Scenario and Megatrend
The macro-economic scenario seen in Italy in 2019 led to a slowdown, with growth in GDP coming to +0.2% over the previous year. Projections for 2020, instead, points towards a recession coming to -9.5% due to the Covid-19 health emergency (source: European Commission). Italy’s GDP should return to a trend of growth in 2021, with a rise coming to +6.5%.
Through the Cottarelli Plan, in 2014 the Government showed that there is a clear, substantial surplus of operators in the local public services, entailing major efficiency / rationalization margins as well as growth opportunities for the largest and most efficient operators in the industry.
Irrespective of some perimeter variances, a recent study by Utilitatis confirms the size of the industry (about 1,100 providers) as well as the current rationalization margin. Surveyed companies generate a global turnover of about € 50 billion and employ more than 200,000 direct and indirect resources. In view of the consolidation expected from the gas bids and from channelling water cycle and urban sanitation into provincial ambits, the streamlining is estimated to involve about 800 operators. Assuming an eventual alignment of current underperformers to best practices, a 1.5 billion € overall benefit is estimated.
This excessive fragmentation opens significant room for changes leading to company grouping in all public utility sectors, with benefits coming from the economies of scale, efficiency and improved service quality gained .
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The scenario outlined by Snam in its forecasts for gas supply and demand from 2018 to 2035 is based on an assumption of GDP growth expected to reach 0.9% over 2018-2035. In this context, gas demand in Italy will likely decrease by an average of roughly 0.3% per year in between 2018 and 2035, due to energy efficiency investments in the residential sector and to the development of renewable energy that will reduce the use of thermal power plants.
In the gas distribution sector, concessions have expired across the country and tenders are currently being held, called by the Authority ARERA, for reassigning local monopoly concessions. The newly defined areas concerned by the concessions are larger than the previous ones, with the aim of increasing the average size of operators. The process involved in the tenders is thus expected to lead to a reduction in the number of operators, because the most efficient company, that wins the tender, is expected to acquire all activities from the losing companies. This process will thus offer opportunities for growth for the most efficient and largest operators.
From a linear expansion of recent trends in electric intensity, which take into account the impact on the past of recently introduced measures in energy efficiency, Terna has developed two scenarios for future changes in demand:
- “Basic scenario”, which begins with an estimated 0.5% growth in GDP and takes into account the effect of a full implementation of energy efficiency policies, leading electric intensity to be increased by 0.5% in the 2017-2040 period;
- “Development scenario”, which corresponds to a high estimated growth in GDP (+1.3%) and takes into consideration both a different degree of application of energy efficiency policies and a gradual spread of e-mobility, leading electric intensity to be reduced by 2.5% in the 2017-2040 period.
In the period from 2017 to 2040, the development scenario foresees trends in energy demand to reach an average annual increase of +1.1%, corresponding to 412.7 billion kWh (TWh) in 2040.
The basic scenario, obtained through estimates of a more modest electricity demand, expects an average annual growth of +0.5%, with electricity demand coming to 361 billion kWh in 2040.
On 1 January 2022, a complete liberalisation of the electricity sales sector is expected to begin. The market currently consists in 36 million customers, of which 20 million still have protected types of contracts, regulated by ARERA. Doing away with these contracts will require higher competition (currently blocked) and no operator will be able to begin with a dominant market position (above 50%), according to the Antitrust rules. This scenario represents an opportunity for growth for smaller operators, who will be able to compete in acquiring “formerly protected” customers, who will no longer be able to be served by the current incumbent player.
In the environment industry, Italy is still burdened with severe infrastructure shortages against European benchmarks, and the way to recovery is still very uncertain. The downward trend in the use of landfills for municipal waste disposal is ongoing Europe-wide; in the EU-28, the value equals 23.7%. Landfills are instead the main method of disposal in Italy: 25.7% of municipal waste disposed of in 2017 was landfilled, whereas 20.9% was channelled into waste-to-energy.
To reduce the gap that has Italy ranking behind the rest of Europe, the government adopted a number of key measures, aimed at an optimal use of the existing infrastructure system. Article. 35 of L. Decree no. 133/2014, which was converted - through amendments to Law 164/2014 - into the so-called "Unlock Italy" decree, aims to achieve an adequate, integrated system of solid waste management nationwide, as well as to meet all of the waste collection and recycling targets.
It also aims to ensure national security in terms of self-sufficiency and, as a result, to overcome and to prevent further infringement procedures ensuing from failure to implement European industry standards. C urbing waste landfilling is another key target. In this scenario, the use of waste-to-energy as an alternative to landfill disposal ensues from several sanctions imposed to the Italian State by the European Court of Justice. The latest –December 2014 - amounted to 42.8 million euros for every 6 months of non-compliance and was due to a protracted failure to comply with the European directive on authorization, for 198 landfills in the Italian territory.
The critical situation described above has led to a strong rise in prices for waste treatment all across Europe, while in Italy prices have risen by 47% in the last 5 years, with an uninterrupted progression.
As regards urban waste collection and street sweeping services, the Authority ARERA has recently approved the first “national” tariff system, recognising a return on invested capital that is closer to the ones for other services regulated by ARERA. This will level out the differences between the nation’s various localities, and increase the visibility of regulation over the medium term.
The Italian water industry has inherited a very disjointed industrial scenario from the past, with large industrial companies coexisting with small and medium businesses, which are often in economic disruption and therefore unable to meet the necessary investment needs.
Furthermore, the failed coverage of the costs incurred over the years has generated low investment levels. For this reason, the rates in some areas of the country - whose values are among the lowest in Europe - indicate that service quality and stability are relatively poor (e.g. large network losses and low degree of purification).
Comparing the investment expense of other more compliant European countries, if we aim to improve service quality and boost the sector development, a national average investment totalling at least € 5 billion a year is estimated, equalling € 80 per inhabitant.
Transferring tariff accountability into AEEGSI in 2013 was a key turning point towards restoring credibility and perspective in the industry. The results achieved in the first six years are positive.
Concessions for this service in the Emilia-Romagna region are all close to expiry. In this region, tenders have taken place in Ravenna and Cesena (awarded to Hera) and Modena. The others are expected to begin within the next 4 years.
The Authority, ARERA, has approved a revision of tariffs for the Water service, confirming stability in the system, introducing a few changes whose effects are expected to be positive and giving higher visibility to return over the medium term.