How Italy's ‘Superbonus’ Tax Credit Fueled Growth but Overloaded the Grid – and the National Debt

In 2020, at the height of the COVID-19 pandemic, then-Prime Minister Giuseppe Conte introduced the ‘Superbonus’ tax credit to kickstart Italy’s struggling economy and accelerate the transition to decarbonization. While the program succeeded in stimulating short-term economic growth and accelerating the adoption of low-carbon technologies (LCTs), it led to several unintended consequences. These include overwhelming Italy’s electric grid with connection requests, causing significant delays for renewable energy projects, and exacerbating the country’s national debt, which soared due to the program’s financial overreach.

This article explores the unintended consequences of Italy’s ‘Superbonus’ tax credit, examining its impact on the country’s (1) energy transition efforts and (2) economic stability.

What is Italy’s ‘Superbonus’ Tax Credit?

For years, residents of Castelnuovo di Porto, a medieval village near Rome, had postponed home maintenance due to household financial constraints, until suddenly, in 2020, the Italian government's ‘Superbonus’ tax credit changed everything. The tax credit allowed Chris Warde-Jones, along with four shared homeowners, the opportunity to undertake several projects on their 18th-century tufa stone house, totaling more than €200,000.

Italy’s ‘Superbonus’ tax credit allowed Chris and other Italian homeowners to deduct 110% of their home renovation costs from their taxes, provided the renovations made the buildings more energy-efficient, sustainable, and/or earthquake-resistant. In essence, the government paid Italian homeowners to upgrade their properties. Eligible projects included:

• Replacement of existing heating, cooling, and hot water systems with more energy-efficient systems (e.g., heat pumps)

• Installation of solar photovoltaic systems

• Installation of battery systems

• Installation of electric vehicle charging stations

The introduction of this tax credit generated significant interest among Italian homeowners, leading to an expenditure of €215 billion by the Italian government over 4 years – far exceeding the initial prediction of €35 billion over 15 years (Graph 1). While several other EU countries have subsidy schemes for home improvements to reduce carbon emissions, none have been as generous and far sweeping as Italy’s.

Graph 1: Expenditure to Support Italy's "Superbonus" Tax Credit 

Actual vs Projection, 2020 - 2035

In response to the severe fiscal overrun, the tax credit benefit was reduced from 110% to 90% in 2023 and to 70% in 2024, with expectations that it will continue to decrease in the coming years. However, due to the long delay in revising the benefit, the generous handouts have resulted in longer-term consequences for Italy's economy and the sustainability of its energy transition.

Italy’s ‘Superbonus’ Impact on The Energy Transition

Supporting the Adoption of Low Carbon Technologies

One of the primary goals of the ‘Superbonus’ tax credit, beyond boosting short-term economic growth, was to enhance energy efficiency in residential buildings. By May 2024, the program had facilitated 495,717 energy renovations in residential homes, according to Energia Nucleare ed Energie Alternative (ENEA) and other sources, representing a notable achievement in reducing energy consumption across approximately 5% of Italy’s housing stock (Graph 2).

Graph 2: Energy Renovations in Residential Buildings

Italy, Cumulative Number of Renovated Residential Buildings

These energy-saving renovations have delivered significant results. In December 2022, ENEA reported an estimated annual energy saving of 9,050.04 GWh. Based on the continued implementation of the program, this figure is projected to rise to 12,481 GWh per year. To put this into perspective, the average per capita electricity consumption in the European Union is 1,671 kWh annually. With an average household size of 2.3 people, the energy savings achieved through the ‘Superbonus’ tax credit could power roughly 3.3 million households annually – equivalent to the total number of households in Denmark.

With the substantial number of energy renovations, the adoption of LCTs has accelerated:

• Cumulative installations in the residential photovoltaic (PV) sector grew by 24% in 2022 and 35% in 2023 (Graph 3). 

• Home energy storage capacity surged from 94 MWh in 2020 to 321 MWh in 2021, marking a more than threefold increase year-on-year. By 2023, Italy had become the second-largest battery energy storage system (BESS) market in Europe, capturing an 18% market share (Graph 4).

Graph 3: Growth in Italy's Residential PV Sector

Cumulative Residential PV Solar Installed (MW) & YoY Growth Rate

Graph 4: Top 5 European Cumulative Battery Storage Installed Capacity Shares 2023

Installed Capacity as a % of total EU capacity

The 'Superbonus' tax credit has significantly raised public awareness of energy efficiency and renewable energy. As more people participated in the program, it fostered a culture of sustainability and energy consciousness.

However, the substantial growth in LCTs has also introduced challenges in other critical areas of the energy transition, notably in the development of energy infrastructure.

Creating Grid Bottlenecks and a Construction Bubble

Despite the growing adoption of LCTs supporting the energy transition, a major bottleneck has emerged: the electric grid. In both Europe and the United States, as more LCTs are connected, the time required to secure a connection has increased exponentially. Gigawatts of solar, wind, and battery projects are stuck in interconnection queues as transmission and distribution operators struggle to keep up with connection requests and upgrade their networks to facilitate timely connections (Graph 5).

Graph 5: Grid Connection Queues for Wind and Solar

UK, Spain, Italy, France & US, in Gigawatts

In Italy, solar and wind project queues have outpaced those in other European countries, placing significant strain on grid operators who were unprepared for the scale and speed of these developments. According to Terna SpA, the primary grid operator in Italy, they are overwhelmed by an enormous number of connection requests. This situation has underscored the urgent need for strategic infrastructure planning to ensure that grid capacity can keep pace with technological advancements. A report by the World Energy Council identified the grid as one of the top priorities for action in Italy (Graph 6):

Graph 6: World Energy Issues Monitor

Italy, 2024

The reassuring news is that grid investments have been accelerating. In 2024, Terna SpA announced it would invest €16.5 billion over the next five years to improve the grid, representing a 65% increase in capital expenditure compared to its previous strategy. However, given that large-scale infrastructure investments can take several years to yield substantial benefits, meaningful impacts may only become noticeable several years after 2024. In the interim, due to the current lack of grid modernization and existing constraints, Italy’s grid is at risk of system instability, congestion, and integration challenges. These issues could lead to curtailments, dampening enthusiasm for renewable energy at a crucial time.

Beyond issues with the grid, the ‘Superbonus’ tax credit has significantly inflated the cost of materials and construction. According to Mario Draghi, a former Italian Prime Minister, “the cost of improving efficiency has more than tripled … the 110% [Superbonus] eliminates the incentive to negotiate on price”. At the end of 2021, the price of scaffolding (temporary structures used to support building construction) had risen by more than 400%. By removing the price negotiation leverage between buyers and sellers, this has created a bubble in the construction sector, causing the cost of raw materials such as iron, steel, and concrete to skyrocket. As the ‘Superbonus’ tax credit phases out in the coming years, energy-efficient upgrades may remain expensive and become prohibitive for lower-income families, potentially adversely impacting the energy transition. This issue is already unfolding – in February 2023, Italy was reported to be resisting a major European Union directive aimed at improving building energy efficiency, seeking to delay and obtain exemptions for renovations that neither the government nor homeowners can afford.

Measuring the Impact of Italy’s ‘Superbonus’ Tax Credit on Economic Stability

The Benefit to Short-term Economic Growth

The ‘Superbonus’ tax credit contributed significantly to Italy’s swift economic recovery following the pandemic, with the Italian economy outperforming the European Union (EU) from 2021 to 2023 (Graph 7):

Graph 7: Annual GDP Growth

Italy & European Union in %, 2020 - 2023

Furthermore, the ‘Superbonus’ tax credit created at least 410,000 new jobs in the building sector and 224,000 jobs in related supplier sectors, leading to a boom in construction output (Graph 8).

Graph 8: Comparison of Construction Output in 2022

Real deviation compared to 2019 Pre-crisis Level in %

Despite the boost to short-term economic growth and activity, researchers from the Bank of Italy found that the ‘Superbonus’ tax credit imposed significant costs on the government without delivering a proportional economic benefit. They concluded that benefits to the economy in terms of added value were lower than the costs incurred.

Creating Longer-term Economic Instability

Due to the fiscal overrun caused by the ‘Superbonus’ tax credit, Italy’s debt significantly increased. The country’s deficit-to-GDP ratio reached 8.6% in 2022, before easing slightly to 7.4% in 2023. Additionally, Italy’s gross debt-to-GDP ratio was 137.3% in 2023 (Euro area: 88.6%) and is projected to remain elevated over the coming decade (Graph 9), even as the Euro area is expected to see a decline in its gross debt-to-GDP ratio.

Graph 9: Debt-to-GDP Ratio (%)

Italy vs Europe, 2015-2029

As of 2024,  according to the International Monetary Fund, Italy has the second-highest debt-to-GDP ratio among G7 countries, following Japan, at approximately 139.2% (Graph 10).

Graph 10: Government Gross Debt in 2024

% of GDP

Due to Italy’s high debt-to-GDP ratio and fiscal deficit, several negative long-term implications arise (Graph 11):

Graph 11: Negative Long-term Implications Caused by High Debt-to-GDP Ratio

• Reduced fiscal flexibility: High debt limits the government's ability to respond to economic crises and implement counter-cyclical fiscal policies. This constraint is particularly concerning in the event of economic downturns or emergencies, where the government may struggle to finance stimulus measures without exacerbating the debt situation. In May 2024, the International Monetary Fund (IMF) issued a warning to Italy, highlighting the need for swift fiscal reforms to address its debt.

• Market confidence and borrowing costs: A high debt-to-GDP ratio can undermine market confidence, leading to higher borrowing costs. Investors have been demanding higher yields on Italian bonds to compensate for perceived risks (Graph 12), which creates a vicious cycle of increasing debt servicing costs and further budgetary pressure.

Graph 12: Ten-year Government-Bond Yields

Italy, United States, Germany & Japan in %

• Social and political impact: High debt and fiscal austerity measures to control deficits can lead to social unrest and political instability. Necessary cuts in public spending, pensions, and welfare programs to reduce deficits can provoke public opposition, resulting in protests and strikes that undermine the government’s ability to implement essential reforms. Italy is currently facing budget challenges, needing to find an additional €20 billion (approximately 1% of GDP) to meet its budget commitments for 2025, and a further €23 billion annually in 2026 and 2027.

• EU fiscal rules compliance: Italy's high deficit and debt levels complicate compliance with the EU Stability and Growth Pact, which sets limits on budget deficits and debt levels. EU rules limit budget deficits to 3% of GDP and debt to 60%, with disciplinary measures for those who do not reduce their deficits fast enough. While it may be improbable that Italy will face significant penalties if it does not meet these targets, the country is likely to encounter diplomatic pressure from fellow EU members.

• Credit rating downgrades: Persistent high debt and deficits can lead to credit rating downgrades by agencies such as Moody's, S&P, and Fitch. Lower credit ratings increase borrowing costs and can restrict access to financial markets. Italy's credit rating has been under scrutiny, and further downgrades could have severe repercussions on its ability to finance its debt (Graph 13).

Graph 13: Italy Credit-Rating Watch

While the ‘Superbonus’ tax credit has played a crucial role in Italy’s post-pandemic economic recovery and activity, it has also caused a substantial increase in national debt, raising concerns about long-term economic sustainability. Outlined by the American Enterprise Institute, Italy’s debt trajectory is unsustainable, posing a risk of a sovereign debt crisis that could threaten financial stability of the euro area.

Conclusion

While Italy's 'Superbonus' tax credit has undoubtedly spurred short-term economic growth and accelerated the adoption of LCTs, it has also revealed significant long-term challenges. The fiscal burden of the ‘Superbonus’ tax credit has led to a sharp rise in national debt, reducing Italy’s fiscal flexibility. With the country grappling with a high debt-to-GDP ratio and increasing borrowing costs, the initial economic benefits of the policy have been overshadowed by growing economic instability. Additionally, record interconnection queues and inflated construction costs have put pressure on both the grid and the construction sector, creating bottlenecks and a construction bubble.

Nevertheless, investment in the energy transition is essential, especially given the historical underinvestment in this area. However, to ensure sustainable growth and development, such investments must be more comprehensive and measured. Governments should not only focus on incentivizing LCTs and enhancing energy efficiency but also prioritize upgrading the electric grid and infrastructure to accommodate rising demand. By adopting a more strategic and balanced approach, countries like Italy can ensure that the energy transition contributes to long-term economic stability and resilience.

About The Author

Colin Tang, CFA is the Senior Investment Officer at Corinex, where he leverages his extensive experience in finance to drive the company's investment strategy and portfolio performance. With a proven track record of identifying and capitalizing on investment opportunities, Colin plays a crucial role in supporting Corinex's financial objectives and growth.

Contact us to request access to the data and analytics mentioned in our article, and discover how Corinex solutions enable grid flexibility and address grid constraints. https://www.corinex.com/