I INTRODUCTION

Over the past decade, there has been a substantial increase in renewable energy projects in Italy, resulting in the use of more renewable energy sources (RES) in all sectors. At the same time, factors such as the economic recession, the enhancement of energy efficiency and particularly favourable climatic conditions have led to a reduction in energy consumption.2

The shrinkage of consumption, in conjunction with the increase in RES, is expected to have a significant impact on the reduction of the country's high rate of energy dependency on foreign countries (83 per cent, compared to the European average of 55 per cent3) and, consequently, lead to improvements in energy security and diversification. The expansion of RES also represents a significant driving force for the country's industrial supply chain, offering tangible opportunities for industrial growth and launching new enterprises capable of promoting the competitiveness of the national economy.

The share of RES in the Italian energy mix has more than doubled in the past decade, outpacing the EU4 and Italian governments'5 RES targets for 2020. However, to ensure that 2030 targets are met, efforts must be increased.6

The Italian government has supported renewable energy projects with a range of economic incentive schemes that have simplified administrative procedures for the construction and operation of RES plants (e.g., green certificates) and have favoured RES plants over traditional thermoelectric plants in many respects (e.g., priority dispatch).The generous incentive system led to an unprecedented level of development in renewable energy projects in Italy between 2010 and 2013,7 especially with respect to photovoltaic power. Following this development, the Italian government reduced direct economic incentives,8 and the development of non-programmable RES – and photovoltaics in particular – seems to have stabilised.9 In contrast, the growth of wind farms, while still significant, has been much more linear over time.10

In 2018, Italy's RES installed capacity amounted to approximately 1.162MW, corresponding to a 28 per cent increase from 2017. This growth can primarily be attributed to the advancement of the wind power sector, especially during the final quarter of 2018. Overall, in 2018, RES plants generated more than 54GW in power, accounting for about 45 per cent (or approximately 118GW) of the gross Italian energy production.11 Of that 45 per cent, wind power accounted for 511MW of new installed capacity, taking the lead for the first time from the photovoltaic sector, where capacity amounted to 437MW. As a whole, non-programmable RES recorded greater growth in 2018 than in 2017, particularly because of the increased role of the wind power sector. Additionally, hydroelectric power and bioenergy also recorded a slight increase in new installations, with capacities of 140MW and 74MW respectively.12

The territorial distribution of RES production remains heavily influenced by the presence of hydroelectric plants in the northern regions of Italy. On the other hand, the south, which holds a competitive advantage over the centre–north because of morphological, orographic and climatic characteristics,13 contributes 96.7 per cent and 42.9 per cent of the country's total electricity production from wind and solar power respectively.14

While there has been a recent trend towards recourse debt financing by issuing green bonds, major transactions in the renewable energy sector typically involve project financing schemes.

Energy service companies (ESCOs) play an important role in promoting small generation projects, usually through contracting schemes that indemnify small customers against financial risks related to such projects.

II THE YEAR IN REVIEW

Key legislative developments in the renewable energy sector in the second half of 2018 and the first half of 2019 included the following:

  1. Law No. 145/2018 (the 2019 Budget Law), which extended tax deduction for expenses relating to energy-efficient renovation of buildings15 to 31 December 2019 and provided for incentives for biogas power plants for electric power generation with power equal to or less than 300kW;16
  2. Ministerial Decree of 2 March 2018 (the Biomethane Decree), which introduced a support scheme for biomethane injected into the natural gas grid and for advanced biofuels to be used in the transport sector. The Biomethane Decree applies to (1) production plants starting operations between 2018 and 2022; (2) existing plants already qualified or in the process of being qualified, pursuant to the Ministerial Decree of 5 December 2013, upon request to the Energy Services Manager (GSE) within 30 days of the entry into force of the Biomethane Decree; and (3) existing plants for the production of biogas that is converted, partially or totally, in plants for the production of advanced biomethane between 2018 and 2022. The incentive mechanism is based on the obligation for producers of gasoline and diesel also to supply a minimum quantity of biofuels;
  3. Italian Regulatory Authority for Energy, Networks and the Environment (ARERA) Resolution No. 27/2019/R/gas of 29 January 2019, updating the rules governing the connection of biomethane plants to natural-gas networks, as previously defined by Resolution No. 46/2015/R/gas, which implements the Ministerial Decree of 2 March 2018 on incentives for the production of biomethane;
  4. Law No. 12 of 11 February 2019, which converted into law Decree Law No. 135 of 14 December 2018, which provided that hydroelectric concessions, upon expiration and in cases of forfeiture or renunciation, shall pass, without compensation, into the property of the regions;17 and
  5. the draft Renewables Decree, as amended (the RES1 Decree), governing the public support scheme for RES, covering the three-year period until 2021. The RES1 Decree was approved in March 2018 by the Ministry of Economic Development (MSE). However, the draft is still subject to approval by the European Commission. The RES1 Decree aims to promote the deployment of clean energy power plants in the following categories: (1) wind and photovoltaic plants, and photovoltaic plants where the relevant modules have been installed to replace Eternit or asbestos roofs; (2) hydroelectric, geothermal and gas-powered plants; and (3) wind, hydroelectric, geothermal and gas-powered plants subject to partial or total revamping. Access to the incentives will either be by registration in registers or participation in competitive reverse-bid auctions via eight different tenders. Given that the first round of registration and auctions was expected to launch on 31 January 2019, it can realistically be expected to occur after the summer of 2019, and will be followed by a new round every four months. The draft also mentions the possibility of setting up a platform for the negotiation of long-term power purchase agreements (PPAs).

Key corporate transactions in the renewable energy sector in the past year included the following:

  1. on 25 February 2019, major Italian oil and gas company Eni SpA began construction of a 31MWp solar power plant at the Porto Torres industrial site in Sassari, Sardinia. The plant is expected to be completed by the end of 2019;
  2. on 16 January 2019, German wind turbine manufacturer Senvion SA was contracted by Repower Renewable to equip a 6MW wind park on the island of Sardinia, supplying turbines that will have the largest rotor diameter in Italy;
  3. on 27 December 2018, Italian industrial holding company PLT energia SpA wholly acquired the share capital of the subsidiary owners of a portfolio of wind farms in operation in the Puglia and Abruzzo regions from Podini Holdings SpA. The transaction had a total value of €80 million;
  4. on 27 December 2018, clean energy investor Glennmont Partners entered into a deal to sell its Italian solar power plants to investment fund Tages Capital; and
  5. on 17 December 2018, Canadian Solar Inc, one of the world's largest solar power companies, and TrailStone GmbH, a global commodities trader and investor in strategic commodity assets, entered into a 10-year PPA for the electricity produced by a 17.6MWp solar photovoltaic plant in Sicily. This PPA will cover 100 per cent of the electricity generated and is believed to be the longest-term PPA for a fully unsubsidised solar photovoltaic portfolio signed in Italy to date.

Although the latest estimates indicate that the mix of electricity production in most regions favours thermoelectric sources, certain regions were notable for their emphasis on hydroelectric power. These regions include Valle d'Aosta, Trentino-Alto Adige and Umbria. Furthermore, in regions such as Piedmont, Lombardy, Abruzzi and Calabria, hydroelectric generation remains an important, while not the principal, method of generation. For the south and, in particular, Basilicata, wind and photovoltaic electricity generation prevail.18

In 2018, RES electricity generation accounted for 40.3 per cent of the nation's electricity production and met 35.1 per cent of the electricity demand, which amounted to approximately 322TWh. RES production increased by 9 per cent from 2017. This growth can primarily be attributed to the growth of the hydroelectric sector, which recorded a 31 per cent increase in 2018 after a severe shortage of precipitation in 2017. Other RES sectors performed negatively in comparison with 2017: the photovoltaic sector was down by 4.7 per cent, geothermal by 1.9 per cent, wind by 1.4 per cent and bioenergy by 0.8 per cent.19 Although complete data for 2019 is not yet available, as at March 2019, RES electric energy production had, thus far, increased by 5.2 per cent from the previous year.20

With regard to the photovoltaic sector, the total national capacity in 2018 amounted to 20,070MW, with newly installed capacity totalling 437MW. This marks a 7 per cent increase from 2017, in line with the positive trend that started in 2016 following the slowdown in 2015. This trend suggests that the photovoltaic market is ready to function independently of incentives. However, investors have signalled that they are waiting to see the final version of the RES1 Decree, currently being reviewed by the European Commission, which will govern RES support schemes for the next three years.21

The market value of the photovoltaic capacity installed in 2018 amounted to approximately €671 million. The residential market accounted for 50 per cent of the installed capacity – almost 60 per cent of the total photovoltaic capacity.22 The data for 2018 confirms the 2016–2017 trend towards large-scale plants. The increase in installations in the industrial sector signals the important role of 'prosumers' (who both produce and consume energy)particularly among Italian companies, who firmly prioritise lowering their electricity bills.23

In the wind sector, there was a decrease in the number of small wind turbine installations in 2018 because of the cessation of direct incentives for plants of power equal to or below 60kW as of 31 December 2017. This proved an impediment to investments in small wind farms, which are not yet economically viable without incentives.24 The majority of wind power plants have a power capacity of over 5MW, with the average capacity being 18MW. The market value of newly installed turbines in 2018 was just under €630 million, with 92 per cent of plants having power capacity above 5MW.25

With respect to hydroelectric generation, the total national capacity of hydroelectric plants amounted to 18,842MW by the end of 2018, with newly installed capacity accounting for 140MW, marking a 45 per cent increase from 2017. The regions that recorded the greatest levels of increased capacity in 2018 were Piedmont (91.5MW) and Lombardy (38.25MW), together representing 93 per cent of the newly installed capacity.26 The market value of the hydroelectric capacity installed in 2018 amounted to approximately €378 million and was attributable mainly to large-scale plants.27

The accumulated capacity for electricity generation from biomass (including solid urban waste, agroforestry residues, vegetable oils and biogas) exceeded 4.3GW at the end of 2018, with an overall growth of 74MW; slightly higher than in 2017 (50MW).28 It should be noted that under the new Biomethane Decree, biomethane producers are entitled to Consumer Release Certificates (CICs), which accredit the feeding of biomethane into the gas network. The CICs can be purchased by the producers of gasoline and diesel to comply with their minimum biofuel supply obligations. CICs are issued on a monthly basis and can either be delivered to the GSE or sold on the exchange market managed by the Electricity Market Operator. In addition to the minimum biofuel supply obligation, the Biomethane Decree provides for the offtake of advanced biomethane and other advanced biofuels by the GSE for 10 years at a reference price equal to €375/CIC. A higher number of CICs is granted to biomethane and advanced biofuels produced from byproducts such as algae, green waste, household waste, agricultural waste and food-industry waste.

III 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 2020.29 Italy achieved this national objective for the first time in 2014, well in advance of the 2020 target date.

In November 2017, the MSE published the National Energy Strategy, a 10-year road map setting out the objectives for 2030 and encouraging further RES development.30

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

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

Pursuant to EU Regulation 2016/0375 on the Governance of the Energy Union, the Italian government adopted a draft of its 10-year strategy on energy efficiency and environmental sustainability on 31 December 2018 and submitted it to the EU Commission on 9 January 2019 for the Commission's observations.31 The strategy, or Integrated National Energy and Climate Plan (PNIEC), tackles five categories concurrently: decarbonisation; energy efficiency; energy security; the internal energy market; and research, innovation and competitiveness. The draft PNIEC sets a higher target for the RES share of the energy mix, raising the country's 2030 target to 30 per cent, compared to the 28 per cent target previously set by the National Energy Strategy.32 The draft PNIEC also aims to meet the objectives set by EU Directive 2018/2001 on the promotion of the use of energy from renewable sources, which establishes a new binding RES target for 2030 for the EU of at least 32 per cent and includes a clause that leaves open the possibility of increasing the target by 2023.

The draft PNIEC sets ambitious goals for installed RES power capacity by 2030, in particular for wind power (an increase of 88 per cent) and photovoltaic power (an increase of 158 per cent). Other RES power sources have more modest expectations: an increase of 2 per cent for hydroelectric power, an increase of 17 per cent for geothermal power and a decrease of 9 per cent from biomass (the only reduction). This increased installed capacity would result in an overall increase of installed RES capacity by 75 per cent.33 Electricity generation is expected to increase by 65 per cent from the present rate, reaching over 55 per cent of national consumption (estimated to be approximately 337TWh by 2030).34 Thermal energy generated from RES is essential to achieve these national targets, as the gross final consumption for heating and cooling is around 56Mtoe,35 or just under 50 per cent of the total energy consumption.36 In 2017, the consumption of thermal energy generated from RES amounted to 11Mtoe.37 The Italian government is also proactively supporting RES research and innovation, and Italy is among the promoters of Mission Innovation38 (a global initiative resulting from the COP21 Paris Agreement to launch innovative clean-technology projects) and is committed to doubling the value of public resources allocated to investments in clean-energy research and development, from €222 million in 2013 to €444 million in 2021.

A generous incentive system has encouraged a significant increase in RES in Italy; the incentives comprise a variety of mechanisms, including the following:

  1. the Cip 6/92 mechanism, which is a feed-in tariff.39 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)40 for electricity produced by photovoltaic plants that had commenced activities by 26 August 2012;41 as at 31 December 2017, there were over 550,000 agreements under this incentive system, corresponding to over 22,000GWh of incentivised energy. The incentives paid amounted to over €6.4 billion;42
  3. green certificates, which were awarded by the GSE in proportion to the amount of energy produced by RES and cogeneration plants that had commenced activities by 31 December 2012. The number of green certificates awarded depended on the type of plant used for the energy generation.43 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 the GSE to operators formerly entitled to green certificates;44
  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 commenced activities by 31 December 2012;45
  5. tariff incentives for electricity delivered to the grid by photovoltaic plants that had commenced 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); and
  6. tariff incentives for net electricity delivered to the grid by RES plants (except photovoltaic plants) and thermodynamic solar plants that had commenced activities from 1 January 2013 (in the form of a feed-in tariff for plants not exceeding 500kW in power and a feed-in premium for plants exceeding the 500kW threshold).46 The threshold for access to the feed-in premium was then increased to 1MW by the Ministerial Decree of 6 July 2016.

The governmental incentives for RES-generated electricity amounted to approximately €12.5 billion in 2017, which was paid by the A3 tariff on electricity bills.47 In 2018, governmental incentives for RES-generated electricity is estimated to be approximately €12 billion. This reduction is primarily due to the progressive expiration of the incentive entitlement period for some RES plants.48 Electricity produced by RES plants benefiting from these incentives amounted to around 65TWh in 2017, and this is expected to have remained the same in 2018.49

In addition to 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 plants50 and, more importantly, priority access to the electricity transmission grid for RES-generated electricity (e.g., priority dispatch).51 These measures are neutral with respect to the type of RES feeding the plant. Furthermore, the 2019 Budget Law extended through 2019 a tax deduction of 65 per cent on expenses related to the energy-efficient modernisation of buildings (an 'ecobonus'), including for the installation of photovoltaic panels to heat water. It also confirmed a 50 per cent tax deduction on building renovation.52

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.53

Finally, income from the production and sale of agroforestry RES and photovoltaic energy54 qualifies as agricultural income for tax purposes, within 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.55 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)56 and secondary legislation. The secondary legislation is adopted by the MSE and the Ministry for the Environment, Land and Sea (MATTM) or the ARERA. In particular, these bodies have the following repsonsibilities.

The MSE 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.57

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

The 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. The ARERA determines its costs, which are entirely recovered by means of compulsory annual contributions paid by energy service providers.58 Its regulatory powers include setting tariffs, defining service quality standards and regulating the technical and economic conditions governing access and interconnections to the networks. The ARERA issues general regulations applicable to energy market operators, and resolutions or orders applicable to single operators, for which it must provide comprehensive reasons. The ARERA may also issue fines.59

Every year, the ARERA submits to the relevant parliamentary committees a report on the use and development of RES plants60 and a report on the development of small-scale generation.61

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, the 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 the 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.

There are simplified and expedited procedures for the regulatory approvals required to construct and operate RES plants,62 including, in particular, the procedures outlined below.

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 MSE 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.63 This single authorisation procedure applies even where the project concerns more than one region or delegated province64 or where regions have a special statute under the Italian Constitution.65 The competent public entity must issue a decision on the request for the licence within 90 days.66 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)67 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.68

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.69

The table below shows when the building of small RES plants is subject to the simplified authorisation procedure or to the simple communication regime.70

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 and 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, the GSE plays the role of trade intermediary between the producer and the electricity system. The GSE purchases electricity from producers at a standard rate defined by the ARERA based on market prices (e.g., the regional price on the day-ahead market on the Italian Power Exchange)71 and then resells the electricity to the market. The simplified purchase–resale scheme does not provide any economic incentive72 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.73 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.74

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.75 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.

IV RENEWABLE ENERGY PROJECT DEVELOPMENT

i Project finance transaction structures

Historically, project finance has been the preferred tool for financing renewable energy projects in Italy. In a project finance scheme, the specific project is evaluated exclusively regarding its profitability (i.e., on cash flows the project will generate). The cash flows also serve as the primary guarantee for the debt reimbursement to the financing entity.76

A project finance transaction usually includes a number of participants, each having a specific role. The sponsors are the project promoters, who design the project and evaluate the costs, the bankability and the profitability of the project. The core business of sponsors of renewable energy projects is often manufacturing goods used in renewable energy projects (e.g., turbines and solar panels) or providing services associated with these projects.

To achieve complete legal and economic separation of the project sponsors from the project, the project finance scheme usually requires setting up a specific legal entity (a special purpose vehicle (SPV)), which is in charge of implementing the specific project assigned to it. The SPV is usually a limited company, and its by-laws limit its purpose and activities solely to the implementation of the project. The SPV does not have any financial means other than those provided to it for the implementation of the project. Its assets are isolated, by means of guarantees and contractual constraints, for the benefit of the institutions financing the project (ring-fencing).77

The structure described above limits the risk for the capital invested by the promoters and indemnifies them from the risk of losses by the SPV. The success of project financing for renewable energy is mainly due to the unlikelihood of losses by the SPVs operating RES plants, because of the economic incentives and the dispatching priority for RES plants. The risk ring-fencing and remoteness of insolvency linked to this kind of financing allows the banks operating in this sector to offer low margins and interesting debt-to-equity ratios.

The sponsors, or, if it is set up immediately, the SPV, submit the project to the competent public entities and authorities (the MSE, the regions concerned, or municipalities) to obtain the necessary approvals according to the applicable administrative procedure.

The contractual structure for project financing of renewable energy projects is complex. It includes a network of agreements involving the sponsors, the SPV (which manages the operation and maintenance contracts), financing institutions (which manage financial contracts), public entities, companies in charge of the engineering, procurement and physical construction of the plant (EPC contractors) and companies in charge of the operation and maintenance of the plant (O&M contractors). As mentioned, the EPC contractors are often the sponsors.78

The principal document in renewable energy project financing is the project finance loan agreement, which governs the relationship between the financing institution and the SPV. The terms of the project finance loan agreement do not take into account the financial stability of the sponsors or the SPV – only the capability of the financed project to generate cash flows. Other fundamental documents in the project financing scheme are the EPC contracts (entered into by the SPV and the EPC contractors), the O&M contracts (entered into by the SPV and the O&M contractors), the direct agreements (under which the financing institution is entitled to intervene in the relationships between the SPV, the EPC contractors and the O&M contractors) and the financial collateral arrangements (the 'security package', including the loan guarantees).

A notable opportunity provided by the Italian regulatory framework to promote the bankability of renewable energy projects is that plants admitted to a tariff incentive scheme may assign to third parties (namely credit institutions) the receivables from the GSE.79 This is a further specific guarantee in addition to the other standard guarantees that are part of the security package.80

ii Distributed and residential renewable energy

Distributed generation by RES in Italy has developed significantly in the past 10 years, both in terms of number of plants and capacity installed.

Puglia is the Italian region with the highest value of electricity generated by RES small-scale generation, mainly because of the strong presence of photovoltaic and wind power plants,81 while generation from hydroelectric plants is highest in the north of Italy, because of the greater presence of waterways.82

Small-scale generation offers different ownership structures in Italy. Households and small businesses can purchase their own RES plants directly, generally as part of a service including design, installation, connection to the distribution grid and testing and maintenance of the plant (a turnkey service).

Alternatively, RES small generation projects can be carried out by ESCOs,83 usually under an EPC scheme. Under an EPC scheme, the ESCO conducts an in-depth analysis of customer cost savings from a given distributed RES generation project. The ESCO then implements the project, often with the financial support of third parties, and becomes the owner and manager of the plant, while the customer pays the ESCO periodical fees that are calculated by reference to the amount of energy generated by the plant and to the level of cost savings achieved by the customer. With the EPC, the ESCO guarantees its customer a certain level of energy generated by the plant and a certain level of cost savings by means of the ESCO RES plant project. The European Code of Conduct for EPC schemes defines the basic values and principles that are considered fundamental for the successful preparation and implementation of EPC projects. In Italy, the role of National Code Administrator is held by Federesco, the National Federation of Italian ESCOs. ESCO projects in Italy tend to involve the commissioning and installation of the plant equipment.84

iii Non-project finance development

While project finance is the most common scheme for financing renewable energy projects in Italy, financial leases, whereby a leasing company acquires the ownership of an asset and leases it to the SPV, have been very common, particularly for the financing of small-scale projects (mainly photovoltaic plants) because of the limited arrangement costs. The reduction in the interest rates for project financing coupled with the higher termination costs typical of leasing structures have rendered this financing tool less competitive.85

Additionally, some major companies finance renewable energy projects using traditional schemes, such as both equity and debt financing.

Regarding debt financing options, green bonds have increased in popularity in Italy in the past few years.86

Green bonds have the same features as ordinary bonds, but the issuer undertakes a specific obligation to use the capital collected to finance projects with specific environmental benefits and impacts. Returns on these bonds for investors do not differ from returns on ordinary bonds, but issuers and traders are driven by the common intention to promote renewable energy.

The Italian market for green bonds started in 2014, when the Italian energy operator Hera SpA issued for the first time a €500 million green bond. The capital was employed in the financing of 26 renewable energy projects. In the following years, many other Italian energy operators issued green bonds, with a commitment to employ the capital in renewable energy and energy-efficiency projects.

Today, Italian financial institutions' interest in financing renewable energy is rapidly increasing and numerous green bonds have already been issued.

The Italian company Assicurazioni Generali SpA, which is the third-largest insurance company in the world, announced in January 2018 an underwriting commitment to increase the percentage of its portfolio related to the renewable energy sector by investing €3.5 billion in green bonds by 2020 and gradually divesting from coal-related companies.87

In April 2019, transmission system operator Terna launched a green bond for €500 million. The green bond was placed by a syndicate of banks including Banca IMI, BNPP, Citi, Goldman Sachs, Mediobanca, Santander and UniCredit.88

In April 2019, UBI Banca issued a €500 five-year green bond. The bank's reference portfolio comprises loans primarily for solar (63 per cent), but also wind (23 per cent), biomass (8 per cent) and hydro (6 per cent) power generation.89 Similarly, Cassa depositi e Prestiti90 and Intesa San Paolo91 issued benchmark-sized green bonds in 2017 and 2018, in connection with environmental sustainability projects.

In March 2019, energy producer ERG SpA issued its inaugural fixed-rate green bond for €500 million as part of its €1 billion Euro Medium Term Note Programme to facilitate its transition to renewable energy. The proceeds of the initial six-year bond will be used to finance or refinance renewable energy projects in Europe.92

In January 2019, Italian utility company Enel SpA placed a €1 billion green bond reserved for institutional investors, its third on the European market. The company will use the net proceeds to develop, construct and repower renewable energy plants, build and operate transmission and distribution networks, and execute sustainable mobility, smart lighting, energy efficiency and demand-response projects.93

V RENEWABLE ENERGY MANUFACTURING

Renewable energy manufacturing in Italy mainly concerns photovoltaic panels, wind turbine blades and wind turbines with a power rating below 80kW.94

The leading European factory manufacturing photovoltaic panels is located in Catania (Sicily) and is owned by the Italian energy operator 3SUN Srl, a company in the Enel Group. In March 2018, 3SUN Srl launched a project to convert the factory, intending to make it the first worldwide and exclusive manufacturer of HJT bifacial photovoltaic panels, which are based on heterojunction technology. This technology brings together two different kinds of silicon, amorphous and crystalline, generating particularly high yields.95 The 3SUN Srl factory conversion project entails an investment of over €80 million, partly financed by the European Commission,96 the MSE through the 'Ampere' project97 and the Sicily region.

There are also some other smaller factories in Italy manufacturing solar panels, as well as an important factory manufacturing wind turbine blades, located in Taranto (Puglia) and owned by the Danish wind energy operator Vestas. The manufacturing of turbines for small hydroelectric plants is also growing notably.98

VI CONCLUSIONS AND OUTLOOK

Italy has experienced an impressive increase in renewable energy projects in the past decade, outpacing the target set by the EU and the Italian legislature for 2020. Building on the 2017 Italian National Energy Strategy, the PNIEC has set more ambitious goals by increasing the 2030 target figures for renewable energy and energy efficiency.

The latest legislative and policy developments form a robust basis for Italy to deliver on its energy policies for 2030 and beyond, as they address both cross-cutting elements to promote climate and energy action and specific provisions for sectoral action, where necessary. In fact, the measures adopted in recent years have already produced significant effects in the energy sector, even before the advances anticipated under the RES1 Decree are considered; the RES1 Decree – the first step in a wider government strategy under the general framework of the PNIEC – will also impact the regulatory framework of RES incentives.

Overall, Italy's comprehensive legislative framework, underpinned by government policies committed to environmental sustainability and to the involvement of credit and finance institutions in the green economy, has made Italy one of the global leaders in RES development. However, efforts should be stepped up to ensure that the 2030 targets are attained.99

While these objectives are particularly ambitious, meeting them is necessary to reach the critical targets established internationally.100 In this context, a number of measures should be implemented, namely encouraging the installation of small-scale plants through the imposition of minimum quotas of RES consumption; promoting long-term contracts for large-scale power generation; enhancing self-consumption for small-scale power generation through net metering arrangements; upgrading existing plants by promoting repowering and revamping; simplifying procedures, in particular for environmental assessments; and promoting burden-sharing of the national RES target among the regions. Ultimately, achieving these goals calls for efficient government policies, encouraging investor confidence and decreasing the costs for the development of RES projects over the long term.


Footnotes

1 Marco D'Ostuni is a partner, Luciana Bellia is a senior attorney, Riccardo Tremolada is an associate and Giuliana D'Andrea was a trainee lawyer at Cleary Gottlieb Steen & Hamilton LLP.

2 SRM, MED & Italian Energy Report, March 2019, p. 75.

3 ibid., p. 93.

4 See Directive 2009/28/EC of the European Parliament and of the Council of 23 April 2009 on the promotion of the use of energy from renewable sources, OJL 140, pp. 16–62.

5 Under Directive 2009/28/EC, the Italian legislature set a target renewable energy sources (RES) share of 17 per cent of the energy mix by 2020. See also Italy's Fourth Progress Report under Directive 2009/28/EC, December 2017.

6 European Commission, Fourth Report on the State of the Energy Union COM (2019) 175.

7 ARERA, Report No. 428/2018/I/efr of 2 August 2018, p. 10, table 3.

8 In particular, feed-in tariffs are no longer available for RES plants that commenced activities after 31 December 2012 (see Section III.i).

9 ARERA, Report No. 428/2018/I/efr of 2 August 2018, p. 10.

10 ibid.

11 Energy & Strategy Group, Renewable Energy Report, May 2019, p. 53.

12 ibid., p. 54.

13 SRM, MED & Italian Energy Report, March 2019, p. 86.

14 GSE, Rapporto Statistico, Energia da fonti rinnovabili in Italia, February 2019.

15 Law No. 145/2018 (the 2019 Budget Law), Article 1, Paragraph 67(a).

16 ibid., Article 1, Paragraph 954 (correlatively, on 15 March 2019, the Energy Services Manager (GSE) published an addendum to the implementing regulations of the Ministerial Decree of 23 June 2016 to include the provisions of the 2019 Budget Law on biomass incentives).

17 Law No. 12 of 11 February 2019, Article 11 quater concerning 'Provisions on concessions for large hydroelectric derivations' contains important amendments to Article 12 of Legislative Decree No. 1999 of 16 March 1999.

18 SRM, MED & Italian Energy Report, March 2019, p. 77; see also Terna, Dati statistici, Elettricità nelle regioni italiane, 2018.

19 Energy & Strategy Group, Renewable Energy Report, May 2019, p. 55.

20 Terna, Rapporto mensile sul sistema elettrico, March 2019, p. 6.

21 Energy & Strategy Group, Renewable Energy Report, May 2019, p. 56.

22 ibid., p. 58.

23 ibid., p. 57.

24 ibid., p. 60.

25 ibid., p. 61.

26 ibid., p. 62.

27 ibid., p. 64.

28 ibid., p. 66.

29 Legislative Decree No. 28/2011, Article 3 provided that the national target for final consumption of energy in the transport sector produced by RES was to be at least 10 per cent. In addition, the Ministerial Decree of 15 March 2012 (known as the Burden Sharing Decree) set out the objectives for each Italian region for 2020, with a view to proportionally sharing the activities necessary to achieve this national target. It also made the state-owned company GSE responsible for monitoring and calculating the consumption of RES-generated energy.

31 Pursuant to Article 9 of the Regulation on the Governance of the Energy Union, the Commission may issue specific recommendations on the Draft Integrated National Energy and Climate Plan submitted by Italy no later than 30 June 2019.

32 See Draft Integrated National Energy and Climate Plan, available at https://ec.europa.eu/energy/sites/ener/files/documents/ec_courtesy_translation_it_necp.pdf.

33 Energy & Strategy Group, Renewable Energy Report, May 2019, p. 74.

34 ibid., p. 75.

35 Million tonnes of oil equivalent.

36 Energy & Strategy Group, Renewable Energy Report, May 2019, p. 81.

37 GSE, Annual Report, 2018, pp. 185–186. Consequently, to achieve these goals, it is necessary to reduce consumption by 20 per cent by 2030. Thermal energy generated from RES, therefore, has strong links with the draft Integrated National Energy and Climate Plan measures to increase energy efficiency, such as tax deductions on expenses related to the energy-efficient modernisation of buildings and building renovation; tradable certificates ('white certificates') released by the GSE following energy-efficiency interventions in energy end use; and obligations to have buildings include the use of RES to provide a minimum percentage of the building's energy needs.

39 A feed-in tariff includes an 'incentive' component and a component for remuneration for electricity conveyed into the network.

40 A feed-in premium is an incentive granted exclusively for the electricity produced, and does not include remuneration for the sale of that energy, which might even be self-consumed by the producer or sold to the market, generating extra profits.

41 The Energy Account system includes a standard premium related to the amount of energy produced.

42 Italian Court of Auditors, Decision No. 10/2019, Annual Report on GSE Financial Management, February 2019, p. 36.

43 Green certificates were issued by the GSE and represented the environmental value of electricity generated by an RES plant (i.e., an amount of CO2 emissions lower than that produced by a plant fired by traditional fuels, such as oil). Green certificates could be traded separately from the electricity produced over the counter or through a trading platform managed by the state-owned GES, thus representing a further remuneration for RES electricity producers. Indeed, according to the legislation, each electricity producer (or importer) had an obligation to generate (or put into the grid) a given share of electricity generated from RES or, alternatively, to obtain a corresponding amount of green certificates.

44 Ministerial Decree of 6 July 2012, Article 19. The value of the incentives replacing green certificates has been set out for 2018 in ARERA Resolution No. 32/2018/R/EFR of 25 January 2018.

45 Law No. 244/2007 and Ministerial Decree of 18 December 2012.

46 Ministerial Decree of 23 June 2016.

47 ARERA, Report No. 428/2018/I/efr of 2 August 2018, p. 68.

48 ibid., p. 6.

49 ibid., p. 67, figures 40 and 41.

50 Legislative Decree No. 28/2011, Article 4.

51 Legislative Decree No. 79/1999, Article 3, Paragraph 3 and Article 11, Paragraph 4, transposing Directive 2009/28/EC. This means that, in an oversupply scenario, RES plants will still be dispatched in the context of the power exchange market irrespective of price. In their White Paper on Renewables in the Wholesale Market, ACER and CEER called for EU legislators to bring RES into the market, by removing the priority for RES in dispatching regimes.

52 The 2019 Budget Law, Article 1, Paragraph 67(a).

53 Legislative Decree No. 28/2011, Article 11.

54 Italian Revenue Agency, decision No. 86/E of 15 October 2015.

55 Italian Revenue Agency, decision No. 54/E of 18 July 2016; Law No. 266/2005, Article 1, Paragraph 423.

56 Article 117 of the Italian Constitution defines whether the national or the regional legislator is entitled to adopt relevant rules in the energy sector. For more details, see D Diaco, '“Produzione, trasporto e distribuzione nazionale dell'energia” nei giudizi di legittimità costituzionale in via principale' (2004–2015), Corte Costituzionale, Servizio Studi, available at http://www.cortecostituzionale.it/documenti/convegni_seminari/stu_281.pdf.

57 Legislative Decree No. 93/2011.

58 Law No. 481/1995, Article 2.

59 ibid., Paragraph 20(c).

60 Law No. 239/2004, Article 1, Paragraph 12.

61 ibid., Paragraph 89.

62 Legislative Decree No. 28/2011, Article 4.

63 Legislative Decree No. 387/2003, Article 12.

64 Ministerial Decree of 10 September 2010, National Guidelines for the Authorisation of RES Plants, Paragraph 10.5.

65 Italian Constitutional Court, Judgment No. 275 of 6 December 2012.

66 Legislative Decree No. 387/2003, Article 12, Paragraph 4.

67 See Ministerial Decree of 10 September 2010, National Guidelines for the Authorisation of RES Plants, Paragraphs 12–13, for an exhaustive list of activities subject to this authorisation regime.

68 Legislative Decree No. 28/2011, Article 6.

70 Source: KPMG, Advisory: Investing in renewables, 2011, study on Italian legislation by KPMG (authors' translation).

71 Legislative Decree No. 387/2003, Law No. 239/2004 and ARERA Resolution No. 280/07.

72 Minimum guaranteed prices are, however, available for small electricity producers and only for small volumes of electricity generated.

73 Legislative Decree No. 387/2003, Legislative Decree No. 20/2007 and ARERA Resolution No. ARG/elt/74/08.

74 Legislative Decree No. 79/1999, Article 3, Paragraph 3 and Article 11, Paragraph 4, transposing Directive 2009/28/EC.

75 See ARERA Resolution No. 522/2014/R/eel.

76 S M Sambri, Modalità di realizzazione di impianti di produzione di energia con risorse private (project financing), in E Picozza and S M Sambri (eds.), Il diritto dell'energia, CEDAM, 2015, p. 669.

77 ibid., p. 669.

78 ibid., p. 679.

80 S M Sambri, Modalità di realizzazione di impianti di produzione di energia con risorse private (project financing), in E Picozza and S M Sambri (eds.), Il diritto dell'energia, CEDAM, 2015, pp. 705–706.

81 ibid., p. 42.

82 ibid., p. 45.

83 Legislative Decree No. 115/2008, Article 2(i), defines an ESCO as 'a natural or legal person that delivers energy services and/or other energy efficiency improvement measures in a user's facility or premises, and accepts some degree of financial risk in so doing. The payment for the services delivered is based (either wholly or in part) on the achievement of energy efficiency improvements and on the meeting of the other agreed performance criteria.'

84 See F Arecco, G Dall'O, Energia sostenibile e fonti rinnovabili, IPSOA, 2012, p. 397.

85 DLA Piper, Doing Business in Italy, Energy Investor Guide 2018, p. 59.

86 Energy & Strategy Group, Renewable Energy Report, 2017, pp. 11–13.

94 Energy & Strategy Group, Report on renewable energies other than photovoltaic, 2013. See also Confindustria, Libro bianco per uno sviluppo efficiente delle fonti rinnovabili al 2030, December 2018.

96 In particular, the EU funds were awarded under the European Research and Development project Horizon 2020 European Call LCE-09-2016-2017.

98 Legambiente, Report on Renewable Municipalities for 2017, p. 118.

99 European Commission, Fourth Report on the State of the Energy Union COM (2019) 175.

100 See generally, Aspen, Shell Italia and Elettricità Futura, Massimizzare il potenziale energetico nazionale tra crescita e sostenibilità, 2018.