Market Context

THE MACROECONOMIC SCENARIO

The year 2021 was marked by a significant recovery in the global economy, albeit against a backdrop of wide disparities between different groups of countries. The OECD estimates that global GDP grew 5.6% in 2021, supported by the recovery of OECD economies (+5.3%) and China and India, which reported annual growth of more than 8%. Instead, a lack of resources for public support policies and vaccination campaigns continues to limit growth in low-income per capita countries.

In 2021, the European economy is estimated to grow by 5.2%. European results were affected by the reintroduction, in the latter part of the year, of restrictive measures to limit the spread of the Omicron variant and the slowdown in manufacturing linked to the scarcity of raw materials and semi-finished products. Italy closes 2021 with an annual growth rate above the European average of 6.5%, after the significant contraction in 2020 (-9%).

The post-pandemic economic recovery has been accompanied since late 2020 by an international price recovery. Inflation was particularly intense for commodity prices, given the comparison with historical lows reached during the pandemic period and the scarcity phenomena created in large part by the mismatch between the recovery of supply and demand at the end of the first wave of the pandemic. In 2021, the consumer price index registered an annual increase of 3.5% globally, peaking near 5% at the end of the year. In Italy, on the other hand, price trends remained more contained, with an average for the year of just under 2% and a peak in December of 4.2%.

Household spending

The gradual removal of restrictive measures and the economic recovery supported household spending in the first three quarters of 2021, bringing it to a level 5% higher than the same baseline in 2020. However, in the third quarter of 2021, spending on services was still 7% below the pre-pandemic baseline (fourth quarter of 2019), while total spending on goods was now realigned with the same baseline.

Investments

Stimulus measures and favourable economic conditions supported a recovery in investment during 2021. In fact, the amount of gross fixed capital formation for the first three quarters of 2021 is 18% higher than the same period in 2020, and 4% higher than in 2019. The construction sector, which is heavily incentivised by government support measures, saw the largest increase over 2019 levels (+12%). Annual growth is just under 16%.

Exports

During 2021, foreign trade of the Italian economy showed a significant increase compared to the level of the previous year (+24% and +18% on the first 11 months of the year, respectively for imports and exports). The gradual removal of bottlenecks along production chains should give international trade a new boost over the coming year, with a positive impact on foreign trade performance.

THE OIL MARKET

The average Brent price in 2021 averaged 70.8 $/bbl, up 63.9% from 2020, which averaged 43.2 $/bbl.

The oil market benefited during the first three quarters of the year from the continued optimism in financial markets, linked to the post-pandemic recovery, with OPEC Plus quotas being maintained. The cartel's decision to gradually bring production back on track and the return of some Iranian production contributed to the stabilisation of prices in the last months of the year.

In 2021, an overall increase in demand of 5.5% over 2020 was matched by a less sustained increase in supply, on the order of just under 2%. The OPEC share of total global production in 2021 remained stable at 33%, while an important contribution to demand growth came from the Asian continent, with a 5% increase that more than offset the contraction recorded in 2020.

 

 

THE NATURAL GAS MARKET 

Supply and demand

Gas consumption in 2021 is up 7.9% over 2020, totalling 76.2 bln/m³ (up from nearly 71 bln/m³ last year). Significant growth in consumption occurred particularly during the first half of 2021 as the economy recovered. Slightly below average seasonal winter temperatures also helped support consumption in the latter part of the year.

All sectors experienced significant growth during 2021. Gas demand from the residential sector increased 7.5% over 2020 (totalling nearly 34 bln/m³), followed by the thermoelectric sector (25.9 bln/m³, +6.9%) and the industrial sector (14.0 bln/m³, +6.1%).

Uses and sources of natural gas in 2021 and comparison with previous years

*Cumulative amounts as at 31 December processed by MBS Consulting

 

*Cumulative amounts as at 31 December, processed by MBS Consulting, the value of inventories indicates net movement

**Change of more than 100%

As regards supply, total imports in 2021 were 8.7% higher than in 2020 (at 71.6 bln/m³, compared to nearly 66 bln/m³ in 2020), while domestic production fell by 18.3% compared to 2020 (for a total of 3.1 bln of gas produced).

The general situation of domestic entry points connected with foreign countries is as follows:

• inflows from Russia at the Tarvisio entry point (28.1 bln/m³) recorded a slight decrease compared to 2020 (28.3 bln/m³), but are still the main source of imports via pipeline in the overall Italian budget (about 40% of the national market);
• gas supply was also concentrated in the Mediterranean areas, with a sharp increase in inflows from Algeria to Mazara del Vallo, which saw a 76% increase over 2020 (over 21 bln/m³ in 2021, compared with 12 bln/m³ in 2020), coming to represent 30% of total imports;
• over the course of 2021 the TAP pipeline came into operation, bringing Azeri gas to the new entry point of Melendugno. More than 7 bln/m³ have transited since the beginning of the year, making up about 10% of total imports. The start of the new pipeline is expected to help close the spread between PSV and Northern market prices, TTF in particular;
• the reduction in Norwegian production and the opening of the TAP have led to a decrease in imports from Northern Europe, for a total of 2.1 bln/m³ (-76% compared to 2020).
• LNG imports were down 22.3 % from 2020, totalling about 10 bln/m³. This reduction is primarily due to the strong increase in LNG demand in Asia.

Wholesale gas prices

The historic increase in wholesale gas prices characterised 2021, with the winter months seeing quotations above 80 €/MWh, which was also reflected in electricity price levels particularly in the last quarter.

Growth in the first half of 2021 is attributable to the economic recovery, with a gradual increase in gas demand especially from Asia, which has entered into competition with Europe on the LNG front.

In the second half of the year the continuation of the upward movement is linked:

• again to Asian demand: the energy crisis linked to the scarcity of coal supplies in India and China between September and October contributed to an increase in demand for gas, which is also subject to forecasts of a colder-than-normal winter in the northern Asian hemisphere;
• to problems relating to supply, especially of LNG: some strategic plants in Australia have been subject to a series of maintenance and production interruptions (also caused by unplanned damage) and congestion of sea transport along the Panama Canal;
• to the failure of the North Stream pipeline, in Northern Europe, to come into operation, with the suspension of the approval process by the German regulatory authority;
• to geopolitical tensions on the borders with Belarus and Ukraine and the concomitant gradual decrease in gas flows from Russia as of October;
• to low gas storage levels in European countries and the start of a winter season with temperatures at times below normal, which has supported residential gas consumption to a large extent.

The average spot price at the Dutch TTF for 2021 stood at 46.6 €/MWh, up nearly 400% from 9.4 €/MWh in 2020. The average CEGH price, the Austrian gas market, rose by around 370% to an average of 46.5 €/MWh.

At the Italian PSV, the average spot price is up 347% compared with 2020 quotas, standing at 46.5 €/MWh, with a significant compression of the differential on northern European markets, in line with the entry into service of TAP, the increase in gas supplies from North Africa and the decrease in Russian imports into Germany. The average PSV-TTF differential was therefore around -0.07 €/MWh, compared to 1 €/MWh in 2020.

In 2021, prices at the border followed the general upward trend and settled at a European average level of 34 €/MWh, up more than 240% compared to 2020. Average Italian prices at the border were slightly higher than this average, standing at 34.5 €/MWh.

 

In the Italian market, the imbalance price for the year 2020 averaged 46.6 €/MWh, more than 340% higher than the price for 2020 (10.5 €/MWh). On the markets of the MGAS platform, which are used to define the imbalance price (DAM-GAS and IM-GAS), a total volume of around 8.5 bln/m3 was traded during the year. The IM‐GAS intraday market continues to be the main segment of the platform managed by the GME (Electricity Market Operator), with a total amount of volumes traded of approximately 4.2 bln/m3.

The so-called “CMEM component”, meant to reflect the cost of gas procurement in the protected market price and defined by the ARERA on the basis of the TTF forward prices in 2021, increased with an average of 27.0 €/MWh (compared to 12.9 €/MWh in 2020).

THE ELECTRICITY MARKET

Supply and demand

In 2021, net electricity production in Italy was 279 TWh, up 2.3% compared to 2020. The demand for electricity, amounting to 319 TWh, was 86.6% met by domestic production, and the remaining 13.4% met by imports.

At 182 TWh, domestic thermoelectric production accounted for 65.2% of net domestic production. Production from hydroelectric sources amounted to 46 TWh (-4.5% compared to 2020), representing 16.4% of the national supply, while 51 TWh (+3.5% compared to 2020) were produced from geothermal, wind and photovoltaic sources, i.e. 18.4% of the national supply.

Consumption in 2021 was 5.5% higher than in 2020, a recovery in all areas. Central Italy experienced the most significant increase in demand (+5.8%), followed by the North (+5.6%), the Islands (+5.4%) and the South (4.5%).

Cumulative electricity supply and demand (GWh and trend changes)

Data processed by MBS Consulting

 

Day‐Ahead Market (DAM) prices

In 2021, the National Single Price (PUN) stood at an average of 125.46 €/MWh, up 222% from 2020. Record year-over-year PUN growth was particularly significant in the second half of the year, with a 150% increase between August and December. The average monthly price was higher than in 2020 for all months of the year.

 

The year-on-year increase in prices involved all zonal prices, with the highest incidence for the North (231%) and the lowest for Sicily (179%). The highest average annual price was confirmed in Sicily and the lowest in Calabria. There has also been a narrowing of the differential between average zonal prices and thus a mutual alignment of them.

 

Trends in the main European power exchanges

The average price for European power exchanges in 2021 was 105.6 €/MWh, a sharp increase over 2020 (+228%). The differential with the PUN was 19.39 €/MWh, compared with 6.72 €/MWh in the previous year. In the last quarter of 2021, prices were on average higher than in the same period of 2020 (+405%).

 

Futures of Baseload PUN on the EEX

The following table shows the future prices traded in the last quarter of 2021.

For products with a January expiration date, upward variations were recorded between the beginning and end of the quarter; Q1 22, Q2 22 and Q3 22 also recorded an increase over the quarter, by 74.7 €/MWh, 73.7 €/MWh and 73.1 €/MWh, respectively. Cal 22 followed the same trend, going from 140.9 €/MWh in October to 213.1 €/MWh in December, recording an expected increase in prices.

Compared to the fourth quarter of 2020, average futures settled at higher levels; commodity prices rose above prior-year levels for all months of 2021.

Data processed by MBS Consulting