The Protected Market Comes to an End: Italy Closes the Gap

Liberalization, or the boogeyman. In Italy the latter is the case, similar to France and very distant from the Anglo-Saxon countries and Nordic ones in particular. In these countries, the free market is not considered scary; on the contrary, it is an opportunity. Starting from 2024 (January for gas, April for electricity) the era of the protected market for private users will come to an end in our country and we will move to the free market for all or almost everyone, with the exception of some vulnerable and therefore protected groups. It is a decision that has already been postponed several times but, also due to pressing by the European Union, seems to have been definitively taken. What, however, will change in concrete terms for the market and for consumers? Matteo Di Castelnuovo, SDA Bocconi Associate Professor of Practice of Energy Economics and President of the Italian Association of Energy Economists, discusses the topic in this interview.

Zero hour is near; the protected market for gas and electricity has its hours counted. It may be drawing to a close, although fears in the public seem greater than the hopes of those who look forward to this, in some ways, momentous transition.
I would say that the fears are unwarranted and that the end of the protected market is a good thing. In 2022, for example, those who had already opted for the free market spent less than those who remained in the protected market. In general, there are two reasons why tariffs can rise: the first is increased cost of raw materials (meaning the prices on the protected market would also rise); the second would lead to a competition problem, which would mean that the Authority did not supervise. I consider this, however, a very remote possibility.

It is a measure that comes years too late. Can you give us a summary of the event?
The market liberalization process began in 1999, and in 2007 – with the Bersani bis Decree – the energy market was completely liberalized, opening it up to new suppliers and allowing users to freely choose their supplier. However, the regulatory framework provided for a period of coexistence of the free and regulated markets to allow consumers to make a smooth and gradual transition. The end of the greater protection service has been postponed several times, but now we are there.

What was the reason for such a long wait?
This matter has been politically exploited for the unhealthy idea of protecting the consumer. In reality, even with the end of the greater protection service, the more vulnerable groups will be protected, while – as I said before – I do not expect who knows what kind of rate increases. We should look at what has happened in the wireless industry, for example. The only real decision that will be a bit delicate will be: fixed or variable price? It will be slightly similar to mortgages.

How do you choose your suppliers? What are the parameters to look at?
The ARERA portal shows many options, and knowing the seriousness with which our authority operates, I can say that they have been carefully tested. We are talking about 600 companies for gas and 500 for electricity, which are both well-known companies in the sector – some really small and unknown to most, and other large players who do not have their own production assets, such as Poste Italiane and Wind. The first thing we have to ask ourselves is whether we only want the raw material, i.e. gas and electricity, or even some additional services that many companies offer. Then, based on this, a choice is made paying attention to the clauses of the contract.

There are those who argue that if we imported less from abroad, tariffs would be lower. Is that correct?
No, not at all. Firstly, we need to make a distinction: we have to import gas because we do not have it. As far as electricity is concerned, we import about 15% of our needs and sometimes we even export it. Electricity is neutral and you go where it costs less; if it costs less in Italy, you get it in Italy, and if it costs less from the French nuclear reactor, you get it there. If the nuclear reactor is blocked or if there is congestion on the interconnections or some other phenomenon, you have to get more from another plant.

Going back to the choice of a supplier to rely on, are there different considerations to be made for gas and electricity?
The gas issue is very scary because it immediately recalls that of home heating to which we are all very sensible. In general, I would say no. The considerations are the same and, above all, let's keep in mind that the companies recommended by ARERA have all undergone strict tests and have shown that they have the expertise – including financial – and bank guarantees to be able to operate in a market with very high volatility. Attention must be paid to the cost of the kilowatt hour, the duration of the contract, and in general I would advise against those operators, usually intermediaries, who implement a very aggressive telephone strategy. A general piece of advice is that switching suppliers, if we did it in large numbers, would lead to downward pressure and cheaper rates. To play it down, however, I want to quote one of the world's leading experts on energy policy, Dieter Helm of the University of Oxford, who argues that there are better ways to spend one's evenings than to spend hours looking for an energy supplier.

Earlier you touched on the subject of nuclear power plants. Fourth-generation plants, in particular, produce energy at very low costs. Could this be the solution?
The nuclear issue is delicate because it polarizes positions a lot. There are economic reasons that would push in that direction, but always guided by political choices. As far as I am concerned, I can say that this would not be an economic choice that emerges from market dynamics. The biggest problem is the timing, which is not compatible with what is required of us by the climate emergency and the commitments we have made in this regard, especially for a country where seven years are not enough to install a wind turbine. The costs, in addition, would be very high and long to amortize, considering also that we have dismantled the entire supply chain.