News from the Italian Renewable Energy Market: FER 1's follow-on decree announced

published on 17th November 2021

The Italian government is sending positive signals for renewable energies. As part of the implementation of the RED II Directive, it has announced that FER 1 (Ministerial Decree of 4 July 2019, currently applicable to the granting of support tariffs for wind power and PV, among others) is to be replaced.

It is well-known that the outcomes of FER 1 to date have been disappointing because the rate of participation in auction procedures has been too low. The reasons for this are manifold. For example, the agricultural land regulation provides that greenfield PV systems sited on agricultural land are not eligible for the support tariffs. Furthermore, a general problem is the lack of large-scale projects due to complex and lengthy approval procedures (for wind power, they take on average five and a half years; in the case of PV – two to four years). Market participants complain that the authorities are given too much leeway in environmental impact assessments and criticise their generally negative attitude. Furthermore, the legal situation is difficult, among others due to differences between national guidelines and objectives on the one hand and the legal framework applicable in the regions on the other.

Thus, already in the second procedure for awarding capacities, which took place at the beginning of 2020, the available capacity was not fully exhausted; this negative trend continued in the following procedures, in which participation continued to drop. In the last completed procedure so far, the fifth award procedure since the beginning of 2021, only 297.7 MW of 2,461 MW were awarded. A small glimmer of hope are the award procedures for register-enrolled plants with a capacity < 1 MW; they have recorded increasingly stronger participation in the past and the last two procedures concluded with an invariably high level of participation.

Here, too, the priority criteria of FER 1 have no relevance and the plant operators do not offer to meet them, either (e.g. installation of e-car charging stations). In addition, demand for financial support for self-consumption and grants for eternit disposal is low. The same applies to incentives for rooftop PV systems on public buildings.

According to the draft decree implementing the Red II Directive, FER 1 should apply beyond 2021. Accordingly, after the seventh award procedure in the fall of 2021, which was originally planned to be the last under FER 1, there would be yet further award procedures. GSE should recalculate the remaining capacity quotas after the October 2021 procedure and announce the next auctions. It is expected that FER 1 will continue to apply to both the auction procedure and the register enrolment procedure without any change in the support tariffs. The continued applicability of FER 1 is intended to enable awarding the capacities provided for by the Decree and not yet awarded, either until the total capacity under the Decree is exhausted or a new funding law comes into force. It is more likely that FER 1 will be replaced with the new funding decree, as there are still large capacity quotas to be awarded.

Furthermore, the draft implementation decree also contains some details on a new funding decree. The elaboration of the details should start immediately after the implementation decree has been adopted and is to be completed within six months. The decree will be very similar to FER 1 in terms of its structure and will also confirm the mechanism of the „contract for difference” tariff. However, it will include some important changes in order to respond to the weaknesses of the currently applicable FER 1.

The incentives are generally granted to secure the payment of investment costs, which means that projects that are bankable also without an incentive do not receive it.

Incentives are granted to power plants depending on their size and capacity and for a period corresponding to their average expected service life. New power plants will continue to be incentivised, but also – and this point is new – incentives will be allocated to power plants after reactivation, complete reconstruction, potentiation and restoration. A distinction is made between power plants with a capacity of up to 1 MW and those with a capacity of over 1 MW.

Power plants with a capacity of over 1 MW will still be subject to the auction regime. A new feature is that it will be possible to define a minimum capacity per power plant. Furthermore, capacity quotas will apply and power plants will be grouped by renewable source (it has not been indicated yet how the various sources will be grouped). Unlike in the previous decrees, the capacity quotas will be available for five years, which will make it much easier to plan development capabilities. On the other hand, occasional adjustments should also be possible, e.g. the quotas might be reduced in the event of a large capacity additions. For power plants that are awarded the contract, the obligation to provide securities for the completion of the power plants and the associated deadlines will continue to apply.

Priority will be given to power plants sited in the so-called suitable areas, which are currently being defined in the individual regions.

Also new is the preliminary review procedure by GSE. For power plants with a minimum capacity of 10 MW, operators will be able to submit a pre-application to GSE and obtain a certificate of suitability while the approval process is still underway. The application for participation in the tariff auction will then have to be submitted within three months of the approval being granted.

Another major novelty concerns wind power and PV power plants with a capacity < 1 MW: They will no longer be subject to the procedure of enrolment in a special registry, but they will be granted free access to the support tariffs. This means that the operator will be able to apply for the tariff after commissioning the power plant. Award procedures should still be carried out for innovative technologies. The incentive will be granted for the entire self-consumed as well as for the fed-in (PV) electricity. Also here, the capacity quotas will be available for five years. In addition to self-consumption, also the use of storage systems and asbestos removal will be eligible for support.

Even though the implementing decree covering the items on the agenda discussed above still has to go through a number of stages before it can be adopted, it is expected to take effect this fall.