Who pays for the energy transition?

Surprise: greenhouse gas emissions in Europe are falling. On 31 October the European Commission published the 2024 climate action progress report: in 2023 the EU's net greenhouse gas emissions fell by 8.3% compared to the previous year. It's the largest annual drop in decades — leaving aside 2020, when the pandemic cut emissions by 9.8%. At this rate, the EU can reach its target of cutting emissions by at least 55% by 2030.

The fall in emissions is down to the strong growth of renewables: over 90% of new generation capacity is based on renewable sources.

So the transition is under way, and its acceleration has as a positive "side effect" that the overall cost of producing energy is steadily falling. Because producing renewable energy costs less than producing energy from fossil fuels.

You'll have noticed from your bills too that energy costs less. No?

No, in fact: the anomaly is that while the costs of producing energy fall, thanks to the adoption of new technologies and the lower cost of renewable sources, prices for consumers go up.

The transition accelerates, but consumers pay the costs. Is it right that people should pay for the change? Or should the change reward those who are willing to take it on?

To work that out we first have to answer another question: how is the price of electricity set?

The status quo

In Italy the price of the energy component on your bill is based on the marginal pricing system.

On one side there's the supply of energy, the parties producing electricity from the various sources: solar, wind, coal, gas, oil, and so on. On the other side there's demand, the consumers — all of us. In between there's a body that manages the meeting of supply and demand: the GME, the energy markets operator.

Producers declare the day before how much electricity they'll be able to produce the next day, and at what price, hour by hour. The GME, which estimates how much electricity will be needed, collects the electricity offers from producers. It starts with the producers who declared the lowest price, and works up until the plants with the highest production costs enter the market. Which are the plants with the highest production costs? Gas thermoelectric plants. The plants with the lowest production costs are the ones based on renewable sources, because they don't involve a primary fuel to be transformed and converted.

The price of electricity — the single national price — is therefore set on the basis of the last offer accepted, which is the marginal one. Which means that all producers, including the ones producing electricity from low-cost renewables, are paid at the price of the producer that declared the highest cost.

To make this clearer, let's go back to the fish market.

Every morning fishermen arrive at the market with different fish, which have different prices because getting hold of them can be more or less expensive. The consumer goes to the market and picks 1kg of mackerel, 1kg of clams and 1kg of lobster at 50 euros a kilo. When it's time to pay, the bill is 150 euros. In disbelief, the consumer asks the trader to explain, and the trader points to a sign that says a marginal pricing system applies in this fish market: the most expensive product sets the price of every product.

This system, apparently senseless, is widely used in Europe and has a logic of its own: it was designed to encourage the transition. Marginal pricing has two main consequences:

it forces producers to be transparent about production costs, and reduces the scope for inflating prices by detaching them from cost;
since renewables have low or zero production costs, entering the market with a renewable offer becomes very attractive, because profit margins are high.

This mechanism has had the positive effect of rapidly shifting the energy mix in favour of renewables. But it has also had the negative effect of shifting the costs of the transition onto consumers.

Users pay the price difference that makes it attractive for producers to invest in renewables. They pay the price increases caused by demand peaks that often come from a few large parties (heavy industry, data centres, logistics hubs). And on top of that they also pay the infrastructure costs, the maintenance and the attempts to upgrade an obsolete grid that struggles to keep up with new demands.

So the paradox is that all of us are paying the cost of the transition, while a few are enjoying its benefits. And we know that can't work for long: to last, the transition also has to be economically sustainable, for everyone.

Let's turn it over

Why talk about this now, in November 2024? Because next year things will start to change, and interesting scenarios will open up, above all for consumers.

From 1 January 2025 the single national price regime turns into an hourly zonal pricing mechanism.

Our country is divided into many regions, each with unique characteristics in terms of producing, distributing and consuming electricity. Zonal prices take exactly those differences into account, setting differentiated energy prices for each zone, rather than making the whole country uniform.

The cost of energy will depend on the zone the producer is in — Italy will be divided into 7 zones — and on the time band of consumption. Which also translates into different prices for consumers in different zones.

Will it be more complex? Yes. Should that worry us? Maybe, but…

Making prices more dynamic means bringing out the potential of flexibility in the energy system. A system in which consumers have more scope to affect their own energy spending through their own choices.

Energy suppliers will be able to modulate tariffs, building on the trend of smart tariffs that has already spread considerably in recent years.

We consumers will be able to invest in building renewable plants, with more interesting returns, and contribute to balancing the grid, and be "paid" for it with discounts, incentives, direct earnings.

Picture a house with a solar system, a storage battery, air conditioning, several connected smart devices, maybe an electric car in the garage with its charger. This house isn't a house any more, it's a small power plant.

Whoever lives in this house is a prosumer taking part in the collective production and consumption of energy, and to all intents and purposes is a player in the common energy market: they can buy it, sell it, trade it. They can manage their consumption flexibly and in a modulated way, so as to be as efficient as possible, to save, and to earn.

Seen — and done — this way, the transition is no longer a price to pay: it's an opportunity to take. And energy is no longer just a passive cost, but a form of investment.

Think of a number

371 billion euros

That's the figure European households could save through the adoption of demand-side flexibility tools. According to a study by the consultancy DNV, commissioned by Smart Energy Europe, adjusting consumption to the availability and cost of energy would drastically cut energy spending — by up to 50%. In practice, it's about switching on a widespread "energy intelligence" that lets households consume more when energy is abundant and cheaper, avoiding the price peaks tied to moments of scarcity.

I give you my word

Make Your Power Move

It's the call to action that inspired the birth of Volta Energy. With its double meaning, it captures our way of looking at the future of energy. Taking your energy back into your own hands also means taking back the power to choose knowingly. Because if we want a radically different energy system, we have to build it.