Tariff cut under new auctions threatens investment flight

ITALY: Italy's plans to cap incentives under a new auction scheme, plus delays to green certificate payments, are bad news for investors.

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Italy is preparing to scale back incentive payments to wind and other renewable energy and significantly revamp the market framework, in a move industry associations have warned could affect investment.

A decree published by the country's economic development and environment ministries in April will institute a controversial auction system for wind farms above 5MW. These projects will compete for a feed-in tariff (FIT) through a bi-annual auction process available for 500MW of onshore wind capacity in each of the years from 2013 to 2015.

A further 650MW in offshore projects could be assigned a FIT in the same period through annual auctions. "The main features of the law are that it cuts the value of incentives and the number of incentives available," said Tommaso Barbetti, partner at renewable energy consultancy eLeMeNS.

Just how much incentive prices will fall depends on the auction outcome, but the cash-strapped Italian government has made it clear they will fall significantly. For onshore wind capacity available in 2013, the decree sets a maximum bidding price for larger projects at 2% below a base price of EUR127/MWh, or EUR124.6/MWh. A floor price has been set at a 30% discount to the base price, or EUR88.9/MWh, a figure not far below average wholesale electricity prices in early 2012.

The end result for wind producers is revenues between 16-40% less than current levels of about EUR148/MWh. However, the new onshore wind FIT will be valid for 20 years compared to 15 years for the current incentive scheme. The offshore wind FIT will be paid for 25 years.

Incentives are available for revamping onshore wind projects and wind farms up to 5MW are excluded from the auction process. However, there are 50MW annual limits on incentives available for each.

Delayed green certificate payment

The legislation also contains bad news for current wind-energy investors, whose incentives are based on the issue of green certificates. Due to liquidity problems, the law notes that state energy management company GSE will not pay for all 2011 green certificates by June as scheduled.

Instead, green certificate payments will be made in three instalments, the last in December. "Changing the payment month is not a secondary factor," said Alessandro Totaro, who is responsible for wind energy at renewable energy association Aper. The new timetable creates financing repayment difficulties for some investors.

Even with the new decree, Italy's government plans to raise its 2020 target for electricity from renewable sources to 32-35% from the current 26%. Yet Aper, wind energy association Anev and a long list of other renewable-energy associations argue the new law will make this impossible, leading to the failure of some firms and the flight of foreign investors.

Industry associations are hoping for last-minute changes to the law, which is expected to be finalised in late May once the energy regulator and a state body overseeing relations between the central government and Italy's regions have expressed their opinions. Part of their lobbying efforts involves concentrating on the positive financial benefits of renewable energy, which has already led to a marked reduction in peak wholesale electricity prices in Italy.

"We are at a crossroads," said Barbetti. "Either investors leave Italy and there's a strong reduction in new renewable energy capacity, or there's a change from a financial model to a more industrial one, in which companies try to play by the new rules and no longer look to earn margins on incentives but on efficiency and plant optimisation. Certainly, investments in other markets are also problematic right now."

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