Newsletter 09/2014 - Incentives to PVplants

Recent changes to the rules incentives applicable to photovoltaic plants

Law No. 116 of 11th August 2014, entered in force on 21th August 2014, finally converted into law (with amendments) Law Decree No. 91 of 24th June 2014 (the “Decree”), providing for “urgent provisions for agricultural sector, environmental protection and the energy efficiency of school and university buildings, environment and development of enterprises, the reduction of costs applied to electricity prices, and the immediate definition of obligations arising from the European rules”.

The Decree (as amended by said conversion law) introduces significant changes in the existing feed-in tariff incentive mechanism granted to photovoltaic solar plants, with the declared aim at optimizing the management and timing for collection and payment of the incentives.

1. The Decree

The Decree introduced in our legal system a reorganization of the feed-in-tariffs for all photovoltaic plants with a capacity above 200 kW. In detail, Article 26 (“interventions on feed-in-tariffs for energy produced by photovoltaic plants”) recognizes to owners of such photovoltaic plants, the possibility to choose between two options with effect from January 1st 2015:

(i) re-modulation of feed-in-tariffs, with application of percentages of reduction linked to the residual incentive period and automatic extension of the incentive period from 20 to 24 years starting from the entry into operation of the relevant plant;

(ii) as an alternative to the re-modulation scheme referred to in point (i), owners of such plants may elect to keep the original incentive period of 20 years with a 8% forfeit reduction of the feed-in-tariff applied as of the enactment of the Decree (June 24th 2014).

Changes have also been provided in respect of the payment modalities applicable to the incentives: starting from the second half of 2014, GSE (Gestore dei Servizi Energetici – the competent Italian authority) will anticipate the payment of tariffs on a monthly basis for an amount equal to 90% of the average estimated production of the relevant plant for the reference calendar year, with subsequent settlement based on the actual production within June 30th of the following year.

Furthermore, Article 26, paragraph 5, of the Decree enables plant owners to which re-modulation applies to benefit – in accordance with ad hoc arrangements with the credit system (still to be defined) – of dedicated funds or specific guarantees by CDP (Cassa Depositi e Prestiti S.p.A. – the Italian State credit agency) aimed at facilitating access to bank loans up to amounts equal to the difference between the tariff awarded as of December 31st 2014 and the incentive re-modulated pursuant to the Decree. In this respect it is provided that the exposure of CDP shall be guaranteed by the Italian State, in accordance with the criteria and modalities to be established by the Ministry of Economic and Finance.

2. Amendments to Article 26 of the Decree

Certain amendments and additions to Article 26 have been further provided in the context of the parliamentary process for the conversion of the Decree. In the new scenario, owners of photovoltaic plants with a capacity higher than 200 kW are now entitled to request, with written notice sent to GSE by November 30th 2014:

(i) a payment dilution of the incentives over 24 years starting from the entry into operation of the plant, recalculated according to a percentage of feed-in-tariffs reduction set forth in the Decree ranging from 25% for residual periods of 12 years and 17% for residual periods exceeding 19 years;

(ii) to keep the original 20-year incentive period, provided that the relevant feed-in-tariffs are re-modulated so as the same are lower during the initial years and settled on a later stage; the re-modulation percentages shall be set forth by the Ministry of Economic Development with ad hoc measures to be enacted by October 1st 2014 so that, in the case that all entities entitled to choose adhere to this option, savings for at least Euro 600 million per year in the period 2015/2019 are ensured for the State compared to the actual disbursements under the current incentives;

(iii) to keep the original 20-year incentive period, but for a reduction of the feed-in-tariff – for the residual incentive period – equal to a percentage that varies depending on the nominal capacity of the plant (i.e.: 6% for plants with nominal capacity between 200 kW and 500 kW; 7% for plants with nominal capacity between 500 kW and 900 kW; 8% for plants with nominal capacity higher than 900 kW); this latter option shall automatically apply if no communication is sent by the plant operator to GSE within November 30th 2014.

Whatever option is chosen, the applicable regime will take effect from January 1st 2015.

Article 26 of the Decree confirms that – starting from the second half of 2014 and notwithstanding the size of the plant – GSE disburses the incentive tariffs in monthly installments for an amount equal to 90% of the estimated average production of each plant for the relevant calendar year, with subsequent settlements by June 30th of the following year, based on the actual production.

The possibility for operators to benefit of bank loans has been also confirmed by the Decree for a maximum amount corresponding to the difference between the tariff awarded as of December 31st 2014 and the re-modulated tariff and based on ad hoc arrangements within the credit system, which will in turn benefit of State funds or guarantees made available through CDP.

Moreover, new Article 26 now expressly contemplates the possibility of assigning or securitizing with “entities selected amongst primary financial operators in Europe” up to 80% of the incentives according to modalities and terms still to be defined; a discounted rate, however, shall apply to such transactions with the additional requirement of a specific auction/tender procedure also to be defined. Those feed-in-tariffs shall not be affected to re-modulation.

3. Incongruences and critical aspects

Through the above mentioned amendments, the Italian legislator maintains that the remodeling of the bonus which investors that have installed photovoltaic plants in the past years are currently benefiting will result in a better sustainability of the policies in support of renewable energies.

The impact of the new rules new on long term contractual relationships already in place, however, is not to be underestimated as the rights acquired over the land where plants have been built normally have a duration of 20 years (and the same duration accordingly applies to the relevant term loans and agreements with GSE) and the underlying investment decisions were made based on economic forecasts and business plans according to which the expectation to receive certain (higher than now) incentives played a fundamental role.

In this prospective, it has to be evidenced that Article 26 of the Decree is a retroactive measure impacting on operators that have already invested in the photovoltaic industry being the beneficiaries of favorable feed-in- tariffs. In substance, the new rules modify consolidated juridical positions in respect of which there is no margin for discussion and re-negotiation. The new regime appears to be in open contrast with the basic principles of legitimate expectation, predictability and stability of the legal environment. The conversion law also seems to conflict with Directive 2009/28/EC and Article 117, first paragraph, of the Italian Constitution, as the final version of the Decree would infringe the commitments undertaken by the signatory States to ensure stable, fair and favorable conditions to investors in the development of their initiatives. In accordance with such national and international principles, investments must on the contrary enjoy full protection and security and not be affected by unfavorable changes of the legal and economic conditions on the basis of which such investments were made.

As a final note, it is to be highlighted that the November 30th 2014 deadline provided by the legislator to exercise the re-modulation option is not consistent with the failure (so far) by the government in issuing the enactment rules (still to be defined) necessary to implement different rights and obligations resulting from the Decree.

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