IEA (2023), Italy 2023, IEA, Paris https://www.iea.org/reports/italy-2023, License: CC BY 4.0
Italy’s energy system has changed notably since 2010 and today the country’s energy mix includes more natural gas and renewable energies and less coal and oil. From a lower base than the IEA average, Italy’s energy intensity, measured by the ratio of total final consumption (TFC) to gross domestic product (GDP), declined by 15% between 2005 and 2021, reflecting a shift in the economic structure from industrial to the service sector combined with energy efficiency improvements.
Italy is on track to reach the emissions reductions and energy efficiency targets set in its National Energy and Climate Plan (NECP) for 2030. However, it will need to make substantial additional efforts to meet the much more ambitious new targets for 2030 stemming from the European Union’s (EU) Fit-for-55 (FF55) package (and that are still being defined in the EU legislative process) as well as to align with the even more ambitious objectives proposed by the REPowerEU plan aimed at rapidly reducing the European Union’s dependence on Russian fossil fuels. Italy reduced total greenhouse gas (GHG) emissions by almost 30% between 2005 and 2019. There was an additional strong dip from 2019 to 2020 largely due to the Covid-19 pandemic, but preliminary data show a noticeable rebound of emissions in 2021, although they were still 4% lower than in 2019. Italy is committed to achieving carbon neutrality by 2050.
Energy poverty has been a key policy issue ever since the presentation of the Clean Energy for All European package in 2016 and has gained more importance in Italian energy policy in light of the recent massive price increases for natural gas and electricity. The government is implementing several policy measures to restore affordability across the board, but there is scope for more targeted interventions to combat energy poverty.
The current energy crisis demonstrates that accelerating the clean energy transition can also improve energy security. Italy’s energy sector is strongly reliant on fossil fuel imports from the Russian Federation (hereafter “Russia”), which in 2021 accounted for one third of total energy supply (TES) of fossil fuels. Natural gas was the single largest fuel in TES in Italy at 42% in 2021, 94% of which was imported and around 41% of natural gas imports originated from Russia. Natural gas is also the dominant fuel in the electricity sector, with a share of 50% of generation. Italy is committed to phasing out the dependence of Russian gas by 2025.
Over the last decade, Italy has diversified its gas supply routes and sources and increased the flows through the existing liquefied natural gas (LNG) and pipeline import infrastructure. This now helps ease the country’s high dependence on Russian gas, which was reduced to around 3% of total gas imports by November 2022. Reducing overall demand for natural gas through an accelerated diversification to alternative energy sources and a stronger focus on energy efficiency will not only strengthen energy security further, but also help the country meet its emissions reduction targets.
Oil accounted for 33% of TES and 37% of TFC in 2021. A high share (92%) of crude oil is imported, 12% of which came from Russia in 2021. Italy’s crude oil import dependency on Russia has steadily declined over the last ten years and is expected to cease by the end of 2022 when an EU ban on seaborne imports of Russian crude oil enters into force.
Oil demand fell significantly in 2020 due to the restrictions on mobility during the Covid-19 pandemic, but has rebounded strongly since mid-2021. The government expects oil consumption to decline notably over the medium and long terms as a result of policies to promote alternative fuels for passenger cars. The uptake of biofuels in the transport sector is particularly strongly promoted while there are plans to expand charging infrastructure for electric vehicles (EVs) and maintain the sale of new passenger cars with combustion engines beyond 2035 but running on climate friendly fuels. However, Italy does not have specific targets for reducing oil consumption. In 2022, the government introduced a discount on the excise duty of gasoline and diesel to mitigate the impact of rising fuel prices on consumers caused by Russia’s invasion of Ukraine. While this seems justifiable from a social policy point of view as a countermeasure to mitigate the price hikes, the government will continue implementing other policy measures to reduce oil consumption, and has removed the discount as of 1st January 2023.
Coal plays only a minor, and continuously declining, role in Italy’s energy mix. It accounted for just under 4% of TES and 5% of electricity generation in 2021 and represented 7% of energy-related carbon dioxide (CO2) emissions in the same year. But all coal is imported and more than half of coal imports in 2021 came from Russia. As part of the country’s energy transition, Italy committed to phase out coal use in electricity generation by 2025 and replace it primarily with gas-fired and renewable generation, supported by a reinforced transmission infrastructure. While Italy has opted to temporarily increase the use of coal in light of the current energy crisis, it remains committed to the phase-out target year.
Given its geographical location, Italy has a strong resource base to replace some of its electricity from natural gas with renewable power generation capacity. In 2020, the share of renewables in gross electricity consumption was 38% (with hydro being the main source), a substantially higher share than the target for 2020 of 26.4%. However, this share slightly decreased in the following years, due to the rebound of total electricity consumption in 2021 and lower hydro availability in 2022.
Impressive renewables growth occurred between 2010 and 2013 when about 20 gigawatts (GW) were added to renewable electricity capacity, of which solar photovoltaics (PV) accounted for three-quarters, thanks to generous incentives. However, deployment has since stalled because the EU 2020 targets had been reached early and less generous incentives were sufficient for the sector. Long and complex permitting procedures on the other hand continue to plague new investments. As a result, between 2014 and 2022, Italy added only 8.6 GW of new renewable capacity, of which solar PV accounted for 5.6 GW.
While capacity additions have recently grown due to changes to the regulatory framework, Italy is far from installing 4 GW of new renewable capacity annually, which is needed to meet the targets set for 2030. In 2022, Italy added 1.6 GW of new solar PV capacity and 0.5 GW of new wind capacity. Italy has scope to increase the share of wind power, which accounted for 11 GW (9%) of installed capacity and 7% of electricity generation in 2021. The NECP sees wind power capacity reaching 19 GW in 2030, which would require an accelerated roll-out. The government estimates that to achieve the FF55 package’s likely more ambitious renewable electricity generation target, 5 GW of new renewable generation capacity must be added annually from 2020 to 2030. The annual additions will need to be even higher to make up for the low additions in the years to 2023 and to also account for the new targets under the REPowerEU plan.
The delivery gap for new renewable installations is due to the long permitting procedures, high administrative burden and increasing local opposition. Permitting procedures are also slowing down the strengthening of the distribution and transmission grids, which is required in a system with higher shares of distributed generation. Italy, therefore, needs to simplify the overall permission process all along the renewable electricity sector value chain. Encouraging legislative steps were taken in 2021; however, the regulatory implementation framework has not yet been fully adopted.
Another important aspect is to incentivise Regions, which are in the lead of granting permits, to deliver their contribution to accelerating the country’s energy transition. The Regions have largely achieved the targets set for 2020, while new regional targets for 2030 are under negotiation between the Central government and the Regions. Moreover, these targets are not mandatory and the central government thus far has only limited leverage under Italy’s constitution to enforce them.
Another challenge for Italy is the considerable regional disparity between renewable electricity generation and load centres. Dispatchable renewable sources (hydro and bioenergy) are far more present in northern regions than in southern ones, which have a dominant share of variable sources (solar and wind). These territorial disparities complicate the management of electricity flows along the national transmission and distribution grids, which need to be further extended and upgraded. Italy has already made substantial progress in the development and deployment of system flexibility and smart grid solutions, including the installation of smart meters, but a higher penetration of renewables will require greater transmission, distribution and storage capacity. Italy is also heading international efforts to ramp up progress in power system modernisation, including through Mission Innovation Green Powered Future Mission and the International Smart Grids Action Network.
Improving energy efficiency, especially in the building sector, which accounted for almost 40% of TFC in 2021, would make an important contribution to the energy transition. As natural gas was the main source of energy in buildings (with 51% in the same year followed by electricity at 27%), reducing energy use will also contribute to increasing energy security.
Italy has put several measures in place to improve the energy efficiency of buildings and since 2017 building energy demand has started to decline. Looking towards 2030, the building sector is expected to contribute 60% of annual final energy savings. To achieve this, the government has launched several new policy instruments for retrofitting existing buildings, including tax rebates for private and subsidies for public buildings.
To stimulate economic recovery after the Covid-19 crisis, especially in the construction sector, and promote energy efficiency, the government launched the so-called “Super bonus 110%” in 2020. The scheme offers a declining rate of tax deductions, from 110% of incurred expenses for works performed by the end of 2023 to 65% in 2025 when the scheme ends; the same level as the earlier bonus scheme. While the Super bonus has resulted in a notable uptake of energy efficiency investment, it is not cost-effective, as investors do not feel the need to find the cheapest offer and the high demand has seen overall costs for renovation works increasing.
The government should consider modifying the Super bonus to deliver stronger energy savings at lower costs and to also offer other climate-related benefits, for example via the chosen energy carrier of the new heating and cooling systems. When designing new instruments, a special focus should be given to energy efficiency measures that address the energy needs of the most vulnerable segments of the population. These groups often cannot benefit from the existing instruments to the same degree as other socio‑economic groups. Italy should consider providing tailor-made policies and instruments that successfully overcome the identified access barriers.
The government of Italy should:
- Revise the National Energy and Climate Plan, in line with the European Union timetable, to strengthen energy security, including by defining a plan that would enable Italy to end any reliance on Russian fossil fuels, while incorporating Italy’s commitments under the European Union’s Fit-for-55 package and its 2050 carbon-neutrality target and aligning to the more recent REPowerEU plan proposals.
- Implement policies to reduce oil consumption in transport and promote the use of alternative fuels and vehicles, including through preferential taxation, to reduce carbon emissions from the transport sector.
- Swiftly implement the reform of permitting procedures for renewable generation projects and grid development, proactively engage with affected communities, introduce an incentive scheme for timely compliance by Regions based on agreed targets at the State-Regions Conference level from 2023 onwards; and improve capacity to deliver at all government levels by providing adequate staff and technical assistance.
- Avoid untargeted measures, such as tax cuts, to address energy poverty; instead, focus on helping vulnerable consumers and consider combining light-handed demand restraint measures with awareness-raising campaigns to encourage reduced energy consumption in the short term to reduce consumers’ bills.
- Revise the tax deduction schemes for energy efficiency investments in buildings to maximise energy savings per euro spent; ensure that the schemes can be sustained for longer periods, thereby giving stakeholders market certainty. Ensure that the support schemes target low-income households more specifically and address identified barriers to their participation, taking into account the experiences with ongoing support schemes in Italy.