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Interactions between market forces and regulatory interventions in the Italian market of white certificates

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Abstract

The goal of this paper is to analyze the equilibrium of the Italian market of white certificates (WC) during the 2006–2021 period by relying upon granular data of prices, traded volumes, demand, supply, and information on regulatory interventions. It emerges that market forces, represented by an infinitely inelastic demand curve and a convex supply function, describe the trends of prices and traded volumes up to mid-2016, while they do not during the following biennium. We suppose that the remarkable and sharp fluctuations of the WC price observed in 2016–2018 are due to decreasing returns that energy companies face in energy efficiency investments and to exogenous shocks caused by poorly designed regulatory interventions. It turns out that the equilibrium is the results of interactions between market forces and public intervention, as well as their related failures, aiming to a self-sustainable mechanism oriented to technological innovation.

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Notes

  1. EEOs schemes or WC can be expressed in terms of reduction of different units, for instance primary energy consumption in Italy, in final energy consumption in France, in carbon emission in UK.

  2. Austria, Belgium, Bulgaria, Denmark, France, Ireland, Italy, Luxembourg, Malta, Poland, Slovenia, Spain, UK. See Lees and Bayer (2016), Rosenow et al. (2017) for a detailed description of the architecture of EEOs schemes among these countries. In June 2018, the Danish government announced that the scheme will not be continued when it expires in 2021 (Surmeli-Anac et al. 2018).

  3. Further discussion about the interactions between white certificate obligations and other environmental policy instruments can be found in Oikonomou et al. (2007), Child et al. (2008), Oikonomou and Jepma (2008), Sorrell et al. (2009), and Meran and Wittmann (2012).

  4. See Fawcett et al. (2019).

  5. “Additionality” refers to the certification of genuine and durable increases in the level of energy efficiency beyond what would have occurred in the absence of the energy efficiency measure, for instance only due to technical and market development trends and policies in place. The degree of additionality is a decisive factor in determining the economic viability of an energy efficiency project (Bertoldi et al., 2010; Stede 2017).

  6. RVC-S are no longer among the feasible applications for new EE projects since 2017.

  7. WC can be distinguished according to the sector where ES are attained: (i) electricity, Type-I, (ii) natural gas, Type-II, (iii) other than electricity and natural gas, but not in the transport sector, Type-III, (iv) other than electricity and natural gas, and attained in the transport sector, Type-IV.

  8. Up to 2015, the minimum target was set to 50%.

  9. The compensation period was previously set to 2 years (AEEGSI 2014; MiSE 2012).

  10. The compliance period is from 1 June to 31 May, but since 2017 targets can also be attained by 30 November.

  11. In 2017, MiSE set the 30 November as additional deadline for target compliance (Mise 2017).

  12. It is worth to mention that since September 2017, the exchange of WC occurs on a unified basis, implying there is no more distinction, at least from the economic point of view, among the different types of certificates (Mise 2017).

  13. For the sake of clarity, the supply/demand ratio is a macro indicator computed at a national level that is not able to take into account the possible excess of WC for a specific obligated party in the case of a national under-issuance to fulfill the early obligation.

  14. As an alternative, the demand curve could be depicted as a very inelastic downward sloping curve implying that if energy companies fail to achieve energy-saving targets they will face a very high price of compliance, which may include the cost of the sanction imposed by regulators.

  15. Di Santo et al. (2014), ENEA (2017), GSE (2019).

  16. Just think about an energy company at its early stage of energy efficiency measures, as the implementation of fluorescent lamp that provide the company large savings at small costs, and a company that, in order to generate additional savings, must carry out further, and costly, renewable energy interventions such as co-generation or photo-voltaic plants.

  17. ENEA (2017), GSE (2014, 2018). According to Eurostat (2017), the industrial sector is estimated to provide nearly 25% of total EU final energy consumption.

  18. See MiSE (2017) and GSE (2019).

  19. The WC market has many participants on both the demand and supply side (ENEA 2017; GSE 2019).

  20. Energy companies would not have any incentive in reducing energy consumption without an energy efficiency scheme.

  21. Between 2011 and 2012 yearly supply increased by 72% while demand showed small increases.

  22. Given that firms are facing increasing average and marginal costs, it is reasonable to suppose that they are not able to lower their minimum reservation price, denoted by the horizontal segment of the supply curve.

  23. The calculation of the tau coefficient is given by the following formula:

    $$\tau =\frac{RNI}{RNc}=\frac{{\sum }_{i=0}^{T-1}{(1-{\delta }_{i})}^{i}}{U}=1+\frac{RNa}{RNc}=1+\frac{{\sum }_{i=U}^{T-1}{(1-{\delta }_{i})}^{i}}{U}$$

    where RNI are net energy savings (i.e. gross energy savings minus non-additional energy savings), RNc are net energy savings expected during the useful lifetime, RNa are net energy savings between the end of useful lifetime and the end of technical lifetime, T is technical lifetime of the EE project (years), U is useful lifetime of the EE project (years), δ is the rate of decay of energy savings generated. The rationale behind the calculations of “k” coefficients (see Table 3) is the same of the tau coefficient except for that k allows to increase the amount of WC awarded by a higher amount during the first half of the project lifetime.

  24. Stede (2017).

  25. GSE (2014) reports a remarkable shift of projects from the residential and tertiary sectors to industry.

  26. AEEGSI (2014). Before this decision, the value of the reimbursement was linked to the average price of a basket of energy goods (Di Santo 2017; Garbellini 2017).

  27. Many cases of fraud and irregularities on application procedures also emerged, leading to a lot of rejections of project proposals by GSE and ENEA (Mise 2018).

  28. The margin between the price of WC and the new monetary reimbursement became 4 euro/toe, rather than 2 euro/toe as previously imposed (AEEGSI 2017a,b). It is worth to mention that the large demand of WC coupled with the difficulty of generating new certificates may have produced a hoarding effect among market participants, since those energy companies with a surplus of WC could have preferred to store them instead of selling in the market.

  29. See AEEGSI (2017a).

  30. “Traders” are obligated energy companies that have already achieved the compliance target or voluntary companies that trade WC in order to feed the upward trend of price and thus obtaining a capital gain or benefit from an higher monetary reimbursement.

  31. Di Santo et al., (2018a,b), Di Santo (2019).

  32. The provisional value of the involved certificates was 700 million euros, of which 105 million already obtained and delivered to Eastern Europe countries and United Arab Emirates through a series of linked companies (Di Santo et al., 2018a,b, Di Santo et al. 2019). See also Guardia di Finanza: www.gdf.gov.it/stampa/ultime-notizie/anno-2017/ottobre/truffa-ai-danni-dello-stato-e-riciclaggio.-profitti-illeciti-per-105-milioni-di-euro. Similar issues have also emerged in France (Di Santo et al., 2018b). Most frauds dealt with the civil/household sector, since it is easier to find ways to produce false documents and data than with the industrial sector (Di Santo et al., 2018b).

  33. For instance, strong regulatory instability and regulator interventionism have characterized the French WC scheme. See Tordjman et al. (2020).

Abbreviations

AEEGSI:

Italian Energy Market Regulator

EE:

Energy Efficiency

EEOs:

Energy Efficiency Obligations

ENEA:

Italian National Agency for New Technologies, Energy, and Sustainable Economic Development

ES:

Energy Savings

ESCOs:

Energy Service Companies

IPEX:

Italian Power Exchange

GME:

Italian Energy Markets Operator

GSE:

Italian Energy Services Operator

MiSE:

Italian Ministry of Economic Development

MET:

Minister of Ecological Transition

RSE:

Italian Research on the Energy System

RVC:

Requests of certification

Toe:

Tonne of oil equivalent

Mtoe:

Millions of toe

WC:

White Certificate/s

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  1. Department of Economics, Engineering, Society and Business, Tuscia University Viterbo, 47, Via del Paradiso, 01100, Viterbo, Italy

    Patrizio Morganti & Giuseppe Garofalo

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  1. Patrizio Morganti
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Correspondence to Giuseppe Garofalo.

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Morganti, P., Garofalo, G. Interactions between market forces and regulatory interventions in the Italian market of white certificates. Energy Efficiency 15, 18 (2022). https://doi.org/10.1007/s12053-022-10027-y

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