Italy: Incentivised renewables

Author: | Published: 1 Oct 2008
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It was only economic considerations that gave the final push to inducing the Italian governments of the last few years to support renewable sources of energy to increase their contribution to the country's ever-increasing energy requirements. Environmental aspects, underlined by the Kyoto Protocol (that also contributed to the increase of the cost of using fossil fuels) and political pressure from the European Union, have played equally important if not greater role.

Following Directive 2001/77/CE and the proposal for a new directive, this year Italy has simplified the permitting procedures for the construction and operation of electrical power plants fuelled by renewable sources and has introduced incentive schemes that have made investing in this sector particularly attractive to Italian and foreign investors. This process started in 2003 and is continuing (the latest piece of legislation, Law 115, is dated May 30 2008) to enhance the path to simplification, at least for renewable sources of energy. The chronic illness of the country has always been its slow and cumbersome permitting process.

In Italy, renewable sources are defined from the legal perspective as non-fossil sources such as those generated by the wind, the sun, waves or tide, the flow of water, geothermic phenomena or biomass and dump gas. Article 229 of Law 152 of 2006 also includes among renewable sources fuel made from high quality wastes (CDR-Q) to the extent of their biodegradable portion.

Construction and operation

Simplified permitting procedures for the construction and operation of plants for production from renewable sources were first introduced in 2003 by Law 387 and were supplemented in 2007 by Law 244/07.

Article 12 of Law 387/03 provides that "the construction and the operation of plants for the production of electricity fuelled by renewable sources, their modification, upgrading, partial or total revamping and the restarting of their commercial operation, as well as any connected facility and infrastructures necessary for their construction and operation are subject to a single permit to be released by the Region or by the provincial authorities delegated to do so by the Region".

The "single permit" is all that is required to build and operate medium and large power plants in conformity with their approved project. It is therefore an important simplification as it imposes on all public administrations involved (region, province, municipality) the duty to participate in a single proceeding and allows the applicant to obtain a single decision at the end of the proceeding, within a maximum of 180 days from the application.

In actual fact, the implementation of the law is not yet completely satisfactory as far as timing is concerned. Experience to date, particularly with respect to wind farms but also with respect to photovoltaic and biomass, has shown timing well in excess of 180 days, due in some cases to the complexity of the project and, in others, to the presence of building or zoning constraints in the area. There are examples, though, of local decisions based on political considerations such as the position taken by Calabria and Basilicata, two regions that have chosen to suspend the issuing of any permit (for wind farms in Calabria and photovoltaic plants in Basilicata) until the approval of their respective Piano Energetico Ambientale Regionale (Regional Energy and Environmental Plan). A similar position was taken by two other regions (Puglia and Sardinia) but was overruled by the Constitutional Court, as is likely to happen with Calabria and Basilicata.

Municipalities, too, have in some way attempted to play a role neither contemplated by the said law nor aligned to it. Those in the territory for which the plant was intended have tried to impose the execution of concession agreements providing for compensation and environmental rebalancing fees proportional to the amount of energy produced. Here again the initiative is gradually losing momentum because of the decisions of the administrative courts, which have decided on the illegality of those forms of compensation in contrast to the purpose of the law: to give an incentive for the production of electricity from renewable resources.

The efforts made by the public authorities regarding adhering to the intention of the legislator and the guidelines of the EU are undoubtedly still significant but, even so, one cannot doubt the fact that the recent enactment of new laws as mentioned above and the parallel legislation to the same effect by the regions is producing a general trend in local authorities for a tendency not to create (or indeed remove) obstacles to the issue of a single permit for renewable sources of energy.

Emblematic is the case of Puglia, a region that took a conservative view in the past and where now one may see a real surge of applications for new permits, from large plants to small ones. The region itself has issued legislation in favour of the use of renewable sources, anticipating the national legislation by allowing the construction and operation of plants not exceeding 1 MW, on the basis of a unilateral communication to the relevant authority (the DIA), without requiring even the single permit otherwise necessary, with an obvious reduction of costs and time.

National law has progressed further, with the recent Law 115/2008, published in the Official Gazette on July 3 2008, permitting the construction and operation of so-called mini plants (wind generators with a diameter no larger than 1 metre and a not higher than 1.5 metres and photovoltaic installations that fit to the roof without adding to the dimensions of the building) only on the basis of a simple communication to the municipality.

The complexity of the legal framework is still such that the role of legal counsel requires a high degree of specialisation, from the delicate phase of due diligence over the status of the land and its conformity to use to the evaluation of the proceedings to be followed (or, as often happens, already followed) in the specific circumstances, taking into account both national and regional laws, and the resulting permits (DIA).

Many small or not so small developers have come from nowhere, often leveraging their activity merely on their knowledge of the local environment, putting together land and permits to build and operate (normally a series of small) renewable resource-based plants and offer these projects to professional investors or industrial concerns. It is not rare to find cases in which crucial peculiarities that may have a serious impact on the project (such as tax status or flaws in the permitting), as well as on elements that might undermine their bankability, have been underestimated.

Financial aid mechanisms

Several methods of providing incentives for the use of renewable sources have been adopted by the Italian legislator over the years and apply to date.

CIP 6 (feed-in tariff)

The feed-in tariff is a pre-determined price for every unit of electricity produced for a given period of time and introduced into the grid. Its purchase, having priority over conventionally produced energy, is purchased by the State Agency for Electrical Services (GSE) at a subsidised price and re-sold to the market at market price. This system of subsidy, known as CIP6, only applies to plants built during the period in which the system was in force, but is no longer applicable to new plants, although a new version of the feed-in tariff system is now applicable to photovoltaic plants, as follows.

Green certificates

The incentive is based on the issue of certificates evidencing the production of energy from renewable sources (so-called green certificates or, in Italian, certificati verdi or CV). The scheme runs as follows.

  • Each green certificate is granted by the GSE to producers of renewable energy that conform to the specific criteria of qualification as eligible plants (IAFR), based on their net output for each 1 MWh produced, having started their operation after April 1 1999.
  • The green certificates may be purchased (either in one-to-one transactions or on the market) for the purpose of satisfying the requirements imposed on conventional producers by Article 11 of Law 79/1999, which imposes on producers or importers of electricity a duty (renewable requirement) to introduce from 2002 a minimum amount equal to 2% of the electricity produced from plants fuelled by renewable sources that have started their operation after April 1 1999 (quota). The said percentage has been increased by 0.35% each year between 2004 and 2006 and by 0.75% between 2007 and 2012. The market for green certificates is therefore created by the demand from producers and importers who do not produce sufficient electricity from renewable sources to satisfy the renewable requirement quota, as well as by purchasing green certificates from other producers.
  • The respective quota of the renewable requirement of each producer or importer is calculated on the basis of the production or import in the previous year, net of cogeneration, the plant's auxiliary services consumption, exports and a deduction of 100 GWh.
  • Each green certificate is valid to satisfy the renewable obligation (of its purchaser) for the year in which the renewable energy it represents was produced and for the following two years. For example, green certificates issued in relation to renewable energy produced in 2006 can satisfy the renewable requirement in relation to non-renewable energy produced in 2006, 2007 and 2008.
  • The green certificates not used by their expiry date are purchased by the GSE at a pre-determined price from time to time.

Conto energia (energy account)

This particular type of incentive, based on the feed-in tariff system, is dedicated to photovoltaic plants. They can enjoy, as an alternative to the green certificates, a subsidised tariff paid by the GSE for each unit produced, as provided by the Ministerial Decree of February 19 2007 and by the Resolution of the Authority for Electricity and Gas (AEEG) 90/2007. The tariff is paid for 20 years from the start of the commercial operation of the plant and its amount varies depending on its characteristics (whether on the ground or totally or partially integrated with a building). The incentive is available up to a global maximum amount of 1200 MW installed, of which approximately 63 MW have so far been installed, hence leaving space for the foreseeable growth of investments in this field.

Budget Law 2008 novelties

An in-depth review of the incentive system for energy produced by renewable sources has been introduced by Law 244 of December 24 2007 (Budget Law 2008), together with the Connected Law to the Budget Law 2008 (DL 159/07, converted with amendments to Law 220/07) for plants starting their commercial operation from January 1 2008, apart from photovoltaic plants which, as mentioned, enjoy the conto energia alternative, which is confirmed.

The most significant changes are the following. They are to be further detailed and clarified based on the rulings and resolutions of the relevant ministry and authority:

  • the incentive is differentiated based on the type of renewable source used;
  • IAFRs with a production not exceeding 1 MW may enjoy, at the request of the producer, a simplified incentive as an alternative to the green certificates, consisting of a subsidised tariff; and
  • no energy subsidy is applicable to those plants that started their operation after December 31 2008 if they have enjoyed other types of public subsidy.

The green certificates regime has been partly revised as follows:

  • the duration of the new green certificates is extended from 12 to 15 years; and
  • the GSE may issue for its own use green certificates of an amount equal to the amount of renewable energy purchased by the GSE under the CIP6 scheme, as well as for other reasons such as to offset fluctuations in the annual production of renewable energy or insufficient offers of green certificates on the market (but subject to certain reconciliation obligations every three years).
  • From 2008, the GSE may sell such certificates on the electricity market at a price per MWh equal to the difference between: (i) a reference value, initially set at €180/MWh ($257/MWh); and (ii) the yearly average price at which IAFR plants sold electricity to local network operators during the preceding year, to be assessed by the Authority for Electricity and Gas (AEEG). The reference price may be altered every three years by the GSE in order to ensure a remuneration of the investment adequate to provide an incentive for the development of renewable energy.
  • On the other hand, should the total offer of green certificates exceed their demand on the market as a consequence of a failure to increase the renewable requirement, the GSE is obliged every year to purchase any unused green certificates at a price equal to the average price of green certificates recorded on the electricity market during the preceding year.
  • The following table illustrates the most significant changes introduced by Budget Law 2008 and its connected law.

Sale of renewable energy

Another form of incentive for the production of renewable energy is offered by the ways in which it can be sold, as follows.

  • Directly, by way of sale on the electricity market or, by a bilateral contract, to a gross dealer. The disadvantage, constituted in this case by a complex selling process, is often compensated by a higher price. A disadvantage in financial terms includes, in particular, the necessity to enter into transport and dispatch agreements with the operator of the national grid (TERNA) and possibly with local distributors and to provide the relative collaterals to secure performance, as well as the complex management organisation required for the trading of the energy produced.
  • Indirectly, by way of a sale to the GSE, in conformity with AEEG Resolution 280/07 (so-called dedicated withdrawal), irrespective of the grid to which the relevant plant is connected and that of its purchaser. The advantage for the producer is the simplified process of sale, dispatch and transport, all of which is regulated by a power purchase agreement with the GSE. The price is the average price on the electricity market at the time (hour) of the producer introducing the electricity into the grid. For newcomers to the market and for small producers, there is no doubt that this constitutes an extra incentive for the production of renewable energy.
Table
Start of operation date (entrata in esercizio) Entrata in esercizio before April 29 2006 Entrata in esercizio from April 29 2006 to end 2007 Entrata in esercizio from January 1 2008
Duration of the right for IAFR plants to receive green certificates 8 years 12 years 15 years
Unitary value of the green certificates 1MWh 1MWh 1MWh
Number of green certificates that the IAFR plants are entitled to Based on net output Based on net output Based on net output x 1.0 (onshore wind farms)
The 1.0 ratio may be altered every 3 years by the MSE
Reference for the calculation of the green certificate price to be sold by the GSE (from January 1 2008) €180/MWh – yearly average of IAFR power value (as defined by the AEEG) €180/MWh – yearly average of IAFR power value (as defined by the AEEG) €180/MWh – yearly average of IAFR power value (as defined by the AEEG)
Price for purchase of unused green certificates by the GSE N/A Average of green certificate market certified by the GME during the preceding year Average of green certificate market certified by the GME during the preceding year

Author biographies

Eugenio Grippo

Gianni Origoni Grippo & Partners

Eugenio Grippo is a partner in the firm and specialises in financial transactions and corporate matters, with special emphasis on their financial aspects. His main areas of practice include joint ventures, M&A and project financing. He has lengthy experience in the energy industry, having advised on a number of electricity, oil and gas projects, starting with oil and gas upstream development in the seventies, main gas pipelines in the eighties, electricity liberalisation in the nineties and renewables at the present time. He is the co-author of the textbook Manuale Breve del Diritto dell'Energia (Short Treaty of the Law on Energy), CEDAM, 2008.

Eugenio works with clients in Italy and abroad, recently having advised ENI with respect to the dismissal of an Italian pipeline, ENEL on the acquisition of the project company Maritza III for the revamping of a generation plant in Bulgaria, the lending banks on three wte plants in Sicily and Lukoil on a joint venture with ERG with respect to a refining complex in southern Italy.

A partner and then managing partner in Milan of the first partnership of lawyers in Italy from 1973 to 1985, he founded Studio Grippo & Associati in Milan and Rome and formed a joint-venture firm in 1993 with a prominent UK law firm, followed by a full merger in 1997. He joined Gianni Origoni Grippo & Partners in 2001 and is qualified to practice before the Italian Supreme Court.

Eugenio is fluent in Italian and English.

Giuseppe Velluto

Gianni Origoni Grippo & Partners

Guiseppe Velluto is a partner in the firm and specialises in public and administrative law. He has extensive expertise in infrastructure regulation, utilities and project financing. He routinely assists leading national and international companies in the development of new projects in the energy, gas, waste and water sectors.

He worked on the team of advisers for the co-lead arrangers Unicredit Infrastrutture SpA, Royal Bank of Scotland, Cassa Depositi e Prestiti and Banca Intesa in the financing on a non-recourse basis for the construction and operation of three waste-to-energy integrated systems located in Sicily. This was awarded "Project Deal of the Year" by Finance International Magazine in 2006. He recently advised the Scottish renewable energy company Airtricity, a subsidiary of Scottish and Southern Energy (SSE), in a joint venture with Entropya. He also advised on the sale of Mirant Generation San Severo Srl to EN Plus (subsidiary of Atel AG) by Ascopiave SpA and Alerion Industries SpA, a transaction valued at €13.5 million.

Giuseppe received his law degree from the University of Milan in 1995. He joined Gianni Origoni Grippo & Partners in 1999. He is a regular lecturer at seminars on project financing and energy regulation and contributed to the publication of Manuale del Project Financing, Stefano Gatti, Milano 2006.

Giuseppe speaks Italian, English, French and Spanish.

Ottaviano Sanseverino

Gianni Origoni Grippo & Partners

Ottaviano Sanseverino is a partner in our Milan office and specialises in project finance with a special focus on the energy sector. He has been involved in the energy sector since the beginning of liberalisation and has advised several foreign and domestic clients. He has worked on matters including trading in electricity and gas, site developments, CTAs, PPAs and other supply related agreements, import of gas and electricity, tariffs and other regulatory matters concerning power, gas and utilities in general. He also advises foreign and domestic clients on investments in the utilities sector.

Ottaviano has worked on many national and international project financings. He is very active in renewable energy projects, particularly in the development and financing of wind and photovoltaic assets. In 2008 he advised International Power on the Italian regulatory aspects of the financing of the acquisition of Maestrale from Trinergy, the largest wind farm portfolio in Italy and is now completing the financing of several PV portfolios exceeding 120 MW.

Ottaviano received his law degree (maxima cum laude) from Rome University in 1990. He has been with Gianni Origoni Grippo & Partners since 1995 and was made partner in 2001. He spent several years in charge of our London office and is a member of the Italian Bar Association, as well as being registered as a European Lawyer with the Law Society in England.

Ottaviano speaks Italian and English and can be reached at +39 02 763741 or osanseverino@gop.it.