Power bills squeeze Italian business

Reuters

* Italy SMEs pay 40 pct more for power vs Europe

* Green subsidies add 12 bln euros/yr to bills

* Rome mulling debt issuance to help cut green levies

* Italy generates over 40 pct of power from gas

By Stephen Jewkes

MILAN, Nov 4 (Reuters) - Enrico Frigerio has been trying tosave on energy bills at his car-parts plant in northern Italyfor years. The CEO of Fonderia di Torbole last year upgraded theair-intake and lighting systems to make them more efficient.This year, he installed meters to monitor energy costs to bagefficiency bonuses.

Yet Frigerio's company is still struggling with high energybills that last year totaled around seven million euros,compared to Fonderia di Torbole's 70 million euros in sales."Bringing down energy costs are crucial for competinginternationally," says Frigerio.

High taxes, dependence on imported gas and bottlenecks onthe power grid have long pushed up the price Italian companiesand consumers pay for energy to fuel factories and heat homes.

Small and medium-sized companies, with a yearly energyconsumption of between 500-2,000 megawatt hours, areparticularly hard hit. They paid around 40 percent more fortheir power in the second half of last year than the EuropeanUnion average, according to data from Eurostat. Energy costs forthis category of company are higher only in Cyprus, Eurostatsaid.

Now, with Italy tiptoeing out of its worst post-warrecession, energy costs are proving a stumbling block to anynascent business recovery, companies say. Italy's small andmedium companies make up 80 percent of the country'snon-financial private sector employment, according to theEuropean Commission.

Business associations have recently become so vocal aboutpower costs that Italy's economic development ministry isscrambling for new ideas. Among them: a proposal to issue bondsto help pay for the 12 billion euros a year that Italy spends onsubsidies to the renewable energy industry and that ends up ineveryone's energy bill.

The idea, which was included in a bill drafted in Septemberby Industry Minister Flavio Zanonato, is still being discussedby the government, partly because of concerns among Treasuryofficials that the measure would cause Italy to overstep itsbudget commitments.

Still, the move - which would shave three billion euros ayear off bills over the next three years by selling bonds tohelp spread the cost of green incentives over a longer timeframe - is finding support within the businesscommunity and underscores how desperate Italy Inc. is to findnew solutions to the high energy price problem.

"It's a classic case of debt restructuring. It wouldcertainly cost more in the end and it would load more debt onour children. But it would give industry a breathing space atthis tough moment," said Chicco Testa, head of Italy's powerproducers association Assoelettrica.

GASSED OUT

Italy liberalized its energy sector at the turn of themillennium, but retail prices have not fallen in the same waythey have in other liberalized industries, notably the telecomssector. Part of the reason for that is that the underlying costof oil has risen almost tenfold.

Italy's wholesale prices, before taxes and add-ons, are alsosome of the highest in Europe. With no nuclear power and a verylimited use of coal, Italy has been dependent on natural gas tofuel its power generation - most of it imported on costlylong-term contracts.

State-controlled Eni, the dominant player onItaly's gas market, has in recent times wrung better terms onits contracts, but still has a way to go with key suppliers likeRussia and Algeria, which are reluctant to cede too much ground.

"We are the country that is most dependent on gas in Europe,and we get it from countries still geared to expensive long-termgas contracts. Germany can afford to fund its renewable industrybecause it uses a lot of cheaper coal," said Davide Tabarelli,head of energy think-tank Nomisma Energia.

Taxes and subsidies, which make up around 50 percent ofItaly's electricity bills, are the biggest burden. As in othercountries, the subsidies are designed to fund the country'srenewables drive to enhance security of energy supplies andcreate a new industry and jobs.

Most EU countries are subsidising green energy, as they tryto meet mandatory targets for renewable energy production by2020. Italy's energy regulator recently calculated that of the514 euros on average that Italian consumers will pay this yearfor their electricity, some 93 euros will go to pay greensubsidies. Most of them will be photovoltaic since Italy isEurope's second-largest producer of solar energy after Germany.

As a result of the subsidies, solar power installations haveskyrocketed almost 4,000 percent since 2008, helping fuel growthin renewable energy sources, which generated 32 percent of finalpower demand in Italy last year. That compares to 23 percent inGermany, 15.5 percent in the UK and just 13 percent innuclear-dominated France.

GREEN DISTORTION

As in other countries there is much debate as to whether thesubsidies to renewable energy are distorting the market. Italy,which uses natural gas to fuel over 40 percent of itselectricity, has one of the most modern gas-fired generationfleets in Europe. As the economic crisis saps power demand andrenewables muscle in, the plants are underused and in some casesmothballed.

"These plants are very efficient but they were built to work8,000 hours per year. A lot of them are now working on1,000-2,000 hours only, and that's not a clever way to dothings," said Paolo Ghislandi, secretary general of AIGET,Italy's association of energy traders and suppliers.

Moreover, by their very nature renewable energy sources areintermittent; they don't work when the sun stops shining and thewind stops blowing. To keep the lights on, therefore, flexiblegas-fired plants are needed as back-ups that are ready to beswitched on upon demand - a standby process that remains costly.

Under pressure from energy firms across Europe and industryat home, Rome moved last year to cap aid to renewables. But thesubsidies will still cost Italians around 240 billion euros overthe next 20 years.

Of these taxes and surcharges, the burden fallsdisproportionately on small and medium-sized businesses becausebig heavy energy users get a slew of incentives.

So-called interruptibility contracts, for example, allow bigcompanies to pay lower power bills if they sign a contractagreeing to go dark in the case of an emergency. Italy's biggestindustrial battery maker Fiamm recently signed such a contractat two of its plants in Italy as a way to lower its bill, saysNicola Cosciani, head of the group's energy storage business.

But some critics say these contracts are just disguisedstate subsidies, because the chances of power being completelydisrupted is next to nothing in a country where falling energydemand due to the economic crisis has created a glut of supply.

Earlier this year the European Commission launched a probeto see whether Germany was providing illegal state aid to agroup of energy-intensive companies by exempting them frompaying the renewable energy surcharges in power bills.

Beyond local companies, foreign investors are alsorethinking their strategies in Italy because of high energycosts. Last year aluminium group Alcoa shut its smelterin Sardinia blaming high power prices for undermining itscompetitiveness. Multinational plumbing company Ideal Standard -which makes sinks and bathroom units - listed energy as one ofthe reasons for which it is considering closing a factory innorthern Italy.

Frigerio, whose Fonderia sells some 80 percent of itsproduction on foreign markets, says Italy's high energy priceshave created an uneven playing field for companies that aretrying to go global. "We've already seen companies move abroadto save on energy. It could happen again if the governmentdoesn't act soon."

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