Italy approves temporary gas-for-power price cap at €58.90/MWh

Italy's government has approved a temporary mechanism to cap the cost of gas used for power generation at €58.90/megawatt-hour ($66/MWh), it said late Nov. 9.

The mechanism, drawn up following consultation with the European Commission, would reimburse gas-fired generators for any gas consumed above this level, thereby acting as a buffer against gas price pass-through in electricity bills.

The measure is scheduled to take effect on Jan. 1, 2027, alongside other approved measures, including a "liquidity service" auction for gas at its northern border and a measure to reduce system costs of €850 million.

"The gas cap measure will remain in place for eighteen months and includes a gradual phaseout to avoid abrupt changes when it expires," Italian Prime Minister Giorgia Meloni said.

The phaseout would aim "to avoid significant distortions in the internal market, limit fluctuations in cross-border electricity exchanges, and minimize effects on the merit order," according to the draft document.

The document did not include details of the phaseout terms

The mechanism will be based on the Dutch TTF day-ahead price.

The Energy Security Ministry was contacted for comment Nov. 10.

Platts, part of S&P Global Energy, assessed the Q1 Dutch TTF gas price at €80.105/MWh on Nov. 9, down 5% day over day.

In periods when the power price is not set by thermoelectric plants eligible for reimbursement, the regulator, Arera, shall reduce the reimbursement amount based on the difference between the market price and the last accepted offer from a qualifying thermoelectric plant.

Under Arera's draft proposal, there were two options for the methodology: a "linear, predetermined trajectory" that, similar to the Iberian price cap applied in 2022, would see an agreed price which would then increment by €5/MWh until reaching parity with the market, or an "index-linked" trajectory that "maintains a minimal link between natural gas forward prices and the conventional ceiling used for sell offers in the wholesale electricity market, thereby addressing a dual requirement," according to the regulator's document.

Accompanying measures

The gas-for-power price cap measure, initially proposed as part of the April 2026 Utilities Bill (Decreto Bollette), is accompanied by two other market measures, the government said.

One of these will "ensure that the benefits of energy produced at lower costs are reflected in utility bills," Meloni said.

"Arera will establish even stricter rules against those who deliberately withhold production capacity to drive up prices. Furthermore, we have demanded that the lower costs associated with renewables truly translate into a benefit for households and businesses," Meloni said.

"If Italy is producing an increasing amount of clean energy, this should also mean more affordable energy for those who use it. We are aware that correcting this mechanism may displease those who have been reaping very high returns from it, but our duty is to defend the interests of the citizens," Meloni said.

The regulator has been given 30 days to "adopt guidelines setting out criteria for assessing the withholding of capacity by wholesale market participants ... to strengthen competition in wholesale electricity markets and to ensure that the valuation of variable costs associated with non-dispatchable renewable energy sources is reflected in offer prices," according to the draft.

The decree will also "establish strict limits on the passing on of costs," Meloni said. "Those required to fund the mechanism may not shift these costs onto utility bills, except to the extent expressly permitted by the regulation."

The modified gas cap measure is based on a "preliminary agreement" reached with the EC in October. The plans discussed were "in line with EU law, in particular with the principles established in the Middle East Crisis Temporary State Aid Framework (METSAF)," the Commission said Oct. 19.