Electricity, why does it cost so much in Italy? The answer in 2 graphs

Energy prices and dependence on gas in Italy: it is in this combination that lies the reason for electricity bills that are among the highest in Europe.
According to an analysis appearing on Reuters, in fact, in our country the energy mix is still too unbalanced in favor of raw materials such as fossil fuels and this trend makes the nation vulnerable to cost fluctuations.
With the industry suffering the most.
In detail, average wholesale electricity prices in Italy have been the highest among major European markets over the past three years, driven by a substantially greater reliance on natural gas for electricity generation than in rival economies.
According to LSEG, wholesale electricity prices in Italy averaged 127 euros per megawatt hour in 2023, a third more than in Germany and France last year and more than 50% higher than the average price in Spain.
How much does electricity cost in Italy? Looking at the LSEG data, we discover that Italy has often placed itself in the top places due to the high cost of wholesale electricity.
Our country's energy costs have risen further above some of its major rival economies so far in 2024, with wholesale prices last month averaging nearly 40% higher than prices in France and 60% higher than at wholesale prices in Spain.
The graph drawn up by Reuters is eloquent in showing this negative Italian record: A similar trend has damaged the main energy consumers in Italy, in particular industry and large producers, some of which have been forced to cut use and production of energy over the last year or so to avoid accumulating large financial losses.
Italy is too dependent on gas Reuters observers highlighted that Italy's relatively greater reliance on natural gas for electricity generation was a key factor behind high energy costs.
The share of natural gas in Italy's electricity generation mix in 2023 was just over 45%, compared to 6% in France, 15% in Germany and 23% in Spain, data from think tank Ember shows .
Such a high dependence on natural gas impacts Italian utilities, which have had little room to maneuver to deploy other forms of energy for generation, even with annual increases in renewable energy production in the country.
This in turn has meant that as regional natural gas prices have soared since Russia's invasion of Ukraine in 2022, and replacement supplies in the form of liquefied natural gas (LNG) imports and alternative pipelines have also increased by price, Italian electricity companies have had to pass these higher costs on to consumers.
What energy mix in Italy? Fossil fuels have accounted for around 60% of total electricity production in Italy in the last ten years, while natural gas alone has accounted for around 50% in recent years.
As recently as 2019, thermal coal accounted for an additional 12-15% of electricity generation, but pollution reduction efforts have led to the closure of some aging coal plants, helping to push coal's share of the generation mix of electricity at a historic low in 2023, with 5.3%.
However, reduced coal production has forced power companies to further increase their reliance on gas as the main pillar of the country's energy system, even as gas prices have risen following the Russia-Ukraine war.
The energy mix is not yet that strong, with fossil fuels taking up a significant share of resources, as the Reuters graph shows: Italian power companies have also sought to increase electricity production from other sources, with solar production on the rise by 37% and wind by 34% since 2018, Ember data shows.
Hydroelectric plants also play a key role in the production of clean energy in Italy and in 2023 they represented 15% of total electricity production.
However, hydroelectric production levels can be volatile due to drought, such as in 2022, when total hydroelectric production fell to its lowest level in 20 years and represented just 10% of total electricity production.
Such unpredictable output from hydropower plants, coupled with intermittent generation from solar and wind farms, means that Italian power companies are unlikely to be able to reduce their use of natural gas for baseload generation any time soon.
And this, in turn, means that any further increases in regional natural gas prices could keep electricity prices in Italy higher than elsewhere in Europe.