The Italian wind energy sector has made the transition to a market based on green certificate trading from a support structure based on fixed payments for green power production seemingly without any major difficulties. And as market players and their financial backers became increasingly accustomed to the change, some 357 MW in new wind capacity was installed in Italy last year. That is about triple the volume seen in each of the previous two years.
"Wind farms were constructed under the new system and people saw that they really were able to sell their certificates," says Paolo Montanari, a wind energy consultant with MX Matrix. "And for developers, there is a possibility of making a good profit."
Green certificates trading replaced a market structure based on fixed purchase prices laid out in law CIP6/92. The law guaranteed that all energy produced could be sold at an incentive price for a period of eight years, with the cost borne directly by consumers in their electricity bills. Market players say that the price paid over the period was largely guaranteed at a fixed sum and fluctuated very little, providing a significant guarantee to banks. Those CIP6 contracts, very few of which are for wind projects which have yet to begin operation, will gradually expire. One of the most criticised aspects of CIP6 was that it provided incentives not only for renewable sources like wind, but also for so-called assimilated sources such as cogeneration facilities. The price was different for each eligible energy source.
Under the green certificates system, incentives are given out only for energy defined as renewable. Legislative Decree No. 79 of March 16, 1999, otherwise known as the Bersani Decree, identifies renewable sources as those coming from the sun, wind, hydro resources, tidal wave motion, biomass and both organic and inorganic wastes. Critics point to the inclusion of inorganic waste in the Italian definition and highlight deregulation in the biomass sector. There are also concerns that the concept of what is renewable will be expanded further, although these factors are not currently expected to impede growth in Italy's wind sector.
Italy's green certificates market is supported by an obligation on both producers and importers of electricity to demonstrate they are including specified proportions of renewable energy in their supply portfolios. Initially set at 2% in 2002 and 2003, the percentage increased to 2.35% in 2004 and will rise by additional 0.35% increments in this year and the next, to reach 3.05% in 2006. The obligation is in effect for electricity in excess of 100 GWh/year. One of the most controversial aspects of the requirement is a series of exemptions from the renewable energy obligation, including one for cogeneration.
Companies that do not satisfy the renewable energy requirement internally can buy green certificates, either on the organised market run by Italian electricity market operator Gestore per il Mercato Elettrico (GME), or through bilateral trades. Those with a surplus can sell to others seeking to make up a deficit.
Stefano Alaimo, who is in charge of GME's environmental markets, notes that Italy is the only country with an organised marketplace for green certificates. Other countries rely on bilateral exchanges. "I would say that the system is functioning well," he says, "We have seen a positive impulse to the construction of renewable energy plants. Wind has had the highest growth rate."
Prices still fixed
While green certificate trading is a step towards a more market-oriented system, for now the price is not set by the market but is instead dictated by transmission network operator Gestore della Rete di Trasmissione Nazionale (GRTN), which each year establishes a reference price. Generators that are certified as renewable with a guarantee of origin from GRTN are issued with certificates for their output for a period of eight years, the same period for which CIP6 incentives were in effect.
The network operator makes up for what is currently a shortfall in the supply of green certificates by selling its own. Although its share of the market is gradually decreasing, GRTN in 2004 sold certificates related to 1.1 TWh of energy, still more than 25% of certificates representing a total of 4 TWh in energy sold that year. GRTN's certificates are those that it retains related to CIP6 renewable plants which already receive a green incentive under the previous system.
The reference price -- set at EUR 0.09739/kWh in 2004 -- has been released in August or September of the year in question. Market players are awaiting the 2005 figure. Renewable plants receive this price for the eight years for which certificates are issued in addition to proceeds from the sale of electricity. Green certificates trade independently of the underlying energy they represent.
The reference price acts as a cap, since GRTN is by far the largest seller of certificates and would actually have enough certificates to cover the entire demand. To date, this price has equalled that for transactions on the organised marketplace while bilateral exchanges take place slightly below the GRTN reference price. GRTN is expected to need to continue to compensate for a shortfall in the number of green certificates for at least the next few years.
Artificial but functioning
"The market for green certificates is an artificial market, a way of providing incentives for the construction of renewable energy plants," says Francesco Starace, who heads up the power division of utility Enel SpA's generation and energy management unit. "But it functions well."
While the market is not expected to reach its own equilibrium without the support of GRTN certificates before about 2007, Starace predicts it will never be long on green certificates either. "No one will ever construct to have green certificates in excess because it would have a detrimental effect on prices." Enel is currently a net buyer of green certificates, although it predicts it will be able to meet the obligation in 2006 with its own generation before being able to sell certificates on the market in 2007.
Those subject to the renewable obligation have until March 31 of the following year to demonstrate compliance, depositing their green certificates with GRTN. Compared to CIP6, the task of securing a green power incentive has been made easier under the green certificate system. Previously, it was necessary to receive a number of specific authorisations while now anyone who meets the requirement for a renewable plant and requests green certificates will be issued them.
Certificates are traded online in a forum that is open for business at least once a week in the January to March period and once a month from April to December. Since 2004, a certificate has represented 50 MWh, which was reduced from 100 MWh to meet the needs of smaller producers. The market has been up and running since March 2003, for renewable obligations related to 2002. Total market demand last year amounted to green certificates representing 4 TWh in energy. GRTN estimates that this figure will grow to 6.9 TWh in 2007.
"Green certificates are certainly the reason it's interesting for wind investors right now," says Luciano Pirazzi, of Ente Per le Nuove Tecnologie, l'Energia e l'Ambiente (ENEA), the main government agency responsible for promoting renewables. "The price is appetising, even though we've seen internationally that a fixed tariff gives greater assurances to banks."
Indeed, Simone Togni of Italian wind energy association Associazione Nazionale per l'Energia del Vento (ANEV) notes that in 2004 a wind plant operating under the new regime received a little above EUR 0.097/kWh for its green certificates in addition to roughly EUR 0.053/kWh for energy sold, making for a total of about EUR 0.15/kWh -- more than the EUR 0.1276/kWh paid for generation from wind farms still subject to CIP6 contracts. Commenting on the transition from one incentive system to another, Gianni Silvestrini of Italy's Kyoto Club says: "In the beginning, banks were worried about the transition, but now they have been reassured. For wind power, you could argue that the mechanism is even too generous."
A significant change from the CIP6 mechanism is that there is now a single price for a green certificate, no matter what the source of energy. Under CIP6, the cost of the fuel source was one of the elements calculated into the size of the incentive. And for wind, that was zero.
"This [new] method has the advantage of favouring plants that cost less and in this way, costs for the system as a whole are minimised," says Luca D'Agnese, managing director of GRTN. He acknowledges, however, that the strongest opposition to a single green power certificate system comes from people who say renewable sources like solar that cost a lot today could become much cheaper if they were given a chance to enter the market and develop technologically.
Given that Italy's hydroelectric capacity is approaching saturation, most room for future growth is seen in wind energy. Wind accounted for 15.7% of the 2.9 TWh in certificates issued to qualified private producers last year, up from 12.2% in 2003, according to GRTN.
No secure future
But while mainstream wind project developers are earning more money today -- and that is leading to more turbines in the ground -- there is also a downside to the new system. Although established wind players or bigger companies may have no problems self-financing projects or receiving funding from banks, ANEV's Togni points to difficulties faced by smaller companies or new players in the business. "We don't yet know the reference price for 2005, much less for the next seven years," he says. "For a bank, it's more important to know that you'll earn EUR 0.10/kWh for ten years rather than EUR 0.15/kWh for one."
Market players point to uncertainties forecasting future prices for green certificates when GRTN ceases to play an active role in the market. Moreover, GRTN's reference price for green certificates is calculated as the difference in the average price GRTN pays for energy under the old CIP6 contracts and the price for which that same energy is sold. Yet the number of CIP6 contracts will gradually decline until these contracts cease to exist. "No one knows what could be the future value of green certificates," says Luigi Spotti of renewable energy group EnerTAD SpA.
For now, ANEV's Togni says it would be sufficient to simply say that once it were no longer possible to calculate a reference price based on CIP6 contracts, a body would be charged with coming up with a new mechanism for pricing. "It can never be a real market system until these energy sources are competitive," he says.
Meantime, the Italian government has yet to reveal the long awaited renewable obligations for 2007 and beyond. "The definition of an adequate growth rate for 2007 to 2010 would allow us to give additional guarantees not only to wind power but also to other renewable sources," says Silvestrini of the Kyoto Club.
"Those who would like to invest would like the certainty of having a good price," notes Alaimo of electricity market operator GME. But he believes that fears of certificate prices collapsing are unfounded. "There are the Kyoto commitments and it is in the interest of the government, whether it be a centre-right or a centre-left government -- to increase the use of renewables." Indeed, the general industry perception is that a worst case scenario would see the annual growth rate maintained at 0.35% increments.
High prices not enough
The relative optimism is due to Italy's Kyoto commitments and other international obligations. According to the European Union directive on renewable energy, Italy has a target of generating 25% of its electricity from renewables by 2010 compared to 16.3% last year. Silvestrini says the 0.35% annual increase would have to be about doubled for Italy to meet this objective.
While the experience to date with the new incentive scheme has been positive for wind power, no one believes that a solid renewables obligation and a well functioning green certificates market are enough on their own. Central government might set the targets, but it is Italy's local governments that authorise the construction of wind plants. There have been problems, most recently evident in Sardinia where the regional government imposed a full-stop on wind projects last year as part of legislation protecting the island's coastlands.
"Incentives aside, there is a problem with the location and authorisation of plants," says D'Agnese of GRTN. You can bring the annual requirement for increasing renewable energy sourcing to 0.5% but that doesn't guarantee that plants will be constructed," he says.
Indeed, some observers say that one of the best incentives for Italy's wind sector would be clearer rules for what can often be a troublesome authorisation process. Industry players are still waiting for the government to approve a number of follow-up measures to a key renewable energy law that went into effect in 2004, including a measure to streamline a tangled site-permitting process and institute more uniform procedures nationally.