infraread issue 14 10 Feb 2020 New Italian Incentives for Renewables FER 2019

On 9 August 2019, the new Ministerial Decree providing incentives for power plants producing energy from renewable sources, for the three-year period 2019-2021 (the FER 2019), was finally published in the Official Gazette, and entered into force on 10 August 2019.

The FER 2019, which entered into force on 10 August 2019, provides for new incentives that can be granted, upon specific award procedures, to renewable energy source plants.

Such incentives can be granted to most of the renewable energy source plants, including solar plants that in the past benefited from a separate incentive scheme, and apply to construction, revamping and repowering (except for solar plants, which are not eligible for repowering/revamping). In addition, as in the past, ground-mounted solar plants located in agricultural areas are not eligible for the incentives.

The incentive system ends once the incentives granted have reached an overall indicative yearly cost equal to €5.8 billion per year.

The FER 2019 provides two ways in which to benefit from the incentives:

1. via enrolment in special registers (for plants with a power capacity lower than 1 MW);
2. via auctions (for plants with a power capacity equal to or higher than 1 MW, including aggregates of plants that have an overall capacity equal to or exceeding 1 MW and individual capacities of between 20 kW and 500 kW);

The incentives shall be granted for plants based on rankings according to the power quotas set for each renewable source and provided that the relevant construction works start after their inclusion in the rankings.

The procedures to obtain incentives differentiate plants and quotas as follows:

• Group A: includes wind plants and solar plants;
• Group A-2 (only for plants with power capacity lower than 1 MW and registered in special records): includes rooftop solar plants replacing roofs of buildings and rural buildings, and with full removal of Eternit or asbestos (such plants may accrue, in addition to the incentive, a bonus of €12 per MWh);
• Group B: includes hydroelectric plants and sewage treatment gas plants;
• Group C: includes wind plants and B-Group plants in ongoing entire or partial refurbishment.

The FER 2019 provides for seven tender procedures to obtain incentives, which will be launched over a three-year period, each with different (and increasing) power quotas for each group of plants, as follows:

Table 1 (via register i.e. < 1 MW)

Table 2 (via auction i.e. > 1 MW)

In order to benefit from the incentive, the plant must already have been authorised at the time of the subsidy application.

The incentives will be available to plants where construction works are due to start after the plant has been included in the rankings (except for plants that were not successfully included in the rankings of the previous FER Decree 2016 Ministerial Decree 23 June 2016 or those having direct access to the incentive pursuant to the same decree, i.e. without either enrolment in a register or auction).

As in the previous incentive system, plants cannot benefit from either the "ritiro dedicato", i.e. the one-year PPA entered into with the GSE (Gestore Servizi Energetici, the Italian public authority in charge of the incentives) nor the on-site exchange (scambio sul posto).

The energy produced by the incentivised plant remains available to the producer who can sell it to third parties (except in the case of an all-inclusive tariff for plants up to 250 KW).

The launch dates for tenders are as follows:

The deadline to submit applications is 30 days from the launch date, and the GSE publishes the rankings within 90 days of the tender closure.

The incentive is granted for the working life of the plant, which is set by the FER 2019 according to the type of source (for most plants it is 20 years from the commercial operation date).

The incentive is equal to the tariff offered by the bidder minus the hourly zonal price (prezzo zonale orario) of the area where the energy produced by the plant is fed into the grid. In cases where the zonal price is higher than the tariff, the negative difference is adjusted by the GSE through a clawback mechanism.

The base tariff by type of plant (on which bidders are asked to propose a reduction, see below) and working life during which the tariff will be paid (which cannot be changed by bidders) are as follows (in a nutshell, for solar and wind >1 MW, these are €70/MWh and 20 years respectively):

From January 2021, the base tariff will be reduced by 2% for Group B plants and by 5% for Group A plants, and additional tariff reductions are provided depending on the date of entry into operation of the plant.

Access to the incentives through the register (for plants with power capacity <1 MW)

In order to be awarded incentives through inclusion in the register, plants < 1 MW must meet certain eligibility requirements. Once such requirements are met, bidders are ranked based on certain priority criteria set out below.

Eligibility requirements for the register:

In order to apply for incentives, the following eligibility requirements must be met:

1. the plant must have all necessary permits;
2. the connection proposal by the grid operator must have been accepted;
3. the works must not have started (except for plants for which applications were submitted but not granted under the 2016 FER Decree);
4. delivery of a bid bond equal to 1% of the capex (final performance bond equal to 2% of the capex to be delivered upon award of the incentive).

Priority criteria:

Once the above eligibility requirements are met, bidders are ranked based on certain priority criteria set out below:

• for Group A plants (solar and wind plants): if located on exhausted landfills, exhausted quarries and peat bogs, contaminated sites, etc.;
• for Group A-2 plants (rooftop solar plants): if built on, in order of priority, schools, hospitals, public buildings;
• for Group B: in relation to (a) hydroelectric plants, if the construction meets the requirements set forth in article 4, par. 3, lett. b), nn. (i) (ii), (iii), (iv) of the FER Decree 2016; (b) sewage treatment gas plants, if coverage of the digestate tanks is provided;
• for all groups: if the plant is connected in parallel with the electricity grid and with electric car recharging stations, provided that the total recharging power is not lower than 15% of the plant's power capacity and that each recharging station has a power capacity not lower than 15 kW;
• for all groups: aggregates of plants up to 1 MW of power capacity;
• for all groups: highest percentage of reduction of the base tariff offered by the bidder (provided that it is not higher than 30% of the base tariff). This is likely to be the most important parameter unless a plant falls into one of the above categories (which is rare). Therefore this may potentially trigger a bidding war among bidders and, considering the maximum discount which may be offered is 30%, there is a possibility that many bidders will bid the highest discount (30%) and therefore the tariff will be awarded on the basis of the following residual criteria:

- for all groups: lowest value of tariff due in absolute terms (considering the power of the plant) based on the reduction offered. This means that, assuming the same percentage discount is offered by all bidders (see previous point), smaller plants (within the < 1 MW plant range) will be more likely to be awarded the tariff; or

- for all groups: earliest date of application. This is a rather strange residual parameter because it rewards the bidders who, assuming equal economic terms of their bids (see previous two points), file their applications early, which may trigger a rush to file applications immediately after this becomes technically feasible.

Access to the incentives through auctions (≥ 1 MW)

In order to be awarded the incentives through auction, plants of ≥ 1 MW must meet certain eligibility requirements. Once such requirements are met, bidders are ranked based on certain priority criteria set out below.

Eligibility requirements:

In order to apply for incentives, the following eligibility requirements must be met:

1. the plant must have all necessary permits;
2. the connection proposal by the grid operator must have been accepted;
3. the works must not yet have started (except for plants where applications were submitted but not granted under the 2016 FER Decree);
4. delivery of a bid bond equal to 5% of the capex (final performance bond equal to 10% of the capex to be delivered upon award of the incentive);
5. evidence of financial capacity (by means of a bank statement which may be in the form of a commitment to finance the works);
6. capitalisation (paid-up share capital and/or payments for future share capital) in the following percentages:

i. 10% on the capex up to €100 million;
ii. 5% on the capex between €100 million and Euro 200 million; or
iii. 2% on the capex exceeding €200 million.

Capex for solar plants is conventionally set in €1000/kW.

Priority criteria:

Once the above eligibility requirements are met, bidders are ranked based on certain priority criteria set out below:

highest percentage of reduction of the base tariff offered by the bidder (the reduction of the base tariff cannot be lower than 2% nor higher than 70%). This is likely to be the most important parameter and may trigger a bidding war among bidders, as happens also in other countries with similar schemes, bringing the level of the actual tariff for solar and wind down to €21/MWh for 20 years (assuming a 70% discount on the base tariff);

holding a special rating certification issued by the Antitrust Authority, on the basis of a legal compliance index (rating di legalità);

for Group A plants (wind and solar): if located on exhausted landfills, exhausted quarries and peat bogs, contaminated sites, etc.;

for Group B plants: in relation to hydroelectric plants and sewage treatment gas plants, if some technical requirements are met; and

prior date of application. This residual parameter (which also applies to plants of < 1 MW as noted above) is even more relevant for plants of > 1 MW because in most cases for such plants the only other relevant parameter will be the discount (as the other parameters listed above apply only to specific plants). As noted above, this parameter may trigger a rush to file applications immediately when this becomes technically feasible.

Long-term PPAs

Other than the new incentive system, the FER 2019 also provides that plants not benefiting from incentives will be eligible for long-term power purchasing agreements (PPAs) negotiated on a market trading platform, which will be implemented by a decree to be issued by the GME (Gestore Mercati Energetici), the Italian public authority in charge of energy markets), following a public consultation to begin in February 2020.

Such long-term PPAs may be entered into in relation to the following plants: (i) plants already built and in operation since 2017; (ii) plants authorised but not built and for which the grid connection estimate has been accepted by the grid operator (preventivo di connessione), starting from their entry into operation.

The above is without prejudice to the right of producers to enter into PPAs outside this platform.