My calculations on the kWh price: A legalized scam costing 15 billion annually?
"If the PUN were calibrated to the actual production costs of energy in Italy, prices would drop by 30% for households and businesses (and for the state)." With the help of AI, Bruno Campanino, a reader who wrote to us, conducted two calculations on how the price of one kWh is determined. He concluded it was a "legalized scam" by the STATE and EUROPE. So why "present nuclear energy as the solution to all problems or seek complex algorithms to reduce the PUN by just 1 or 2 cents per kWh in financial reports? What do you think? Am I wrong?" To write to us: info@vaielettrico.it.
Here are the details of his calculation based on official data from Terna and GSE.
How significant are renewables and how much does gas cost?
- Total gross/net domestic production is approximately 270 TWh per year.
Table of electricity production in Italy
Average reference data
Source/Category
Indicative annual TWh
Percentage of domestic production
Total renewables (hydro, solar, wind, bio, geothermal)
125–135 TWh
45%–49%
Thermal power (mainly natural gas)
130–140 TWh
48%–52%
Other sources (e.g., waste/remaining coal)
5–10 TWh
2%–3%
Comparison of marginal price and actual production cost
We analyze the proposed hypothetical scenario (out of a total of 270 TWh, 60% covered by gas turbines at 162 TWh and 40% covered by renewables at 108 TWh) by comparing the price determined by the marginal cost criterion (the theoretical PUN based solely on gas costs) with the actual weighted average price based on the real production costs of each energy source.
Gas turbine production cost (with gas at ~90 €/MWh)
1. Fuel cost (raw material)
Considering an average efficiency of combined cycle gas turbines (CCGT) of 55–60%, approximately 1.7–1.8 MWh of thermal gas is needed to produce 1 MWh of electricity.
With gas priced at 90 €/MWh, the cost of the raw material alone rises to about 153–162 €/MWh.
2. ETS costs (CO₂ emission allowances)
Approximately 0.35–0.40 tons of CO₂ per MWh of electricity. With stable emission allowances at around 65–75 €/ton, the CO₂ cost remains at 24–28 €/MWh.
3. Fixed and operational costs (O&M)
Around 10–15 €/MWh.
Comparison with renewable energy production costs
Unlike gas, renewable sources have no fuel costs or CO₂ quota fees, so the production cost is primarily determined by the depreciation of initial investment (CapEx) and maintenance costs (OpEx).
At these levels for gas, the cost of generating one MWh using gas-fired thermal power rises significantly, greatly widening the cost gap compared to renewable sources:
Energy source
Production cost (€/MWh)
Production cost (€/kWh)
Notes
Solar photovoltaic (utility-scale)
45–60
0,045–0,060
Highly competitive during sunny hours.
Wind (onshore)
40–55
0,040–0,055
One of the cheapest sources overall.
Hydropower (existing)
30–50
0,030–0,050
Historical plants with very low operating costs.
Gas turbine (combined cycle)
185–205
0,185–0,205
Depends on the prices of raw materials and CO₂.
The cost of generating 1 kWh of electricity using methane-fired turbogas plants is more than twice the average production cost of large-scale solar and wind plants. The main reason turbogas plants remain essential lies in their programmability and flexibility, which are crucial for balancing the electricity grid when sunlight and wind are unavailable.
Assumptions and reference costs (with gas at ~90 €/MWh)
Turbogas (60% of production / 162 TWh): estimated production cost at 195 €/MWh (central value of the range 185-205 €/MWh, including gas, CO₂, and O&M).
Renewables (40% of production / 108 TWh): weighted average production cost (solar, wind, hydro) estimated at around 50 €/MWh.
1. The PUN based on marginal price (electricity market rule)
In Italy’s and Europe’s electricity market (marginal pricing), the wholesale price (PUN) is not the average of the costs of all power plants, but rather is determined by the most expensive plant needed to meet the final unit of demand (the marginal plant).
In a scenario where 60% is covered by gas and 40% by renewables, for most of the day (especially when demand is high or solar power is not generating, such as at night), it is the gas plant that dictates the price.
Theoretical marginal PUN: Since gas sets the market price for all technologies when it is in use, the selling price paid for each MWh traded on the market aligns with the cost of the gas plant.
PUN value: 195 €/MWh (0.195 €/kWh).
Under this system, even the energy produced by renewables (which costs 50 €/MWh to generate) is “priced” in the market at the cost of gas (~195 €/MWh), resulting in substantial extra profits for renewable energy producers.
2. The PUN calculated by properly weighting production costs (weighted average)
If, instead, we imagine a system where energy is compensated exactly based on the weighted industrial production cost (cost-plus) according to actual quantities:
By substituting the values from the scenario:
Total generation cost:
Resulting weighted average price:
Summary comparison table
Parameter / Method
PUN at marginal price (current system)
PUN at weighted average cost (real/mixed)
Least expensive/cost-effective option
195 €/MWh (0,195 €/kWh)
137 €/MWh (0,137 €/kWh)
Who sets the price
The marginal cost of the last plant (gas)
The weighted average of all technologies
Economic impact on the system (out of 270 TWh)
~52.6 billion euros in theoretical wholesale costs
~37.0 billion euros in actual production costs
Difference / Margin
—
A theoretical savings of over 15 billion euros that, in the current market, is absorbed in the form of marginal returns/extra-profits.
For households and businesses: a huge impact
A 30% reduction in wholesale energy costs is by no means a minor detail:
Going from 0.195 €/kWh to 0.137 €/kWh means saving 58 euros per Megawatt-hour.
For an average household with an annual consumption of 2,700 kWh, this means saving around 150–160 euros per year just on the raw material cost (plus VAT and proportional taxes).
For a manufacturing company or industry that consumes gigawatt-hours, a 30% difference represents the dividing line between remaining competitive in the global market or being left out of it.
For States and markets: the issue of marginal rents
The 15 billion euros in discrepancy identified through the calculations represents a massive transfer of wealth.
In a marginal pricing system, these 15 billion euros do not go toward covering actual industrial production costs but instead become rent-seeking gains (extra-profits) for those who use renewable energy facilities with already amortized or very low fixed costs.
A mechanism that needs adjustment. But what is the alternative?
It is certainly true that renewables generally have lower production costs than gas. And it is true that the marginal price mechanism can generate submarginal returns for plants that operate at costs lower than those of the technology that sets the market price.
However, this premise does not imply that there are automatically 15 billion euros in extra profits.
The first problem is that it is assumed that gas determines the price for all energy produced, whereas the marginal price is set in each market segment and in different geographic areas. It is not the annual production mix that determines how many hours gas is marginal. For example, with high levels of solar and wind production, the price can drop significantly even when gas accounts for a significant portion of annual production.
Math works, but units of measurement don’t
The second issue is the comparison between different economic quantities. The 195 €/MWh for gas turbines is an estimate of the generation cost under specific gas and CO₂ price conditions. In contrast, the 50 €/MWh for renewables is an estimate of the average production cost, which also includes initial investment. These are not directly comparable quantities.
The third issue concerns the 15.66 billion euros. The mathematical calculation is correct if we assume that 60% of the energy costs 195 €/MWh, the remaining 40% costs 50 €/MWh, and all 270 TWh are compensated at 195 €/MWh. But this is a theoretical exercise, not a measure of the actual excess profits earned. To determine the latter figure, it would be necessary to know how much is actually sold in the spot market, at what price, through which contracts, and with what costs and burdens imposed on producers.
The marginal price coordinates demand and supply
There is finally a fundamental issue: the marginal price was not designed to compensate each plant at its average cost, but to coordinate demand and supply and ensure that the necessary energy is always produced. It is normal that during times of maximum stress on the grid, when blackout risks exist, the system is willing to pay more to the supplier who provides the additional capacity. This is a simple law of the market.
Expansion of renewables and decoupling from gas prices for a sustainable future
Therefore, it is legitimate to discuss whether this mechanism should be integrated or corrected, especially in a system where renewables are playing an increasingly important role. But an alternative based on the average production cost cannot be automatically considered more efficient, cheaper, and above all equally safe. At least not in a system with free competition among private producers. It is no coincidence that among the various options, the possibility of “nationalizing” gas turbine power plants is also being considered, as long as they remain essential for balancing the grid.
In summary, we agree with the argument that greater adoption of renewables can reduce the average energy cost and dependence on gas. We do not agree with the conclusion that the current system necessarily results in 15 billion euros in extra profits flowing to renewable producers. To prove this, real market data are needed, not just a simulation based on two average costs.
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