Italy - Depression expected as market policy tightens

ITALY: Italy's wind energy sector is expected to slam on the brakes in 2013, after a less generous and more stringent market framework went into effect on 1 January.

Market conditions: Italy struggles under FIT requirements (photo:Chiara Marra)
Market conditions: Italy struggles under FIT requirements (photo:Chiara Marra)

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Market participants are now estimating that about 250-400MW in new wind capacity will be installed this year, well below the roughly 1GW annual average seen over the last five years.

The year began with the results of Italy's first competitive auction for a new feed-in-tariff (FIT). For onshore wind, a FIT was available for a maximum 500MW of capacity, but only 18 projects were presented with a total 442MW in capacity out of some 3.2-4GW that analysts had estimated could be eligible.

GSE, the state energy management company that ran the auction and pays out renewable energy incentives, said the tariffs awarded were at an average discount of 7.81% to the base auction price of EUR 127/MWh, or about EUR 117/MWh. That compares with previous remuneration of about EUR 155/MWh, although the new onshore FIT will last for 20 rather than the previous 15 years. The most aggressive bidder was Portugal's EDP Renovaveis, which settled on a FIT of about EUR 96/MWh for one 14MW plant in Apulia.

Struggling for eligibility

While lower tariffs mean that only projects with strong wind resources are now feasible - and very few of these are left in Italy, where the average capacity factor of existing wind farms is less than 20% - a number of projects were also weeded out by hefty financial requirements for auction participation. The market is increasingly expected to be dominated by utilities and other deep-pocketed investors.

One 30MW offshore project, which would be Italy's first offshore wind farm, was awarded a FIT at a 2% discount to the base auction price of EUR 165/MWh, while a FIT was also awarded for 60MW in small-scale projects outside the auction process. Attention should now shift to a second tender expected to be announced in March, this time covering a FIT to be available for 2014 capacity, with a 500MW limit once again being set for onshore projects. Some developers say they are examining what adjustments could be made to projects to make them financially viable.

While Italian wind energy association Anev and renewable energy association Aper are among those that have asked for the incentive mechanism to be modified, the likelihood of that happening in the near term is seen as slim. "At another time, such a drastic decline in capacity growth might have resulted in an immediate change in regulations," believes Luciano Santi, portfolio manager at Italian renewable energy developer Veronagest. "But with electricity consumption so low because of the economic crisis I think things will stay this way at least for the next few years."

italy capacity pieAs project sponsors rushed to connect projects to the grid before the 1 January change in incentives, Italy set a record in 2012 for new capacity. "There were projects being hooked up to the grid on New Year's Eve," says Luciano Pirazzi, scientific director at Anev. According to Anev figures, Italy's installed wind capacity amounted to 8.14GW at the end of 2012. This is up 1.4GW, or 21%, from the 6.74GW first reported for 2011.

The expected market slowdown in 2013 and coming years, however, has led some investors to consider their strategy for the Italian wind sector. The International Power subsidiary of French utility GDF Suez in December agreed to sell a portfolio of 550MW of Italian wind farms, and 86MW in Germany, to Italian energy group Erg. The transaction makes Erg, which already had 488MW of installed wind capacity in Italy, the market leader. Analysts see more mergers and acquisitions in the Italian wind sector this year.

Forecasting squabbles

At the same time, wind farm operators have been adjusting to new requirements, in place since 1 January, which see producers sharing in balancing costs when forecasts are incorrect. In May, the administrative court of the northern Italian region of Lombardy is expected to rule on the legitimacy of that measure, which has been challenged on a number of counts by the country's renewable energy associations. "One thing that's absurd is that in Sicily GSE makes the forecasts, but the more their forecast is wrong the less they have to pay you," notes Santi. He points out that GSE's error rate has been much higher than that of an independent provider the company uses for forecasting production in Calabria.

On the brighter side, curtailment of Italian wind farms due to grid security problems has declined as transmission system operator Terna continues with grid enforcement work, particularly in the area between Benevento and Foggia in the southern Italian regions of Campania and Apulia, where a high percentage of Italian wind farms are concentrated. "Where work on the grid has been completed, you can see a major improvement in dispatching," says Mattia Boccolini, a senior engineer with GL Garrad Hassan's Italian office. "In other areas where work is underway the situation is also improving and there is a bit of optimism."

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