Cuts in support for renewable energy- an earthquake called Sostegno-ter

published on 17th February 2022

In the current economic situation, characterized by an increase in commodity and energy prices and an inflation increase of 3.9 % for 2021, the Italian government is intervening on several fronts, trying, among other things, to compensate for the sharp increase in the price of electricity. One of these measures can be described as an earthquake for the renewable energy market and is unfortunately reminiscent of the measure taken a few years ago, when the Italian legislator implemented voluntary cuts in certain renewable energies and then cuts in photovoltaic support with the so-called „spalma incentivi”.

At issue here is Legislative Decree No. 4/2022 (the so-called „Decreto Sostegni-ter”), which entered into force on Jan. 27, 2022, with which the government introduces three measures that provide, on the one hand, tax mechanisms to reduce energy costs for certain categories of energy consumers and, on the other hand, a compensation mechanism to limit the extra profits of some electricity producers. To fully understand the measure, we first present the first two items, which are tax mechanisms, before addressing the provision on renewables in item 3), which is currently causing great concern.

1) System costs

The first measure provides for a reduction in the general system charges (i.e., the cost item on the electricity bill that usually represents about 20%, which is used to finance collective objectives). The Sostegni-ter Decree provides for the suspension of general network charges for the first quarter of 2022. Beneficiaries of this measure are consumers with an available power of 16.5 kW or more, including those connected to medium and high/high voltage, as well as for public lighting or for charging electric vehicles in places accessible to the public.

2) Tax Credit

The second measure provides for the approval of a tax credit in favor of so-called „energy-intensive” companies (companies with high electricity consumption, as per the MISE Decree of December 21, 2017) whose cost per kWh of pure electricity, excluding additional charges, calculated using the average of the last quarter of 2021 and net of taxes and any subsidies, has increased by more than 30% compared to the last quarter of 2019. The recognized tax credit amounts to 20% of the expenses for the pure electricity excluding additional charges purchased and actually used in the first quarter of 2022.

3) Cuts for renewables

The third measure provides for a compensation measure for owners of RES plants with a capacity greater than 20 kW, in particular photovoltaic plants - both subsidized and unsubsidized (this is one of the unpleasant surprises that was not included in the last drafts of the decree, and was inserted just before the decree was adopted) - as well as hydropower, geothermal and wind plants that are not subsidized. As the government explains, „from February 1, 2022, to December 31, 2022, a two-way energy price equalization mechanism will be applied to electricity fed into the grid by photovoltaic plants with a capacity greater than 20 kW that receive Conto fixed premiums that do not depend on market prices, and to electricity fed into the grid by solar, hydro, geothermal, and wind plants with a capacity greater than 20 kW that do not receive support.” According to government calculations, this measure will generate about 3 to 5 billion euros in revenue especially from hydroelectric and photovoltaic plants with Conto Energia, which will be used to reduce electricity bills. More specifically, the revenues will be used to reduce the sums needed to cover the general network charges, thus reducing the price of electricity for consumers.

Therefore, the Promotion Decree provides for a compensation mechanism for certain renewable energy installations, applicable for the year 2022 and calculated as follows: Difference between

(a) A reference price (considered appropriate for the plant), which is the average of the hourly zonal prices (PZO) between the date of commissioning of the plant and Dec. 31, 2020 (or, if the plant has been commissioned before, from Jan. 01, 2010), indexed according to the ISTAT index, and

(b) the hourly zonal market price (PZO di mercato) for the facility (or, in the case of supply contracts entered into before the effective date of this Decree, the average price indicated in such contracts).

The regulation does not entail anything other than a cap on revenues and the possible obligation to repay amounts to the GSE (according to analysts' estimates, this cap could reach €80/MWh in individual cases). The cap is calculated based on the average of prices from the date of commissioning of a plant until December 31, 2020, so that only the lower values of the first year of the pandemic are taken into account, but not the very high prices of 2021.

If the price obtained for the plant on the electricity market is (b) below the calculated ceiling, the GSE pays the corresponding amount to the generator. If, on the other hand, the price obtained is above the calculated ceiling, the GSE will offset the difference or claim it from the generator. This means nothing more than that the generator must return part of the revenue to the GSE if the hourly zonal market price remains high, while the GSE must make a payment to the generator in the (unlikely) event that prices fall below the cap.

Electricity supply contracts concluded before the entry into force of this Decree are excluded from this compensation mechanism, provided that they are not linked to the price evolution on the spot markets for electricity and were not concluded at an average price that is 10% higher than the reference price in subparagraph (a).

In practice, the owners of RE plants, must verify if their plant is affected by this measure:

(i) Whether it is a PV plant over 20 KW with Conto Energia that is not market-priced.

(iii) Whether it is a non-subsidized solar, hydro, geothermal or wind plant.

Therefore, the following installations are excluded from the measure: PV plants below 20 KW, PV plants with FER-1 subsidies, PV plants with Conto-Energia subsidies that receive market price-linked premiums, biomass and biogas plants, and all RE plants (wind, hydropower, geothermal) that are subsidized by FER - subsidy decrees. Clarification is still needed on the meaning of the term market price linkage in Conto Energia and the implications for subsidized PV plants.

Owners should also consider:

(i) whether their electricity supply contracts were concluded before 27/01/2022. If they were concluded after that date, they are certainly affected by the compensation mechanism in question.

(ii) If the supply contracts were concluded at an earlier date, check whether the contract provides for a spot or fixed price that is more than 10% higher than the 2010-2020 average price. In these cases, the above-mentioned compensation mechanism shall also apply.

(iii) On the other hand, if the contract was entered into prior to the effective date of the rule and contains fixed prices that are not 10% higher than the average price for the 2010-2020 period, the compensation mechanism will not apply.

By the end of February 2022, the Regulatory Authority for Energy Networks and the Environment (ARERA) will regulate how the provisions on the compensation mechanism will be implemented.

Criticism of the decree is, as might be expected, widespread, even though, according to the government's stated intention, the decree is aimed only at correcting the consequences of an electricity market that is in some ways out of control. Certainly, one can have doubts about the legitimacy of a measure that only affects the revenues of RE plants without introducing similar mechanisms for other sectors that benefit in the same way from high market prices. Furthermore, once again it tends to hit photovoltaics and it is not clear why other RE types are largely exempted.

One can also wonder why plants that do not receive incentives are also included in the correction mechanism: given a choice of the operator not to opt for a support regime and thus fully participate in all opportunities and risks of the electricity market, it does not seem justified to us to cut revenues even if they stem from a one-time historical event (without being equally protected in the future against historical events in the other direction, namely with particularly low prices).

Several details are not entirely clear and we will have to wait for the confirmation or amendment of the decree, as it still has to be transformed by Parliament, which should be the case by the end of March 2022, to have certainty about the real impact of the measures.