Tough FIT tender heralds fall in new capacity

ITALY: Italian wind investors have started examining the viability of authorised projects in their pipeline, after state-energy management agency GSE announced the first tender for wind capacity to be assigned a feed-in-tariff (FIT) under a less generous, more bureaucratic system that comes into effect next year.

The auction system is likely to bring a more industial approach to development
The auction system is likely to bring a more industial approach to development

Far fewer projects are expected to make it through the hoops. The new system sets a limit on the number of onshore projects that will receive the FIT at well below the 1GW annual growth rate the Italian market has seen in recent years. "Without a doubt there should be a strong reduction in new wind capacity," said Costantino Lato, GSE's research and statistics director.

The terms of the tender state that onshore wind projects above 5MW with permits must enter a competitive tender process that will award the FIT to a maximum 500MW capacity. The minimum bidding price for the first tender is €88.9/MWh and the maximum is €124.6/MWh, although this will decrease in subsequent years. The assigned FIT may be reduced in the event of construction delays.

Caution expected

While up to 650MW of offshore projects are covered by a separate competitive FIT tender, it is likely that no projects will be submitted at this stage. Italy currently has no capacity offshore.

Meanwhile, smaller (60kw to 5MW) and repowered projects, for which a FIT will be assigned to a maximum 60MW and 150MW respectively, must instead sign up for newly created registries — the official lists of projects seeking the FIT.

These projects will be ranked and the first 60MW or 150MW will receive the FIT. Those that fail can reapply the following year. FIT requests for repowering, still in its early stages in Italy, are expected to fall far short of the capacity limit.

Sponsors can make auction offers and sign up for registries from 8 October to 6 December, and GSE expects to announce results in early 2013.

"I think there will be a very cautious approach to this first auction," said power company Erg Renew CEO Massimo Derchi. "I would imagine that projects presented won't be very large and will be very well thought out." Derchi expects much less than 500MW in onshore projects to be tendered.

"It's hard to say how the auction will go," said Rainer Karan, general manager of Vestas Italia. There are a few thousand megawatts of authorised projects, so there will not be a problem with lack of interest, but participants would have to evaluate the business case, he pointed out.

Project sponsors are already studying how to cut capital and operating expenses and are discarding some low wind sites that may have been financially feasible under the old market regime.

New pragmatism

While dissatisfaction at the introduction of auctions is almost universal, some market participants point out that the lower tariffs will favour a more industrial approach to the sector.

As they prepare for the new system, some of the smaller developers and investors who got into Italy's market during the boom years have already left. Others are seeking to sell projects, although not at the high prices seen just a few years ago.

Italy's wind market is expected to be dominated by a limited number of investors with deeper pockets, as wind financing problems are increasing. "We started out providing services to other companies and then began to develop our own wind projects," said Luigi De Simone, CEO of developer and operator ICQ Holding. "It's possible we could go back to our initial business."

Forecasting penalties

Meanwhile, wind producers are busy calculating the likely impact of new balancing requirements that will affect already operational wind farms. From January 2013, Italian energy regulator AEEG will fine wind producers whose generation forecasts are inaccurate. While in 2013 there will be a degree of tolerance for errors, the regulator says it will increasingly shift responsibility for balancing costs to generators.

Alessandro Totaro, who is responsible for wind energy at renewable energy association Aper, noted that forecasting accuracy is a tricky issue for wind producers, largely because Italy's electricity market remains relatively inflexible.

"While the lead time between forecasts and actual delivery time of electricity has decreased, it is still excessive," said Totaro. In addition, forecasts and actual wind production figures will be aggregated for wind farms up to 10MW. This could lead to wind farms with more accurate forecasts being penalised while those with inaccurate forecasts are rewarded.

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