Any room available for energy efficiency in the Italian hotel sector?

Italy is one of the top touristic destinations of the world and it ranks third in Europe, after Spain and Germany, in terms of presences in hotels and similar accommodations. The hotel sector is of fundamental importance for the Italian economy, since tourism contributes to a substantial share of the national Gross Domestic Product (GDP), 10.2% of the GDP in 2015, and it is relevant also at international level, because 16.5% of EU hotels is located in Italy.

Since hotels offer a large range of services to their clients, they are among the highest energy consumption building types, therefore it is central to evaluate the possible energy efficiency potential of this particular class of buildings.

Given the strategic importance and the consistence of the hotel sector in Italy, a model is developed, by using the LEAP platform, in order to determine energy consumption per class of hotels and to evaluate the possible potential energy saving. The Italian hotel sector is modelled (LEAP-IHS) by taking into account the different categories of the structures with the corresponding appliances available in different categories of hotels.

Figure 1. Primary energy saving BAT vs. BAU scenario

After a successful validation based on literature data, LEAP-IHS has been used to build three scenarios, namely BAU, BAT and REA.

Figure 2. Primary energy savings REA vs. BAU scenario

The BAU scenario represents the “baseline” of the energy consumption in the hotel sector, which is not available from statistical data, therefore it represents a first important achievement of the present study. The BAU has shown that primary energy consumption will tend to decrease even though no efficiency measures will be implemented in the Italian hotel sector, because the penetration of renewables will increase in the power sector, which develops independently from the hotel one. BAT and REA scenarios included a set of measures to be possibly implemented the hotel sector and it is shown that relevant savings can be obtained, especially in the BAT scenario. On the other hand their financial sustainability is weak. In contrast, REA scenario allows achieving a lower level of energy savings and emissions reduction, but it has the relevant advantage of being sustainable from the financial point of view, even though externalities savings are not reinvested in the hotel sector.

According to the proposed analysis, it can be said that the implementation of the BAT scenario is a purely policy option, because at moment it cannot be justified on the basis of the economic return, but it can be pursued in accordance with other policy reasons, such as to enforce the security of supply by reducing primary energy consumption or by promoting environmental friendly policies.

Instead, the implementation of REA scenario can be substantially justified from the economic point of view, even without any state aid (e.g. reinvestment of externalities savings). For this reason, REA scenario could be directly promoted by private operators, such as hotel association or financial institutions, because it can guarantee energy savings and financial return at the same time.

The complete analysis is available here.

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“To heat or not to heat by using heat pumps? This is the question”. An Italian dilemma on energy efficient heating in buildings.

Italy is one the largest consumers of fossil fuels in Europe, in fact, it is the third country after UK and Germany, in terms of natural gas consumption.

In particular, most of the consumption of the residential sector is due to space heating, which has natural gas as preferential fuel. This choice derives from an energy policy strategy of ~30-40 years ago, when it was decided to build an effective, efficient and widespread natural gas distribution network, able to reach most of the flats and houses of the Italian citizens.

The supply was ensured by building pipelines which directly connect Italy with producing countries (i.e. Libya and Algeria) and by signing long term supply agreements, with oil indexed prices.

The aim of this policy was to reduce the consumption of expensive and pollutant oil products and it demonstrated to be successful to some extent, because a relevant reduction of fuel oil consumption for buildings heating was achieved with the consequent reduction of a relevant amount of pollutants.

Nowadays, the context is completely changed and there are concerns about the security of supply and the reduction of carbon emissions, as well as the implementation of energy efficiency policies.

Security of supply is related to the reliability of the supply, in order to have a continuous source of natural gas. This issue is strictly connected with the geopolitical stability of the suppliers, which strongly worsened in the last years. Moreover, another issue is represented by the depletion of the resources in the supplying countries and in the increase of their internal demand. All these factors increase the risks linked to the supply.

In the last years, European Union decided to push aggressive renewable energy policies, which resulting in binding agreements with the member states for the implementation of determined quantity of renewable energy plants in the electricity sector. This fact reduced massively the carbon intensity of the electricity sector, because of the large development of renewables, especially solar photovoltaic and wind in Italy.

Another fundamental pillar of the European energy policy of the last years is represented by the implementation of energy efficiency measures, in order to reduce the consumption of fossil fuels. In this framework building sector has a relevant role, in fact it accounts for ~40% of the total energy consumption and it represents the largest sector in the end-users area, followed by transport with the 33%.

An approach to reduce primary energy consumption for buildings heating purposes in the residential sector is to use air to air heat pumps.

The idea is based on the fact that this kind of heat pumps are very easy and fast to install, they do not require special maintenance and they are perceived as simple household appliances.

Moreover, in a relevant share of dwellings, this equipment is already installed and utilized for summer cooling; therefore it would be only necessary to stimulate the utilization for winter heating.

The energy input for heat pumps is electrical energy, which is now generated in relevant part by renewables, even though, in Italy, a substantial part is still obtained from fossil fuels, mainly natural gas, but the “electricity to heat” conversion performance of heat pumps could result to be convenient in any case.

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Figure 1. Estimated increase of electricity demand due to heat pumps utilization: (a) yearly increase in the base case; (b) sensitivity analysis with respect to the variation of penetration and second law efficiency 

Bianco et al. analyzed this scenario in detail by employing a simple model based on the second law efficiency of heat pumps. In particular, they estimated that if 25% of the current dwellings surface is heated by heat pumps having a second law efficiency of 0.2, an increase of 26 TWh of the electricity demand is achieved in 2024 by assuming a linear penetration of heat pumps from 0% in 2014 to 25% in 2024 (Figure 1). This would a corresponding saving of natural gas equal to ~2bcm per year (Figure 2).

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Figure 2. Natural gas savings due to heat pumps utilization in the base case

It is authors’ opinion that the utilization of air to air heat pumps for buildings heating is one of the simplest and cheapest options to implement, in order to promote energy savings in buildings. In particular, even promoting the use of the heat pumps that are already installed in many dwellings may allow to obtain significant results in terms of primary energy savings, mainly natural gas.

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The Retrorunning of Oil Prices

From October 2014 up to March 2015 a continuous decrease of oil prices was detected up to a minimum of ~45 $/bbl. This level is very far from the ~95 $/bbl of the end of August/ beginning of September 2014. In April and May a slight recovery has been observed, but even the most optimistic analysts consider very difficult the possibility to have a price higher than ~70 $/bbl at the end of the year. The main question which simply comes to the mind of everybody is the reason behind this sudden collapse in oil prices. There are various hypothesis on the tables and they will be presented in the following.

1- Market Oversupply

Oil_Price

Evolution of Oil Prices

The price of a commodity is given by the interaction of supply and demand, therefore their equilibrium will determine the price. The same should be in the case of oil. At moment, for many analysts, there is an oversupply (excess of production) that the current market level is not able to accept, thus a sharp fall in prices was detected.

The oversupply is supposed to be due to the relevant increase in oil production of USA and Canada, after the discovery of shale oil reserves, which allowed USA, in about six years, to double their oil production. As a consequence, oil from Nigeria and Saudi Arabia, which was directed to the USA, is now available on the international markets, causing the current oversupply condition.

The situation is complicated by the fact that European economies are affected by recession or by very low growth rates, provoking a reduction of their demand. Therefore the trends of the two determinants of price (i.e. demand and supply) move in the direction of a relevant price fall.

2- Issue of Shale Oil

In the last years, USA and Canada discovered the existence of large shale oil reserves in their soil and they started to extract it, enforcing their position on the oil market. In fact, as reported by Bloomberg, in 2014 USA were the largest world oil producer, after overtaking Russia and Saudi Arabia.

Oil_Image_1This fast and relevant growth has caused a reaction in the traditional oil producing countries, headed by Saudi Arabia, which increased their production to cause a decrease of oil prices in order to make unprofitable the extraction of shale oil. In fact, it is commonly agreed that shale oil extraction cost is between 70-80 $/bbl, therefore market prices below this level displace shale oil production.

Of course not all the OPEC countries agree with this position, which penalize some time (e.g. Algeria, Venezuela and Iran), but they were not able to find an internal agreement.

Saudi Arabia claims the success of its oil price strategy, because last April, their production hit the record level of 10.3 Mbbl, whereas in USA there was a slow-down in the extraction of shale oil.

Anyway, it is too soon to derive some conclusion from this side, because the possible dispute is still at the beginning and not many data are available.

Much may also depend on the evolutions from the demand side and on the technological evolution on shale oil extraction techniques, which may cause a relevant decrease of the extraction costs.

3- Geo-Political Issues

According to other point of views the “war” on oil prices could have been an instrument to put pressure on Russia and Iran, in order to soften their position on the disputes with Ukraine and on the plans to develop nuclear power plants

 

The three issues discussed above have a logic and can be realistic, but in my opinion something is missing in the analysis.

In particular, as argued and shown by Carollo in his book, the physical exchange of oil represent only a very small part of the oil market, because, for example, Brent is largely traded for financial aims. The purely financial transactions of the Brent largely exceed the physical ones, so it is not clear how an increase or decrease of the production can alter oil price that much.

Secondly, it is true that the price is set by the interaction of supply and demand, but of what?

Oil is not used “as is”, but its derived products are used in different businesses with different demand evolutions and in order to obtain these products, there is the necessity to have refining capacity. To understand the trend of oil prices, one should look at the market of gasoline, jet fuels, fuel oil, etc. The demands of these products influence the oil prices and the availability of refining capacity, as highlighted also by Carollo.

To have a complete picture of the situation, in my opinion, it is necessary to understand what happened to the volume of financial transactions of Brent, the demand of gasoline and jet fuels (i.e. the high value derivatives) and to the refining capacity, which is supposed to represent a bottleneck of the process (see Carollo).

(c) Vincenzo Bianco

 

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Energy efficiency in the Italian residential sector: is there a real opportunity or only bar talk?

Energy efficiency is often referred to as a hidden fuel. This definition is based on the assumption that if you are more energy efficient in performing some activities, you have an excess of energy to do other things.

The concept of energy efficiency has a precise date of birth, the year 1973, when there was the so called OPEC embargo, in other words a cut of oil production of the OPEC countries which had the result to provoke a sudden increase of prices in the consuming countries.

This experience showed to the international leaders that the energy policy of their countries was in the hands of external “policy-makers” based in turbulent areas of the world.

The main idea to reduce the degree of dependence was to try to consume less, therefore the energy efficiency concept was introduced.

Today, the discussion is again hot, for both geopolitical reasons (security of supply) and environmental concerns (reduction of carbon emissions), especially in European countries. Moreover, the sustained costs of oil (at least up to a couple of months ago) represented another arrow for the bow of energy efficiency.

According to BPIE, buildings are responsible of up to 40% of the primary energy consumption in EU countries, mainly for heating, therefore large possibilities are envisaged to perform energy conservation measures.

The focal point is to understand if they are self-convenient or it is necessary to adopt an incentive policy. Let’s try to analyze the case of Italy, with reference to natural gas consumed in buildings for heating purposes.

The consumption of natural gas in Italy can be linked to Heating Degree Days (HDDs), gas price and Gross Domestic Product (GDP) per capita. HDDs give a measure of how much gas is necessary to heat dwellings and GDP per capita may be seen as a proxy of the spending capacity of people.

Extrapolation of BAU consumptions in different HDDs scenarios

Extrapolation of BAU consumptions in different HDDs scenarios

On the basis of historical data, it is possible to find the coefficients linking these variables in order to obtain an equation to extrapolate the consumption (click for more details).  This extrapolation represents the so called Business As Usual (BAU) consumption, because, according to the estimations of GDP per capita and HDDs, the demand of natural gas is estimated without taking into account possible future structural changes of the sector (i.e. the implementation of aggressive policies of energy efficiency).

The Italian dwelling stock, for simplicity, is divided in two categories: single houses and flats. Only the portion of the stock fuelled with natural gas is considered (~70% of the total). Then, the specific consumption in kWh/m2 is determined.

Consumption as a function of yearly refurbished dwellings

Consumption as a function of yearly refurbished dwellings

In the present analysis, on top of the BAU estimation, it is evaluated the impact of some measures of energy efficiency, namely substitution of windows and utilization of an improved wall, roof and floor insulation (technical data are taken from Ecofys). The new specific consumption taking into account the efficiency measures is estimated and energy savings are determined.

Furthermore, an economic analysis is developed (cost data are taken from Ecofys) and its results show that pay-back period of the above mentioned actions is over ten years, therefore it seems that incentives are necessary to stimulate the implementations of the measures.

It is possible to conclude that, in Italy, energy efficiency measures can be significant because, by acting on a limited share of the dwelling stock, significant savings can be achieved and the consumption of natural gas may be less than the present one.

(C) Vincenzo Bianco

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Is the price friendship between oil and gas over?

natural_gas_1In the ‘60s years natural gas started to gain importance and to be consumed in large quantities, therefore a natural gas market was established. Natural gas market developed on a regional basis, in opposition to the oil market which evolved on a global scale. This was due to the difficulties in supplying natural gas all over the world. Thus, in different geographic areas, gas markets progressed according to different principles.

In particular, in United States and UK price level was determined on the basis of “hub markets”, whilst in continental Europe the “long-term oil indexed gas price” was adopted, instead in the Soviet area there was a state-regulated price model (Stern, 2012).

Gas hubs are physical or virtual points where natural gas is exchanged between buyers and suppliers, thus there is an interaction between supply and demand, which, in turn, determines the price. If the number of the transactions on the hub is high, it is said to be “liquid”.

In opposition to this trade mechanisms, there are the long term supply contracts, which consist in agreement negotiated with producing countries (e.g. classical European suppliers are Russia, Norway, the Netherlands or Algeria), that last many years (i.e. up to 30). During the duration of the contract, the consumer takes the obligation to withdraw a certain quantity of gas and the supplier furnishes the agreed quantity on the basis of the price negotiated.

It is said that consumer assumes the volume risk, whereas the supplier takes the price risk. This risk sharing agreement is expressed in the so called  TOP (Take or Pay) clause, which states that the consumer is obliged to withdraw a minimum quantity of gas every year and if it does not take it, it must be paid as well.

When these kind of contracts were introduced, natural gas was considered to be a good and direct substitute of heating oil, therefore it was almost an obvious consequence to link gas price to that of oil, because it was seen as its closest substitute.

Another important reason to link gas and oil price was found in the fact that, at that time (’60-’70 years) there was already a developed and transparent oil market, therefore it was seen as a warranty to establish gas price on the basis of a clear mechanism not suspected to be influenced by the parts involved in the contract. But, on the other hand, the price connection between oil and gas is not linked with the fundamentals of natural gas sector and, after 1998 when OPEC decided to adopt the IPE Brent as price reference for oil (i.e. a financial product), natural gas price became subjected to the speculations of the financial market.

The main reason to adopt long term agreements is that they are supposed to offer an acceptable level of security to gas companies in order to perform investments in huge and capital intensive infrastructures, such as pipeline, development of basins, storages and so on.

This kind of agreement has undisturbed dominated the European gas market for more than forty years until about 2005.

Around 2005, gas hubs started to be developed in Europe, except for NBP (i.e. National Balancing Point in UK) which started its operations in the middle of ‘90s, and up to 2007-2008 continental European gas hubs did not expressed price levels significantly different from oil-indexed contracts and their liquidity was limited.

After the 2008 this condition drastically changed as a consequence of the general economic downturn and due to some specific issues (Bianco et al., 2014):

  • Economic downturn caused a reduction in natural gas demand, with the consequence of increasing volumes on the market;
  • Such as natural gas, also electricity demand decreased and electricity generators tried to sell on the gas market part of their ‘‘take or pay’’ quota, in order to reduce financial losses;
  • Because of the strong development of unconventional gas extraction in USA, a huge quantity of liquefied natural gas (LNG), originally directed in USA, was diverted towards European and Asian markets.

Given this situation, power generators, which are among the larger consumers of natural gas, tried to sell part of their TOP on the gas hubs, gas suppliers tried to react to the drop in consumption offering increasing quantities of spare volumes on the hubs and also LNG operators adopted the same strategy to sell the volumes originally directed to USA.

All this caused an increase of liquidity on the hubs and, according to the general market law of equilibrium, the prices sharply decreased and decoupled from oil-indexed contracts. In fact, oil-indexed price continued to increase, because oil price increased, showing an uncorrelated behavior.

All this has meant that, from 2008, the usual commercial environment for European gas companies has been subjected to a number of new (and difficult to predict) forces, which have exacerbated the problems of reliance on the relatively rigid oil-linked price formulae in long term contracts (Stern, 2012).

From 2008 up today, many renegotiations of oil-indexed natural gas supply contracts are in progress, because consumers see very low prices on the gas hubs if compared with the level of their contracts, therefore they try to obtain better conditions for their furniture.

In the meanwhile, small power operators and natural gas wholesaler started to buy natural gas volumes on the hubs benefiting from very competitive prices and large operators, which in most of cases have significant oil-indexed supply contracts in their portfolios, to avoid the displacement from the market, offered their power plants or gas quantities in line with the price level of the hubs, suffering huge financial losses.

This situation has generated a great confusion, because hub prices have been perceived as “more convenient” with respect to oil-indexed formulas, but the fallacy of this equation is rather evident, because there is the mistake of confusing price formation with price level (Stern, 2012).

Thus the assertion that, when the gas supply/demand balance tightens, gas prices will “recouple” with oil prices, reflects this confusion.

A tight supply/demand balance will certainly result in higher prices, but there is no necessary relationship between the latter and oil related price levels (Stern, 2012).

In my opinion, this is certainly true from the theoretical point of view, but from thenatural_gas_2 practical point of view it might be considered a “rule of thumb” that the oil-indexed gas formulas represent the highest limit for price level. If gas price on the hubs should exceed oil-indexed formulas, it does not make any sense for large consumers to purchase on the hubs due to the complex issues connected with the physical delivery; on the contrary it results more convenient to sign a long term agreement to obtain a stable furniture, even though less flexible.

It can be said that, at moment, energy markets in general and gas market in particular are in a period of transition and a new equilibrium is expected to be found after the economic crisis, when the demand of energy is expected to rise again.

Many analysts are thus concerned about the future price level of natural gas and the related price formation mechanisms.

For some of them, i.e. (Stern, 2012), the price level will be expressed directly by the interaction of demand and supply on the gas hubs and long term oil-indexed contracts will be abandoned, because they do not reflect the economic fundamentals of natural gas sector.

On the contrary other analysts, i.e. (Standard&Poor’s, 2012), think that the current condition is only transient and when there will be a recover of the demand the prices will come back on the pre-crisis level.

It can be concluded that the price friendship between oil and gas is weakened, but it is difficult to think that it will be broken.

(c) Vincenzo Bianco

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