Energy Transition: In Conversation, with
Paolo Gallo, CEO, Italgas
Paolo Gallo has been Chief Executive Officer and General Manager at Italgas since 4 August 2016. Ahead of confirming to join the digitalization keynote at the Energy Transition Summit London, we sat down with Paolo to hear more about the progress of transition in Italy and get his thoughts on the role of gas within the future energy mix.
How would you evaluate the current progress of the Energy Transition in Italy?
In Italy we are approaching a model based on the so-called "sector coupling", i.e. the integration of electricity and natural gas sources targeting a more effective and fast decarbonisation of economy and energy consumption. We believe this is a process where an extensive network such as the natural gas one, which in Italy boasts a level of penetration of the use of methane for residential purposes as high as 92% (the highest penetration in the EU + UK, as high as that one of the Netherlands) can and must play a leading role in order to foster the progressive replacement of traditional energy sources such as diesel oil, fuel oil, coal and pellets for the supply of residential consumption. The availability of such widespread gas distribution networks also makes it possible to limit the significant investments in electricity distribution networks that would be necessary in the event of a complete electrification of energy consumptions. EURELECTRIC, for instance, estimates that in order to achieve a 95% reduction in CO2 emissions by 2050 in the EU, the electrification rate in the transportation, industrial and construction sectors should rise to 60%, starting from the current 22% (average value between Nordic countries as high as 32% and Eastern European countries as low as 18%). According to EURELECTRIC, this target would require massive investments for the upgrading of the existing electricity infrastructure worth an estimated 90-110 billion Euro on average per year to achieve the capacity development needed to meet growing demand and the transition to a zero-emission energy system. These figures clearly show that the achievement of European objectives through electrification alone is quite unrealistic and, in any case, even if the rate of electrification was to reach 60%, it is obviously foreseeable that the remaining 40% will consist mainly of natural gas, being the only readily available traditional fossil energy source with a low environmental impact.
Further concrete steps taken by Italy towards decarbonisation are the Government's decision to opt for a gradual phase-out of coal, resulting in the main national coal-to-energy producer (Enel) to dramatically reduce the fair value of its coal-fired power plants; furthermore, the introduction at the end of 2019 of a new capacity market mechanism, designed to support the national grid in view of the progressive increase of the incidence of electricity generation from renewable sources. Well, the outcomes of the first capacity auctions managed by the national electricity TSO (Terna) have clearly proven that the Italian electricity system is (and will be for many years coming) still highly dependent on natural gas.
How is the current market flux regarding Covid-19 and the oil price affecting you ability to align with Paris?
It is difficult today to say whether and to what extent the achievement of Paris targets will be impacted by the current health emergency and its future consequences. It is reasonable to imagine that the roadmap towards these targets will be reshaped by giving priority to making maximum use of existing infrastructures and by following a more selective approach to investing in new energy generation, energy efficiency initiatives and new energy infrastructure projects.
As regards to Italgas, which acts as a 'pure player' of the gas distribution sector in a fully unbundled market, it should be pointed out that our business model is impervious to gas price and volume risks : Italgas' economic results come mostly from the O&M its own network and are independent from how much natural gas is dispatched to end consumers through these networks and the its price.
Moreover, it is by now well renowned that the trend in the price of natural gas on international markets is decoupled from the price of oil: the current bearish dynamics we are seeing on the oil markets due to the combined effect of the price war between OPEC and other big oil companies and the collapse in demand resulting from the Covid-19 emergency do not directly affect gas prices. Lastly, with regard to domestic demand for natural gas, it is true that we are witnessing a sharp contraction on the industrial and thermoelectric gas consumption front, typically carried by the major national transmission backbones managed by national TSOs, whereas on the retail distribution front, that one being managed by operators like Italgas, in fact the consumption in the first quarter of 2020 was almost in line with the previous year, with an increase of 13.1% in March thanks to the support of residential consumption, where the population was restricted at their homes due to the lockdown measures.
How do you evaluate the role of natural gas within both our current and future energy mix, and where do the most significant opportunities for growth lie?
Natural gas is today the only fast and cost-effective solution adequate to significantly reduce greenhouse gases and particulate emissions, ready to use to replace coal in power generation and heating, while integrating renewable electricity. The replacement of coal-fired power stations will not be fully achieved by using renewable energy or by electrification of consumption. The data released by the latest report of the International Energy Agency (IEA) at the beginning of 2020 point to this direction, indicating that global CO2 emissions from the energy sector remained stable over 2019, after two years of steady growth. A significant result, all the more so if analysed in the light of the overall and contextual growth of the world economy (+2.9%). A more detailed analysis of the results of the survey shows that natural gas plays a leading role, with the largest drop in emissions on a national basis in the United States (-2.9%), where the increased availability - thanks to the advance of shale gas - produced prices almost as low as half of those of 2018 and a consequent increase in electricity generation from natural gas, which reached a record increase of +37%. A similar process occurred in Europe, where emissions were cut significantly (-5%) due to the combined growth of renewable energy sources and natural gas, with power generation from gas up to 15% compared with a decrease of -25% in the use of coal.
In terms of benchmarking, what milestones are you putting in place and what progress have you made in terms of aligning with Paris?
Italgas is playing a leading role in the transition process towards a decarbonized economy through various initiatives: for instance, by making its network available for the connection of biomethane plants, which also contributes to solving the waste problem; moreover, by supporting the spread of sustainable mobility, through the construction of connections for CNG refuelling stations for light and heavy vehicles throughout the country; furthermore, by completing the transformation of its networks into digital infrastructures both for a more efficient management of the network as a whole, and as a prerequisite for receiving and effectively managing hydrogen and biomethane in future times; and finally by planning to contribute to the development of 'power-to-gas' technology that allows the production of gas (hydrogen and/or synthetic methane) that can be used in existing networks from renewable energy waste.
What technologies and/or innovations do you see as most significant enablers for ET?
As already mentioned, we believe that power-to-gas technology will play a significant role in the energy transition process. In fact, it makes it possible to create renewable energy storage systems (there are already dozens of experimental plants in Europe and around the world) in order to facilitate their movement in time and space by relying on a transport and distribution network, for example, like the Italian one, extended and digitized. To give an example, this system would allow to consume in Sicily the energy produced months before by wind farms in Germany. Speaking again from a future perspective, the production of green hydrogen (obtained from the electrolysis of water) has a medium-term perspective, since today its production costs are still high, but we believe that technological progress and innovation can bring these costs in line with those of natural gas. The situation of biomethane, a source already available and whose economic sustainability is already evident, is different. As we shared at the beginning of the year with the European Commission's DG Energy, Ditte Juul Jørgensen, in order to receive and distribute biomethane and hydrogen, we need networks that are able to do this, and we are working to ensure that our entire network is able to do so thanks to the complete digitisation of infrastructures and processes.
I’ve heard about the incredible work you’ve been doing in Sardinia re digitalization. Can you tell us a little more about this – what were the major successes and challenges?
Within our investment plan of 500 million Euro until 2025, we have planned to lay down more than 1,100 kilometers of pipelines in Sardinia. To date, the works have progressed to an advanced state in all areas, involving the main cities of the island, for a total of about 60% of "native digital" network already laid. We are talking about a network equipped with a widespread sensor system that allows the massive acquisition of the physical parameters of the network and their interpretation by means of specific algorithms. This allows real-time monitoring of network operation, alarm management, big-data analysis and predictive maintenance, gas leak detection through the best technologies in the world, and further optimization of processes. Next to the gas network, the infrastructure to house the optic fibre has been laid: Sardinian citizens will not only be able to connect to the new gas network, but they will have access also to the connection provided by the optic fibre. In addition to the future benefits associated with the use of an economic and sustainable energy source such as natural gas, this project has also contributed to the creation of value in the area, to the extent of over 600 new jobs generated in the related industries. Soon we plan to start distributing methane in some municipalities, thus offering the resulting advantages for production activities and residents in terms of continuity of service, resource economy and sustainability.
On a regulatory level, what do you think the most important development could be to help drive clean energy solutions?
From our point of view, in order to support the energy transition process, a gradual refocusing of regulatory action is desirable, by adding to consumer protection also the achievement of Paris environmental targets. The scenario we have before us today shows us a series of technologies that can support the decarbonisation of the energy system, but we do not yet know which ones will be able to do so in a truly economically sustainable way. It is likely that we will not find a "silver bullet", a unique solution, a unique energy model, but we will have to rely on the integration of several "clean" technologies, each one able to make its own contribution in relation to the reference territorial and infrastructural context (a country, a region, a community). The use of the different technologies will also probably be dynamic, in the sense that it may vary - depending, for example, on peaks in demand and the characteristics of renewable energy production plants - over the course of a season or a day. Energy infrastructures will have to be able to handle a greater complexity than at present, integrating with each other and with a progressive loss of centrality in the distinction between vectors, between molecule and electron. Imagining a refocusing of regulatory action then means providing for the introduction of instruments capable of supporting, first and foremost, the diversification and contextual integration of renewable energy sources, supporting pilot projects and research in the most promising sectors and those capable of making the most of the investments already made over the years (think of the physical storage of natural gas and the capillarity of distribution networks). Secondly, it means stimulating the infrastructure system to reach a level of operational flexibility adequate to the expected complexity: in the gas sector, this means stimulating the development of both hardware - i.e., physical integration and reverse flows, from distribution networks to transportation networks - and software - i.e., the ability to manage highly variable flows in quantity and quality thanks to increasingly advanced digital solutions. I would add that regulatory action alone is not sufficient, but must be supported and guided by an appropriate legislative framework, both national and European. For example, in the perspective of increasingly fragmented energy production, the role of the distributor evolves towards that of a collector of locally produced energy and makes it necessary to redefine the way in which developments in major transport routes are planned. For this reason, it is desirable that European legislation recognise an institutional role for the gas distribution sector through the creation of a "DSO Entity Gas" - as already done, moreover, with the recent reform of the electricity market - able to make its voice heard in the definition of the TYNDP and to contribute to the definition of network codes and technical and quality rules for gas. The financial aspect also plays an important role in this context. In this sense, a revision of the TEN-E Regulation and the way in which its funds are used would provide additional resources to support renewable energy development projects with a cross-border impact.
Hydrogen continues to be discussed as a key element of our future energy mix – how do you see the role of Hydrogen both now and over the next ten years?
We believe that hydrogen may acquire an increasingly important role over the next few years as a real alternative to traditional fossil fuels for the implementation of decarbonisation policies. There are, however, some economic and technological barriers that will have to be overcome in order to follow this path.
First of all, the current cost of producing hydrogen by means of electrolysis (through Power-to-Gas technology) is still prohibitive: only a large-scale development of electrolysis technology, resulting in a steep reduction of the associated investment costs, can lead in the medium term to narrow the gap between the price of hydrogen and the price of methane. In this sense, the introduction of a structured and unified regulatory framework at European level would be useful to support the promotion of the technology.
In addition, the large-scale transportation of hydrogen will require the conversion of existing natural gas transportation, storage and distribution infrastructures in order to allow the dispatching of mixtures of methane and hydrogen or even pure hydrogen: some experiments are currently underway worldwide, but still at very low mix levels.
Do you have any plans to diversify, either into new regions or new technologies … if so, how?
Italgas is today a leader in gas distribution in Italy and Europe: our goal is to invest further in this sector, which represents our core business, also through M&A operations in Italy and abroad, because we strongly believe that there is room for further growth.
At the same time, we are carefully investigating about other markets, different but similar to gas distribution, being ready to take advantage of possible investment opportunities in Italy, also with a view to business diversification. For example, it is a clear evidence of our approach our commitment in the energy efficiency sector, which started with the acquisition in 2018 of Seaside, one of the most important Italian ESCo, and continued with the acquisition of a stake in Enerpaper, an interesting Italian startup that has patented an innovative system of "hooding" buildings. We are also very interested in entering the gas market through an offer of innovative services for the benefit of distribution operators who are interested in exploiting the skills and know-how acquired by Italgas over many years of development: for instance, in areas such as smart metering, asset digitization, gas leak detection through the innovative Picarro technology, modern emergency response management integrated with continuous network monitoring, the use of innovative augmented reality devices for remote driving of maintenance and repair work, the management of an efficient fleet of methane vehicles. All these are, today, distinctive skills of Italgas, which make the company unique in the gas distribution sector at Italian and international level.
Reuters Events is part of Reuters News & Media Ltd, 5 Canada Square, Canary Wharf, London, E14 5AQ. Registered in England and Wales: 2505735.
Want to hear more? Join us at the Energy Transition Summit London
Register for the online edition using form on the right.