The peculiar case of the Italian market development: an outlier in the energy sector
November 2016 | SPECIAL REPORT: ENERGY & NATURAL RESOURCES
Financier Worldwide Magazine
Being one of the most industrialised countries in the world, Italy is also one of the largest electricity consumers. Even if potentially able to produce, through its power plants, an amount of electric energy sufficient to entirely meet internal demand, Italy needs to import a large amount of raw material necessary to produce electricity, due to its lack of mineral resources.
Considering that the foreign producers of this raw material are, in some cases, politically unstable countries (e.g., Libya) or, in other cases, eastern countries often in friction with western ones, energy independence is an important issue, not just from an economic angle, but even more from a national security point of view.
Since 1991, Italian energy policy has been subject to drastic measures aimed at reducing the amount of ‘dirty’ energy produced by fossils, and to encourage investments within the ‘green’ energy sector.
This epic change in the national energy politic has made Italy, in 10 years, a world leader in the renewables sector. The production of electricity from renewable sources has grown by 137 percent from 2007, while renewable energy deployment has tripled. This rousing achievement, made possible because of massive government incentives to the sector, boosted Italian production to meet the EU Vision 2020 target five years in advance, both in relation to gross final consumption of renewable sources and in relation to electric energy deployment percentage.
During June 2016, a symbolic goal was reached: monthly energy production was covered with 50.5 percent of electricity produced by renewables. As of today, hydroelectric represents the greatest portion of renewables sources (39 percent), while the photovoltaic (21 percent), wind (19 percent), biomass (16 percent) and geothermal (5 percent) sectors experienced continual growth over the last 10 years to become mature technologies, capable of competing with traditional energy sources in the energy market.
Recent changes in law and perspective
During the last two years, the Italian parliament introduced several amendments to energy sector legislation, essentially aimed at reducing the burden of incentives on the public budget. Most operators called it a dangerous step backwards.
The Decree no. 91/2014 (‘spalmaincentivi’) provided a de-facto retroactive re-modulation of public incentives for photovoltaic plants. Introduced with the aim of cutting energy bills for small and medium enterprises, the Decree raised many complications among producers, lenders and, generally, among PV operators, considering that incentives represent the principal revenues of these plants and, consequently, the major cash flow with which to service debt.
According to the Decree, operators in the photovoltaic sector had to choose between three options in order to re-modulate the relevant feed in tariff: (i) spread the incentive period from 20 to 24 years; (ii) keep the incentive period to 20 years, but with a reduction in the first period followed by a corresponding increase in the second period; and (iii) keep the incentive period to 20 years, but with a cut of the incentive between 6 percent to 8 percent in proportion to the plant power class.
According to data provided by Gestore dei Servizi Energetici (GSE S.p.A., the government-owned body which manages the assignment of incentives) the Decree’s provisions involved almost 12,900 photovoltaic plants, while the reductions will be €395m per year. The most questionable aspect of the Decree concerns the retroactive effects of its provisions. The latter may breach certain constitutional principles, including the fact that the law is not retroactive in general, and the theory of acquired rights.
As a consequence, the Decree was recently brought before the Italian Constitutional Court which will consider its provisions. The first hearing is scheduled for 6 December 2016. Should the Decree be declared unconstitutional, the GSE will be forced to pay out the incentives not acknowledged by virtue of the Decree.
Moreover, with reference to renewable plants other than PV, another important measure which deserves to be highlighted is the entry into force of the Ministerial Decree dated 23 June 2016 (Renewable Decree). The Renewable Decree made available more than €400m through incentives for 2016, to be distributed among a quota power of more than 1300 MW.
The Renewable Decree also introduced important innovations in the field of incentives for plants fed by renewable sources, even compared to the previous regime introduced on 6 July 2012. In particular, it introduced new criteria for calculating the aggregate cost of incentives, new provisions on the artful splitting of plants (s.c. artato frazionamento degli impianti), and new dispositions in relation to hydroelectric and thermodynamic plants.
Opinion on the Renewable Decree definitely seems positive for the availability of an additional €435m – enough to regenerate the renewable energy sector. Moreover, the six month validity of the new incentive regime appears sufficient to give operators the chance to invest in the renewable sector. Despite the limited time extent of the Renewables Decree, the new calculation method based on the aggregate cost of incentives – and the availability of finance for the incentives – seems to suggest the Italian legislator’s intention to issue a new decree in order to regulate the period after 31 December 2016. The Renewable Decree appears to be a temporary rule which establishes the incentive regime applicable for the next three years.
Go forth on the green energy road
The negative effects of the measures outlined above, in particular in the case of the Decree, consist of the distrust they have generated beyond Italian and foreign investors. Indeed clear, certain and long-lasting rules are the gist of the investment policy. This is what Italy needs most: a precise and rigorous energy policy, whose main purpose should be to continue and further develop the production of green energy. This energy strategy, to be effective, needs to be shared not only within political forces, but also with all stakeholders.
Due to the measures related to the new incentive policy, some operators and ecologists accused the government of being influenced by fossil fuel lobbyists. The amount of incentives earmarked for the coming years seem to be less that in the recent past; however, it is justified on one hand by the excellent achievement reached in comparison to other European countries, and on the other hand by the need to contain public expenditure.
The Italian government knows that the road to green energy is the only one available, and also the most convenient. With this in mind, Italian prime minister Matteo Renzi publicly stated Italy is willing to bet on green technology and renewable sources; even though apparently more risky and expensive, in terms of public expenditure, as part of a long-term vision it should produce more advantages. It is a concrete investment opportunity, both to accelerate the Italian economy and to ensure complete, effective energy independence.
Rosella Antonucci is a partner and Ivano Saltarelli is a managing associate at Legance. Ms Antonucci can be contacted on +39 06 93 18 271 or by email: email@example.com. Mr Saltarelli can be contacted on +39 06 93 18 271 or by email: firstname.lastname@example.org.
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Rosella Antonucci and Ivano Saltarelli