the root causes of the energy crisis.

So, What Can We Expect This Winter?

As we approach the colder months, the issue of energy bills remains a central concern for Italian households. But what can we realistically expect this year? It's important to note that Italy has experienced a more significant impact on energy prices compared to other countries, jumping from an yearly mean of about 80 USD/MWh to nearly 320 USD/MWh. This was caused by the inability to access hydroelectric energy sources, heavy reliance on fossil fuels, and increasing energy demand from the industrial sector in a year of economic recovery. Futures contracts for Q4 2023 and Q1 2024 indicate rising prices in the Eurozone, reflecting the continued high risk of limited supply.
However, there's a bright side. While demand in Europe is expected to rebound and return to pre-crisis levels in the next two years, Italy is an exception to this trend. Thanks to investments in energy efficiency and, unfortunately, a slowdown in economic growth, electricity demand in Italy is expected to decrease by about 1% per year. This could mitigate the rise in energy prices. Moreover, high gas reserves and water levels could offer a respite from recent record price hikes. But it's crucial to remain vigilant.
Geopolitical uncertainty, climate change, and the ongoing energy transition are variables that could still significantly impact bills. Faced with these uncertainties, the key will be to stay informed and proactive. Now is the time to consider investments in energy efficiency and explore renewable energy options as a way to mitigate future costs.
These strategies can not only help control energy expenses but also represent important steps toward a more sustainable energy future. As we continue to navigate this complex landscape, awareness and preparation will be our best allies. So, as we gear up for autumn and winter, it's time to act—not just to tackle immediate challenges but also to build a more sustainable energy future.

Electricity demand in the European Union experienced a net drop of 3.5% in 2022, the second largest percentage drop since the global financial crisis of 2009.

Stefano Di Nicola

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