Italy: Promoting renewable energy through DECRETO FER 1

It took a little longer again for a variety of reasons but the legislative work on the new decree on incentives for renewables is nearing an end and the decree is about to be published soon. The EU Commission had already given the green light at the end of June and requested only a few minor changes. Now it is only a matter of some details and incorporation of provisions concerning the hard-fought incentives for hydropower. As regards hydropower, the interest groups were not able to force through their case even in the most recent draft; the Ministry of the Environment maintained its hard-line approach and added only a section concerning hydropower called for by the EU Commission. The most recent draft existing as of the date of finalising the editorial work on this issue is dated 28/06/2019 and will in all probability not undergo any fundamental changes.

Italy is generally in a good position as far as compliance with the EU requirements for the expansion of renewables is concerned: the expansion targets defined in the RED I directive have already been achieved, despite tariff reductions and tough controls by the GSE in recent years.

The new decree sets a new course for the further expansion of renewables, which had already been announced in the Italian National Energy Strategy of November 2017. The GSE will announce 7 calls for bids under the registry and auction regimes: the first one will be advertised in autumn 2019, the last one in autumn 2021. Prospective bidders will have 30 days to submit their bids, after which the GSE will prepare and publish a ranking of bidders. Certain criteria will give bidders priority in the ranking. Anyone wishing to take part in the proceedings will have to prove their seriousness by providing guarantees and proof of their financial resources.

The main novelty is the reinstatement of photovoltaics as the incentivised technology, but this time not through a separate decree dedicated to PV (so-called Conto Energia from the years 2005-2013) but as part of the FER decree, i.e. the RES Act for all sources of renewable energy. Hence the number “1” in the name of the decree.

The new bill is the result of an evaluation of results of the previous FER decree dating back to 2016 and the trend towards renewable energy sources in Italy. The new decree provides for incentives for photovoltaics, wind energy, certain types of hydropower plants and biomass gas. For geothermal energy, a separate decree is expected to be issued. Direct access, which was still included in the 2016 decree, will now be abolished – incentives will only be offered for power plants for which enrolment in a special registry is applied for after obtaining all projects rights (i.e. public construction and operating permits, grid connection and registration of the power plant in Gaudi) but before starting the construction, or which took part in a tariff auction.

Incentives will be then diversified depending on the type of the power plant and no technology-neutral auctions will be held: this is said to account for the fact that electricity generation costs substantially vary depending on the type of the power plant – on the one hand, there are power plants using sophisticated technologies that involve low costs, for which lower incentives would suffice, such as photovoltaics, and, on the other hand, there are power plants using innovative technologies that involve high costs and for which higher incentives must be offered.

Furthermore, there are several factors to consider when talking about incentives for decentralised energy generation: priority criteria for connecting power plants to electric car charging stations that consume a certain amount of the produced electricity, and special incentives for self-consumption.

Finally, it will also be possible to participate in the incentive schemes with groups of installations that consist of several power plants, each with a capacity of over 20 kW, as long as the total capacity does not exceed 1 MW as of the registry enrolment date or if the total capacity exceeds 1 MW as of the auction participation date.

The incentive will be structured as a tariff in two directions [as a payable and a receivable]. Moreover, only power plants with a capacity of less than 250 kW can receive a general tariff (i.e. a tariff that is both mere remuneration for electricity and an incentive), all other power plants will receive only a premium and will have to actively sell the electricity generated by the power plant on the electricity market. Should the power plant be incentivised under the decree, it will not be able to apply net metering or be subject to the so-called Ritiro dedicato by the GSE (a special regime where power plant operators do not have to participate in the electricity market). It is expected that it will be further possible to use certificates of origin (GO), which have been a well-liked additional source of revenue for many power plants for years now, in addition to the incentives.

Also the premium will be received only in the best case, because the tariff goes in two ways: positively and negatively, so if the calculation between the power plant’s tariff and the market price is negative, the power plant operator will pay the bill to the GSE, and if the calculation is positive, the payment will be made by the GSE.

Enthusiasts of photovoltaics should bear in mind that power plants on agricultural land will not receive any incentives (this is already known from the Conto Energia decrees; so the same prohibitive rule is invoked here). Photovoltaics is also not included in the category of repowering stations that are eligible for incentives (group C). The focus here is clearly on specific greenfield installations and renovated rooftop systems, whereas also here the public sector has priority over private buildings (or actually schools, then hospitals, then public buildings). As regards photovoltaic power plants, it should be noted that power plants with a capacity of less than 20 kW are not eligible for incentives, but the provisions relating to tax deductibility of investment costs will continue to apply. As was previously the case with Conto Energia, photovoltaic power plants may be constructed only using new components.

In the case of photovoltaic power plants built on roofs from which asbestos or Eternit was removed, a premium of 12 EUR/MWh, the so-called asbestos premium, will be added on top of the base tariff. Therefore, these power plants (and only those and no other) will be granted incentives not only for the electricity that is produced and fed into the grid, but also for the energy consumed to generate electricity as part of self-consumption – this aims to enable the operator to cover the costs of keeping the power plant in a renovated condition. Furthermore, building-mounted power plants with a capacity of up to 100 kW will receive an additional premium of 10 EUR/MWh for the net electricity consumed on site, if the electricity produced for self-consumption purposes represents over 40% of the net production of the power plant (self-consumption premium). This premium may be explicitly combined with the asbestos premium.

Also the course for a future without incentives has been set: the decree provides for creating a platform for negotiating PPAs, yet on a voluntary basis and for power plants that do not receive incentives for the produced electricity and were commissioned after 01/01/2017. Also future power plant operators can now register with the platform and put the electricity produced by their power plants up for sale. In the same direction goes an article of the decree reading that power plant operators will be able to resign from the incentive at any time during the incentive period (but the received incentive will have to be repaid in such cases).

The market has reacted to the upcoming decree rather sluggishly, at least as far as wind and PV are concerned: PV project developers have already planned their projects without incentives for years and most of them see no reasons why they should rely on the new decree at that and expose themselves to the risk of GSE controls and tariff cuts again – currently many PV power plants are in the planning phase and are planned to be operated through merchant PPAs and without incentives. In respect of such power plants, it is expected that, after investors and funds, also utilities will enter the project development market in the near future. In the case of such type of projects, the limiting factor is not longer the electricity generation costs, as was the case until the end of 2017, but increasingly the bottlenecks on the part of the public authorities responsible for grid connections and building permits, and it is worth analysing in which regions permits can be obtained more quickly than in others.

Also the market players in the wind energy segment do not see the necessity to fall back on the decree as the first projects using this technology and structuring their revenues purely as merchant PPAs have already been launched in recent months – they refer to repowering power plants or non-incentivised capacity additions to existing power plants. Also a first corporate PPA for a new power plant is expected: the deal has been announced between the power plant operator and a new trader who will re-sell the electricity onto a steelworks.

Let’s see how the new draft of the decree looks like in detail.

INCENTIVE ELIGIBILITY – POSSIBLE ROUTES

The draft of the decree provides for two different routes for obtaining incentives. For power plants with a capacity of less than 1 MW, incentives are granted after enrolment in a special registry, while power plants with a capacity of over 1 MW will be subject to the auction regime.

Below we present the capacity volumes subject to the registry and auction regimes by type of power plant.

Power plants to be commissioned within one year of the effective date of the decree are subject to the tariffs specified in the FER 2016 Decree. This does not include photovoltaics, for which no tariffs are provided for under the FER 2016 Decree.

Also a GSE management fee will be added at a rate of 0.1 EUR/KWh.

In the case of enrolled power plants, the expected tariff rate will depend on the reference rate of the tariff subject to a percentage deduction where possible.