1. ALBA SOLUZIONI Italian gas and power market update Moltrasio
Consultancy and information services in energy and finance
Italian gas and power market update
Moltrasio
27 September 2019

2. What did we learn in summer 19?
We started summer with high storage inventories and record LNG supplies
What would balance the European gas market?
coal-gas switching
EU production turn down
Pipeline import turn down?
Or would global gas prices fall to shut in US LNG production?
How would coal switching and gas dynamics affect the Italian gas premium, power prices and the PSV spark spread?
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3. ...and what’s coming next?
We expect Europe to start winter with full gas storage
But in addition to the usual winter risks, Ukraine transit contracts for Russian gas expire on 31 Dec
What are the prospects for extension?
When will Nord Stream 2 and TurkStream pipelines and transit be ready?
Will LNG/storage/gas-coal need to fill a gap, and at what price?
What role will Italy’s gas and power markets play?
European imports of Russian gas v combined capacity of Nord Stream 2 TurkStream (bcm)
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4. Longer term, markets in Italy being shaped by implementation of M5S policy
M5S-Lega government broke up in August18
Giuseppe Conte - Prime Minister resigned after Salvini called a no confidence vote
Luigi Di Maio
(Five Star Movement - M5S)
Economic Development
Minister
Matteo Salvini
(Lega)
Interior Minister
Sworn enemies, M5S and
PD have now formed new
government
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5. Alba Soluzioni
Independent consultancy established in 2005 operating in the energy sector in Italy
Italian gas & power market report
Gas e Elettricità Oggi
GeEO - Italian Gas & Power
Italian Regulatory Alert Service
AlbaStack power price forecasting model
AlbaFlows daily gas service
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6. Alba Soluzioni Peter Crilly Managing Director, Alba Soluzioni 2004-
Head of European gas, Barclays Capital
Head of UK Gas, Enron
Head of asset optimisation, Enron
Supply & Trading Director, Midlands Gas
Various power purchasing and project
development roles, Midlands Electricity
Economic analyst, AEA Technology
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7. Italian gas and power market update
European context
Power market review
Gas market review
Power outlook
Gas outlook
This presentation has been prepared using publicly available information in addition to Alba Soluzioni’s proprietary Italian market price information. The interpretation of publicly available information and the analysis and conclusions derived represent Alba Soluzioni’s viewpoint as an independent observer of the markets. Whilst Alba Soluzioni has no reason to believe that there are any inaccuracies or defects in the information and analysis presented, there are no representations or warranties, express or implied, to the fitness of such information for any purpose.
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8. EU has already raised ambition from Paris INDC
European context - climate
EU has already raised ambition from Paris INDC
June 2018
EU Commission, Parliament and Council agreed
increase to 32.5%
increase to 32%
the basis for the EU Paris climate conference INDC
increase energy efficiency to save 27% of EU energy consumption compared
to business as usual
supply 27% of total EU energy consumption with renewable energy
reduce emissions of greenhouse gases by 40% from 1990 levels
European Commission analysis published in June 2019: achievement of the higher EU targets for renewables and energy efficiency agreed in 2018 would result in reduction of green house gas emissions in 2030 of 45.6% compared to the current 40% target
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9. Legislative steps in the energy transition
European context – energy transition
Legislative steps in the energy transition
Emissions trading directive - to meet 40% 2030 target - approved
Gas security of supply directive – approved
The Council ,
Parliament and
Commission
have reached
political
agreement on
all 8 ‘legislative
files’ of the
clean energy
package
Directive
Regulation
ACER
Risk
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10. Von der Leyen Green Deal
European context - climate
Von der Leyen Green Deal
Ursula von der Leyen will replace Jean-Claude Juncker as Commission President on 1 November with a promise to propose a European Green Deal in her first 100 days in office
The Green Deal - which will need to gain the approval of EU Member States in the European Council - will include
a European Climate Law to enshrine the 2050 climate-neutrality target into law
extension of the Emissions Trading System to cover the maritime sector
a Carbon Border Tax to avoid carbon leakage
Von der Leyen also wants to “reduce emissions by at least 50% by However, to achieve real impact the world has to move together. The EU will lead international negotiations to increase the level of ambition of other major emitters by By this date, I commit myself to putting forward a comprehensive plan to increase the European Union’s target for 2030 towards 55% in a responsible way.”
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11. Power market review The market environment Renewables
Italian gas and power market update
Power market review
The market environment
Renewables
Supply demand evolution
Lesson 1 from S19 – coal switching
Modelling the market
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12. MSE approved plant closures
Power review – Market environment
MSE approved plant closures
Genova 6, Sarmato and Bastardo kept online W16 due to reduced imports on French nuclear outages
Bastardo still not approved
Terna sees capacity market essential to prevent further closures
M5S/Lega government was initially against capacity market but became supportive when realised that it was necessary to enable coal phaseout
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13. Wind installations speeding up this year
Power review – Renewables
Wind installations speeding up this year
Installations have
averaged
393 MW pa over
last 3 years but
ANIE/GSE data
shows wind
installation
increasing this
year
So most of
remaining
737 MW of
capacity with
right to incentives
to be Installed in
2019?
Capacity installed by type (MW)
Total 737 MW split:
Wind 515
Hydro 47
Geo 66
Biomass 110
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14. Capacity/demand evolution
Power review – Supply demand evolution
Capacity/demand evolution
Until the end of 2007, large volumes of flexible hydro or higher priced thermal plant was required at peak
But falling demand, rising renewable and CCGT capacity mean flexible hydro has to undercut CCGT to get scheduled
Falling CCGT area below the average demand line indicates falling CCGT load factor
Mothballing and closure of hybrid/ fuel oil has little effect
Availability adjusted capacity by type and average and peak demand from Jan 06 (MW)
Improved demand and CCGT closures have tightened the market a little in the last 2/3 years
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15. Average daily coal selected values from 1 January to 23 August 2019
Power review – Coal switching
Italian coal-fired power production
Coal switch is slower than we expected – at -2 differential we have >2000 MW of coal still running – because coal margin is still positive
Portfolio players turn coal down when CCGT is cheaper than coal, but correlation is better to coal margin
But stockpile constraints, term coal contracts and burning of waste alongside coal (Fiume Santo, Brindisi?) mean some coal still runs at –ve margin
Average daily coal selected values from 1 January to 23 August 2019
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16. Correlation of CCGT margin and percentage of available CCGT required
Power review – Modelling the market
Available CCGT required
If we look at the percentage of available CCGT required, our correlation is improved further
For forecasting this means we also have to forecast CCGT availability and non CCGT thermal production in addition to imports, renewables and demand
But this was very important in S19 with coal switch potential
Correlation of CCGT margin and percentage of available CCGT required
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17. Gas market review The market environment Supply/demand evolution
Italian gas and power market update
Gas market review
The market environment
Supply/demand evolution
Long term contracts
LNG supply to Europe
Balancing continental Europe
The PSV premium
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18. Transportation costs to Italy have increased
Gas review – Market environment
Transportation costs to Italy have increased
For many years, NCG/TTF spread has been €/MWh reflecting interruptible capacity availability at low prices
NCG introduced 0.15 €/MWh entry “neutrality” charge on 1 October 2018
And spreads have increased
to often reflect firm
TTF-NCG capacity being
offered at 0.5 €/MWh
(annual), 0.8 €/MWh
(monthly)
- LTC expiry?
TTF-NCG transport now
0-0.8 €/MWh – add
0.2 Wallbach exit – at
upper end, transport from
TTF to Transitgas close to
Oltingue to Transitgas
GY18 spot gas spreads in €/MWh
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19. Supply capacity evolution
Gas review – Supply/demand evolution
Supply capacity evolution
Annualised supply capacity and demand (bcm)
There has been no new capacity added since OLT in 2013
But TENP string 1 shutdown for repairs has reduced Wallbach exit capacity to 30 mmcm/d or less from summer 2017
Capacity in mmcm/d
…exact capacity to Passo Gries imprecise
There is 51 mmcm of entry into Transitgas
Average Swiss demand of about 8 mmcm/d but no storage so available winter capacity to Italy about 40 mmcm ?
GRTN – commercial management of Terna grid to ensure 3rd party access
GRTN to set up AU, mercato elettrico
GME to set up electricity pool market
AU to act as single buyer – purchasing power
Enel to sell 15 GW
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20. Actual ISTAT v 2009 proxy formula (€/MWh)
Gas review – Long term contracts
ISTAT v proxy
Actual ISTAT v 2009 proxy formula (€/MWh)
ISTAT customs data of volume and value of imports by country of origin published since 2009
Regression of 2009 prices gives proxy formula which is approx 90% x GR04
Shows a delayed correlation to PSV month ahead MAGI prices when hub diverges from oil in S14 (following Eni deals with GasTerra and Statoil late 2013/early 2014), S16 and W17
Hub indexation lags month ahead prices…could be mixture of quarter ahead/month ahead or a lag – Jan MA sets Feb price?
* until May 2019
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21. LNG supply to Europe has jumped
Gas review – LNG
LNG supply to Europe has jumped
Average European sendout never falls below 100 mmcm/d, even when Asian premium is high - due to long term contract deliveries to terminals that cannot reload?
At around parity,
summer 17 average
sendout was about
150 mmcm/d,
at around parity, W18
sendout 220 mmcm/d
From Q317-Q418,
55 bcm pa,
149 mmcm/d new
Atlantic basin supply
Cal 19 LNG supply to
continental Europe is up
40 bcm to 11 September
- Europe growing by
more than global
Production?
Sendout v spread
Occasional European premium is reducing Atlantic basin diversion to Asia?
GRTN – commercial management of Terna grid to ensure 3rd party access
GRTN to set up AU, mercato elettrico
GME to set up electricity pool market
AU to act as single buyer – purchasing power
Enel to sell 15 GW
ALBA SOLUZIONI

22. Continental supply S19 to end Aug
Gas review – Balancing the market
Continental supply S19 to end Aug
bcm
Net Russia and North Sea down 5 bcm
Actual LNG increase is 25 bcm
Net Southern down 2 bcm, partly on planned Algeria reduction to Italy
Groningen leads production drop of 2 bcm
Implies consumption up 21 bcm to 125 bcm
5 bcm less injection
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23. Passo Gries volumes and location spreads
Gas review – The PSV premium
Passo Gries volumes and location spreads
NL & Norway
TENP/Transitgas
Passo Gries
Russia
TAG
Tarvisio
Eni should optimise to meet Italian gas requirement on a portfolio basis, rather than optimise TENP-Transitgas capacity separately
So Eni optimising PG (TTF) v Tarvisio (lagged hub index) v Mazara (oil index) and maybe LNG within flexibility of long term contracts
(Libya assumed must take) to achieve
minimum purchase cost
When Eni does not need to use all PG capacity it will offer PSV gas for sale (or maybe short term capacity?) – in competition with FluxSwiss/TENP/Snam (interruptible or firm) capacity sales
But due to timing issues, this is not perfect competition: Wallbach exit and Passo Gries entry auctions run to PRISMA timetable, FluxSwiss is “over the counter”
Snam LNG
Panigaglia
Algeria
TTPC
Mazara del Vallo
Libya
Greenstream
Gela
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24. Power outlook Demand Infrastructure development Winter 19
Italian gas and power
market update
Power outlook
Demand
Infrastructure development
Winter 19
Longer term issues
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25. Annual power demand (TWh
Power outlook – Demand
Demand scenarios
Annual power demand (TWh
Terna base scenario from 2017 strategy returns to modest 0.3% growth
High scenario growth 0.9% - increasing electrical intensity due to progressive tariffs or EV? – corresponds to base scenario of SEN
Alba scenarios:
low at 0.3%,
high at 2%
On low scenario, average demand falls by about 560 MW pa in 2019 and 2020
Terna high/SEN gives 300 MW pa
Alba high scenario gives 750 MW pa increase
GRTN – commercial management of Terna grid to ensure 3rd party access
GRTN to set up AU, mercato elettrico
GME to set up electricity pool market
AU to act as single buyer – purchasing power
Enel to sell 15 GW
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26. Requirements for coal phase out (MSE)
Power outlook – Infrastructure development
Requirements for coal phase out (MSE)
Network infrastructure
Completion of projects in Terna 2019 Development Plan
New Sardinia-Sicily-Continent HVDC interconnector(1000 MW)
SACOI (Sardina-Corsica-Italy) cable replacement
4500 MVAr synchronous compensators (of which 750 in Sardinia)
New generation/storage capacity
12 GW new renewable capacity
4 GW new gas capacity (of which at least 50% OCGT)
0.4 GW of storage/gas peakers in Sardinia
Active demand and storage
3 GW new pumping/electrochemical (battery) capacity
1 GW new "demand side response" resources
to be secured through capacity market
GRTN – commercial management of Terna grid to ensure 3rd party access
GRTN to set up AU, mercato elettrico
GME to set up electricity pool market
AU to act as single buyer – purchasing power
Enel to sell 15 GW
ALBA SOLUZIONI

27. Coal switching, Brindisi
Power outlook – Winter 19
Coal switching, Brindisi
Forward prices on 12 September
CCGT variable cost rises above coal from December to March
And coal margin rises to >10 €/MWh
So we expect coal production to increase to an average 2.2 GW
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28. Coal switching, Brindisi
Power outlook – Winter 19
Coal switching, Brindisi
Forward prices on 12 September
CCGT variable cost rises above coal from December to March
And coal margin rises to >10 €/MWh
So we expect coal production to increase to an average 2.2 GW
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29. Year on year change in call on CCGT (MW)
Power outlook – Winter 19
Call on CCGT
Year on year change in call on CCGT (MW)
Forecast
Lower coal burn increases need for CCGT by an average 650 MW
GRTN – commercial management of Terna grid to ensure 3rd party access
GRTN to set up AU, mercato elettrico
GME to set up electricity pool market
AU to act as single buyer – purchasing power
Enel to sell 15 GW
ALBA SOLUZIONI

30. Base demand scenario (MW)
Power outlook – Longer term
Base demand scenario (MW)
GRTN – commercial management of Terna grid to ensure 3rd party access
GRTN to set up AU, mercato elettrico
GME to set up electricity pool market
AU to act as single buyer – purchasing power
Enel to sell 15 GW
Additional import and renewable loosen market in 2020/21 but then coal phaseout tightens to 2025
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31. Gas outlook Demand Infrastructure development Winter 19 Longer term
Italian gas and power
market update
Gas outlook
Demand
Infrastructure development
Winter 19
Longer term
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32. Annual gas consumption in bcm
Gas outlook – Demand
Scenarios
Annual gas consumption in bcm
Base scenario is Terna demand, renewables as SEN target, coal phase out
CCGT output is squeezed by new interconnectors in 2020 then higher renewable installation until assumed coal closures
Alba flip assumes full switching/phaseout of coal and imports flip to export plus Snam transport upside
Alba flip assumes continued partial switching increasing to full flip by 2022 due to stability mechanism
GRTN – commercial management of Terna grid to ensure 3rd party access
GRTN to set up AU, mercato elettrico
GME to set up electricity pool market
AU to act as single buyer – purchasing power
Enel to sell 15 GW
We will use the extremes – Alba base and Alba flip to look at supply/demand scenarios
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33. ...but delayed to ‘commercial start by Dec 2020’
Gas outlook – Infrastructure development
Shah Deniz II gas buyers
...but delayed to ‘commercial start by Dec 2020’
Construction started May 2016
Offshore pipelay started in March 2019, the
microtunnel to bring the pipeline ashore in Italy completed April 2019, Minambiente granted construction extension September 2019
Shell has acquired part of Engie’s long term contract
First phase
construction of
the 1.75 bcm
bi-directional
BRUA pipeline
was on schedule
for completion at
the end of 2019
But status now
unclear
TANAP started shipping Shah Deniz 2 gas to Turkey last summer
GRTN – commercial management of Terna grid to ensure 3rd party access
GRTN to set up AU, mercato elettrico
GME to set up electricity pool market
AU to act as single buyer – purchasing power
Enel to sell 15 GW
ALBA SOLUZIONI

34. If a deal is not done, a Q120 Ukraine transit disruption is manageable
Gas outlook – Winter 19
If a deal is not done, a Q120 Ukraine transit disruption is manageable
LNG supply as per Q119 would result in a storage requirement similar to Q118 with consumption at average of last 2 winters
We will start winter with 100 bcm storage inventory so if Q4 draw similar to 20 bcm of Q417, we would end winter with 34 bcm
Q418 draw was only 13 bcm due to strong LNG supply
What price is needed to get LNG supply?
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35. Market imports for Italy
Gas outlook – Winter 19
Market imports for Italy
Winter average daily supply (mmcm/d)
and PSV premium over neighbours in €/MWh
Mazara (assuming extra Dec-Mar) plus Gela booking is same as W18 supply
Tarvisio booking 17 mmcm/d above W18
With production and LNG as per W18, Passo Gries requirement falls sharply if Tarvisio runs at booked level – so spread often <variable cost to turn back pre-hedged PG?
Based on W14 experience (Velke almost at net zero after reverse flow to Ukraine), we would expect Ukraine transit halt to lead to bigger reduction at
Baumgarten as Hungary and
Romania transit would also be lost
Need for strong import at Passo
Gries would push the spread
above total daily transportation
cost
When Velke flows were reduced in W14, Tarvisio gas came from North Europe to Baumgarten – but at 6 year low of mmcm
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36. Gas outlook – Longer term
Long Term ToP from Algeria, Libya, TAP, LNG including outages and ToP adjustments
Annualised ToP plus northern supply capacity and demand in (bcm) - existing and committed infrastructure
Adjusted for actual Algerian and Libyan supply to 2019
Assuming 11 bcm Algerian supply from 2020
TAG and Transitgas included at 100% of annual supply capacity
Need for gas from the North falls sharply on TAP startup in low demand scenario
Flip scenario bullish for PSV/TTF spread – need spot LNG
GRTN – commercial management of Terna grid to ensure 3rd party access
GRTN to set up AU, mercato elettrico
GME to set up electricity pool market
AU to act as single buyer – purchasing power
Enel to sell 15 GW
Supply likely to be well below max, but not zero at Tarvisio in the event of Ukraine transit halt
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