Payments - Italy reforms pay for forced cutbacks

ITALY: Italy's energy regulator has announced a more accurate method for compensating wind producers for forced production cutbacks.

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The issue of remunerating producers for power cutbacks is an important one in Italy, where transmission system operator Terna has been asking producers in areas with a high concentration of wind farms to turn down the power when the wind is blowing strongest.

Power reductions, prompted by fears of surges when wind production is high, began in 2008 and have shown no signs of slowing down. Many developers believe Terna has taken an overly cautious approach to such cutbacks and, whether or not this is true, they have meant hefty losses for some companies.

Forecasting production

In the hope of minimising future power reductions, regulator L'Autorita per l'Energia Elettrica e il Gas has appointed Italian renewable energy promotion agency Gestore dei Servizi Elettrici to forecast production at Italian wind farms. Production losses from 2010 onward will be based on wind data from GSE, the regulator says. Developers had asked that forecasting responsibilities be handled by a third party like GSE, given Terna's conflict of interest as grid operator; Italian utility Enel, also a wind developer, owns about 5% in Terna.

Under GSE's plans for the new system, which is not yet operational, accurate wind data will be acquired in real time from individual wind farms. Forecasting will commence with those wind plants that already have the needed equipment to measure and register the necessary wind data. Producers will also be given incentives to install equipment to help GSE in its wind forecasting tasks. Producers who put a wind forecasting system in place will be rewarded for correct forecasts at EUR1/MWh in 2010, falling to EUR0.60/MWh in 2011 and EUR0.30/MWh in 2012.

The new compensation system should see wind producers reimbursed for almost all revenue lost as a result of power cutbacks. Emanuela Delucchi, investor relations manager at wind developer Erg Renew, estimates a recovery rate of 90%.

"Before, there was a very conservative approach in estimating losses," explains Mattia Boccolini, an engineer at Garrad Hassan's Italian office. "You were reimbursed, but much less than actual losses."

Lost certificates

Roughly speaking, under the old method, producers recovered about 40% of the lost electricity revenues. However, producers only recouped about 20% of total lost revenues, since the green certificates on which the incentive scheme is based are not issued when Terna turns down the power. Instead, the time period for which green certificates are issued for a wind farm is extended by the amount of time production is cut off. "But getting green certificates in 15 years is almost like not getting them at all," notes Boccolini. "In addition, these power modulations occur during periods of high production and it is not certain that there will be the same good wind conditions in the periods in which the green certificates will be issued."

While the issue of lost green certificates is yet to be resolved, most developers welcome efforts to compensate them more fairly. While the reimbursement of lost 2010 electricity revenues should be a straightforward exercise, Boccolini notes the new mechanism is likely to involve some complication. According to the new regulations, reimbursements after 2010 will be only made to producers that have complied with the letter of Italy's grid code or have received a formal dispensation from Terna. "There is a long series of technical requirements (in the code), some easier to satisfy than others," explains Boccolini.

Compliance may be relatively easy for new plants, but it will be more difficult for existing plants to adapt - even more so because 200-odd Italian wind farms will be competing for the consultants and parts needed to satisfy the new regulations, notes Boccolini. Companies meeting all requirements will be compensated completely for lost revenues. Others could see payments for up to 80 equivalent hours of lost production withheld.

While the regulator's measures are seen as a step in the right direction, it may be trying to do too much too soon. Boccolini predicts that follow-up regulations and clarification of a number of still unclear aspects of the regulations will be needed.

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