2022: a year of two halves for Italy

By the end of 2022, Italy’s growth in GDP had surpassed expectations, keeping the technical recession feared by many analysts at bay. During the first part of the year, the Italian economy was driven by the construction sector and a number of related industrial sectors, while it was services — and tourism in particular — which fuelled growth after the pandemic during the second and third trimesters.

However, the positive effects of re-openings were dampened by the erosion of household purchasing power: indeed, the outbreak of the energy crisis triggered inflation, with a resulting reduction in families’ propensity to save. Despite that, the overall situation of the budget is positive: GDP has increased by 3.7% (Istat data).

Another key factor for the year 2022 was climate. Climate change, which is increasingly visible in Italy, has devastating effects not only on the land but also on the electricity system as it simultaneously affects both demand (by triggering above-average consumption, such as the ever-growing use of air-conditioning systems, for example) and generation capacity.

Trends in electricity demand mirror the economic and climate-related context described above: Terna, the company that manages the Italian national transmission grid, experienced a 1% downturn in 2022 compared to 2021. In line with GDP performance, the demand for electricity also showed two distinct patterns during the two halves of the year, with generally positive trends during the earlier months and negative ones starting from the month of August.

According to the findings of the report published by Terna, “2022: A year of two halves for Italy”, the first six months saw a growth of +2.3% compared to the same period in 2021, while the second semester was characterised by a gradual reduction in demand, resulting in a negative variation of 4% and causing an overall downturn for the year (see figure 1). Consumption was lower due to the measures taken by citizens and businesses to reduce electricity use on the instructions of the government, as well as high prices and milder temperatures than 2021.

The impact of climate change on the electricity system. Over the last year, we have experienced a particularly hot summer and a mild, dry winter. The high temperatures during the summer months contributed to an increase in the demand for electricity of around 5 TWh compared to the same period in 2021; conversely, a less severe winter on average than those of the previous years reduced consumption levels, with a drop in electricity needs of 1 TWh.

Renewable sources covered a total of 31.1% of demand, with a marked drop in hydroelectric production (-37.7%) in particular, due to the lack of snow and rain, even at high altitude. The combined effect of these two trends resulted in historically low hydroelectric production values, with a reduction of no less than 17.2 TWh compared to 2021. 2022 also saw drops in wind (-1.8%) and geothermal power (-1.6%). Bucking the trend, however, solar power grew by an encouraging +11.8% thanks to widespread clear sky conditions and the new plants installed, with a growth in capacity of around 2.5 GW.

The reduction in hydroelectric generation was partially offset by the increase in thermoelectric generation (+6.1%), and in particular by the increase in coal-fired production. In fact, it was in this context that the programme to maximise coal-fired production was launched on the instructions of the government to contain gas consumption.

From the end of 2021, the prices of energy commodities grew progressively, undergoing further increases following the Russian invasion of Ukraine. The surge in gas prices rapidly made its effects felt on the cost of electricity in Italy too, with effects never seen before on demand.

Initially, both families and businesses adopted new consumption habits in order to offset the rising costs of energy, for example by switching their consumption/production to the hours when prices were cheaper. However, as the energy crisis dragged on, it was no longer possible to sustain these “corrective” measures. Families had to reduce their consumption, and some businesses were forced to close.

The impact of rising energy prices on production costs. The energy crisis had a knock-on effect on production costs for economic activities, which trickled down to impact both industry and services in different time frames. In recent years Terna has prepared the IMCEI, an index of large energy consumers connected to the national electricity transmission grid, in order to directly monitor industrial consumption.

Looking at the trends in Italy’s main industrial sectors, almost all of them were down in 2022, in particular the steel, engineering and non-ferrous metal sectors. Positive changes for the food, ceramics and glass industries; the chemical industry remained stable. Overall, growth in the construction materials sector slowed down, but it nonetheless finished 2022 with a better result than the average for manufacturing thanks to support in the form of tax incentives.

Services, on the other hand, proved less vulnerable to price increases. With reference to figure 2, it is interesting to note that the fluctuating trends in services appear to mirror those of electricity demand throughout all the months of the year; unlike industry, in which the trends depend on the period in question. This can be explained by the different price elasticity of energy in the two sectors: it is very closely correlated to the cost of energy as a percentage of the finished product, which is normally higher in industry than in services, as well as being highly variable within different product categories.

There are three variables (gas, the war in Ukraine and inflation) which will make 2023 a critical year for determining whether the nation can emerge from the crisis with fresh impetus and a greater understanding of the importance of energy efficiency and autonomy, or whether the negative effects will outweigh potential positives.

Climate change puts energy security at risk, leaving the system no choice but to adapt. There was a growth in installed renewable sources in Italy in 2022, reaching an overall value of 63.6 GW by the end of the year. However, the 3 GW added in 2022 are still not enough, barely one-third of what is estimated to be necessary to reach the 2030 target. In addition to the need to increase the number of plants installed, it is also important to bear in mind the volatility of production from renewable energy sources, an intrinsic element of their non-programmable, unpredictable nature: in 2022, green production came to 98 GWh, a drop of 13% compared to 2021.

To ensure an ever-increasing integration of renewables, it is necessary to develop a highly interconnected European network which can resolve situations involving a high load and/or a reduction in the availability of generation by enabling imports and exports of energy between neighbouring countries. This need was confirmed in 2022 not only by the increase in the quantity of energy imported (+1.8%) into the country, but also and especially by the increase in exports (+16.4%), partly caused by the decreasing availability of French nuclear facilities, which has affected all Europe.

Immense challenges must be overcome in order to bring regulations and infrastructure up to date, and to stimulate the necessary investments. These must include investments in storage facilities, systems capable of holding the energy generated from renewable sources and preventing it from being reduced in the case of overproduction. The beneficial effects of incentive mechanisms are supported by the large increase in activations of storage systems in 2022, the installed power of which has reached 1,121 MW, thanks partly to interventions related to the Superbonus.

Therefore, it remains essential to boost the energy transition by implementing pragmatic policies and incentive mechanisms which favour the achievement of pre-determined objectives and increase our independence from gas and fossil fuels.