Tim Bulman
OECD Economic Surveys: Italy 2026
Abstract
High energy prices, high dependence on energy imports, geopolitical uncertainty and the need to reduce emissions make improving energy security and electricity supply crucial to supporting activity, investment and real incomes in Italy in the long term. The electrification of carbon-intensive activities, especially transport and heating, will be key to reducing fossil fuel dependence and emissions, but will place new pressures on the electricity system. Despite earlier progress and Italy’s great natural potential, new renewable electricity generation lags these needs and national goals. Streamlining permitting for renewables, transmission and storage would help achieve the transition to low-carbon electricity. Electricity pricing is being reformed to better reflect supply and demand conditions. Public interventions to support the electricity transition need to provide long-term stability for private investors but avoid distorting incentives and excessively transferring costs to the public budget.
Securing sustainable and competitive energy supply is needed to support growth, the competitiveness of Italian firms, the living standards and availability of affordable energy for households and to meet climate change mitigation objectives in the long term. Italy remains more reliant on fossil fuel – notably natural gas – than many EU and OECD countries, with fossil fuels accounting for more than half of electricity generation, as well as being used heavily in transportation, industry and for home heating (Figure 3.1, Panels A and B). The 2026 Middle East conflict underscores the importance for Italy of reducing its exposure to global energy supply disruptions and volatile prices. Italy’s national energy strategy provides for renewable energies becoming much more important in generating electricity (Figure 3.1, Panel D), as part of larger remission reduction goals, and achieving this will require accelerating progress.
Reliance on fossil fuels, which Italy imports, creates an-going dependence on other countries, exposure to shocks in global energy markets and higher overall energy costs, even considering modest recent inroads into these challenges. Imported energy provided 74% of net total energy consumed in 2024, a share that has been broadly stable for over a decade. The surge in energy prices linked to the conflict in the Middle East underlines the risks to growth, security of supply and real incomes. Natural gas use is among the highest in Europe per capita. Following Russia’s 2022 full-scale invasion of Ukraine, Italy achieved one of the largest shifts among OECD countries from Russian-supplied pipeline gas to other suppliers. However, the large increases in natural gas prices contributed to a surge in wholesale electricity prices, rising by 120% between 2019 and 2025, and the premium in Italian electricity prices compared with the EU average increasing from 8% to 26% (Figure 3.2). The increase in gas prices subtracted over three percentage points of GDP from the current account balance, shifting it to deficit in 2022 for the first time in a decade. Up to 9% of households had difficulty paying energy costs (Istat, 2023[8]), despite Italy’s strong fiscal support measures. Industrial consumers cut production and employment and delayed investments, especially in energy-intensive metals and chemical manufacturing, while other Italian manufacturers were somewhat protected by their relatively high energy efficiency. Meanwhile, new challenges to energy security are emerging. The disruptions from the 2026 Middle East conflict have led to substantial downgrading in projected economic growth and to higher forecast inflation as higher energy prices weigh on household demand and firms’ production.
Electrification, together with increasing the share of solar and wind in electricity generation, would help in the longer run to increase energy security, lower energy prices and achieve greenhouse gas emission reductions’ goals. Adapting to the changing climate underscores the importance of these shifts: more frequent and intense heatwaves shift electricity demand from winter to summer and increase demand peaks, while reducing demand for heating and fuels, such as gas. Meanwhile, changing rainfall patterns and greater evaporation during warmer weather make hydroelectric sources less reliable, such as those in the Po Valley. Natural gas has a high share in Italian electricity generation compared to most EU countries (Figure 3.1, Panel B) and more strongly determines the marginal electricity price than in most EU countries, especially when production from solar or wind generation is low or during peak demand periods. However, the overall levelised cost of solar- and wind-generated electricity, accounting for associated transport and storage investments, is generally lower than that of fossil fuels (IEA, 2025[12]). Faster progress in electrification and shifting more rapidly to renewable generation in Italy’s energy mix would help reduce energy costs and improve energy security. The recent development of energy supply and costs in other OECD countries with similar climates shows the potential contribution of solar and wind generation (Box 3.1). Across European countries, a greater share of gas in electricity generation is associated with higher electricity prices, while the reverse is the case for the share of renewable energy sources, even outside the 2022-2023 period of exceptionally high gas prices (Figure 3.3).
The shift in energy usage towards electricity in Italy has lagged many other OECD countries (Figure 3.1, Panel C) and the transition to higher solar and wind generation could be accelerated. Electricity demand was lower in 2023 than in the late 2010s. Electrifying energy used for transport, heating, and industry more quickly would help reduce the role of fossil fuels in Italy’s overall energy mix. But high and volatile electricity prices, due to the high reliance of natural gas in generation, discourages users from switching from fossil fuels to electricity. While Italy has long benefited from significant hydroelectric generation, solar and wind electricity generation and transmission and storage capacity are growing (Figure 3.1, Panel D). In August 2025, renewables generated 48% of Italy’s electricity needs, up from 40% a year earlier, following recent reforms and investments. Italy is reforming the institutional and regulatory environment for renewable energy generation, transmission and storage investment (Box 3.2).
Notes: Panel A: TES here excludes electricity and heat trade. Coal also includes peat and oil shale where relevant. Panel D: the dashed lines indicate the national objectives for 2030.
Source: OECD, IEA Energy balance statistics.
Growing solar and wind generation is supporting areas that have traditionally lagged, including much of the South and the Islands with their substantial natural resources, creating skilled technical jobs. Together with recent reforms to pricing, this can reduce energy costs in those areas. Developing interconnections across Italy and with its neighbours can enable broader access to low-cost, low-emission electricity and reduce risks of localised price increases in high-demand areas such as the North (Alessi, Bonaldo and Fontini, 2025[13]; Terna, 2025[17]). Nevertheless, there is scope to accelerate these developments and use Italy’s high solar and wind generation potential by encouraging investment and more efficient energy use will require pursuing reforms that improve price signals’ effectiveness and make the regulatory environment more supportive.
Spain leads among OECD countries in the share of energy generated by renewable sources. Solar and onshore wind generation as a share of total installed capacity rose from 40% in 2000 to over 65% in 2023, while the share of electricity they generated rose from 17.2% to 51.1% over the same period (Figure 3.1, Panel D). The difference between the shares of installed capacity and of generation reflects the intermittent nature of renewables production and the lack of storage capacity.
Onshore wind first led this expansion, then solar photovoltaic after 2019, due to a mix of allocations of new capacity, declining production costs, adoption of renewable energy targets, and rising self-consumption. Spain aims to increase the share of renewables to 80% by 2030.
The growth of renewables with their low marginal costs has lowered wholesale electricity prices by about 20%, allowing them to fall from above the European median between 2018 and 2021 to below since 2022. Electricity wholesale prices have become negative during some periods, notably when solar production has surged while demand has been low. Lower average prices do not appear to have deterred further investment, which have been supported by lower instillation costs for renewables. Instead, issues such as constructing interconnections and storage capacity feature among the main challenges for expanding renewables capacity.
Note: Panel B unit is EUR per MWh Gross calorific value (GCV).
Source: OECD, IEA Energy prices database.
Reforms and investments to improve energy security absorb approximately one-third of the National Recovery and Resilience Plan (NRRP) resources. To improve Italy’s energy independence and security, the NRRP provides for investments in grid modernisation and the energy transition, including in renewable energy, energy efficiency, grid projects such as the Tyrrhenian Link between Sicily, Sardinia and the mainland, smart grid upgrades, diversifying gas sources, and support for energy communities and for vulnerable groups (Table 3.1). It allocates EUR 0.5 billion to improve the climate resilience of 4 000 km of transmission and distribution lines. The 2026 budget defers some of these projects to 2028 and reduces the public support for transmission projects. The 2025 budget includes a multi-year investment to support the high upfront investment costs of ‘smart grids’ technologies, which improve the use and security of existing transmission infrastructure. This complements the major distribution companies’ investments, such as Enel’s EUR 0.6 billion of smart grid projects.
In addition, Italy’s national transmission grid owner, Terna, plans over EUR 23 billion in grid modernisation and expansion, notably between the South and Islands with their high renewable generation capacity and connections with North Africa, and the North with its high demand and connections to other EU countries.
The NRRP’s policy reforms include simplifying authorisation procedures for renewable energy, reducing connection costs for biomethane production plants, and new legislation that promotes the production and consumption of renewable gas and that mitigates financial risks associated with power purchase agreements from renewable sources.
Source: OECD IEA Energy prices database.
3.2.1. Raising investment in solar and wind generation
Italy has developed significant new solar and wind generation capacity, alongside the long-standing role of hydroelectric power that accounts for around 25% of capacity. The country’s potential for these energies is significant (Figure 3.4). Solar and wind generation capacity has accelerated, notably since 2022. Over 2022 and 2023 this growth was led by small-scale photovoltaic systems, with households’ and small businesses’ investments motivated by the surge in energy prices and the ‘Superbonus’, ‘Ecobonus’ and other tax credits. National Recovery and Resilience Plan (NRRP) measures have supported the growth of renewable energy communities and collective consumption schemes for small-scale generation, although instillations have fallen short of goals. With the end of tax incentives, the pace of growth in small-scale instillations slowed in the first half of 2025, and utility-scale investments became the main source of increased renewable generation capacity.
Source: (OECD, 2025[1]), Castillo, C. P., et al., (2024). ‘Renewable Energy production and potential in EU Rural Areas’, EU Joint Research Council.
Even with recent progress, the pace of development needs to accelerate to achieve the shift away from fossil fuels and to meet the National Energy and Climate Plan (NECP) and EU targets (Figure 3.5). The NECP foresees Italy installing at least 10 GW of renewable capacity annually by 2030 – equivalent to 17% of total installed capacity from all sources in 2023 – if it is to achieve the targets of 42.5% of energy and 60% of electricity generated by renewable sources. This will require significantly expanding the pipeline of new investments (Figure 3.5, Panels B and C). However, even if its renewable generation growth goals are achieved, Italy will continue to source a larger share of its energy mix from imported natural gas than most other EU countries. Priority actions to strengthen solar and wind energy investment include removing bottlenecks in the planning and approval processes for new generation capacity, alongside continued efforts to enhance grid and storage infrastructure.
Regulatory fragmentation across agencies and levels of government continues to impede investment in energy infrastructure, and the growing volume of utility-scale projects adds pressures. Italy’s land-use planning and authorisation system is decentralised. For the central government, the Ministry of Environment and Energy Security oversees large-scale generation and transmission projects, conducts Environmental Impact Assessments and coordinates environmental policy at the national level as well as investment incentives and market rules. Regional governments control territorial planning and the siting of new plants, including solar and wind generation, and issue construction and water-use permits. They also manage small-scale solar and wind and distributed generation projects. As a result, projects often require both national and regional approvals, creating delays and conflicts when regional planning or environmental standards exceed national requirements or diverge from national energy policy objectives. Although a 2024 law assigned regions the task of designating suitable areas for solar and wind generation development, and a 2025 legislative decree strengthened the legal framework for these designations, progress has been slow and interpretations vary significantly across regions.
National frameworks are intended to identify areas suitable for renewable energy development by identifying zones where approval processes can be simplified and accelerated, such as former industrial sites or quarries. International experience suggests such framework can be effective. For example, in Germany, streamlined authorisation procedures for projects within pre-designated areas, coupled with presumptive approval mechanisms, can aid investment. Italy’s 2024 Decree on Suitable Areas introduced uniform national criteria to support regional and local authorities in identifying land eligible for solar and wind generation deployment. These criteria aim to ensure consistency across the country while protecting cultural, environmental, and agricultural assets. However, implementation has been uneven. Some regions have delayed preparing their plans due to stakeholder disagreement and legal challenges, contributing to uncertainty for investors. Enhancing consistency in spatial planning – especially by establishing technical criteria for defining “suitable areas” and acceleration zones – would reduce legal risks and improve investor certainty. Italy’s conferences of regional and provincial governments could play a stronger coordinating role in this process. The national government can also support local authorities in updating and aligning municipal plans with national renewable-energy objectives, while limiting the scope for discretionary interventions at the local level.
Note: Announced PV solar capacity, and PV capacity in the pipeline is exclusively focused on utility-scale. Member States whose combined installed capacity and total capacity from announced and pipeline projects through 2030 exceed the targets set in their National Energy and Climate Plans (NECPs) are represented in the figures on the right as having installed and pipeline capacity more than 100% of their NECP goals.
Source: Approximated estimates for the share of gross final consumption of renewable energy sources in 2024 (EEA 2024 RES share proxies), European Environment Agency (EEA). EMBER, Eurostat, IRENA, GEM, TZ-SAM. OECD calculations (see (OECD, 2025[1])).
Provinces and metropolitan cities are responsible for integrating regional land-use plans into municipal planning guidelines, which municipalities then operationalise through zoning and land-use regulations. A single project may require interaction with up to 30 authorities across national, regional, and municipal levels—and considerably more where multiple jurisdictions are involved, reflecting Italy’s multilayered governance system. While each authority fulfils important regulatory functions, overlapping competences and divergent decisions increase approval times and raise compliance costs, particularly for smaller investors. Conflicts between multiple applications for overlapping sites further drain administrative resources. Capacity constraints, especially in lagging regions with high renewable potential, also slow decision-making. For example, a 2024 study of solar and wind generation developments in Apulia identified regulatory barriers including decentralised governance of land use planning, outdated land use plans, conflicts between national and regional directives for approving projects, duplicate processes across different levels of government, and discretionary interventions by municipal decision-makers creating inconsistencies (OECD, 2025[1]).
Recent regulatory reforms aim to align Italy’s permitting procedures with EU requirements for accelerated deployment of all types of renewables, including heating, cooling, buildings, transport, and industry. These reforms seek to simplify authorisation procedures and introduce clearer time limits (Box 3.3). However, frequent changes have also generated new uncertainties for developers and authorities, magnified by judicial appeals that have suspended certain provisions. For example, in 2024 the Sardinia regional government adopted a temporary moratorium on new renewable projects in several areas and revoked previous authorisations, citing environmental and cultural considerations. This measure conflicted with national energy plans. The Constitutional Court ruled in 2025 that national legislation prevails, but the dispute delayed projects and added to costs. Clearer guidance to implementing authorities and developers, alongside strengthened coordination mechanisms, would help ensure that reforms translate effectively into accelerated investment.
Italy is reforming the processes for approving solar and wind energy developments, towards reducing the time and costs for expanding generation capacity. Greatest progress has been made in reforms that allow certain types of investments to follow lightened planning processes. Among the more important reforms were 2025 legislative changes that streamlined permitting processes for projects in areas with minimal environmental impact, such as industrial zones or former quarries. For example:
Procedures have been simplified for smaller and medium-sized photovoltaic systems (between 1 MW and 12 MW), and rooftop photovoltaic and thermal systems are exempted from permitting – except for buildings in areas of significant historical value.
Wind projects can expand by up to 15% of their initial size without renewed authorisations, and projects smaller than 50 MW and that do not change the area occupied are not required to prepare new environment impact assessments.
Floating photovoltaic projects in quarries, mines, and industrial areas zoned as “suitable areas” for solar development are exempt from full environmental impact assessments and have fast-track authorisation, significantly shortening approval timelines and helping to develop previously underused sites.
Source: (OECD, 2025[1])
Streamlining and integrating permitting processes—particularly by consolidating environmental authorisation regimes into a single, transparent framework—would help reduce administrative burdens and shorten approval times. While establishing a fully centralised authority may not be feasible within Italy’s constitutional framework, a coordinating body could play a valuable role in supporting applicants, sharing information, identifying procedural bottlenecks, and facilitating inter-institutional cooperation. Italy has adopted a single platform to ensure the once-only principle and streamline permitting procedures. The ‘SUER’ platform implementing the “once-only” principle and streamlining permitting procedures was legislated over 2021 to 2024. It is managed by the state-owned energy services operator and provides a central entry point for applications and to track progress. However, it is yet to be fully operational. Standardising methodologies for environmental and landscape assessments and expanding the use of digital tools, such as GIS-based cumulative impact analyses, would further increase predictability, strengthen administrative capacity, and reduce the likelihood of legal appeals.
3.2.2. Investing in electricity transmission
Higher demand for energy, more volatile demand and the rising share of electricity generated by solar and wind require a major upgrade of the capacity of the electricity grid and cross-border connections. Lack of connection capacity halts investments in renewable capacity and in energy-consuming activities, contributing to higher energy prices and more fragile energy supply. Much of Italy’s solar and wind generation potential is in the South and the Islands, creating congestion where energy enters the transmission system, while the greatest demand is over 1000 kilometres to the north, especially where new IT facilities are congesting the grid where energy exits the transmission system. The historical split of the electricity market into seven geographical areas limited inter-regional connections, leading to congestion. Wind and solar generation require shifting from an approach based on large generation facilities supplying dispersed users, to both generation and users being dispersed and with flows potentially in two directions – by mid-2025 Italy had over 1.4 million “prosumers”. This requires significant investments in distribution networks, and in physical and operational infrastructure. Adding to these investment pressures are ageing infrastructure and the effects of more extreme weather on infrastructure.
Italy has significant investment and reform plans to strengthen its energy transmission and distribution system and cross-border connections (Figure 3.6, Panel A, and Box 3.2), but the construction backlog has become a barrier to developing new generation. The national electricity transmission operator, Terna, is responsible for grid connections. Requests to connect new renewable generation reached 350 GW by mid-2025, five times the government’s 2030 renewables investment target. These requests were largely in southern regions, with almost half for solar connections, while 109 GW was for onshore wind and 89 GW for offshore wind, with many projects stalled in approval or due to changing investor priorities. Grid connections are slow and costly, at about EUR 150 000 to EUR 300 000 per project (OECD, 2025[1]), compared with the typical cost of EUR 550 000 to EUR 700 000 per MW of capacity for a utility-scale solar project of 2 MW to 5 MW capacity. This creates barriers especially for smaller producers and energy cooperatives. Alongside the connection requests for new renewable generation, Terna’s 2025 10-year development plan expects energy exchange between regions to increase from 16 GW to 39 GW by 2030. Achieving this investment, while maintaining network charges at relatively modest levels (Figure 3.6, Panel B), will be central to improving energy security and cost competitiveness.
An important step for upgrading the transmission and distribution system is reprioritising connection projects. Requests had been prioritised on a first-come-first served basis. A decree published in January 2026 annuls connection requests for generation projects that have not been authorised or validated, eliminating connection requests for inactive projects, and divides Italy into 76 micro-regions to coordinate connections within each territory. These measures can enable the approval of connection projects that coordinate with and contribute to broader transmission and distribution network investments, rather than when the request was made. Complementing these reforms are targeted measures to accelerate connections for large users, such as data centres. It will be important to ensure that effective transition or legal arrangements are in place to avoid projects that had previously been partly approved but are cancelled by the reform making legal appeals that block the reform.
Note: Panel A: Figure shows additions to grid capacity by projected by national transmission system operators in their ten-year plans relative to expected growth in photovoltaic generation (SolarPower Europe (2023). EU Market Outlook for Solar Power 2023-2027.
Source: Cremona, E., & Rosslowe, C. (2024). Putting the mission in transmission: Grids for Europe’s energy transition. Eurostat (nrg_pc_204_c).
As urgent connection demands are addressed, progressively shifting to a more anticipative strategy to developing the transmission and distribution grid would provide greater certainty and reduce costs for generation capacity investments. Anticipating planning and regulatory approvals to develop connection capacity into areas prioritised for generation investments, building on Terna’s decennial national transmission development plan, would reduce uncertainty and streamline planning and approval processes. The 2025 ten-year plan integrates territorial planning, which can help direct investments, for example, towards former brownfield sites such as disused industrial areas, avoiding the more contentious investment projects, such as in agricultural areas. This anticipatory approach will require making detailed information on infrastructure development plans, agreed with regional and municipal authorities, available to investors.
As it does for generation projects, Italy’s multi-layered governance complicates the various authorisations required for connection projects, slowing major projects especially. Transmission and distribution plans are managed and coordinated at the national level, with the transmission plan approved by Ministry of Environment and Energy Security and the distribution plans assessed by ARERA. Once the biennial national transmission grid development plan has been prepared, it undergoes a strategic and environmental assessment before implementation. Individual projects then require environmental impact assessments. Until the overall plan’s environmental assessment is complete, individual projects cannot start, leading to larger transmission projects taking up to eight years to build. While permitting for transmission projects remains the responsibility of the national government, municipalities’ involvement can also slow and fragment the approval processes, as they influence siting decisions but, for example, their plans may be outdated with respect to national and regional strategies, or setback rules can vary between municipalities, leading to delays. Developing harmonised guidance for municipalities could accelerate and align approval processes across the multiple municipalities involved in a transmission project. The new PAI (Piattaforma delle Aree Idonee, ‘suitable area platform’) digital tool, which assembles cartographic data regarding zones for renewable energy development, is helpful in this regard. Updating and aligning plans of the different levels of government, and ensuring local and regional governments’ spatial plans include accurate information about substation locations and planned upgrading to infrastructure, could accelerate the approval process. Box 3.4 outlines some approaches in other decentralised countries to accelerating renewables investments.
Renewable generation development in decentralised countries, such as Australia, Germany or Spain, tends to be structured around a national vision for generation and transmission development framed in national policy goals and incentives, with subnational authorities – regions or states – responsible for most detailed planning and approval arrangements. Coordination mechanisms are used to align subnational planning with national objectives, for example by jointly agreeing on dedicated zones. Anticipating planning approvals, ahead of specific project proposals, can reduce project times while maintaining environmental and other safeguards. Coordination mechanisms can be implemented as in the form of formal bodies that involve multiple government bodies, meet regularly, and, in some cases, assume planning authority from subnational governments and streamline rules and processes for investment approval.
Source: (IEA, 2023[18]) (Banet and Donati, 2024[22])
3.2.3. Expanding energy storage and back-up capacity to ensure stability
Increasing the role of renewable electricity generation in overall supply requires ensuring adequate storage and back-up supply capacity to balance supply and demand, including during poor weather conditions such as cold and windless winter evenings. Solar and wind generation responds to natural conditions (sun and wind) rather than to demand, requiring significant storage capacity to meet demand. For example, generation capacity is expected to fall 8 GW below a projected peak load of 62 GW in 2028, and 13 GW below the peak load of 67 GW in 2033. In addition, greater solar generation, as a direct current flow rather a spinning turbine driving a generator, reduces the physical inertia in the electricity supply system, which works to stabilise volatility in demand and supply conditions. Addressing the intermittency challenge of renewables entails developing large scale storage, improving the grid’s capacity to balance demand and supply across distances, developing ‘smart grid’ technologies to raise its efficiency and manage demand including through fast battery systems to provide synthetic inertia, and by maintaining flexible back-up generation capacity by maintaining legacy plants.
Italy is making important progress in developing electricity storage, supported by rapid falls in costs. By August 2025, 17.3 GWh of electricity storage had been installed, 55% more than a year earlier. This is equivalent to 7.1 GW of supply capacity and could supply 97 500 households for 24 hours, based on annual average household consumption. Italy has the largest pumped-based hydroelectric storage capacity in Europe, at 7.6 GW of capacity, and is investing to better use this resource and raise this capacity to 8 GW. Small-scale storage capacity, often associated with solar generation in homes and small businesses, is expected to reach 4 GW by 2030. Achieving the government’s objective of 22.5 GW of storage capacity by 2030 will be important as renewables’ share of generation capacity increases.
An innovative regulatory framework is helping to develop grid-connected large-scale battery-based storage and investment plans are surging. The 2030 strategy foresees this capacity rising to 11 GW. Italy’s ‘MACSE’ (Meccanismo di Approvvigionamento della Capacità di Stoccaggio Elettrico) regulatory approach to energy storage treats it as part of its energy grid infrastructure, unlike in many OECD countries where it is treated similarly to energy generators. The typical, longer-standing approach to encouraging storage investments have been through auctions for supply projects for short-term capacity with returns linked to spot market price movements. Italy’s framework has developed national auctions to provide storage capacity renumerated through long-term revenue contracts. These started in 2025. The first auctions provided for 15-year, indexed revenue contracts managed by the transmission entity, Terna. These induced large volumes of bids at low prices from investors, largely in developing battery storage located close to renewables generation in southern regions. 50 GW of the total capacity are planned to be auctioned through the latter mechanism by 2030. Ensuring that these storage projects can be implemented, cost effectively and as scheduled, will require addressing permitting and authorisation issues similar to those discussed above in relation to renewables capacity.
Reserve, back-up and redundant generation capacity complement solar and wind generation. Italy’s 2030 electricity strategy sees conventional gas plants continuing to supply up to 27.5% of electricity in 2030. This capacity is financed through annual auctions of contracts to provide supply during peak demand periods, with supply bids open to all technologies, including renewables and storage, and the latter have won a growing share of these auctions. Achieving the ambition of net-zero electricity generation by the late 2030s will require sufficient renewable energy generation and storage that gas-fired generation is only called in exceptional cases rather than as a recurrent part of the energy supply mix. Pricing of conventional generation back-up capacity, given their long duration, will need to avoid encouraging excessive investments in conventional generators with the risk of stranded assets and ongoing payment obligations to the gas-fuelled generators.
Italy is pursuing measures to address the effects of climate change and increased security threats to energy supply, underscoring the importance of accelerating grid investment plans. Italy has developed a clear set of emergency response procedures for electricity supply disruptions, and various risk scenarios have been outlined in its Risk Preparedness Plan, including cyber-attacks, weather- and climate-related events, and physical attacks on electricity infrastructure. Accelerating planned grid maintenance and strengthening projects will add security. Investments are being made to prevent cyberattacks. Strengthening the national plan and response strategy to a large-scale event that affects multiple regions simultaneously could limit the damage of such events. Currently, a regional cooperation approach is taken, but a large-scale event may require national-level responses.
3.2.4. Supporting electrification of transport, buildings and industry
The electrification of the Italian economy and switch away from direct use of fossil fuels in transport, homes and commercial buildings, and industry is central to addressing energy costs and security. It lags other major economies, and after accelerating with the surge in energy prices in 2022 and various subsidy schemes (Figure 3.1, Panel C), slowed in 2024 and the first half of 2025 as prices stabilised and support measures were withdrawn. Progress in reducing emissions from transport and buildings have lagged the broader economy or the pace required to achieve Italy’s greenhouse gas reduction commitments. Achieving the National Energy and Climate Plan goals for renewables’ share of overall energy consumption will require a strong rise in electrification, alongside increased use of non-fossil fuel energies for contexts that are hard to electrify.
The new Emission Trading System (‘ETS2’) gives a new impetus to electrification. It is set to extend from 2028 emission prices to fossil fuels used in buildings, road transport and non-energy intensive industries, such as small-scale district and industrial heating and SME emissions, raising the cost of these fuels. (The first emissions trading scheme already applies to electricity generation among other sectors, and is estimated to have fully passed through to electricity prices.) ETS2 will narrow the cost competitiveness gap of electricity-based devices, such as heat pumps or electric cars, relative to fossil fuel-based technologies. Currently the difference in taxation, levies and fees between electricity and gas is wider than the average of EU countries and limits the savings, for example, for a household replacing its gas boiler with a heat pump. If Italy fully implements ETS2, with national co-financing, Italy will have access to around EUR 9 billion (0.4% of 2026 GDP) over 2026 to 2032 through the Social Climate Fund. These funds can limit the distributional effects of higher fossil fuel costs by helping cash-constrained households and firms electrify their energy use, for example by funding insulation and energy renovation of social housing, or investing in electric vehicles and machinery to be leased to SMEs.
Sector-specific actions can help accelerate electrification or develop sustainable alternatives:
In transport, despite the growth of electric vehicles, their take-up by both the private sector and public transport operators lags other EU countries. Car ownership rates are the third highest across OECD countries, in part reflecting significant public transport investment needs. The car fleet is older than in most OECD EU countries. Support for electric vehicles has varied and their high upfront cost is a barrier for low-income households. Social leasing can help low-income households change their vehicles. One brake for all users is the lack of charging infrastructure, alongside high electricity prices. A public observatory is improving transparency and comparability of charging prices. Developing the network of chargers, including across motorways, is held back by complex regulatory processes. Aligning approval requirements across municipalities and allowing investors to access longer-term land concessions would help develop commercial charging points.
Public buildings are often old and energy inefficient, and administrations lack the capital and human resources to undertake deep renovations. Financing arrangements need to address the high upfront costs of renovations and long timeframe of savings in a fiscally-constrained context. Italy’s fragmented governance weakens procurement scale for electrification investments, such as heat pumps or photovoltaic generation and storage systems. Dedicated and adequately resourced national agencies with multi-year mandates can provide the technical and implementation capacity for energy efficiency and electrification renovations of public buildings even when they are the responsibility of different levels of government, as countries including Korea and France have pursued (OECD, 2022[14]). Dedicated financing agencies can help public agencies fund the renovations, financed through the energy cost savings and, where justified through economic and social considerations, subsidies. Estimating the lifetime costs of different energy sources, accounting for higher fossil fuel prices, can help ensure the economic case for investing in electrification.
Substantial support for private housing and commercial building renovations, including the highly generous ‘Superbonus’ tax credit scheme (discussed in Chapter 1), has had limited effects and was not well targeted towards the least efficient and most fossil-fuel intensive buildings. While overall heating efficiency is near the EU average, improvements were limited between 2010 and 2023 (Figure 3.7). Recent public measures better encourage investments in heat pumps, allowing households to shift from gas to electricity for heating. For household and small business consumers, electricity is taxed more than natural gas, reducing the advantage of switching. ETS2 will help to close this gap. The end of reduced tax benefits for gas-fuelled boilers will also help. Limited fiscal resources would be more effective if provided though longer-term support mechanisms targeted towards low-income households and renters, rather than annually renewed measures.
In industry, the cost and technical capacity of electrification can limit the shift away from gas. Still, Italy has achieved important progress in energy-intensive sectors, such as the shift of 89% of steel production to electric arc furnaces by 2024. Hydrogen, supported by the national hydrogen strategy and development of renewable hydrogen through ‘hydrogen valleys’, may provide solutions for replacing natural gas where electrification is not feasible, such as in ceramics and glass manufacturing. However, it will be important to ensure that subsidised alternatives to electrification do not delay electrification where that is economically feasible, such as for low-temperature heating.
Household heating consumption per m2 (adjusted for differences in climate)
Source: Odyssee database.
3.3.1. Pricing to encourage investment in a secure and efficient energy system
Market design should play a key role in ensuring appropriate price signals in the electricity market, ensuring continuity of supply, avoiding excessive price fluctuations and driving an efficient energy mix. Pricing in the electricity market has long been challenging due to limited contestability in some areas, the dominant position of the legacy operators, information asymmetries, and competing policy goals, including lowering costs and ensuring access, while eliminating greenhouse gas emissions. Renewable generation without adequate storage complicates this given that production generally cannot respond to short-term price signals. During renewables’ limited production hours, supply can be high, leading to low market prices, meaning that longer-term positive priced contracts, such as the contracts for difference being expanded in Italy, are necessary for investments to be viable.
Ongoing reforms to wholesale pricing are both developing finer price signals across time and geography, and providing greater certainty to investors. In 2025, the ‘TIDE’ (Integrated Text on Electricity Dispatching) reforms shifted balance settlements from hourly to 15-minute blocks, part of broader European harmonisation that can reduce balancing costs especially during peak demand periods. From 2026, Italy shifted wholesale electricity pricing from a uniform national price (Prezzo Unico Nazionale, PUN) to pricing in each of seven regions. Meanwhile, procurement of ancillary services (largely reserve capacity to build inertia in the system, correcting frequency deviations or maintain grid voltage levels) is on a market basis. These shifts can improve the efficiency of investment decisions throughout the energy production, distribution and use process. For example, they can encourage large users to locate near the growing, low-cost renewable generation in the South and the Islands, and in regions with more robust transmission and distribution grids, reducing the pressure on constrained transmission capacity. Regional pricing, by creating explicit and variable prices on grid congestion, can encourage investments in grid capacity. Electricity supplied through bilateral ‘over-the-counter’ contracts has declined to 18% of the total in 2024. 72% of electricity is now supplied via the day-ahead spot market and 12% on the intraday market. However, more pricing zones and more frequent price settlement may increase price volatility as prices will better reflect mismatches between supply and demand, and will place new technical and IT demands on grid operators and other market participants. Terna’s 10-year investment plan anticipates these risks and envisages stronger inter-regional and cross-border connectivity to manage these flows and potential tensions. In the meantime, to manage these risks, regulators can undertake robust communication and ensure transparency among market participants, remaining vigilant for stresses. Sustaining backstop systems and reserves in case systemic issues emerge.
As the pricing system develops and producers and consumers become more familiar with divergent regional prices, Italy could consider developing dynamic bidding zones to adjust regional pricing borders as grid conditions and renewables expand and evolve. These can address persistent price gaps or market power concentrating among large producers or consumers. A further step for the longer-term would be to follow OECD countries as diverse as Chile, New Zealand, the United Kingdom, Mexico and Brazil in developing nodal pricing, whereby wholesale electricity prices are set by geographical location on the grid to reflect both the cost of producing the energy, the transmission cost of supply to that location and demand in that location. This internalises transmission congestion and losses within an area, rather than just between areas, reducing the need for explicit mechanisms to shift supply and manage congestion. Developing nodal pricing will require significant institutional and practical reforms, and the dominant position of Italy’s legacy electricity producers will create challenges for ensuring markets are competitive. In the longer-term, these challenges are surmountable and nodal pricing can further strengthen price signals and investment efficiency (Eicke and Schittekatte, 2022[19]; Antonopoulos et al., 2020[6]).
The TIDE reforms permit negative pricing on the day-ahead market and this may become more common in regions with high renewable generation capacity and constrained demand, such as the Islands. Well managed, the TIDE reforms can improve the potential returns for investors in services, such as storage or in back-up or callable option capacity and maintaining reserves of fossil-fuel generators and interconnections for periods when production falls short, supporting energy security. At the same time, predictable and stable prices encourage long-term investment. Pricing in the day-ahead market can be distorted by large suppliers’ market power and the withholding of supply capacity, requiring ongoing vigilance and reactivity by the regulator.
Reforms since the 2022 energy price crisis have sought to develop longer-term contracts with more stable prices than in the short-term or spot market. Electricity supplied under publicly-supported pricing arrangements made up 17.1% of total consumption in 2024, at a cost of EUR 9.3 billion, 27% more than in 2023. Much of these costs are the legacy of earlier support measures which provided a premium on energy production to encourage investments. These public measures can support stability and long-term investment, but may also dull or distort price signals. The government is seeking to shift its approach to develop support mechanisms that complement market-based power-purchase agreements and renewable energy auctions and that evolve with the energy system. Calls for tender for 20-year government production subsidies in the form of two-way contracts-for-difference for solar generation have drawn high volumes of bids. Under these contracts, the government guarantees producers a minimum price in return for price caps limiting producers’ revenues, with the government receiving revenues above the agreed cap. As discussed in the OECD Economic Survey of the EU (2025[10]), this may reduce incentives for producers to enter commercial power purchase agreements with consumers and exposes the public sector to risk. As renewable capacity grows and prices fall below the agreed price more often, the financial burden on the government will rise (Heussaff and Zachmann, 2024[4]). As the markets develop and deepen and market participants’ experience with the various instruments grows, curtailing the role of subsidised instruments such as contracts-for-difference in favour of unsubsidised agreements can reduce fiscal risks while sustaining investment and lowering prices. In practice this may take some time to develop – for example, even in the German market, liquidity for contracts longer than one year is low and minimal for contracts beyond three years (ACER, 2024[3]).
3.3.2. Improving support for vulnerable consumers and encouraging energy savings
For consumers, investments and reforms over recent years have created the environment for competitive pricing. There are many participants in the electricity resale market. Smart meters, which allow dynamic pricing, have been broadly installed. However, retail markets could become more dynamic. The historical incumbent operator remains dominant across the market and fewer consumers have shifted operators using, for example, web platforms, than in comparable markets (IEA, 2023[20]). About half of household contracts are market-based regulated price contracts, a lower proportion than in other countries. More dynamic pricing signals can encourage households to economise energy during periods when supplies are scarcer and shift demand to lower price periods. To develop contestability in the retail market, giving retailers greater access to user billing and consumption data, or encouraging consumers to use accessible platforms to compare different operators such as ilportaleofferte.it, would reduce the incumbent operator’s advantage, help innovative suppliers develop customised products, and reduce consumers’ energy costs.
Price signals tend to have a relatively larger impact on lower-income households’ energy use, and large price increases can harm lower-income and rural households’ well-being (Faiella and Lavecchia, 2021[23]). Cash constrained households may be unable to make investments that would reduce their energy needs. Italy implemented the largest energy price support mechanisms of major OECD countries over 2021-2024. Among measures directly addressing energy costs, almost half were in the form of price support (OECD, 2024[9]). In early 2025 as gas and electricity prices rose again, measures to reduce VAT and system charges worth an additional EUR 3 billion (0.13% of GDP) were announced, with the benefits split between smaller businesses and households. Measures included reducing the VAT rate on natural gas for civil, industrial and transport uses from 21% to 5%. The extended Bonus Energia, introduced in 2021, also provide grant incentives for SMEs investing in renewable energy systems, and for households charging electric cars overnight. These were expected to provide approximately eight million households with average annual savings of EUR 300 on electricity bills and EUR 200 on gas bills. Meanwhile, very large tax credits (up to 110% of costs) worth EUR 220 billion or about 3% of GDP per year over 2021-2024 were provided for household energy efficiency renovations, although it benefited only 4% of housing units. Very little of these untargeted supports benefited poorer households and Italy had among the lowest shares of household reporting improving energy efficiency in the five years to 2023 (Carfora, Minervini and Scandurra, 2025[24]). Shifting to well-targeted income support for vulnerable households, potentially linking to measures to improve the energy efficiency of their homes, would more effectively support vulnerable households while limiting fiscal costs and better encouraging energy efficiency (Hemmerlé et al., 2023[10]).
Electricity charges for the largest volume consumers, such as large industrial users, are about 45% of those for the smallest volume category. The difference reflects all components of the final electricity tariff, including the cost of energy supply, network charges, and many of the taxes and levies imposed. While lower tariffs are common across OECD countries, and reflect in part lower supply costs for large consumers and their greater negotiating power, the difference is also due to higher per-unit taxes, VAT rates, and contributions to public service obligations for smaller consumers. This difference can be justified by the need to ensure large, energy-intensive businesses remain competitive in the global market. Still, the difference in prices paid by larger and smaller consumers in Italy is larger than in most countries – it compares with around 61% on average across EU countries. These discounts can reduce the incentive for large consumers to improve their energy efficiency, while any cross-subsidy from smaller consumers, including smaller businesses, harms the latter’s competitiveness and raises their cost structure. In the longer-term, reducing prices across the energy system, notably by efficiently developing renewable energy production and electrification, will reduce the role of this discount. In the meantime, shifting part of the expenditure on reduced tax rates or other reductions to supporting firms’ investments in energy efficiency can better secure their competitiveness and Italy’s energy security.
Fossil fuels have provided around three-quarters of Italy’s total energy supply on average since the mid-2010s, only slightly less than prior to the global financial crisis. Lack of domestic resources means over 92% of fossil fuel supplies are imported (Figure 3.8). Use of coal in particular, as well as crude oil, fell over the decade from the mid-2010s, although the closure of the last coal plants has been suspended given uncertain energy import reliability. In contrast, natural gas use in 2023 was near the levels of the mid-2010s, despite the large rise in natural gas prices in 2022. Italy has been among the OECD countries which achieved the largest shift in fossil fuel supply sources in 2022 and 2023, replacing natural gas piped from Russia by piped and liquified natural gas from other suppliers. The share of natural gas sourced from Russia fell from 40% in 2021 to 5% in 2023, although gas imports from Russia rose in 2024 and the first months of 2025, due to some imported liquified natural gas being originally extracted in Russia.
Net energy imports as a share of total energy supply
Source: OECD IEA World summary energy balances.
Italy will need to ensure a balanced mix of generation capacity across energy sources as part of ensuring stable supply, even as the share generated by renewables increases. While pricing mechanisms may help to achieve this, the government will likely need to play a role in ensuring that an appropriate mix of capacity is in place, including through appropriate long-term contracts with producers maintaining reserve capacity. This mix is likely to include a continued but limited role for natural gas, focussed on meeting peak demand or when periods of stress for lower cost supply. Development of biogas and consideration of nuclear power may help in this context.
To improve the security and lower the cost of natural gas supply for electricity generation and other uses, Italy is developing alternative suppliers and supply routes for natural gas and expanding liquid natural gas (LNG) import facilities. LNG import and regassification capacity is being increased from 16.1 billion cubic metres (bcm) in 2022 to 28 bcm in early 2026 (the equivalent of 45% of 2023 gas demand), with 10 bcm provided through floating plants. These investments develop Italy’s role in the European energy network as a hub supplying central European economies. Developing this infrastructure is helping to reduce the price premium of liquified natural gas over pipeline-delivered gas. In 2024-2025 this premium fell from as much as 100% to between 15% and 30%, although it can be significantly greater when supply chains are disrupted or demand high. Expanding LNG import and regassification facilities is costly but can reduce the difference between wholesale prices in Italy and those near other major European import hubs, and can serve as an insurance against uncertain supplies. At the same time, national energy and climate strategies provide for a progressively declining role for natural gas in the energy mix of Italy and of other European countries supplied through Italy’s import facilities. Pursuing infrastructure investment plans, while remaining vigilant against over-investment in capacity or renewed reliance on one energy type or source, will be important for ensuring these investments are viable, contain energy costs, and support the competitiveness of the Italian economy (Draghi, 2024[2]). Complementing this, transport and import capacity constraints and risks with international natural gas supplies underscore the importance of raising the share of domestic sources in Italy’s energy mix.
Contributing to efforts to diversify Italy’s energy sources, the Mattei Plan is developing energy transmission infrastructure and production facilities and deepening cooperation with African countries. The Plan’s initial funding of EUR 5.5 billion for a five-year horizon from 2025 is modest. It is largely sourced from the Italian Climate Fund plus resources from the cooperation budget. Additional resources are being mobilised through multilateral development banks and cooperation with other EU states, and in conjunction with private finance. The 2025 annual report describes 33 projects underway, many of which build on pre-existing initiatives (Presidencey of the Council of Ministers, 2025[5]), rising to 60 by the end of 2025, of which 14 focused on energy. The Plan’s goals of scaling-up and diversifying energy sources and types are welcome and merit pursuing. Making the most of the Plan’s funds and ensuring it supports large-scale diversification of energy types and sources, including those required for the transition to low-emission energies, will require ensuring priority is given to projects for renewable generation and connections. The Prime Minister chairs the Plan’s steering committee, and a task force coordinates activities. Achieving the Plan’s objectives will require that, beyond ensuring effective coordination among implementing bodies, the funded projects and their outcomes are subject to robust oversight.
Development of biofuels from waste could help boost energy security, lower costs and reduce net emissions. Italy has the fourth largest biogas production capacity in the world, making use of agricultural biomass, livestock manure, organic waste and agro-industrial by-products. Historically this has largely been directed to electricity generation. Nevertheless, biogas makes up less than 4% of overall gas use. The potential is significant, and the government targets large expansion in capacity up to 2030 (Italian Ministry of the Environment and Energy Security, 2024[21]). Italy’s biogas development has been strongly linked to support measures and slowed when support was lowered after 2012, (Benato and Macor, 2019[7]). The National Recovery and Resilience Plan (NRRP) provides significant investment incentives, with the goal of more than doubling biogas production from waste between 2023 and 2030. Italy’s ‘Biogas Done Right’ concept uses anaerobic digestion ‘reactors’ to generate gas while breaking down waste matter from food production: these reduces greenhouse gas emissions – for example, capturing the methane generated by animal manure generates energy. The energy generated can be sufficient to reimburse the investment costs even before accounting for carbon credit benefits. The value generated through biogas can help Italy address long-standing challenges in the treatment of physical waste, especially in the South (discussed in past OECD Economic Surveys).
The production of biomethane from fermenting organic waste is growing but dependent on government support. In Italy, most biomethane supplies the domestic gas grid, primarily for transport and heating, and Italy has been leading across OECD countries in the use of biomethane for transport. Biomethane production capacity is supported through a grant of up to 40% of the construction costs incurred with a support tariff providing an operating incentive. Various feed-in tariff arrangements are to be phased out by 2027, replaced by a Guaranteed Minimum Price or Contracts-for-Difference, which can reduce the fiscal cost of subsidies while providing investors with stable revenue projections. This scheme expanded the support to sectors using biomethane, including transport (including maritime), industrial and residential users. Support was allocated through public tenders building on REDII and REDIII regulations. Requirements that transport operators blend biofuel with fossil fuels has the effect of financing biomethane production. Converting existing biogas plants to biomethane can extend the plants’ life and improve their revenues. Developing larger-scale plants that combine supplies from multiple biogas plants would reduce production costs, but requires greater coordination in a relatively fragmented sector. As biomethane capacity develops and the production market deepens and matures, Italy will be able to reduce the explicit public support and allow a stronger role for market incentives to encourage investment (Dechezleprêtre et al., 2024[25]).
Italy is considering returning to developing nuclear energy, after it closed its reactors in the 1980s and early 1990s and national referenda in 1987 and 2011 rejected allowing nuclear power development. Nuclear energy has been assessed to offer stable, low-carbon and cost-competitive electricity in several OECD countries. Legislation went to parliament in 2025 to allow the government to regulate nuclear power, create a safety authority, strengthen research and skills, and implement an information campaign. Policy discussion focuses on the plans for small modular reactors, which are also being considered in several other OECD countries, such as Estonia. However, this technology remains unproved at scale. Its levelised costs are currently higher than conventional nuclear power reactors and are projected to remain so until the 2030s, while the cost of new renewable sources can be one-third to one-half of nuclear plants (IEA, 2025[12]). Nuclear power can contribute to improving energy security, and nuclear electricity production is more stable over time compared to intermittent renewables while also being low-carbon, although concerns involve high-impact negative risks in case of severe nuclear accidents as well as waste storage. It is important for nuclear projects, as well as any other energy project, to be underpinned by transparent and comprehensive life-cycle cost-benefit analyses that, inter alia, account for the cost of constructing power plants, storing nuclear waste and decommissioning disused power plants. Such analysis must also consider the (direct and indirect) subsidies granted through the entire production cycle.
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