After many years of solid but modest incentives on offer for renewables generation, Italy is now in the process of dramatically overhauling its regulations in order to achieve a step-change in new capacity coming online over the next few years.
But every action has consequences – intended or otherwise – and the move could well take Italy’s renewables market into a much-changed investment landscape, due to both the scale and potential generosity of the new regulatory package contained in the upcoming so-called Fer X decree, which was first announced in summer 2023.
However, the decree still requires final approvals in both Rome and Brussels, with the latter dealing with EU state aid rules.
Nevertheless, Italy’s government plans to award 20-year incentives tariffs to 62.5 GW of new renewables capacity until the end of 2028, which equates to almost half of the country’s 131 GW overall installation target for 2030, representing a vast acceleration in project development.
Not only this, but the proposed tariff caps also look attractive in the context of current market conditions, with EUR 85 per MWh pencilled in for new solar projects and EUR 80 per MWh for onshore wind.
Imbalance
While these figures are a comfortable increase on recent auction tariffs in Italy which have settled in the mid-EUR 60s per MWh, they would also be substantially above current 10-year PPA prices of around EUR 60 per MWh (although one contact approached for this article suggested these could have dipped as low as EUR 48-55 per MWh in recent weeks).
In addition, the proposed structure for reimbursement would both remove all risk from curtailment but also pay out in the event of negative prices on the spot market, so generators would get paid under more or less any scenario and enjoy what appear to be cast-iron revenues.
While the headline tariff prices are not a million miles away from those registered in auction processes in various other European countries in recent months, and there should be little reason to decry an initiative that will ultimately substantially support the industry, the potentially dramatic consequences this could have for Italy’s PPA market are worth highlighting, particularly if the upcoming auctions clear at, or close to, the maximum tariffs outlined above.
With 45 GW of solar capacity set to be offered over the course of the regulatory programme, this could mean comfortably more than 10 GW could potentially clear the auctions each year. However, while there is reckoned to be about that latter figure currently near shovel-ready status across the country, it is unlikely, given Italy’s current planning environment, that a similar volume of projects could be ready to bid in each successive auction.
Any slackening of competitive tension would therefore make it much more likely for project sponsors to lodge high auction bid prices, in doing so maintaining a gulf between CfD and PPA prices.
“If we keep to the cap, PPAs will have to suffer a bit, or at least compete hard against auctions. We have experienced that in a competitive market environment PPAs and auctions [prices] tend to converge towards the same range,” says Paolo Grossi, chief commercial officer at renewables development platform Galileo, which has both signed corporate PPAs and entered auctions in Italy in recent quarters.
But will a pending demise of PPAs matter a great deal? Grossi, for one, highlights the ambivalence of some developers towards one model or another, which is a stance perhaps made easier by the vast quantities of capacity that are due to come through the auction system over the next few years.
“Our job for each project is to evaluate location, volumes, profiles, and market prices and to try to find the most valuable route to market for the projects,” he adds.
Coexistence
However, others assert that there will remain space for both CfD tariffs and PPAs in the Italian market, in part because of the sheer volume of projects coming through but also due to lingering scepticism in some quarters over future government actions, particularly in light of past retroactive tariff cuts.
“Several renewable energy investors who have been in Italy since the inception of the market and who suffered the effects of the incentive-cutting decree a decade ago are decidedly skeptical about the unexpected generosity of the new incentives mechanism. They doubt the long-term sustainability of such incentives and consequently assess the related 'GSE risk' as too high,” says Dario Gallanti, partner at PPA advisor Our New Energy.
Meanwhile, one financial advisory contact told NPM Europe last week that the high potential tariffs would be a welcome and necessary protection against tightening conditions for generators.
“We are all trying to shift production to zero marginal cost, so of course it makes energy cheap but this could also depress investment. So, of course CfD is a good mechanism. A problem? Not so sure,” they said.
Nevertheless, the rules contained in the draft of FER X contain several other aspects that will have tangible impacts on the market.
Firstly, and perhaps in a slight reprieve for the PPA market, bidders in auctions will be able to allocate tariffs to only a specified portion of the production from their assets, creating additional flexibility in structuring routes-to-market by leaving the option open to go at least partly merchant or put in place PPAs of various sizes or lengths.
There could also be a locational coefficient introduced which will allow national TSO Terna to change future auction results to favour some regions over others.
“The TSO can include a geographical element for reordering ranking because of grid congestion. The operator in this way can avoid constraints, but some areas will be more at risk in this respect than others,” says Grossi.
Developers will no doubt be awaiting firmer details of how this aspect will work in practice, and the extent to which certain locations will be favoured over others, in order to inform bidding decisions for their projects.
Meanwhile, the simple inclusion of greenfield, utility-scale solar in the future auction rounds will represent a new initiative in the context of Italy’s recent renewables history, with these types of projects excluded from incentives over recent years.
This factor may have compelled the government to set tariff caps at EUR 5/ MWh higher for solar than is the case for wind, but this has left many market participants puzzled, due to PV’s typically lower LCOE.
“From many, there has been a sense of surprise regarding the fact that the base auction price for wind assets was lower compared to solar’s, given that - at least in the majority of the cases - this does not seem to reflect the actual costs,” says Gallanti.
Zonal Pricing
A new auction series is not the only regulatory change set to hit the Italian market, with the country’s Ministry of Environment and Energy Security, as part of its Energy Security Decree, proposing to introduce zonal – rather than national – pricing for electricity.
This could well create an imbalance in risk allocation in PPA contracts, particularly where those are ordinarily indexed or tied to the current national price.
Power buyers will under current plans, from January 1 2025, pay the new zonal prices to their energy supplier but will maintain the national index price as a hedging reference under virtual PPAs, leading to a potential discrepancy between the two prices that does not exist under the current system.
One solution being proposed to counter this, and other related risks, is to maintain the publication of a national index price, essentially a weighted average of the six zonal prices that will enter into force, to continue to guide PPA contracts even after the system is changed. An average of the pricing pool will, by its very nature, be less volatile than individual regional prices, it is anticipated.
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