Conference Report Italy: Plenty of potential but problems persist

Driven by its obligation to meet the EU's renewables targets for 2020, Italy's installed wind capacity has seen a remarkable increase despite the recession. But if that growth is to continue, the country will have to improve its transmission network and tackle its stifling bureaucracy.

Although Italy appears to be on track to at least match last year's record 1 GW rise in installed wind capacity, the country's developers and investors face a number of challenges. Adding to the historical difficulties of long authorisation processes and rules that vary across regions, there are now serious shortcomings with the electricity grid. When the wind is blowing strongest, transmission system operator Terna has been turning down the power at wind farms in a part of the country that is peppered with turbines.

The three conference days at the 2009 Eolica Expo Mediterranean in Rome gave the Italian wind industry an opportunity to discuss problems new and old as well as the potential opportunities for Italian wind power. As the participants gathered at the annual trade show in late September, they knew that wind farms with a total generating capacity of around 4.3 GW were operating in the country, up from 3.7 GW at the end of 2008.

While the expo is a forum for discussing mainly Italian issues, Stephen Miner, a senior vice-president of the American Wind Energy Association, started the dialogue with reference to the strong US wind power development, where 8.4 GW wind generating capacity was added during 2008 and another 6 GW by late September 2009, bringing the total to over 31 GW.

Although the scale of the markets in Italy and the US clearly differ, Simone Togni, secretary of the Italian wind energy association Associazione Nazionale Energia Del Vento (Anev), took advantage of Miner's presence to nudge Italy and its policy-makers to do more. "The US did more in six months than Italy has done in 15 years," said Togni. "And we must remember that the US wasn't a signatory to Kyoto and doesn't have the (renewables) obligations that Italy does as a member of the EU."

International obligations

Indeed, Italy's international commitments are a major reason that sentiment in the country's wind business remains relatively sanguine despite a series of problems. Italy's binding EU obligation was a frequent backdrop to discussions at Eolica Expo. Under the EU Renewable Energy Sources directive, Italy must source 17% of its energy - including for heat, cooling and transport, as well as electricity - from renewables by 2020. To help achieve this, the government is aiming to increase the supply of electricity from renewables to 25%, up from 17% in 2008. Anev suggests wind power could account for most of this, supplying 7-10% - around 27.2 TWh - of Italy's electricity by 2020. This would require more than 16 GW of wind capacity, up from 4.3 GW at present.

Much hope is pinned on the expectation that, in the coming months, the Italian government will break down the renewable energy obligations into regions. This is expected to overcome obstacles raised in some areas to the development of wind and other renewable energy.

But a recent study by an Italian sustainable development research institute, Fondazione Sviluppo Sostenibile, estimated that as much as one third of electricity consumed in the country would need to come from renewable energy sources. A small portion of this is expected to come from imports. Togni pointed to Anev's estimate of Italian wind farms achieving 7-10% of total Italian electricity consumption in 2020, based on 16 GW wind capacity. "It is quite possible that this will be the capacity installed in 2020," agreed Stefano Conti, head of institutional relations at Terna.

However, there are concerns that operators may not ba able to maximise output from the new wind farms. "The problem with wind farms is that they are concentrated in an area between Campania, Apulia and Basilicata, which is already rather congested due to the presence of other power plants," explained Gerardo Montanino, director of operations at Gestore Servizi Elettrici, the government agency responsible for promoting renewable energy. "And since the spring of 2008, every time there's a strong wind, Terna has asked to turn down the power."

Without investments in transmission and distribution, Montanino warned, the problem would only get worse. "Some 30 GW of renewables should come online in roughly the next ten years, and it will be concentrated in the centre-south of the country," he said. "If (power cutbacks) already happened with 3.5 GW of wind, what will happen with 12 or 14 GW and with other renewable sources coming online, too? If we don't get moving in time, we will have installed a lot of megawatts, but the (EU) directive isn't satisfied with (just having the capacity)."

Grid infrastructure authorisation, like wind farm authorisation, can be a lengthy process. "If a new electricity line is decided on today, I would be happy to see it operational in five years' time," Montanino said.

Conti of Terna said the slowdowns on authorisations during 2006-2008 had improved considerably this year and pointed to a number of projects, including those to bolster the transmission link between the wind-rich islands of Sardinia and Sicily with mainland Italy. The Sardinian undersea link should be completed in the next few months, Conti noted, while the construction site for the undersea cable portion of a new 380 kV link between Sorgente in Sicily and Rizzoni in Calabria has opened.

Inadequate compensation

Meanwhile, the current compensation scheme for companies that lose out financially through power cutbacks on the grid is widely seen as inadequate. Carlo Primio, general manager of International Power in Italy, noted that Terna reduced power production from its wind farms by some 50 GWh in the first six months of this year. "More or less we have recovered about a sixth (of what we would have made)," he said.

"It's not the fact that you lose four or five GWh on a production of 200 GWh, but that there are limitations without any warning," said Enzo Dal Pane, the head of wind energy technology at Edison Energie Speciali, the renewable division of Italian utility Edison. "From an entrepreneurial point of view, it's discouraging. Producers, those who invested, are paying for this."

In the next few months, Italy's energy regulator is expected to approve a change in the remuneration system, which should see companies reimbursed at a rate that more accurately reflects lost production.

While Italy is known for its high incentive prices for wind energy, many producers would gladly accept lower prices in return for greater stability, and so would the banks that are financing deals. "Prices were more certain before," noted Riccardo Bicciato, a banking and finance lawyer with Clifford Chance. "Now Italy is perceived more and more as a market with merchant risk."

The structure of project financing deals reflect this, with sponsors being asked to cover the risk with specific guarantees. "Some banks are having a difficult time finding a model to evaluate (the likely future value of) green certificates," said Catia Tomasetti, a partner with law firm Allen & Overy. "Some foreign banks are taking a very conservative approach."

Italian market participants at the conference debated the likely effects of a law approved by parliament in July that changes how the renewable energy mandate, which supports the Italian incentive system, is applied. The law will shift the mandate from electricity producers to distributors. As is often the case in Italy, however, a follow-up law laying out key details has yet to be approved. But while the change was set to take effect in 2011 and would have applied to energy to be distributed in 2010, an amendment now being discussed in parliament could push back modification by a year.

Green certificates also lose some of their attraction through uncertainty. They form the backbone of the Italian renewable energy incentive and can be purchased by companies that are subject to the renewable energy requirement in lieu of direct energy purchase. Wind energy producers receive green certificates for every MWh of energy produced and receive revenues from both the sale of the green certificates and the underlying electricity. In October, the combined revenue stream for green certificates and electricity was running at about EUR0.15-0.16/kWh. While this price is certainly attractive by international standards, the changes in the way the system works have upset some market players.

Problems remain

At the same time, a raft of old problems continues to hamper wind development. The Italian authorisation process typically requires years, despite the legal maximum being 210 days. Conference attendees recounted cases of projects that are still in the authorisation pipeline after seven or eight years.

A number of Italian regions have also resorted to moratoriums on new wind projects. While these are typically shot down in the courts, they make life more difficult for developers. National wind farm siting guidelines, first called for in 2003, have still not been approved. "We are working on the guidelines," explained Luciano Barra, head of the economic ministry's energy department. "We have to get ministries that protect very different interests to agree, but we are trying to arrive at a situation where there's a least a set of clear and shared rules."

Yet, even with a number of old issues still on the table and a measure of uncertainty in the market, the view of many conference participants is that the Italian market has remained remarkably buoyant. "The development of renewable energy is being led by the ambitious (EU) objectives for 2020 and wind is certainly among the renewables that can deliver the fastest results," noted Barra. "The rate of growth of wind has even surprised the industry associations." How long that will continue in Italy without addressing the issues of the grid remains to be seen.