Italy’s preliminary agreement with the European Commission on measures to limit the effect of high gas costs on electricity prices could change trading conditions across Southeast Europe. The intervention could affect exporters, generators and lenders whose revenue assumptions rely on Italy maintaining a price premium over neighbouring electricity markets. The issue is the potential for policy to change the spread between Italian and regional power prices.
Italy’s proposed gas-cost measures
Rome and Brussels reached a preliminary agreement on October 16 on temporary measures intended to reduce the impact of high gas costs on electricity prices for households and businesses. Under the expected mechanism, eligible gas-fired generators would receive compensation for part of their elevated fuel costs when gas prices exceed a defined threshold. That support would reduce the marginal cost otherwise feeding into wholesale electricity prices.
Italy still has to formally notify the measures under EU state-aid rules, and regulatory decisions will determine the final technical implementation. The measure’s design will therefore affect its eventual impact. Italy and the European Commission have said it must preserve the EU internal market and minimise competitive distortions.
Italy is one of Europe’s large electricity markets most dependent on gas, which often sets its marginal power price. High gas costs have historically contributed to substantial price premiums in Italy compared with markets elsewhere in Europe and Southeast Europe. The proposed intervention is aimed at compressing the gas-driven component of that price.
Potential effects on cross-border trade and hedging
That premium can add value for neighbouring exporters. Power generated in Montenegro, Slovenia, Greece and the wider Balkan region may become more valuable when Italian prices rise far enough above domestic or regional prices to justify cross-border exports. Measures that reduce Italy’s gas-driven electricity price could therefore alter export economics on the other side of the border.
The immediate risk is not that electricity exports will disappear, but that the Italian premium becomes less predictable. A generator may have forecast merchant revenue on the assumption that Italian prices would remain structurally higher than those in neighbouring markets because gas-fired generation continued to set the marginal price. If the intervention narrows the premium during periods of expensive gas, the export value of the same MWh could fall.
This matters for projects that rely partly on merchant revenue after fixed-price contracts expire, as well as for traders with cross-border positions between Italy and Southeast European markets. Such a trade involves forecasts for the exporting-market price and the Italian price, alongside the availability of cross-border capacity and the cost of securing it. An intervention affecting only the Italian market changes the relationship between those factors.
The resulting exposure is policy-driven basis risk. A hedge can perform as its contract specifies while failing to offset the physical position as intended. For example, a Southeast European generator selling power may hedge some future revenue against an Italian electricity benchmark, but Italian prices could then be suppressed by the policy mechanism while the generator’s domestic market remains exposed to fuel, scarcity and balancing conditions.
In that case, the historical correlation between the markets may weaken, leaving the hedge linked to the wrong price relationship. Cross-border transmission rights do not remove this risk. They can protect or monetise elements of congestion exposure, but cannot ensure that the spread remains economically attractive.
Implications for Southeast European markets and investment
For Montenegro, the issue is particularly relevant because its submarine link with Italy gives direct access to the Italian market. The cable has strengthened Montenegro’s strategic position as a transit and export market, allowing generators and traders to compare opportunities across domestic, regional and Italian prices. If Italian prices are structurally lower during high-gas periods, the economics of westward exports could change.
The same principle applies to Greece and Slovenia, which are both directly connected to Italy. It also has indirect relevance for Croatia and other Balkan markets, since power flows respond to relative regional prices rather than national borders alone. Reduced demand from Italy could affect where regional surplus generation ultimately goes.
The potential effects also reach project finance. Banks financing merchant or partially merchant renewable assets commonly model future power prices using long-term assumptions about market relationships. A project in Southeast Europe may derive part of its expected value from the ability to export to higher-priced markets, but intervention that changes those relationships could lead lenders to put less weight on historical spreads.
Lenders may instead use more conservative assumptions for cross-border merchant revenue, increasing the value of fixed-price contracts, floor structures and other forms of revenue protection. The change could also affect acquisitions. Infrastructure investors often value operating renewable portfolios using forecasts that extend 20 years or more, including assumptions about electricity-market coupling and price convergence.
A policy that allows a major neighbouring market to temporarily change the relationship between gas and electricity prices adds a variable to those valuation models. Future due diligence may therefore need to include policy-adjusted power-price scenarios as well as conventional commodity forecasts.
Implementation details and market exposure
Electricity traders face a more immediate challenge if Italian spot prices fall relative to expectations after forward positions have already been established. Portfolios could then have mismatches between physical and financial exposure. Collateral requirements may amplify the impact: a hedge moving sharply against a trader can require cash margin even if the physical electricity position ultimately generates offsetting value.
As a result, policy-driven changes in cross-border spreads can create a liquidity issue as well as a pricing issue. The mechanism could also affect generation behaviour in Italy. Compensating gas-fired plants for part of their fuel costs may change bidding economics and could make them more competitive against imports in certain periods.
The precise effect will depend on the final design, including the activation threshold, eligible volumes, funding structure and safeguards against overcompensation. Those details remain important while technical implementation is pending. The measure is therefore an emerging risk, not an established new price regime.
For Southeast Europe, Italian power prices can no longer be modelled solely as a mechanical function of gas, carbon and power-system fundamentals. Policy has become another variable in the spread. Exporters, traders and banks must consider not only whether Italian prices will remain above Balkan prices, but whether that premium will remain available to the market or be subject to government intervention when it becomes politically unacceptable.
That distinction could affect how Southeast European export revenues are hedged, financed and valued.