Italy’s power demand to observe limited growth during summer

• Lifting of lockdown and international travel ban to support demand in Q3

• But recovery to be capped by limited demand from tourism sector

• More significant demand recovery expected in September

LONDON (ICIS)–The Italian power demand will likely be supported during the third quarter as coronavirus-related restrictions, including a ban on international travel, have been progressively eased in recent weeks.

However, traders remain only cautiously optimistic. The uncertainty is partially due to consumption levels so far struggling to restore the values they had both before the pandemic and over summer months in the past five years.

Concerns about a new coronavirus outbreak seem to be also deterring market participants from betting more heavily on a summer recovery. Even if a second wave of the pandemic is avoided, activity in the tourism sector is likely to remain muted, curbing demand expectations.

LIMITED DEMAND GROWTH

Since Italy reopened its economy in week 19, daily demand has averaged 31.6GW, roughly 11% more compared with what had been recorded under lockdown.

But this figure is well below the pre-crisis period, in which power demand was consistently hovering around 36-37GW, data from grid operator Terna showed.

Only weeks 22 and 25 made an exception, with average power demand rising to the highest level since week 10 when social distancing measures were not in place yet.

Consumption levels dried up in week 23 on the back of a bank holiday on 1 June.

Power load averaged 32GW so far in June, well below the five-year average of 36GW, according to Terna data. Therefore, Italy’s demand rebound looks at this stage too volatile to predict a full recovery over the summer period.

SUMMER DEMAND

Over the past five years, the Italian daily demand in the third quarter has averaged 37.5GW, nearly 14% more compared with the consumption recorded in June so far.

Such level will unlikely be reached next quarter given that the tourism sector – one of the main demand triggers in the Italian summer – will continue to underperform, as long as the infection risk persists.

The Italian Q3 ’20 has so far risen 10% since the start of June, after falling 24% between April and May, ICIS assessment data showed.

With an average of €34.97/MWh throughout June, the Italian Q3 ’20 product is 32% cheaper than its 2019 equivalent, suggesting the contract will expire well below the €51.43/MWh recorded last year.

Q3 CLEAN SPARK SPREAD

With the demand uptick largely disappointing market expectations, the profitability of Italian gas-fired power plants looks set to remain low over the third quarter.

The Q3 ‘20 clean spark spread fell by 9%, or €1.27/MWh, month on month between 1-14 June, and was 5% lower compared with the Q3 ‘19 equivalent during the same period in 2019.
Clean spark spreads are indicators of profitability for combined cycle power plants (CCGTs), taking into account the cost of carbon permits required by these plants to operate.

Gas-fired capacity makes up roughly 60% of Italy’s power portfolio, as illustrated by generation data from Terna.

It is worth noting that, among the monthly contracts making up the summer quarterly product, the September ’20 clean spark spread is by far the widest.

This reveals that the Italian power market is currently pricing in a more substantial rise in demand only at the end of the third quarter, when a number of companies may be able to reopen.

By Federica Di Sario