EU Rejects Italy's ETS-Based Power Price Reduction under the "Decreto Bollette"

What you need to know

• This alert examines the implications of the European Commission's Temporary State Aid Framework in Response to the Middle East Crisis, adopted on 29 April 2026, for the measures envisaged in Italy's "Decreto Bollette" (Decree-Law of 20 February 2026, converted into Law 10 April 2026 No 49. or the "Decree"), in particular the proposed neutralisation of EU ETS costs for gas-fired electricity generators.

• The Commission's Communication effectively sets conditions that are incompatible with the Decree, closing the door to a structural bypass of the ETS at national level and therefore leaving the current system in place.

• Article 6 of the Decree, which had attempted to neutralise such ETS costs, was subject to the approval by the EU and therefore will not come into force.

Background: High energy prices in Italy – the rationale for the Decreto Bollette

In Italy, wholesale electricity prices are set through a marginal pricing mechanism: on the day-ahead market, offers are ranked by cost and the price of the last unit needed to meet demand sets the clearing price for all transactions in that hour. Since gas-fired plants are the marginal technology in the majority of hours, the price of natural gas is the primary driver of Italian electricity costs (partially explaining the persistent gap with other EU Member States).

Against this backdrop, Article 6 of the Decree envisaged a mechanism to "neutralise" EU ETS allowance costs for gas-fired generators: producers would be reimbursed for their ETS compliance costs, with the cost recovered through a tariff component charged to all electricity consumers and gas-fired generators would be prompted to reflect such lowers cost base in the selling price of electricity produced by them. This structure was intended to be neutral for gas-fired generators (lower costs and lower revenues) but would have been material for renewable energy producers (because they would have lower revenues without lower costs) and for BESS owners (because they would have fewer trading opportunities as a result of the reduction of price spikes). Article 6 was expressly subject to prior authorisation by the European Commission under EU State aid rules

The Commission's response to the Middle East Crisis: The Temporary State Aid Framework

On 29 April 2026, the European Commission ("EC") adopted the Temporary State Aid Framework in Response to the Middle East Crisis ("METSAF Communication"), responding to the disruption caused by the closure of the Strait of Hormuz and the resulting spike in energy and commodity prices.

The METSAF Communication, whilst not formally addressed to Italy, effectively sets the parameters against which the Commission will assess the Decree.

The METSAF Communication enables Member States to provide targeted, temporary support to the most exposed sectors, including transport and energy-intensive industries, until 31 December 2026. At the same time, the EC emphasises that any temporary support must not undermine the clean energy transition and confirms the ETS as "fundamental" to energy security.

In particular, the EC accepts that Member States may consider temporary measures to mitigate high gas prices in electricity generation, including subsidising gas-fired power production fuel costs. However, any such measure requires a case-by-case assessment and must satisfy several cumulative conditions:

• is clearly defined and limited in time;
• is designed to prevent distortions of the internal market, ensuring no effects on the merit order and no restrictions on cross-border trade or electricity flows;
• preserves long-term investment signals for clean energy;
• compensates only for certain increases in gas costs and does not cover EU ETS compliance costs, nor uses ETS prices as a proxy to determine the compensation, thereby maintaining all ETS obligations and incentives;
• provides that the gas subsidy or price cap converges gradually towards market prices to avoid abrupt changes at the end of the measure;
• includes safeguards to ensure full pass-through of benefits to final consumers while avoiding undue regulation of wholesale prices; and
• if the Member State decides to charge the costs of the measure (or part thereof) to consumers, only those consumers who benefit from the measure should contribute to its financing.

Implications for the Decree

Such parameters appear incompatible with the Decree. Point 45(d) expressly prohibits compensation for ETS compliance costs or the use of ETS prices as a proxy, which is what Article 6 of the Decree envisages. Furthermore, the Decree is designed as a structural measure with no time limit linked to the crisis, whereas the METSAF Communication requires any gas-cost subsidy to be clearly temporary and to converge towards market prices. The Decree also charges ETS reimbursement costs to all consumers without distinction (e.g. including those with fixed-price contracts) contrary to the METSAF Communication requirement that only benefiting consumers should bear the cost.

In substance, the Communication is an indirect rejection of the Italian approach (as envisaged in the Decree), confirming the ETS as a pillar of European electricity markets. The Decree's mechanism could, in principle, be redesigned as a temporary gas-cost subsidy compliant with the METSAF Communication — but this would be a crisis-related, time-bound intervention, not the structural solution to Italy's electricity price gap that the Decree was intended to deliver.

What's next

The European Commission's response to Italy will likely mirror the METSAF. While the path towards neutralising the ETS at national level appears closed, however the Italian Government may revise the Decree's mechanism as a temporary gas-cost subsidy compliant. However, addressing Italy's structural electricity price gap will require EU-compatible measures.