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Friday, December 2, 2022

(IV) Toward a New Model of Promoting Renewable Energy Sources: What Lessons Can We Learn From Italy?

Author: Ivana Dominković Cecelja, Attorney at law

Approximately at this time last year Italy was going through a process Croatia is precisely facing at the moment – the process of approving the programme of stimulating the production of electric energy. The mentioned Italian programme relates to an operative incentive for the production of electricity in the form of guaranteed prices (so called registers), and for capacities exceeding 1 MW, in the form of premiums on the market price of electricity sold by the project operator independently on the market. It actually promotes the use of renewable energy source technologies of capacities higher than 20 kW, of on-shore wind and photo-voltage electric power plants (FVP) in one group and of hydro-power plants and plants on sewerage gases in another group. For power plants characterised by higher construction costs the elaboration of a special incentive system is planned.

This programme, which covers the period 2019 -2021 and envisages investments of about one billion EUR, should stimulate production capacities of 8.000 MW in Italy (of which about 5.320 MW through tenders for market premiums). All this is necessary in order to attain the objectives planned to be reached by 2030 and they envisage the doubling of wind and solar capacities as compared to 2018.

The goal of the programme is to enhance environmental protection by using renewable energy sources, and to do that by stimulating precisely these technologies for which they consider that still haven’t reached the conditions by which they could be financed according to market mechanisms. In order to underpin this theory, the Italian authorities presented data on the money flows of  existing standard installations to the European Commission. Showing that the costs of electricity production are higher than the income they can generate on the market. The new programme envisages seven tenders at four month intervals. The European Commission approved the programme in June and the Italians announced the first tender for market premium incentives last year in September. The list of selected project holders was made public in January 2020.

It is of interest to note that one of main complaints regarding the Italian programme during its preparation was that photo-voltage power plants and wind farms should not mutually compete. The reason given was that the construction of photo-voltage power plants was equalised with market prices, which was not the case for wind farms, so fear existed that the former could use up all the tender quotas. The results of the first tender completely refuted the claim. Wind farms, 18 of them, offered prices between 48.65 EUR and 66.50 EUR per MWh. At the same time the only photo-voltage power plant project was in the winning range with the price of 50EUR per MWh. This in undoubtedly also due the measures Italy had taken to prevent the offering of excessively low prices at the tender.

In spite of rumours from the market, at the first Italian auction, out of an overall quota of 500MW, as many as 495 MW were distributed to wind farms and only 5 MW to one photo-voltage power plant project.

Similar steps are ahead of us, and just like Italy where fixed stimulus prices for PVP were cancelled in 2013, and remained valid for other technologies all the way to the last such tender in December 2016, we have a time gap of a few years from the previous stimulus model. On the other hand, we have no experience with tenders. For that reason I will refer to some of the solutions opted for by that country. It will be interesting to see whether we will, and how we will, solve the same issues in our incentive model.

How does the renewable energy source incentive system function in Italy?

In Italy, large producers are considered those exceeding 1 MW, and in our country, those exceeding 500 kW, and these are stimulated through a market premium provided on the basis of a tender. The remaining applicants can achieve an incentive price by inscribing in registers without participating in tenders, while in our midst such producers can enter into contracts at a guaranteed buying price.

Plants with a capacity to 250 kW have the right to a fixed stimulus price, for example, photo-voltage electric power plants of 105 EUR for MW/h, and wind farms of 150 EUR per MW/h.

Plants with capacities from 250 kW to 1 MW have the right to the spread between the upper fixed stimulus price and zone prices of electricity per hour, selling the energy on the market.

For large producers, both countries announce the reference price in  public invitations, the difference being in what the project holders are offering.. In Italy, the project holders offer a discount on the reference price in the range of 2 to 70 percent, and in Croatia they will offer a price amount that has to be lower than the reference price established in the tender. The outcome is the same: the winner is the one offering the lower price within the stimulated quotas, either in percents as in Italy, or amounts in the Republic of Croatia so that the price become the reference price for that particular project (so called descending auctions). The premium that can be achieved by the holder of the projects represents the spread between the reference price for a specific project and the market price. In Croatia the latter will be calculated by HROTE on a monthly basis while in Italy it will be the zone price of electricity per hour.

Through a two-way contract – along with the setting of a maximum discount and by deterring the offering of prices that are too low at the tender, Italy will ensure that when the market price is higher than the reference price for the project, the spread will be paid to the Italian GSE by the project!

The maximum reference price for wind farms and photo-voltage power plants in Italy has been established at 70 EUR per hour (for other technologies it stimulates, with capacities over 1 MW, the prices will amount to 80 EUR). These prices were calculated on the basis of the assessment of average overall direct costs of electricity for the given technology, including a fair return for the investment.

In Italy the average rate of return is between 5 and 7.9 percent, depending on the technology and size of the installation. There are mechanisms that are activated in certain situations, for instance, the transmission of unused capacities from tender to tender and transmission of unused capacities from group to group (only for small producers) as well as the possibility of reserving some capacities up to a maximum of 30 percent for a specific technology.

The procedure of selecting a project with an installed capacity of less than 1 MW is based on criteria, mostly ecological, and only indirectly on economic ones.  A project with a capacity less than 100 kW can secure an additional premium of 10 EUR per MWh for energy produced and used at the site of production, on condition that one’s own consumption of electricity exceeds 40 percent of the net production of the plant. This premium was set on the basis of the assessed additional costs of hardware and software devices which enable the maximization of one’s own consumption. 

Projects have the right to incentives during the entire working life of the power plants. For wind farms and photo-voltage plants, regardless of size, it is 20 years and for other technologies between 20 and 30 years. If the market price of electricity is zero or below zero longer than six consecutive hours, the payment of incentives is stopped, however, the duration of the contract on premium incentives is prolonged for this period.

Reconstructed Plants

Our Law which regulates renewable energy sources equates certain reconstructions with new installations, in the following cases: if the overall costs of reconstruction exceed 100 percent of the overall planned income of the plant, calculated in the manner prescribed by law if an specific power plants is older than envisaged by the law according to technologies, for example, 15 years for wind farms and 20 years for photo-voltage plants.

Considering that an increasing number of plants are exiting the system of incentives, the question will become ever more topical. For example, in the course of reconstruction wind farms will perhaps not built new towers and therefore not fulfil the first criteria while photo-voltage will cease to be eligible for the stimulus system and will have to wait for six more years before they can compete with their reconstruction at tenders for incentive premiums. Such strict solutions are confusing because everybody’s goal should be to use all locations as ecologically efficiently as possible. In other words, if owing to new technological solutions reconstructed power plants can produce more energy and at the same time decrease their impact on the environment in relation to ecologically more challenging and hitherto unused locations, no barriers should be in place to that effect.

In this programme Italy provides for the participation of all reconstructed plants, regardless of whether partial or integral, with the exception of photo- voltage plants which have to be newly constructed. Italy justifies this stipulation with environmental requirements. As these plants cover large areas of land, in Italy they consider it justified to simulate exclusively the latest most advanced technologies since they would ensure maximum production per unit of surface. Therefore, the third group (along with new wind farms and photo-voltage plants in one and the other technologies in the second) within the overall  incentives quota consists of reconstructed plants without photo-voltage plants. Italy is more liberal both in regard to the age of the pants as well as the volume of reconstruction, indicating in that regard:

  • that the maximum reference price can amount at the most to 90 percent of the maximum reference price for new plants, depending on the type of reconstruction; the relationship of the average cost of intervention and average cost of the new plant is used for the precise calculation and the costs are subject to ex post verification
  • that the plants which can participate have passed two thirds of their working life and the previous incentive systems have expired.

It is not necessary to stimulate only those reconstructions that can equate with new plants. There are ways and a need to stimulate projects with lesser interventions in their reconstruction, not as the new ones, but nevertheless in a way that makes these interventions cost-effective.

How funds are provided for incentives?

The overall cost of the incentives according to this programme is assessed to approximately one billion EUR. Similarly like in our country, the funds for incentives are collected from charges for the consumption of electricity from end consumers. Gestore deil Servizi Energetici (GSE), the Italian entity which is a counterpart to our HROTE, reports to the Italian regulator on a monthly basis on the funds that are needed. Accordingly, the regulator revises the incentive charge paid by the consumers. The collected funds are transferred to GSE which manages the funds and pays incentives out of them. If the domestic production of electricity is supported by an incentive financed through charges for all the consumption of electricity (including the consumption of imported electricity) there is a possibility that the levy on imported electricity, which has no benefit from it, will be considered a levy that has a discriminatory effect.

In order to avoid any kind of dilemmas in this respect Italy has provided for the participation in tenders, to a certain percentage point of the overall quota, to projects from other EU countries under specific conditions. The most important thing to emphasize is the fact that these are as a rule projects physically exporting electricity to Italy. Given that the system of charges is similar to the Italian one, it will be interesting to see how we will solve the right of participation of EU countries in our programme, or else those with which we have concluded free trade deals with  and of course, how many of those project holders will be interested to actually participate in the Croatian incentive system.

 Salvation is in spending all the incentive funds!

If there was ever any doubt, the current pandemic situation has clearly shown that human interventions are responsible for environmental pollution. It could therefore be expected that even greater emphasis will be placed on renewable energy sources. However, impending recession can impact the will of investors to invest, including in renewable energy sources.

In that regard, the incentive model is extremely important so in its planning and adoption it is necessary to recognize the priorities and to implement it as soon as possible in order for the generators of electricity to also be the generators of the impending economic recovery. How will know if our incentive programme is appropriate? That at least is simple – if we spend all the money envisaged by the programme for incentives!

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