In review: renewable energy policy and regulation in Italy

An extract from The Renewable Energy Law Review, 3rd Edition

The policy and regulatory framework

i The policy background

In implementing Directive 2009/28/EC, the Italian legislature set a 17 per cent target for the share of RES in the energy mix by 2020. Italy achieved this national objective for the first time in 2014, well in advance of the 2020 target date.

In November 2017, the Ministry of Economic Development, published the National Energy Strategy, a 10-year road map setting out the objectives for 2030 and encouraging further RES development. It did so in accordance with the long-term objective set out in the EU Energy Roadmap 2050 of decreasing greenhouse gas emissions by at least 80 per cent from 1990 levels.

The National Energy Strategy aims to increase the following in the national energy system:

1. competitiveness, by aligning Italian energy prices with European ones for the benefit of both companies and consumers, opening up new markets to innovative companies, generating new employment opportunities and encouraging research and development;
2. sustainability, by decommissioning coal-fired thermal power plants by 2025, according to a thorough plan of infrastructural action in line with the long-term targets of the Paris Agreement on Climate Change (2015), and by encouraging energy-efficiency projects that take full advantage of sustainability benefits; and
3. security, by improving the security of energy supply, while guaranteeing its flexibility and reinforcing Italy's energy independence.

Notably, the National Energy Strategy set the ambitious target of an RES share of 28 per cent of gross final energy consumption by 2030, comprising:

1. a target share of 55 per cent for electricity (set at 33.5 per cent in 2015);
2. a target share of 30 per cent for thermal energy (19.2 per cent in 2015); and
3. a target share of 21 per cent for transport (6.4 per cent in 2015).

Pursuant to EC Communication 2016/0375 on the Proposal for a Regulation on the Governance of the Energy Union, on 31 December 2018, the Italian government adopted a draft of its 10-year strategy on energy efficiency and environmental sustainability, the Integrated National Energy and Climate Plan (PNIEC), and submitted it to the EU Commission on 9 January 2019 for its observations. The PNIEC, tackles five categories concurrently: decarbonisation, energy efficiency, energy security, the internal energy market, and research, innovation and competitiveness. The PNIEC offers fundamental guidance on the future evolution of the Italian energy sector and the policies necessary for its development, pursuant to the provisions of the EU's Clean Energy Package. In January 2020, the final version of the PNIEC, incorporating the changes in investments and incentives provided for in the 2020 Budget Law, was published by the Ministry of Economic Development and sent to the European Commission in accordance with Regulation (EU) 2018/1999 on the Governance of the Energy Union and Climate Action. According to the PNIEC, by 2030, a reduction of 43 per cent in primary energy consumption and 39.7 per cent in final energy consumption is expected, and 30 per cent of gross final consumption will have to be accounted for from RES.

Regarding the policy on tackling greenhouse gas emissions, since 2008, GSE has been responsible for the management of the EU Emissions Trading System (EU-ETS). GSE is the entity that carries out the placement of national emission quotas on behalf of the Italian government. Because of the spike in electricity prices that occurred in 2018, the placement of the emission quotas provided a significant increase in revenues for Italy, reaching a total of €1,453 million (€903 million more than in 2017). The energy generated ultimately enabled Italy to avoid emissions of about 45 million tons of greenhouse gasses and consumption of 117 million barrels of oil.

A generous promotion and incentive system has encouraged a significant increase in RES in Italy. The incentives comprise a variety of mechanisms that have been progressively market oriented over the years, reducing incentive levels in line with decreases in generation costs. These mechanisms include the following:

1. the CIP 6/92 mechanism, which is a feed-in tariff. This mechanism is only available to plants that fell within the scope of the CIP 6/92 resolution while it was still in force, and the tariff is applicable for a certain period, typically up to 20 years (accordingly, the number of plants entitled to benefit from the incentive is gradually decreasing);
2. the Energy Account system, a feed-in premium for electricity produced by photovoltaic plants that had started activities by 26 August 2012;
3. green certificates, which were awarded by GSE in proportion to the amount of energy produced by RES and cogeneration plants that had started activities by 31 December 2012. The number of green certificates awarded depended on the type of plant used for the energy generation. As of 1 January 2016, the green certificate system has been replaced by a new incentive system in the form of extra remuneration granted by GSE to operators formerly entitled to green certificates. Data shows that the amount of electricity produced from RES and incentivised through the use of green certificates was approximately 27.6TWh in 2018. The most significant incentives were allocated to wind (€1.25 billion) and hydroelectric plants (€0.63 billion);
4. feed-in tariffs for electricity delivered to the grid by RES plants (except for photovoltaic plants) not exceeding 1MW power (200kW for wind plants) that had started activities by 31 December 2012;
5. tariff incentives for electricity delivered to the grid by photovoltaic plants that started activities between 27 August 2012 and 6 July 2013 (in the form of a feed-in tariff for plants not exceeding 1MW in power and in the form of a feed-in premium for the other plants). The impact on end customers of the photovoltaic production incentive system, in 2018 (preliminary figures), was approximately €5.81 billion. Electricity incentives, relating to 550,057 plants with a total capacity of approximately 17.6 GW, were approximately 20.2TWh (approximately 1.8TWh lower than in 2017); and
6. tariff incentives for net electricity delivered to the grid by RES plants (except photovoltaic plants) and thermodynamic solar plants that had started activities by 1 January 2013 (in the form of a feed-in tariff for plants not exceeding 1MW in power and a feed-in premium for plants exceeding the 1MW threshold). The threshold for access to the feed-in premium was then reduced to 500kW.

RES-generated electricity benefiting from these governmental incentives amounted to approximately 65TWh in 2017 and around 63TWh in 2018. The figure is expected to be similar in 2019, although aggregate data is still not available. In 2018, the costs deriving from RES incentives amounted to approximately €11.2 billion (and these are paid for by the 'general charge in support of renewable energy and cogeneration' – the 'ASOS' tariff component). For 2019, it is estimated that the costs were equal to approximately €11 billion, again covered by the ASOS tariff component.

The cost of RES incentives between 2017 and 2019 have been decreasing and further decreases are expected in the following years. In particular:

1. the costs related to the feed-in tariffs under the CIP 6/92 mechanism are continuously decreasing because of the progressive termination of CIP 6/92 signed agreements. The remaining CIP 6/92 agreements are expected to end in January 2021;
2. the costs related to the withdrawal of excess green certificates by GSE are decreasing. Based on the data available in July 2019, there are still around 93,000 thousand unsold green certificates. Additionally, the costs for the new incentives that replaced the green certificate system from 1 January 2016 will reduce because of the progressive end of the incentive period for operators granted this form of extra remuneration by GSE; and
3. the costs associated with the feed-in tariffs for electricity delivered to the grid by RES plants not exceeding 1MW in power pursuant to Law No. 244/2007 are expected to stay the same. The incentive period for the first plants benefiting from this scheme will end in 2023.

However, the financial impact of incentives is likely to be profoundly altered by the comprehensive reform introduced in 2019 by the above-mentioned RES1 Decree, which established a new wide-ranging incentive regime for RES plants. Specifically, it supports the production of electric power from RES by introducing new incentive schemes.

The RES1 Decree introduced an overall average annual cap on incentives of €5.8 billion, covering all types of RES regulated by the Decree: wind (onshore only), solar photovoltaics, hydroelectric (running water and reservoir or basin), and sewage gases. Once this annual threshold is attained, no additional incentives will be granted.

RES plants with a nominal capacity exceeding 20KW are admitted to the new incentive mechanism, provided they do not receive incentives pursuant to previous feed-in tariff schemes, nor under the Ministerial Decree of 23 June 2016.

Eligible RES plants are categorised into four clusters:

1. Group A: new onshore wind turbines; complete reconstructions of existing wind turbines; reactivations of systems decommissioned for more than 10 years or power increases of existing systems; and new photovoltaic systems;
2. Group A-2: new photovoltaic systems wholly replacing asbestos roofs of industrial and rural buildings;
3. Group B: new hydroelectric plants, or complete reconstructions of existing hydroelectric plants; reactivations of plants decommissioned for more than 10 years or power increases of existing plants; residual gases from purification processes in new plants; reactivations of plants decommissioned for more than 10 years or power increases of existing plants; and
4. Group C: plants of the following kind subject to total or partial renovation:
   • onshore wind, hydroelectric, and residual gases from purification processes.

Incentives are accessed through either registration with specific registers managed by GSE or auctions organised and managed by GSE, depending on the power of the plant and the group to which it belongs. More precisely:

1. application to the registers is available for plants with power greater than 1kW (20kW for photovoltaic systems) and less than 1MW in groups A, A-2, B and C; and
2. application to auction procedures is available for installations with power greater than or equal to 1MW in groups A, B and C.

Additionally, under certain conditions, the RES1 Decree allows application to the registers or to the auctions by plants of the same group presented in aggregate form.

RES plants that meet the requirements can start receiving incentives after connecting to the grid and filing the required applications to the registers and auctions with GSE. The incentive period is 20 years for all types of RES, except for hydroelectric plants, the incentive periods for which range between 25 and 30 years, depending on the characteristics of the plant. Under the RES1 Decree, there is the option to relinquish incentives before the end of the incentive period and negotiate freely on electricity, but on condition that the net incentives received are fully returned to GSE.

The RES1 Decree establishes seven rounds of registers and auctions, each assigning different power quotas, in accordance with the cluster to which the plants belong.

Overall, over a period of approximately 30 months, 4.8GW of RES capacity will be contracted through the planned auctions. The first two procurement rounds will each realise around 500MW of allocated capacity. In rounds three to five, each tender will assign 700MW. For the final two exercises, the contracted capacity will reach 800MW and 1,600MW respectively.

Round No.	Call for tender opening date
1	30 September 2019
2	31 January 2020
3	31 May 2020
4	30 September 2020
5	31 January 2021
6	31 May 2021
7	30 September 2021

Pursuant to the RES1 Decree, the maximum power capacity that may be incentivised for wind and photovoltaic plants is 770MW (access through registers) or 5,500MW (access through auctions).

The incentives are paid to successful applicants to the registers or auctions on the net electricity produced and fed into the grid by the plant.

The RES1 Decree sets out three different tariffs: the Reference Tariff, the Offered Tariff and the Due Tariff.

Depending on the technology and on the nominal capacity of the plant, different criteria for the calculation of the incentives apply:

1. the feed-in tariff, which consists of a single tariff corresponding to the Due Tariff, which also remunerates the electricity drawn by GSE. The compensation comprises payment for the power generated and fed into the grid, which is bought by GSE;
2. an incentive, which is calculated as the difference between the Due Tariff and the power's hourly price per zone, as the power generated continues to be available to the operator. If the resulting delta is negative, the producer shall be required to return the difference.

RES plants of up to 250kW can opt for either incentive mechanism and can switch from one mode to the other, but cannot switch more than twice during the entire incentive period. Conversely, plants of over 250kW can only access the incentive option.

The RES1 decree also establishes two premium grants for power plants of up to 100kW on buildings (paid on condition that self-consumption of energy on a yearly basis is over 40 per cent of net production) and for solar photovoltaic plants in Group A-2 (paid on all the energy produced).

Additionally, the RES1 Decree includes a clawback mechanism to guarantee that the governmental incentive scheme is limited to the minimum necessary: were market price to spike above the average production cost for each type of RES, the selected plants would no longer be entitled to receive a premium and would be required to return the additional revenue.

The outcome of the first auction and register process for smaller plants was published by GSE on 28 January 2020. The first round offered a capacity of 730MW and GSE has received 880 applications for an overall capacity of 772MW. The results of the second procedure are not available yet.

In addition to the purely economic incentives, such as those mentioned above, the Italian legal framework provides for other important measures that favour RES projects, such as simplified and expedited administrative procedures for the construction and operation of new RES plants and, more importantly, priority access to the electricity transmission grid for RES-generated electricity (i.e., priority dispatch). These measures are neutral in relation to the type of RES feeding the plant. Furthermore, the 2020 Budget Law contains several provisions establishing incentives confirming the position of energy efficiency and related refurbishment measures on the Italian energy agenda as fundamental drivers for economic growth (see Section II).

Additionally, under Italian law, construction projects for new buildings and restructuring of existing buildings must include the use of RES to cover at least 50 per cent of the building's energy needs (both electricity and heat). Failure to comply with this provision will result in refusal of the building authorisation.

Finally, income from the production and sale of agroforestry RES and photovoltaic energy qualifies as agricultural income for tax purposes, below a determined threshold, to the extent that the energy is obtained from the land owned by the farmer. According to Italian tax law, agricultural income is not analytically computed, rather it is determined using cadastral ratios as a form of tax incentive. Energy incentives are normally taxed as business income for companies involved in the activity of the production and sale of energy.

ii The regulatory framework

The renewable energy sector is regulated by primary legislation (both national and regional) and secondary legislation. The secondary legislation is adopted by the Ministry of Economic Development and the Ministry for the Environment, Land and Sea (MATTM) or ARERA. In particular, these bodies have the following responsibilities.

The Ministry of Economic Development is responsible for formulating and implementing Italy's energy policy, by defining the strategy and setting out general principles for the organisation and functioning of the renewable energy market.

The MATTM is responsible for climate policy. It also co-signs the Ministry of Economic Development policy measures promoting renewable energy and energy efficiency.

ARERA is an independent regulatory body governed by a committee of five members elected by Parliament for seven years. It regulates, controls and monitors the electricity and gas markets in Italy. It was established under Law No. 481/1995 for the purpose of protecting consumer interests, promoting competition and ensuring quality, efficiency and cost-effectiveness of energy services. ARERA determines its costs, which are entirely recovered by means of compulsory annual contributions paid by energy service providers. Its regulatory powers include setting tariffs, defining service quality standards and regulating the technical and economic conditions governing access and interconnections to the networks. ARERA issues general regulations applicable to energy market operators, and resolutions or orders applicable to single operators, for which it must provide comprehensive reasons. ARERA may also issue fines.

Every year, ARERA submits to the relevant parliamentary committees a report on the use and development of RES plants and a report on the development of small-scale generation.

The state-owned GSE was established by Legislative Decree No. 79 of 16 March 1999 for the promotion and support of RES in Italy. In particular, GSE works to foster sustainable development by providing support for electricity generated from renewables. It is in charge of (1) determining which plants meet the conditions set by law to benefit from incentive mechanisms; (2) disbursing economic incentives; (3) checking that the conditions for the recognition or maintenance of incentives are met by carrying out inspections and assessments of the plants that have an agreement with GSE; (4) forecasting and monitoring electricity delivered into the grid by RES plants to minimise imbalances in the electricity system; (5) promoting information campaigns to spread the culture of environmental sustainability; and (6) monitoring the development of RES projects.

Pursuant to Legislative Decree No. 79 of 16 March 1999, GSE set up special-purpose subsidiaries for the management of specific segments of the energy market:

1. the Energy Markets Manager (GME), which manages the electricity, natural gas and environmental markets, according to the principles of neutrality, transparency, objectivity and competition;
2. the Single Buyer (AU), which ensures the availability of electricity by purchasing the required electrical capacity and reselling it to distributors on non-discriminatory terms. Additionally, AU has been appointed as the central oil stockholding entity; and
3. the Energy Research Body, which is charged with publicly funded national and international programmes in the fields of electrical power, energy and the environment.

The RES1 decree includes an important development as far as GSE is concerned. Although the RES1 Decree does not introduce many changes relating to PPAs, it provides that within 180 days of the date of its entry into force, GME shall launch a public consultation for the creation of a market platform – an alternative to the incentive scheme set out under the RES1 Decree – for long-term trading of RES energy. Specific requirements shall apply to those operators willing to participate in using this platform. Project characteristics will be published on GSE's website to stimulate meetings between parties who potentially may be interested in entering into trading agreements.

There are simplified and expedited procedures for the regulatory approvals (authorisation, certification and licensing procedures) required to construct and operate RES plants, depending on the technical specifications of the power plant.

The construction and technological enhancement of new RES electricity plants is subject to a single authorisation issued by the region concerned or the delegated province (or by the Ministry of Economic Development for plants of power equal to or greater than 300MW), following a unified proceeding among all the public entities with authorities involved in the project. This single authorisation procedure applies even where the project concerns more than one region or delegated province or where regions have a special statute under the Italian Constitution. The competent public entity must issue a decision on the request for the licence within 90 days. If the project has nominal power greater than 1MW, it is subject to an environmental impact assessment or to the pre-screening procedure, in which case, the single authorisation cannot be issued until this procedure has been completed.

The construction of small plants with low generation capacity (e.g., photovoltaic plants on building roofs) is subject to a further simplified authorisation procedure. The owner of the building is only subject to the obligation to notify the competent municipality with a declaration and a detailed technical description of the project at least 30 days before starting construction activities. The application is authorised via tacit acceptance: work can commence 30 days after submission if no replies or notices have been issued by the municipality.

There is further procedural simplification for the construction of certain small-scale installations that generate electricity or thermal energy from renewable sources, which are considered to be minor works and as such are exempt from building-permit requirements. The works commencement notification must be sent to the municipality together with a detailed report signed by a certified engineer. There is no requirement to wait 30 days before starting work and construction activities can start immediately after the communication has been made.

The table below shows when the building of small RES plants is subject to the simplified authorisation procedure or to the simple communication regime. Ultimately, these special procedures aim to encourage power production from RES by setting up adaptable processing times and more streamlined proceedings than ordinary ones.

RES	Plant type	Generation capacity (kW)	Applicable administrative procedure
Photovoltaics	Plant attached to or integrated into the roof of an existing building and whose surface does not exceed that of the roof on which it is built	–	Simple communication
Plant on an existing building or on an existing building's premises	0–200
Photovoltaic module, placed on a building, whose total surface does not exceed that of the roof on which it is located	–	Simplified authorisation procedure
Other photovoltaic plants	0–20
Biomass, landfill gas, waste gas from purification processes and biogas	Cogeneration plant (microgeneration)	0–50	Simple communication
Plant in an existing building	0–200
Cogeneration plant (small cogeneration)	50–1,000	Simplified authorisation procedure
Plant powered by biomass	0–200
Plant powered by landfill gas, gases left over from purification processes and biogas	0–250
Wind	Individual wind generator plant with a height not exceeding 1.5 metres and a diameter not exceeding 1 metre installed on the roof of an existing building	–	Simple communication
Other wind power plants	0–60	Simplified authorisation procedure
Hydroelectric and geothermal	Hydroelectric and geothermal plant built in an existing building	0–200	Simple communication
Other hydroelectric and geothermal plants	0–100	Simplified authorisation procedure

Variations to projects relating to the construction of RES plants can lead to a range of authorisation procedure issues, both before and after the conclusion of works. As a general principle, minor amendments to the existing plants may be authorised by simplified permits (sworn declarations delivered to the municipality), while major modifications that affect the volume, power or occupied area require a new single authorisation, which is issued following a unified proceeding.

The Italian regulatory framework also provides RES plants with favourable conditions for access to the distribution grid. In particular, the following special schemes are available for conveying RES-generated electricity into the electricity grid.

Simplified purchase–resale can be requested by non-programmable RES plants, irrespective of their capacity generation, except for plants benefiting from feed-in-tariff incentives (which already include the value of electricity) and plants benefiting from incentives provided under the Ministerial Decrees of 6 July 2012 and 23 June 2016. Under this scheme, GSE plays the role of trade intermediary between the producer and the electricity system. GSE purchases electricity from producers at a standard rate defined by ARERA based on market prices (e.g., the regional price on the day-ahead market on the Italian Power Exchange) and then resells the electricity to the market. The simplified purchase–resale scheme does not provide any economic incentive but a simplification for producers benefiting from this sale scheme, as they avoid the accreditation procedures required for trading on the Italian Power Exchange.

The net metering scheme can be requested by RES plants with a generation capacity not exceeding 200kW and that commenced activities from 2015. This upper limit was raised to 500kW by Decree Law No. 91/2014. The net metering scheme is a regulatory measure enabling RES plants to exchange economically the value of electricity that they deliver into the grid in a given hour with the value of electricity that they take from the grid in a different hour. This scheme actually results in an economic incentive, as RES plants do not pay transport tariffs for the network use with respect to electricity that they convey into the grid under the net metering scheme.

Furthermore, and more importantly, the legal framework grants RES-generated electricity priority access to the transmission and distribution grid, thus giving it a competitive advantage over electricity generated from conventional sources.

Additionally, non-programmable RES plants can also benefit from a more favourable regime for the application of imbalance payments, which are the penalties plants must pay if they fail to comply with their daily generation plan. Unlike the previous regime, which fully exempted non-programmable RES from the application of imbalance payments, the current regime, which applies imbalance payments to RES plants, aims to foster better generation forecasting from non-programmable RES, thereby reducing the costs passed on to consumers.