The rise of Energy Costs: Motivations and Consequences

Maria Alessandra Ancona, Sara Zanni February 9, 2022 6 min read

podcast 5

A lot of expectations revolved around the COP, i.e. Conference Of Parties, engaging public institutions, private companies NGO and civil society in a public debate about the climate crisis. Especially in the last two years, each player involved wondered which would have been the impact of COVID-19 crisis on the management of climate crisis, whether it would boost the interventions and the ability to mobilise decision making and funding toward this challenge or, rather, it would have provided the perfect excuse to step back and redefining priorities. 

Considering the financial aspects, the COVID crisis taught us that it is still possible to mobilize huge amount of resources in a very limited time, if the challenge is global (trillions of dollars have been found in a few weeks to sort out the global financial crisis or the Covid pandemic), therefore we can hope in a similar response towards the climate crisis, defining a sort of an emergency Marshall-style “plan for the planet” to boost the interventions in this sense. 

The key results of the Glasgow climate pact, discussed in COP 26, dealt with: (i) the centrality of science and data to take decisions, “reopening the Paris agreement” to move the target from 2.0°C to 1.5°C, (ii) the consequent emission cut and the time horizon, which is approaching dramatically, (iii) “move to ‘phase out’ coal power, pledging instead to ‘phase down’” and (iv) the commitment to draw up a roadmap for swifter revisions, through new COPs. 

To achieve these goals, renewables sources are central. However, in people’s perception, often they are associated with high costs both related to the investments and to the energy bills, but the reality is different. 

First, in the last years, the investment costs for wind and solar – the two main renewable sources we discuss about at present – have decreased, becoming economically viable also without incentives. Indeed, in the last decade, the competitiveness of photovoltaic and wind technologies for electricity production has increased dramatically, reducing the associated costs between 50% and 85%. 

In addition, if we consider, for example, the Italian context, there is still a cost component to support renewables in the electric bill – within the system charges – but this component represents a small percentage of the total expenditure: as an example, in the third quarter of 2021 it accounted for less than 11% and it has been set to zero in the last quarter of 2021 by the Government, specifically to limit the effect of the energy costs rise on families and economic activities. 

Thus, the real cost increase lies in the cost component related to the energy supply and commercialization (which usually account for 59.2% of the bill). This component has indeed more than doubled in the last 9 years, with an increase of around 48% in the last quarter of 2021 compared to the previous quarter. And this is not due to renewables. 

On the contrary, the spread of renewable-based technologies allows to decrease the electricity market price, for example in summer, during the central hours of the day, when the electricity overgeneration (so the electricity generated as a surplus compared to the electricity demand of the users) – which is due to solar in particular – makes the purchase of electricity more convenient during the day than during the night, which is exactly the opposite of what we are used to.

Many countries, especially in Europe, do not have direct access to fossil fuels reserves and they are forced to import them. Thus, they become subject to the very same sources of instability as the countries in which such reserves are located. This means that political decisions taken abroad are able to directly influence our way of life and our business and it contradicts the necessity of securing the sources into resilient supply chain.  

We are currently experiencing the consequences of such framework, for example on the natural gas – there are several reasons behind the increase in prices, both on the supply and demand sides. Three major supply-side factors affect prices, in normal conditions: the amount of natural gas production, at the international level; the level of natural gas in storage;  volumes of natural gas imports and exports.  

Three major demand-side factors affect prices, in normal conditions: variations in winter and summer weather; level of economic growth/industrial production; availability and prices of alternative fuels.  

The current international context sees a boom in prices, a growing worldwide demand and a falling production in the EU. Russia, which traditionally represented the solution for such conditions, used to supply the EU via a pipeline that passes through Ukraine and Poland. At the moment, gas supplies are used as bargaining chip in the complex game played on the edge of human rights at the external borders of the European Union (, while now the big debate has moved on to the opportunity to set a cap to the price of gas at the EU level.  

In Italy, where natural gas is mainly imported from Russia, Algeria, Libya, the Netherlands and Norway, energy costs are planned to increase dramatically in the next few months (+29,8% on electricity and +14,4% on gas compared with 2021). For this reason, among others, the switch to renewables is strategic and urgent for Italy: it represents, by all means, an investment, which will produce savings on supplies over the next few decades. 

We can outline different scenarios. 

If no action is taken – in terms of how the energy is produced (and with energy I mean electricity, but also and especially heating) – in the short term the most predictable consequence is of course a bill increase for any natural gas consumer, or energy consumer in general. We are already experiencing this and, in industry, it will cause problems especially for those industrial sectors that are large heat consumers. 

For example, the glass sector in Italy consumes 7 million of cubic meters of natural gas every year. It means that, with the increase in the gas cost from 0.23 euros per cubic meter up to 0.98 euros per cubic meter, several small and medium sized enterprises may be forced to close the business. 

The same for the ceramic industry, a sector that is worth 6.5 billion euros in Italy, 279 companies and 27 thousand 5 hundred workers. Just think that the increase in the gas price produces 1.4 billion euros of cost increase for this sector, that is completely unsustainable. And of course, other industrial sectors are in the same situation. 

In addition, if we keep on using natural gas as the main source for energy production, in the medium-long term we must expect further continuous price fluctuations and instabilities, as well as possible future economic and politic crisis. 

Thus, all these aspects represent an issue, but they can also be a driver towards the switch to renewable energy sources and to renewables derived fuels or, more in general, to more sustainable technologies which are not economically viable at the moment (green hydrogen or innovative storage systems for example).

This article is based on
Business 4 Climate Podcast ep. 5 | The rise of Energy Costs: Motivations and Consequences
Sara Zanni, Maria Alessandra Ancona