What is meant by decoupling between electricity and gas prices

In Europe the idea of ​​decoupling the prices of electricity and gas is gaining ground, with the upheaval of geopolitical balances and the lack of security in energy supply.Italy has taken the first step.

The theme of decoupling between gas and electricity prices is riding all the European and Italian media, thanks to the implications of theRussian invasion of Ukraine and from the approach of vote in Italy.To avoid simplistic analyzes and risk not using the term correctly, below is a brief explanation of the word and context of use.

Tying renewables to gas, a strategy adopted in the nineties

In the mid-1990s, the European Union introduced a system to tie the cost of electricity, also produced by renewable sources and (at the time) much less convenient, than that of gas, far less expensive.The mechanism was designed in a totally different energy landscape, precisely to try to encourage the diffusion of plants for the production of renewable energy, alternative to that from fossil fuels, because it helped to cushion the amount of initial investments intended for the construction of the production site, guaranteeing greater profit margins.

How the price of gas is determined today

The price of gas is determined in the wholesale market Ttf (title transfer facility), based in the Netherlands.The Ttf, another term widely used in recent times, represents the virtual gas exchange point in Europe and the reference for the virtual exchange point (psv) of the wholesale market in Italy.To simplify as much as possible, the final price of energy is the same in a specific geographical area, usually represented by national borders, but varies every half hour.To determine it, the overall supply is taken into account - not the source with which the energy is produced - and, in particular, the last power station used to satisfy the energy demand, which is usually gas (still among the most used for energy production).

The process also takes place on the Ttf platform buying and selling of gas between between the producers and i suppliers, so that the latter can resell it to their customers. Home users And businesses of the free market do not pay the purchase cost, always linked to the index established in the TTF and, for transparency dynamics, to the production cost, but a higher price, which includes a certain additional margin equal to the supplier's profit.For those who have signed a contract under a protected regime, it is worth remembering that it is theRegulatory authority for energy, networks and the environment to set prices.

Today, however, it is better to return to decoupling (decoupling)

Of course, it's not all that simple.In addition to the dynamics of supply and demand on the market, mechanisms intervene speculation (in analogy with fuels), which experienced a surge following the outbreak of the conflict at the gates of Europe and the redefinition of geopolitical balances.This is due to the urgency of diversify energy supply because of the cut of supplies of Moscow to countries too dependent on Russia (including Italy).

The market has therefore witnessed a remarkable increase in the cost of gas and, consequently, electricity, including that produced from alternative sources.How to say:renewables got involved, because the increase in the cost of this type of electricity was not determined by an increase in production costs but by the combination of all the factors described above.

This is not a new topic:in the aftermath of the leap of energy demand and the surge in prices, favored by the recovery of industrial and productive activities at the end of the peak of the Covid-19 pandemic, we began to discuss it at the institutional tables of the European Union.To avoid repercussions on the sustainable turning point of the Old Continent, the idea of ​​a large portion of technicians and political representatives is to proceed with the decoupling (often defined decoupling) of the related costs and to allow the individual gas supplier to establish the price based on production costs (a mechanism feared by some for fear that it could cause an upward phenomenon).It is not yet clear how this energy market reform will proceed but, in general, it could allow renewable energy to be sold to end consumers at lower prices with more advantageous contracts.

Italy takes a first step and waits for Europe

Precisely to cushion the burden borne by energy-intensive companies, which consume a lot of energy and have also seen their bills triple, the Italian Minister for the Ecological Transition, Roberto Cingolani, signed last September 15th Energy release decree, which provides the sale of 18 terawatt hours (TWh) of electricity to controlled prices, i.e. at the price of 210 euros per megawatt hour (MWh), approximately half of the market value, to industrial customers whose production can be interrupted, such as paper mills, foundries and chemical industries, small and medium-sized enterprises (SMEs) and users on the islands of Sardinia and Sicily, with the mediation of joint-stock company with public participation Gse-Electrical services manager.

At the moment, as stated by Cingolani himself during the press conference that followed the Council of Ministers on 16 September, the European Commission is thinking of a renewable electricity price of 180 euros per MWh, which Italy is ready to align with.From an idea foreign to many countries, which met last September 9th on the occasion of the Council of Energy Ministers, “the vast majority of member states eventually admitted that the price cap (i.e. the ceiling on the price of this resource, ed.) was probably the only serious European way to put a limit on the fluctuations of the TTF and contain the price of gas", said Cingolani at the press conference.

The president of the executive herself Ursula von der Leyen pushes for the adoption of this solution.Next September 30th, as declared by Cingolani, an extraordinary Council of Energy Ministers will be held which should write the last chapter of this story and set a temporary ceiling on the cost of gas, not only Russian, imported and used to produce electricity.A way to avoid further negative rebounds on the growth of projects linked to renewable sources.