A Clean Energy Portfolio (CEP) is already more competitive than new combined-cycle gas plants (CCGTs) in Italy.

Foot Off the Gas finds that investment in new CCGTs would not only be bad for emission goals but also lead to comparatively higher electricity prices and could result in stranded asset risk.

Investing in new CCGTs risks €11 bn ($13 bn) in asset stranding

New build gas plants in Italy are no longer cost competitive when compared to clean energy sources, owing to the rapid cost reductions in renewables. There are plans to build around 14GW of combined cycle turbines in Italy this decade to compensate for the loss from the decommissioning of coal plants.

Foot Off the Gas finds that a CEP is already cheaper than building new CCGTs while offering the same level of grid services.

Figure 1: CEP LCOE vs proposed CCGT gas plant LCOE

Recommendations for investors and policymakers

Based on our analysis we see the following as relevant to avoiding potential stranded assets and helping Italy secure a clean energy pathway.

  • Embrace coal-to-clean instead of coal-to-gas: new investments in gas capacity to fill any capacity gap left by the coal phase outs will unlikely be a least-cost solution over the investment payback period. Importantly, our analysis highlights that a CEP is not only cheaper than new CCGTs but also offers equivalent grid services. This should reassure policymakers of the grid stability, security and adequacy provided by CEPs in meeting Italian energy needs;
  • Reform the capacity market to ensure that gas is not disproportionately rewarded at the expense of other resources: this will ensure the grid does not overlook the least-cost option for the services required and would be compatible with the climate goals of Italy and the EU; and
  • Leverage significant investments already made in existing resources and supporting infrastructure to advance the clean energy transition. These recommendations are discussed in more detail later in the report.

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Key Findings

Investment in Italy’s pipeline of combined cycle gas plants planned for this decade would be misconceived. We find Clean Energy Portfolios (CEPs), a combination of clean energy sources and flexible technologies, are not only cheaper than the 14 GW of new gas plants but also offer the same level of grid services. This should reassure policymakers of the grid stability, security and adequacy provided by CEPs in meeting Italian energy needs. By investing in new gas, investors are exposing themselves to stranded asset risk of €11 billion ($13 billion). By choosing clean over gas, annual emissions savings are estimated to be 18 million tonnes of CO2, equivalent to 6% of 2019 total emissions.

The case for Clean Energy Portfolios is strong across different demand outcomes. We tested a model to manage peak and non-peak demand across the year and, although the contribution of the CEP resources changes, it is shown to be capable of providing the same grid services as a gas plant. We performed a cost sensitivity to key inputs to show that CEP economics are robust. We find that a 25% cost reduction in battery storage would bring the overall cost of a CEP down by 10%. Importantly, because of the substitution between clean energy resources in a CEP, changes to costs of individual resources can be mitigated at the investment planning stage. This is not possible with a gas plant that is wholly reliant on nonsubstitutable gas as a fuel source.

Italy’s capacity market significantly distorts the energy market in favour of new and existing gas-fired plants and away from clean, low-cost renewables. This market effectively underpins the development of new emission producing power plants that would otherwise be uneconomic. The capacity market needs to be reformed to enable more renewables along with demand response and storage resources to compete on a more even playing field.

Italy should also leverage the significant investment it has already made in existing resources and supporting infrastructure. Technologies like smart meters should be used to promote the use of demand response to help integrate existing and future renewables in the mix. Italy should also take advantage of its existing renewable sources, especially solar, and complement these with storage capacity to further the clean energy transition.

The National Energy and Climate Plan, aiming to promote lowest cost clean energy and improve energy independence, risks being derailed by a continued focus on gas power, which would not be compatible with the climate goals of the European Commission or Italy. Although Italy has not announced an overall emissions reduction target compared to 1990 levels, the recent announcement by the EU to cut emissions by 55% by 2030 as a pathway to reaching net-zero emissions by 2050, could see more ambitious climate goals for Italy.