Hydropower plants and saving: two stabilization mechanisms

The 15^th edition of the Salone del Risparmio, taking place from 15 to 17 April 2025 at the Allianz MiCo conference centre in Milan, is a good opportunity for us to pick up the discussion on the importance of saving and how to protect our money.

To do so, let's begin with … hydroepower plants!

Pumped storage hydropower plants play a key function in stabilizing the national electricity system. They ensure the perfect balance between the supply and demand of energy and prevent blackouts. In the event of sudden peaks in demand, for example, the plants release energy into the power grid: when the pipes (stockpens) are opened, the water stored in the upper reservoir falls down to the lower reservoir and its gravitational energy converts into motion energy. This activates giant turbines connected to generators, which, in turn, produce electricity. Conversely, when there is too much electricity in the grid, the process is reversed: the plants absorb energy from the grid and consume it by pumping water from the lower to the upper reservoir, thereby turning electricity into gravitational energy.

Saving works a bit like the water in the upper reservoir. It allows us to stabilize our spending (the 'energy') over time. Anyone of us could find themselves in a situation of excessive energy demand, i.e. a period when we spend more than we can afford. For instance, we might have had unforeseen expenses, such as car repairs or replacing a worn-out appliance. Or, perhaps, we retired and we want to keep the same standard of living as before, even if our income has decreased. In these cases, we can use our savings, the water in the upper reservoir, to support our consumption. When, instead, we have a regular income or other sources of revenue, e.g. an inheritance, we can reduce our spending and set money aside, just like pumping water back into the upper reservoir.

Without proper protection, however, savings cannot perform their stabilization function: the water in the upper reservoir should never evaporate. Putting off today's spending until tomorrow wouldn't be worth it if that didn't allow us to buy at least as much tomorrow as we're giving up today. In other words, we must at least protect our savings from inflation, which reduces our purchasing power even more than we'd expect. Even with a moderate inflation rate of 2 per cent (the target set by the European Central Bank), the real value of our savings drops by about 20 per cent in 10 years-and by 50 per cent in 35 years-if those savings don't earn interest.

What we need to do, then, is associating the idea of saving with the idea of investing. Investing is no easy thing, and it involves a certain degree of risk. What we can do, however, is to find a balance between the purchasing power lost by the savings that we left uninvested and the risk we take to earn a return from our investment. In any case, there are some low-risk investment options, such as Treasury Bills (BOTs), which are as safe as a standard bank account.

Institutions and businesses are getting together at the Salone del Risparmio to learn about the latest trends and share their expertise in asset management. Click here to see the programme and watch videos of the meetings.