The final wording is not yet official, and there may still be some last minute changes before its publication in the Official Gazette, but the Italian Ministry of Economic Development and the Ministry of Finance felt certain enough of its finality last week to present a draft decree that will significantly modify the feed-in tariff (FiT) incentives granted to photovoltaic (PV) plants and have a dramatic impact on their return.

Once the decree has been approved by the Council of Ministers and counter-signed by the President of the Republic, it will be published in the Official Gazette and immediately come into effect. The Parliament will then have 60 days to confirm and convert the decree into law—possibly with amendments—or to repeal it. A repeal is unlikely, considering that these measures are politically strategic to the Renzi Government, which has invested its credibility in the reduction of electricity bills for small and medium-sized enterprises through a reduction in the annual cost of PV incentives.

Redistribution of Feed-In Tariffs The key provision of the draft decree (the Spalma Incentivi provision) applies a reduction of between 17 per cent and 25 per cent to the FiTs that have been awarded under any Conto Energia to PV plants with a nominal peak power exceeding 200 kW. The reduction will apply from 1 January 2015 and will be accompanied by the extension of the applicable incentive period from 20 to 24 years. This extension is intended to ensure that approximately the same overall amount of incentives are granted to the operators, but distributed over a longer period. The decree does not compensate for inflation or loss of interest from the delayed payments of incentives.

The following table shows the reductions to be applied on the feed-in tariffs, depending on the residual period of incentives under the current 20 year system.

Click here to view the table. 

For PV plants that are entitled to the overall tariff, the tariffa onnicomprensiva, which includes the price for the sale of electricity, the reduction applies only to the incentive component of the overall tariff.

To allow operators to cover the gap in their cash flow and, in particular, to avoid a default under existing financing agreements, the draft decree provides that those entities that suffer under the tariff reduction will be able to obtain financing up to the difference between the FiT applicable as of 31 December 2014 and the one resulting from the reduced rate. The State-owned Cassa Depositi e Prestiti SpA will therefore either fund or guarantee the financing on the basis of special agreements made with the banking sector.

To ensure that the extension to 24 years is compatible with applicable permits, the draft decree orders the relevant regions and other competent local bodies to grant the necessary extensions of the permits for the construction and operation of the plants.

The Alternative

As an alternative to the redistribution of the FiT incentives over a 24 year period, operators of PV plants exceeding 200kWp can opt for a 10 per cent reduction of the current FiTs without the extension of the incentive period. This option must be exercised before 30 November 2014 and will come into effect on 1 January 2015.

Financing the GSE

Irrespective of the size of PV plants, with immediate effect from the second semester of 2014, the Gestore dei Servizi Energetici (GSE) will each month only pay fixed instalments amounting to 90 per cent of the plant’s estimated annual electricity production. The adjustment to the actual production in a given calendar year will be paid by 30 June of the following calendar year.

In addition, the GSE and the Ministry of Economic Development will establish a tariff system to allow the GSE to re-charge the expenses for its management and control of the incentive system to its beneficiaries. The charge will apply from 1 January 2015 and will also include a payment to cover the GSE’s current activities.

Damage to Investors

These measures will have a detrimental impact on the cash flow of, and overall return on, PV plants.

As the decree will not compensate for losses deriving from inflation or lack of interest that would have accrued on an earlier payment of the full incentives, it results in a de facto reduction of the net present value of the PV plants’ expected income stream and thus in a reduction of the net present value of the assets themselves. Given the degradation of modules, and thus the reduced productivity of modules in the last four years of the incentive period, it is also be doubtful that the “redistribution” of the incentives over a longer period will even result in the payment of the full nominal amount of incentives.

In addition to reduced net income, investors will now have to face additional operational expenditures, in particular the costs for additional operation and maintenance, land leases and concession fees. The government has instructed the relevant regions and other local entities to extend the permits for the construction and operation of the PV plants, but this does not include concessions granted by other entities, such as ANAS, SNAM, RFI, TERNA and ENEL. In addition, private land lease (or surface right) agreements will have to be extended, and operators will be in the weakest possible bargaining position in such negotiations.

The government has made an effort to reduce the financial impact of the measures by offering access to finance and favourable conditions to cover the cash flow gap between the current FiT and what will come in 2015. This will mainly serve to restructure current debt and avoid the risk of default under pending financing agreements. It is not going to be without cost.

Legal Protection for Investors

The provisions in the draft decree will retrospectively apply to plant operators that have previously been awarded the FiTs under any of the Conto Energia regimes and whose entitlement to the FiTshas been written down in binding agreements with the GSE.

Investors have several options to protect themselves against retrospective changes to their acquired rights.

Domestic Litigation

Investors cannot directly challenge the new decree (not even after its conversion into law), as Italian law does not allow the direct protection of individuals against legislative measures. Investors can, however, challenge the GSE’s administrative resolutions and decisions, or ministerial decrees that may be issued in implementing and applying the decree.

Such challenges will have to be brought in the Lazio Regional Administrative Court (TAR). When checking the legitimacy of a GSE decision or a ministerial decree, the TAR will have to verify the legitimacy of the underlying new decree. The TAR may refer this question to either the European Court of Justice or, more likely, the Italian Constitutional Court.

One principle of the Italian constitution that may be violated by the decree is the need for legislative measures to be proportional and rational as guaranteed by Article 3 of the Italian Constitution, which protects the legitimate rights of the private investor. Another is the principle that laws must not have retroactive effect, as expressed in Article 11 of the preleggi of the Italian Civil Code, to which Italian case law attributes constitutional rank. The compatibility of the decree with Article 117 of the Italian Constitution, which covers Italy’s compliance with the obligations set forth under the EU legal framework, may also be questionable.

International Investment Arbitration

Foreign investors do have an option for obtaining compensation for the detrimental impact of the new decree.

Investment treaty arbitration is a form of dispute resolution that provides foreign investors with potential relief from difficulties arising in a host country. Italy is a party to more than 90 bilateral investment protection and promotion agreements, commonly known as bilateral investment treaties or BITs. In addition, there are multilateral investment treaties, such as the Energy Charter Treaty (ECT) which protects European investors in the energy sector. The ECT is currently being invoked by a number of foreign investors against Spain in relation to the Spanish renewables reform.

These agreements provide investors with protection against discrimination and expropriation without compensation, and secure for investors the right to fair and equitable treatment. Other rights include the right to most favoured nation status and national treatment. In general, the host state will also agree to honour comparable commitments, such as contractual commitments.

Investment treaties provide investors with the option to enforce their claims in an international arbitration in front of an independent tribunal. The investors do not have to first seek redress in the host state. Italy has made a reservation under the ECT that investors must decide between bringing claims in international arbitration or national courts (the “fork-in-the-road” provision). A decision to go before the domestic administrative courts should therefore only be made after careful consideration that this may block a subsequent arbitration. This is of particular relevance bearing in mind a 2012 precedent, in which Italy’s highest Administrative Court, the Consiglio di Stato, ultimately allowed the retroactive abolition of a provision originally included in the first Conto Energia, under which the FiT would be adjusted upward to take into account inflation.

Riccardo Narducci has also contributed to this article.