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Renewable Energy Review: Italy

Developers, manufacturers, investors and other renewable energy industry stakeholders need to know where the next big market is going to be so that they can adjust their business decisions accordingly.

Since 2003, global consultancy Ernst & Young has released its Country Attractiveness Indices, which ranks global renewable energy markets by analyzing investment strategies and resource availability. The indices are updated on a quarterly basis and the most recent report can be found here.

Another One Bites the Dust

Italy has now joined the hall of shame for European countries applying retroactive measures to renewable support regimes, much to the dismay of both foreign and domestic investors. The legislation, passed by the Italian Parliament on 7 August after drafts of the amendments were first released in late June, will apply subsidy reductions to existing solar PV projects built since 2008 and larger than 200kW, with effect from 1 January 2015. 

Scale of the Problem

The move is intended to save €1.5 billion (US$2.0 billion) per year and help the Government meet its pledge to reduce energy bills by 10 percent. Italy’s power prices are currently a third higher than the EU average, which the Government claims is harming small- to medium-sized businesses. Given the 200-kW threshold, the legislative amendments are only expected to affect around 8,600 solar plant owners out of a total 200,000 in Italy. However, they will still impact roughly 11 GW of the 18 GW installed solar capacity given plants larger than 200 kW currently receive at least 60 percent of total support.

Choices, Choices, Choices

Solar plant operators are faced with three options under the revised legislation and will be required to nominate their preference by 30 November 2014. 

  1. Maintain FIT for original 20-year term with rate reductions varying by plant size: 6 percent for 200-kW to 500-kW plants, 7 percent for 500-kW to 900-kW and 8 percent for >900-kW.
  2. Extend FIT term to 24 years with rate reduction of 17 percent to 25 percent depending on the remaining operational years (with a higher reduction for older plants).
  3. Maintain FIT for original 20-year term with a variable rate reduction for the first part of the residual FIT period but an equivalent increase in the second part (specific rates and periods to be defined by 1 October 2014). This option addresses the challenge of extending payment terms (as per option 2 above) on leased land.

In the Detail

Critically, plant operators will now also receive only 90 percent of the monthly fixed payment, based on estimated annual electricity production. The remaining 10 percent will be calculated as an annual reconciliation adjustment based on actual production and paid at the end of June of the following calendar year. Plant owners are also permitted to seek early redemption of their incentives by selling up to 80 percent of the tariff rights to financial institutions via an auction system. The legislation also introduces provisions for the state-owned Cassa Depositi e Prestiti to either fund or guarantee financing to cover the difference between the current FIT and the reduced rate, to assist operators experiencing diminished cash flow as a result of the changes.

Up in Court

As in Spain, the retroactive cuts have already triggered talk of legal action. More than 50 companies active in the solar sector, including institutional investors, lodged a complaint with the EC in late July, demanding an investigation into whether the changes are in breach of Directive 2009/28/EC. Appeals have also already been made before the Italian Constitutional Court, while aggrieved foreign investors may be entitled to seek redress under international instruments such as the Energy Charter Treaty. The legal firm representing the group of companies estimates investors could lose between €1.0 billion (US$1.3 billion) and €3.0 billion (US$3.9 billion) as a result of the new legislation.

Broader Implications

There is some speculation that the relatively small savings from the amendments will not outweigh the potential losses from costly legal action and abandoned projects. This, combined with the stigma of a precedent for retroactive legislative changes, could potentially undermine the Government’s drive to attract foreign capital to bolster Italy’s fragile economic recovery. Further, lenders supporting projects that struggle to cope with the revised revenue streams may be forced to write-off non-performing loans or step in to take over assets.

Too Much

Italy’s program of reduced financial support for renewables, and solar in particular, has already been underway for a number of years, as it seeks a more sustainable balance in the wake of long-lived generous tariffs. But, it remains to be seen whether the latest changes impacting existing projects will be simply too much for the sector to recover from.

Lead image: Italy map via Shutterstock