During the early months of the liberalization of the electricity market, 700,000 households and 1.4 million firms have changed their power providers. The President of the Italian Authority for Gas and Electricity, Alessandro Ortis, looks with optimism at these developments, persuaded that the market will develop thanks to higher competition among suppliers and incentives for investment in power generation.

  The electricity market is highly complex. What are the elements making it problematic from the point of view of competition?
Alessandro Ortis: The congestion of internal and cross-border grids, and the fact that it’s not yet an efficient market. But the final objective remains the protection of the consumer, by facilitating a freer, more informed, and convenient choice.
Michele Polo: The industry is complex and so is the task of the Authority. To understand it better, it’s useful to look at what goes into the electricity bill. Costs reflect the rising price of oil, pulled by higher demand coming from emerging economies, but also the dynamics of competition affected by the liberalization of the market.

  More than eight months after the launch of liberalization of the electricity market, less than a million Italians have changed supplier, with average savings of about €10 per year: much ado about nothing?
Ortis: However you want to look at it, it is still 700,000 households and a million and a half of companies that can now opt for a cheaper choice that was not there. Surely, we are still in the early stages and the process can be better tuned. But I have no doubts that this was the right decision. The advantages should not be evaluated only in terms of pricing, but also in terms of commercial and technical quality of the service being sold.
Polo: Form a media point of view, there was maybe an excessive emphasis on the gains to be made from  liberalization,  thereby creating excessive expectations, but the results so far achieved should not be underestimated.
Ortis:  Skyrocketing oil prices are hitting us and the cost of fossil fuels is major component of the price of electricity. So no matter how much we keep other factors down, there is currently a bias toward an increase in electricity prices, as happened over the last two quarters. Still price increases would have been much higher without market liberalization. Italy is extremely addicted to oil. If we don’t change that, Italy will remain among the EU countries most exposed to fluctuations in prices of hydrocarbons.

  And what about the tax component of electricity bill?
Ortis: Also this aspect should be revised, and this is what we asked the government and parliament to do, regarding TVA being paid also on the so-called “systemic costs” that account for about 10% of the electricity bill, according to data for the first quarter of 2008. The consumer pays such costs to finance energy research, the shift toward renewables, the decommissioning of old nuclear plants, equalization of consumer fees, discounts for energy-intensive industries etc. Why should we pay TVA on these items, when taxes already account for 14% of the total paid? The bill also includes (about 14.5% of the total) the cost of transport and distribution. The remainder, 61%, is constituted by production costs: 46% for fuels and 15% for the production process. The data show that since 2003, transport and distribution fees have declined, power plants have become more efficient, and productive capacity has increased. But all this has been eclipsed by the hike in the price of the oil barrel.
Polo: Let’s go back to the meaning of liberalization, The main impact of a more liquid and competitive retail market will be on the wholesale electricity market, making the entry of new operators more likely. If this happens, there will be effects on the wholesale cost of energy, that 60% of the final price. Electricity market liberalization is being matched by the liberalization of gas and other services, which puts the concept of the multi-utility company, so popular at the end of the 90s, back in fashion. The possibility of offering electricity, water, and gas in the same package will attract operators able to compete along the whole range of services.

  Yet energy producers don’t seem to have been very aggressive in terms of marketing, in the months following liberalization...
Ortis: We have completely liberalized demand, but the same cannot be said for the supply side. Still, the electricity industry is ahead in this domain, with respect to the gas industry where competition is negligible. The comparative lack of consumers switching energy providers is not due to inaction, but to the lack of an abundant supply of packages being offered by a large number of fiercely competitive suppliers.

  What effects will have the recent ambitious EU targets on energy coming from renewable sources? Will they manage to reduce the emissions of greenhouse gases?
Polo: Constraints have been set on emissions, on emission certificates, and on the mix of energy sources that can be used at the national level. The estimated impact is in the range of one percentage point of GDP, and massive investments will have to be made. I wonder who is capable of meeting a challenge of this size today. Right now, the international aspect is the most relevant. If we are able to involve China in the process, climate policy will work, otherwise it will fail. We will understand where we are at after the American presidential elections. Europe has gotten virtuous, but is alone in this. Only together, will the US and the EU be able to apply the necessary pressure on China.
Orti: The control of greenhouse emissions is not within the range of tasks assigned to the Authority. Yet, when asked, we suggest to promote solar and wind energy in an efficient way, and to shift the emphasis from caps on emissions released by European producers, to the CO2 content embodied in the final products being marketed by all countries, India and China included. The global issue of climate change must be tackled via a global approach, which should give a role to market mechanisms and discourage all forms of environmental dumping. Also one should not forget the precious contribution that can be given by energy conservation and a more rational use of energy.