The new decree of 4 July 2019 concerning incentives for renewable sources for the three-year period 2019-2021 (the New RES Decree) has been finally approved by the Ministries of Economic Development and the Environment, was published on the Official Gazette (Gazzetta Ufficiale) No. 186 of 9 August 2019, and entered into force on 10 August 2019.

On 23 August 2019, the Gestore Servizi Energetici – GSE S.p.A., by implementing New RES Decree, has published on its web site, the “Operation Rules for the entry in the Registers and Auctions of the New RES Decree”, which contains detailed information for the filing of the applications to have access to the incentives.

As largely discussed in recent months, among the main innovations introduced by the New RES Decree, we highlight the return of photovoltaic sources and the merging of different sources into the same thresholds, with the declared purpose of exploiting all possible margins for optimizing offers and therefore reducing overall spending.

Besides these new aspects and the others that shall be mentioned below, the New RES Decree has a view to continuity with the previous Ministerial Decree of 23 June 2016 (the 2016 Decree), to which it refers for definitions, procedures and for a series of provisions that are simply confirmed.

Purposes of the New RES Decree

The New RES Decree aims to support, for the three-year period 2019-2021, the production of electricity through plants powered by renewable sources.

The sources contemplated by the New RES Decree are: onshore wind, hydroelectric, plants fuelled by landfill and gas residues from purification processes, and photovoltaic.

On the other hand, the following sources are excluded: offshore wind, biogas plants, geothermic, biomass and bio liquid plants, oceanic and thermodynamic solar plants. These exclusions are justified by the need to provide for different and separate incentive schemes – on the one hand – for those sources that have achieved a high level of development, allowing a significant reduction in costs, and – on the other hand – for those sources that still maintain profiles of innovation and low diffusion, while maintaining higher costs.

Even the New RES Decree, although it provides for registers and auctions until 2021, introduces a safeguard principle represented by the indicative overall annual maximum cost for incentives of EUR5.8 billion. This is the same threshold set by the 2016 Decree. At 31 May 2019, the annual cost was around EUR4.9 billion and is destined to fall dramatically over the next few years due to the termination of some of the existing incentives programs, obviously net of the cost deriving from the incentives granted under the New RES Decree.

The 2016 Decree will continue to apply to plants registered in a useful position in the rankings formed as a result of the relative auction and register procedures.

The provisions of the New RES Decree

The discipline contained in the New RES Decree is largely similar to that foreseen in the 2016 Decree, and therefore we will limit this analysis to highlighting the main changes.

Reintroduction of solar energy

As previously anticipated, the New RES Decree sees the return, at certain conditions, of the incentives to photovoltaic plants. In fact, the incentive ban for plants located in agricultural areas is confirmed.

Solar energy will compete, both for auctions and registers, with wind power plants. The base tariffs are EUR105 for solar and EUR150 for wind (for plants from 1 to 100 kW), EUR90 (for plants from 100 kW to 1 MW) and EUR70 (above 1 MW).

Another important novelty, strongly requested by the operators, is the introduction of a further sub-group composed by photovoltaic plants whose modules are installed on buildings in replacement of covers in asbestos or in any case containing asbestos. These plants will be granted a premium of EUR12/MWh.

The elimination of direct access and other provisions applicable to small power plants

Access to the incentives can only take place through rankings in the registers and participation in competitive bidding procedures. Unlike the provisions of the 2016 Decree, therefore, the New RES Decree eliminates direct access for small power plants.

The cancellation of the direct access mechanism has been justified by making reference to high number of direct access requests under the 2016 Decree; this will certainly have a disincentive effect for small initiatives since it, in fact, provided for a significant certainty on the remuneration of the investment for small-scale plants and for small investors.

In addition to the above, there is also the lowering from 500 kW to 250 kW of the power threshold below which a producer is allowed to opt for the all-inclusive tariff provided by the GSE (which proceeds to the withdrawal of the entire energy fed into the grid – so-called ritiro dedicato).

The only element of protection for small power plants – in addition to simplified admission criteria – is the explicit extension of the effectiveness of the New RES Decree also to plants that under the 2016 Decree directly accessed the incentives and have already started work, by way of derogation from the general principle (also confirmed by the New RES Decree) that only the plants whose work has not yet started as of the date of admission to the incentives can access them (see below).

Registers and auctions – common elements

A first significant change is the new power thresholds that discriminate access to incentives through registration in the registers compared to participation in competitive bids. This threshold, which under the 2016 Decree was 5 MW for all sources, has been reduced to 1 MW. To sum up, plants – either new or repowered or refurbished – with a capacity between 0 MW and 1 MW will access via registers; while plants with a capacity exceeding 1 MW will access through auctions. This change is again justified by referring to the results of the registers of the 2016 Decree that have seen in many cases the saturation of the thresholds.

Another new element is the grouping of plants into two distinct categories by energy source, each of which will compete in the same register or in the same auction procedure. These categories are (A) wind and photovoltaic plants, (A-2) only for registers, photovoltaic plants whose modules are installed in place of asbestos, and (B) hydroelectric and gas-fuelled plants. Then there is a third category represented by the plants subject to reconstruction. Also in this case the choice would have been oriented by the possibility of competing different categories of plants with similar potential for cost reduction. This decision will certainly create uncertainty among operators, who will not be able to foresee the size and characteristics of participation in the registers or the auctions and consequently calibrate their offers accordingly; in fact, operators of a given source certainly have knowledge of the reference market but not also of the markets of the other sources.

Seven rounds of registers and auctions are scheduled, i.e. one every four months starting with the first one in September 2019 and ending with the last one in September 2021.

Finally, the possibility of participating in auctions and registers is also introduced for aggregates consisting of several new plants belonging to the same group and having (i) in the case of registers, a unit capacity higher than 20 kW and a total aggregate capacity not higher than 1 MW, and (ii) in the case of tenders, a unit capacity between 20 kW and 500 kW and a total aggregate capacity not higher than 1 MW. The plant aggregates will participate with the same percentage reduction, referring to all the plants that make up the aggregate. For aggregate plants, it is necessary to give mandate to one single entity defined as “aggregator”, who will represent the other responsible entities of the aggregated plants. For the entry in Registers or Auctions, each aggregated plants shall have the same general requirements and all criteria of priority declared in the application. The offer of reduction is one single and is valid for all aggregated plants.

Both for registers and for auctions, among the new criterion, the priority criteria represented by the anteriority of the date of completion of the application for participation in the procedure has been introduced; participants must therefore try to formalize their participation as quickly as possible in order to gain further opportunities to be successful bidders.

As to the tariffs, it is confirmed that plants entering into operation within one year from the entry into force of the New RES Decree will benefit from the higher tariffs provided by the 2016 Decree.

As for some limitations and rules of operation of the procedures, two partially innovative principles are inserted: (i) the total exclusion of the sliding of the rankings (unlike the 2016 Decree which provided for the sliding in case of waiver within six months by parties who had access to the incentives), and (ii) a partial opening to the sale of the plants before their entry into operation and signing of the agreement with the GSE, now penalized with a reduction of 50% of the due tariff (unlike the 2016 Decree in which the assignment was penalized with the loss of the entire incentive).

An important development is the news represented by the obligation of the GSE to verify in advance the publication of the rankings of the possession of the general and specific requirements and of the characteristics required for the application of the priority criteria, based on the documentation produced during participation in the procedures. This provision should reduce the amount of litigation deriving from ex-post checks by the GSE, ensuring greater system stability, reducing costs and discouraging requests without requirements. It should be noted, however, that the clarification contained in the New RES Decree (Article 4, para 4, last comma) states that the GSE remains entitled to perform subsequent controls.

Furthermore, the now consolidated double deposit mechanism has been confirmed, i.e. the obligation to deliver a provisional bank guarantee at the time of registration and a final bank guarantee following the communication of a positive outcome. With reference to the value of these deposits, (A) in case of plants with capacity above 100 kW and participating to registries, a provisional bank guarantee of 1% and a final bank guarantee of 2% the estimated investment cost; and (B) in case of participating to auctions, a provisional bank guarantee of 5% and a final bank guarantee of 10%. For both registers and auctions, the values of estimated investment cost are the same as of the 2016 Decree, whilst for the solar plants a conventional cost of EUR1,000/KW has been provided.

Finally, plants can benefit of the new incentives only if the relevant works are started after their ranking with the registries/tenders, unless (i) such plants were among those granted with direct access under the 2016 Decree or (ii) those plants that did not fall within the thresholds of the registries/tenders under the 2016 Decree on condition that they enter into operation after the raking under the New FER Decree.

Registers

The capacity thresholds made available to the seven registers are low, especially for wind and photovoltaic for which a total of 770 MW is foreseen for all seven rounds of registers. In fact, we recall that this total threshold must be sufficient both for the return of photovoltaic plants (and therefore the high number of projects that have remained in stand-by in recent years, even if we are talking only of plants below 1 MW located in non-agricultural areas) and the fact that all the mini wind power plants, regardless of their capacity, can only access the incentives after registering in a useful position in one of the registers.

The above is partly mitigated by the provision of a specific threshold of 800 MW entirely dedicated to photovoltaic plants installed on roofs containing asbestos; this threshold is not transferable to other groups in the event that the relative requests are lower than the threshold and at the same time the requests for access for other groups exceed the relative threshold. The threshold for the second category of plants (80 MW in total) and for the plants undergoing renovation (120 MW in total) are even lower.

With regard to the priority criteria for the rankings, in the case of wind and solar plants, in the first place we find the new criterion of the construction of plants on landfills, quarries or depleted mines, or on areas belonging to landfills or on contaminated sites. Two new criteria are also added, represented by (A) the construction on schools, hospitals and public buildings, with reference to photovoltaic systems installed in place of asbestos and; (B) the connection of the plants in parallel with the electricity grid and with charging stations for electric cars, provided that the total charging power is not less than 15% of the capacity of the plant and that each station has a power capacity of not less than 15 kW. Secondly, in order of importance, we find the reduction of the tariff offered by the applicant, which in this case cannot exceed 30% of the tariff (against 10% of the 2016 Decree).

In the hypothesis in which the plants do not enter into operation within the foreseen deadlines (which in part coincide with those foreseen by the 2016 Decree), except for the new 19-month term for photovoltaic plants (24 months for plants built to replace roofs containing asbestos), a tariff reduction of 0.5% per month is confirmed for a maximum of six months. Plants that do not enter into operation within the relevant deadline, thus losing the tariff, (except for those who renounce the incentive within the six-month period) and were readmitted by another procedure, would result in a further specific penalty of 5% on the new tariff (in the 2016 Decree it was 15%).

Finally, it is clarified that for power plants that access incentives through registers and for the construction of which regenerated components have been used, the benchmark tariff will be reduced by 20%.

Auctions

The capacity thresholds made available to auctions for wind and solar is equal to 5,500 MW (compared to the 800 MW of wind for the sole 2016 auction). Also, these figures are justified by the return of photovoltaic and the inclusion of smaller projects with a capacity of more than 1 MW, but also with the number of projects that had participated in the 2016 auction positioning themselves outside the thresholds.

The other thresholds are also relatively high, with a total of 110 MW for the other sources and 620 MW for plants subject to reconstruction.

The New RES Decree confirms, as a requirement to participate in the auction procedures, the financial and economic solidity appropriate to the entity of the intervention, demonstrated also in this case through the declaration of a bank or through the capitalization of the applicant, calculated according to the same criteria and the same proportions provided for by the 2016 Decree (with the clarification that for aggregates of plants the capitalisation is halved).

As for the priority criteria, it is confirmed the percentage reduction of the offer, which in this case cannot be less than 2% or more than 70% (compared to 40% of the 2016 Decree). The New RES Decree increases, therefore, the maximum percentage value of the reduction of the offer from 40% to 70%. This choice – which as already mentioned would be implemented on the basis of the results and assessments that followed the 2016 auction – has been criticized as it would push the participants to make market distortion rebates, with the risk of an increase in initiatives subject to subsequent abandonment as non-remunerative. Moreover, if at an auction two or more offers provide for a 70% discount, the maximum admitted discount at the subsequent auction is increased to 80%, and if at the then subsequent auction two or more offers provide for an 80% discount, the maximum admitted discount at the subsequent auction is increased to 90%.

Secondly, the legality rating follows (which will benefit, albeit in a limited way, wind farms that had participated in the 2016 auction compared to photovoltaic plants); the third criterion concerns the realization of plants on landfills, quarries or mines, or on areas of landfill or on contaminated sites.

In the hypothesis in which the plants do not enter into operation within the foreseen deadlines (which however are in part coinciding with those foreseen by the 2016 Decree, except for the new 24-month term for photovoltaic plants), the expiry of the entire tariff at the end of this period is confirmed, without grace periods but at he same time with no penalties for the hypothesis of admission to subsequent procedures.

The new incentives and the two-way mechanism

The New RES Decree introduces new tariffs, all lower than those set forth in the 2016 Decree. The most significant reduction is recorded in wind power at auction (EUR70 auction base for wind power with a capacity of over 1 MW compared to EUR110 in the 2016 Decree), justified in the premises of the New RES Decree by the fact that the auctions under the 2016 Decree have seen all the bidders offer the maximum discount, suggesting that the market still has margins for reduction.

The reference tariff will be reduced by 1% per year until the plant enters into operation, starting from the 15th month from the communication of a positive result of the auction or admission to the register. All the base tariffs will be also reduced, during each year starting from 1 January 2021, of 2% in case of hydroelectric and gas fuelled plants, and 5% for wind and solar plants.

A bonus of EUR10/MWh is introduced for plants with capacity up to 100 kW and built on buildings, calculated on the net production quota self-consumed on site, on condition that the self-consumed energy is more than 40% of the net production.

Among the most relevant provisions, we would like to point out the so-called two-way mechanism of recognition and payment of the incentive (for plants not opting for the ritiro dedicato mechanism). This mechanism (for which, in the event that the difference between the tariff and the zonal energy price is negative, the difference must be returned to the GSE which will make the appropriate adjustments or request a payment to the producer) was foreseen also in the 2016 Decree for all plants with the exception of those participating in auctions, while under the New RES Decree it is applied to all plants.

The period of entitlement to the incentive mechanisms starts from the date of entry into commercial operation of a plant. Among the hypotheses for extension of the incentive period, in addition to those already provided for by the 2016 Decree (including the case in which the zonal hourly prices are zero for a period of more than six consecutive hours), a new one is added, represented by the stops of production for the realization of modernization or upgrading interventions (provided they are not incentivized), recognized as such by the GSE, and for a maximum period of 12 months. The periods will range from 20 years (for the majority of the sources) to 25/30 years for certain sources or larger plants; solar plants will be granted for a period of 20 years.

Finally, we point out the introduction of the possibility to renounce, before the end of the benefit period, incentives in order to switch to the free negotiation of electricity, but on condition that the net incentives received are fully repaid to the GSE.

Other provisions

Some disappointment would seem to come from the provision relating to long-term sale contracts, so-called PPAs, on which the New RES Decree limits itself to refer to a public consultation that GME should initiate within 180 days from the entry into force of the decree.

GME is entrusted with the creation of a market platform for long-term trading of energy from renewable sources, while the ARERA is required to remove any regulatory barriers. The fact that these contracts are introduced as an alternative to the traditional energy incentive system is striking compared to the rumors circulated in recent months; in order to be admitted to the market platform, the plants must in fact be of new construction, entered into operation after 1 January 2017 and not benefit from incentives on the energy produced (with the express prohibition for these plants to participate in the auction and registration procedures). In order to access the platform, it will be necessary to obtain a specific qualification from the GSE, based on requirements that will be the subject of a specific determination.

Finally, the New RES Decree proposes again the possibility of participating in auction procedures for plants located in other member states or third states bordering Italy, provided that (i) an agreement exists between Italy and the member state or the third state, (ii) the agreement establishes a system of reciprocity and the methods by which proof of the physical importation of renewable electricity is provided and (iii) the plants meet all the subjective and objective requirements set forth in the New RES Decree. We point out that in the context of the 2016 Decree, no plants with these characteristics were admitted to the incentives (and as far as we know participated in the auction).