* Italy SMEs pay 40 pct more for power vs Europe
* Green subsidies add 12 bln euros/yr to bills
* Rome mulling debt issuance to help cut green levies
* Italy generates over 40 pct of power from gas
MILAN, Nov 4 (Reuters) - Enrico Frigerio has been trying to save on energy bills at his car-parts plant in northern Italy for years. The CEO of Fonderia di Torbole last year upgraded the air-intake and lighting systems to make them more efficient. This year, he installed meters to monitor energy costs to bag efficiency bonuses.
Yet Frigerio's company is still struggling with high energy bills that last year totaled around seven million euros, compared to Fonderia di Torbole's 70 million euros in sales. "Bringing down energy costs are crucial for competing internationally," says Frigerio.
High taxes, dependence on imported gas and bottlenecks on the power grid have long pushed up the price Italian companies and consumers pay for energy to fuel factories and heat homes.
Small and medium-sized companies, with a yearly energy consumption of between 500-2,000 megawatt hours, are particularly hard hit. They paid around 40 percent more for their power in the second half of last year than the European Union average, according to data from Eurostat. Energy costs for this category of company are higher only in Cyprus, Eurostat said.
Now, with Italy tiptoeing out of its worst post-war recession, energy costs are proving a stumbling block to any nascent business recovery, companies say. Italy's small and medium companies make up 80 percent of the country's non-financial private sector employment, according to the European Commission.
Business associations have recently become so vocal about power costs that Italy's economic development ministry is scrambling for new ideas. Among them: a proposal to issue bonds to help pay for the 12 billion euros a year that Italy spends on subsidies to the renewable energy industry and that ends up in everyone's energy bill.
The idea, which was included in a bill drafted in September by Industry Minister Flavio Zanonato, is still being discussed by the government, partly because of concerns among Treasury officials that the measure would cause Italy to overstep its budget commitments.
Still, the move - which would shave three billion euros a year off bills over the next three years by selling bonds to help spread the cost of green incentives over a longer time frame - is finding support within the business community and underscores how desperate Italy Inc. is to find new solutions to the high energy price problem.
"It's a classic case of debt restructuring. It would certainly cost more in the end and it would load more debt on our children. But it would give industry a breathing space at this tough moment," said Chicco Testa, head of Italy's power producers association Assoelettrica.
Italy liberalized its energy sector at the turn of the millennium, but retail prices have not fallen in the same way they have in other liberalized industries, notably the telecoms sector. Part of the reason for that is that the underlying cost of oil has risen almost tenfold.
Italy's wholesale prices, before taxes and add-ons, are also some of the highest in Europe. With no nuclear power and a very limited use of coal, Italy has been dependent on natural gas to fuel its power generation - most of it imported on costly long-term contracts.
State-controlled Eni, the dominant player on Italy's gas market, has in recent times wrung better terms on its contracts, but still has a way to go with key suppliers like Russia and Algeria, which are reluctant to cede too much ground.
"We are the country that is most dependent on gas in Europe, and we get it from countries still geared to expensive long-term gas contracts. Germany can afford to fund its renewable industry because it uses a lot of cheaper coal," said Davide Tabarelli, head of energy think-tank Nomisma Energia.
Taxes and subsidies, which make up around 50 percent of Italy's electricity bills, are the biggest burden. As in other countries, the subsidies are designed to fund the country's renewables drive to enhance security of energy supplies and create a new industry and jobs.
Most EU countries are subsidising green energy, as they try to meet mandatory targets for renewable energy production by 2020. Italy's energy regulator recently calculated that of the 514 euros on average that Italian consumers will pay this year for their electricity, some 93 euros will go to pay green subsidies. Most of them will be photovoltaic since Italy is Europe's second-largest producer of solar energy after Germany.
As a result of the subsidies, solar power installations have skyrocketed almost 4,000 percent since 2008, helping fuel growth in renewable energy sources, which generated 32 percent of final power demand in Italy last year. That compares to 23 percent in Germany, 15.5 percent in the UK and just 13 percent in nuclear-dominated France.
As in other countries there is much debate as to whether the subsidies to renewable energy are distorting the market. Italy, which uses natural gas to fuel over 40 percent of its electricity, has one of the most modern gas-fired generation fleets in Europe. As the economic crisis saps power demand and renewables muscle in, the plants are underused and in some cases mothballed.
"These plants are very efficient but they were built to work 8,000 hours per year. A lot of them are now working on 1,000-2,000 hours only, and that's not a clever way to do things," said Paolo Ghislandi, secretary general of AIGET, Italy's association of energy traders and suppliers.
Moreover, by their very nature renewable energy sources are intermittent; they don't work when the sun stops shining and the wind stops blowing. To keep the lights on, therefore, flexible gas-fired plants are needed as back-ups that are ready to be switched on upon demand - a standby process that remains costly.
Under pressure from energy firms across Europe and industry at home, Rome moved last year to cap aid to renewables. But the subsidies will still cost Italians around 240 billion euros over the next 20 years.
Of these taxes and surcharges, the burden falls disproportionately on small and medium-sized businesses because big heavy energy users get a slew of incentives.
So-called interruptibility contracts, for example, allow big companies to pay lower power bills if they sign a contract agreeing to go dark in the case of an emergency. Italy's biggest industrial battery maker Fiamm recently signed such a contract at two of its plants in Italy as a way to lower its bill, says Nicola Cosciani, head of the group's energy storage business.
But some critics say these contracts are just disguised state subsidies, because the chances of power being completely disrupted is next to nothing in a country where falling energy demand due to the economic crisis has created a glut of supply.
Earlier this year the European Commission launched a probe to see whether Germany was providing illegal state aid to a group of energy-intensive companies by exempting them from paying the renewable energy surcharges in power bills.
Beyond local companies, foreign investors are also rethinking their strategies in Italy because of high energy costs. Last year aluminium group Alcoa shut its smelter in Sardinia blaming high power prices for undermining its competitiveness. Multinational plumbing company Ideal Standard - which makes sinks and bathroom units - listed energy as one of the reasons for which it is considering closing a factory in northern Italy.
Frigerio, whose Fonderia sells some 80 percent of its production on foreign markets, says Italy's high energy prices have created an uneven playing field for companies that are trying to go global. "We've already seen companies move abroad to save on energy. It could happen again if the government doesn't act soon."