Italy [Renewable Energy World magazine] The first Italian law providing incentives for producers of photovoltaic electricity dates back to 2001 and it is usually referred to as the ‘Photovoltaic Roofs Programme.’ Aimed at promoting the photovoltaic industry in Italy, however successful in making people aware of the potential of the photovoltaic industry, the results achieved in the energy market were all but insignificant.
In light of the limited success achieved by scheme, in mid-2005 Italy enacted a Ministerial Decree, so switching to the so-called feed-in tariff system (also known as Conto Energia) to promote solar energy. The new rules provided for a scheme whereby PV plant investment was to be returned through incentives paid by the Gestore dei Servizi Elettrici S.p.A. (GSE) for a period of 20 years. The incentives are additional to the price paid by local grid distributors for the electricity sold by the producer. However, paid directly by the GSE to the plant owner, the incentives were cross-financed through an additional fee charged to all Italian end-customers and which was added directly to their electricity bills. Though the feed-in-tariff scheme has been significantly modified over recent years, its financing system remains unchanged and its burden still remains with electricity consumers.
In order to be eligible for the incentives under the 2005 scheme, a PV plant should have a power of 1–1000 kW, excluding all large scale installations. Furthermore, the incentives would no longer apply once the national installed PV ca pacity met the overall target of 100 MW. The Ministerial Decree also set out a photovoltaic energy target of 300 MW, which was meant to be achieved by 2015.
From the very beginning the new feed-in tariff scheme proved to be successful and seven months later in 2006 the government enacted a Ministerial Decree widening its scope. The overall limit of PV energy which could benefit from the incentives was increased from 100 MW to 500 MW. Most notably 360 MW of this was designated to plants with a rated power of below 50 kW, while 140 MW were destined for plants with rated power of 50–1000 kW, although the 1 MW limit for plants benefiting under the legislation persisted.
Though the overall threshold was increased, most importantly the scheme introduced for the first time a yearly limit of electricity which could benefit from the feed-in-tariff. This limit was set at 60 MW for plants having a power below 50 kW and at 25 MW for those with a power of 50–1000 kW, so setting the overall national limit at 85 MW per year.
However, a new restriction was also set out by the 2006 Decree, as it ruled the incentives would no longer apply to electricity which, instead of being sold to the local distributor, was directly consumed by the producer, regardless of it being PV energy. The restriction mostly affected small plants in commercial applications.
Regardless of the significant restraints still existing in 2006, generally speaking the feed-in tariff scheme contributed greatly to the start-up of the PV industry in Italy and by the end of 2007 the overall power produced by PV installations which benefited from the programme already amounted to as much as 60 MW, as compared to approximately 37 MW for the overall national PV power existing before the 2005 Decree. See Table 1, below.
In the light of the success experienced in the first months of the feed-in tariff scheme, the national target for photovoltaic energy was also increased from 300 MW up to 1000 MW by 2015.
The New Feed-in Tariff Scheme
A year later, far-reaching changes were set out. Based on the success achieved by the feed-in-tariff programme, the new regulation set a target at 3000 MW to be achieved by 2016, doubling the target set the year before. Most importantly, however, the newly enacted regulation cancelled most of the restrictions affecting the development of PV. The new rules, which were applicable to all PV plants commissioned after April 2007, removed the size limits for qualifying installations, cancelled the overall yearly limit and provided for the incentives to be granted to all PV plants started up before the national total reached 1200 MW installed, as well as to all plants started up within 14 months after this point. Furthermore, the new scheme cancelled the limit concerning the incentives for self-consumed electricity, allowing the entire electricity produced by a PV plant to qualify. In addition, under the new rules it is also now up to the plant owner to make sure that the PV plant complies with all the technical requirements by providing the GSE with the PV plant documentation, though the GSE is entitled to carry out inspections.
The Decree set up new incentives whose amounts change in accordance, not only with the plant size, but also by the architectural integration of the plant itself, as described in Table 2, opposite.
The overall success of the new feed-in-tariff scheme is illustrated in Figure 1, shown below, which describes the yearly increase of megawattage produced by PV plant under the two schemes.
For installations commissioned between 1 January 2009 and 31 December 2010, all the incentives are reduced by 2% for every calendar year after 2008. Currently, therefore, the figures provided above need to be reduce by 2% for those installations which are started up by the end of 2009. However, for the time being it is unclear whether the incentives, which are to be granted for as long as 20 years, will be also increased every year on the basis of inflation. While the GSE takes the view that no inflationary increment should be applied, it is possible that on-going action to have such an increment acknowledged will be successful, although this is not certain and it should be considered a risk factor in the Italian PV industry.
Developing a PV Plant in Italy
However profitable and low risk the Italian PV business may seem, any development begins necessarily with the search for a suitable location. Although laws expressly provide for agricultural land to be suitable for the implementation of PV projects, the search for land which has the right extension, exposure and proximity to the local electricity grid is not an easy one. For this reason, local contractor companies have often sought suitable locations in order to have PV plants authorized before having even executed an agreement with a buyer. Only once the developer has found the land, executed an agreement with the land owner and filed the authorization for the PV project, would it seek potential buyers willing to carry out the project and assign to the construction works for the PV plant. So, while carrying out an independent search for suitable land may require experience and time, often interested buyers refer directly to developers and ask for ready-for-implement projects in order to overcome such inconveniences.
Figure 1. PV capacity installed (MW) under the 2005 and 2007 incentive Decrees
In order to obtain development authorization, the request needs to be filed by the land owner himself or by an entity which shall prove to have entered into an agreement for the purchase of either the land itself, or the surface rights. In either case the buyer’s first priority will be not to undertake any obligation until the plant has been authorized and the EPC agreement has been executed with a reliable contractor.
In order to avoid the risk of buying land which may turn out to be unsuitable for a PV project, there may be two alternative solutions under which land or surface rights purchase agreements include a compulsory buy-back clause in the event that the plant project is not subsequently granted authorization or an agreement that provides the potential buyer with an option to purchase the land concerned at will. While these solutions represent a balance between capital risk and binding obligations, it is however important to bear in mind that in order to determine which solution is the correct one, a case-by-case accurate analysis of all the relevant circumstances is always necessary.
The process to grant a construction authorization may change depending on the Italian Region concerned. The national Decree provides for the authorization of a PV installation to be granted according to a 6-month simplified procedure to be carried out either before the relevant Regional government or the provincial authority, if appointed. The legislative decree also requires the Ministries concerned to adopt the guidelines for the implementation of the simplified procedure outlined by the national legislation. So far however, such guidelines have not been adopted. On the one hand the Italian Regions have adopted their own rules in order to abide by the Decree, and on the other they have adopted additional provisions setting exceptions or derogations from the national rules which may be important to a PV project.
The authorization to build a PV installation is one of the major problems in some Italian Regions where the local authorities have proven to be incapable of coping with the high number of requests filed over the last year. Unfortunately, if the local authority has remained silent until the expiration of the six-month term provided by law, there will be no alternative to filing an action with the local administrative court and requesting a prompt response. So, a local authority incapable of granting the authorization within the relevant term could affect the completion of the project and it is therefore advisable to take such issue into account before commencing any PV project in Italy.
Due to persistent delays in the grid-connection procedure, the regulatory authority Autorità per l’energia elettrica e il gas (AEEG) adopted new rules for the connection of a PV plant to the local grid which have applied since 1 January 2009. The connection procedure is rather complex and changes depending on the plant output. On the assumption of a PV installation of less than 10 MW power,the applicant shall file a request for grid connection with the relevant local distributor company and pay a filing fee. Within 45 days of the filing the distributor company shall provide its estimate of the costs of works, a list of the authorization requirements, an estimate of the time to perform the works and an indication of the works to be performed by the applicant at the connecting point.
The estimate should be accepted by the applicant within 45 days, attaching proof of having paid 30% of the estimated costs stated by the distributor company, which in case of failure to obtain the necessary authorization for the connecting works shall be returned. If the applicant accepts the estimate, then upon completion of such works required at the connection point, they shall inform the distribution company and attach proof of paying the remaining 70% of the costs.
An AEEG resolution provides for a term to complete the connecting works of 30–90 days, depending on the complexity of the works, in addition to a 15-day extension for each kilometre from the grid to the connection point. The 15-day extension concerns only medium voltage connection. For high voltage connections the distributor company shall notify a detailed time schedule of the works to be performed.
It is noteworthy that such a term does not include the time required by the administration involved in order to grant the authorization of the connecting works. In this respect the AEEG merely states that the distributor shall file the relevant authorization requests within 30 days in case of low voltage connection and within 60 days in case of medium voltage connection. The resolution also makes clear that delay by the public authorities involved in the authorization process shall not be attributable to the distribution company, provided that all the requests have been filed within the relevant terms.
It is noteworthy that the plant and the connecting works authorization procedure can be carried out at the same time, making it possible to begin the connecting procedure before the plant construction has been authorized. In order to co-ordinate the authorization procedures, the AEEG provides that upon completion of the PV plant and the grid connection, the plant owner and the distributor shall notify each other to arrange for the activation of the connection.
Due to the two-fold activity to be carried out by the local distributor and the public authorities involved, in addition to considerable technical knowledge, significant expertise in respect of the local area is also required. It also needs to be pointed out that delays in the distributor’s activities, including the notification of the estimate, are expressly sanctioned with a fixed amount of money per day of delay.
Within 60 days from the activation of the gird connection, the PV plant owner shall file a request for the incentives to the GSE. The plant shall be deemed to be activated at the time the plant and the electricity meters are connected and the electricity transfer agreement is executed. If all such conditions are met and the owner of the plant fails to file the request within 60 days, the plant will never be entitled to the incentives.
Upon receiving the request, the GSE will check the fulfillment of the conditions on the basis of the documents provided. However, the GSE is also entitled to carry out inspections at any time after granting the incentives to ascertain whether the information provided actually matches the technical characteristics.
Buying a PV Plant
From these considerations it can inferred that, while a PV plant represents a rather safe and quite rewarding investment once the project has been completed and the incentives granted, the risks involved in the implementation of the project before the feed-in-tariff is provided by the GSE should not be underestimated. In order to reduce or avoid the risks involved in PV investment, companies active in such an industry have started developing projects and seeking buyers willing to replace them in due course. Most of the contractor companies have undertaken the development of a project without any buyer being bound to purchase the installation. Although a company may build a PV plant and sell the entire installation, most commonly contractors do not go as far as building the entire facility. It is worth recalling that while the risk of failure is located thorough the development steps outlined above, most of the investment shall be made according to the time schedule provided in the contractor agreement, at a time when the land has already been purchased and the project has been authorized. For such reasons some companies have directly undertaken to select the land, prepare the plant and complete the authorization procedure. Upon completion of the authorization procedure and before the beginning of the works the contractor company looks for a purchaser of PV Project.
However, photovoltaic projects require high initial investments and for this reason many banks, credit institutes and leasing companies have entered the photovoltaic market with dedicated financial instruments in order to meet the increasing requests of their many clients. Indeed, due to the safety of the return of a photovoltaic investment, which is mostly based on the 20-year agreement with the GSE, banks have decided to grant loans on industry-made conditions.
What is peculiar to a PV loan agreement is the pay-back scheme. While most loan agreements provide for installments which are either fixed or changing in accordance to the central banks interest rates, PV loan agreements provide for a return scheme based on the incentives paid by the GSE. As a consequence, in case of unexpected factors affecting the plant’s yield – such as an extensive period of poor weather – the borrower should not be required to pay back any sum over the period concerned. On the assumption that the yield of a PV plant can be predicted on the basis of some relevant factors such as, for instance, its size, the technology employed and its location, banks are not concerned over their short-term returns. On the contrary, banks rely on a constant safe cash flow based only on the incentives paid by the GSE. Although banks could require that the loan is paid back through the profits arising from the indirect sale of electricity in addition to the GSE incentives, this is not their common business practice. Generally speaking banks seem to prefer a slow but safe return on their investment, so making it more profitable over time as a consequence of interest.
Based on this common practice it has become usual to set, as a condition for granting the loan, to require the borrower to execute a statement to transfer directly to the bank any right to the incentives to which his plant will be entitled.
Under the new feed-in tariff rules, in addition to the sale of the electricity, the plant owner will be entitled to be paid by the GSE an incentive which is determined on the basis of the installed capacity and architectural integration of the plant. So, while the price for the electricity basically depends on the energy market, the incentives are fixed according to criteria determined by the Legislative Decree. Other measures are designed to ensure timely grid connection and permitting and are enhancing the burgeoning market still further. In addition, the establishment of a feed-in tariff scheme apparently makes it far easier for the development to secure project finance, crucial in today’s financially constrained times.