Energy Horizons: Italian State PPAs: should off-takers really consider them as an alternative to private PPAs?

Daria Buonfiglio:

Hello, everyone, and welcome to a new episode of Energy Horizons. I am Daria Buonfiglio, your host, and today with us, we have Carlo Montella, partner and Global Deputy Business Unit Leader of the Energy & Infrastructure Practice at Orrick, and Stefano Cavriani, Founder and Director at EGO Energy. Welcome to both. So during today’s episode, we will focus on a new measure introduced by the energy decree, which is Article16(b), and according to this article the GSE can now buy the energy produced by renewable plants through the execution of long-term PPAs, minimum duration of which is three years, and then the GSE can sell this energy at discounted prices compared to the ones we’re seeing right now, given priority to a short list of selected entities, which include, for example, energy-intensive companies. The prices at which the energy should be sold by the GSE are yet to be defined by the Ministry of the Ecological Transition, which is 90days from the entry to force of the conversion law of the decree, and that should be around the end of July. The aim of the provision is to support those companies which are most suffering from the energy prices, giving them access to reasonable and stable prices not influenced by the ongoing speculations. And one other important indication of Article16(b) is that the implementation of this new measure should not result in an increase of the public finance charges, but there are several parties who’ve raised concern around this last indication, and we will understand why during today’s episode. So, our first question to Carlo. Do you think that off-takers of utilities scale plants will actually choose to enter into PPAs with the GSE, and if so, which do you think are the main disadvantages that they shall consider compared to private PPAs?

Carlo Montella:

First of all, thanks, Daria, for arranging a podcast on this topic. Going straight to the point, I do not think that this new product might be interesting to utilities scale renewables projects. Mainly for the following reasons: because of the duration, even if it is a provided that the duration should be at least three years. I would not expect to see a duration of such products for ten years plus, which is key now to secure nonrecourse project financing. So a big market share of investors who want to leverage on their investments on a nonrecourse basis should not be interested in this new product, because I would expect such product not to be negotiable for obvious reasons. And these contracts, at least in a few cases we’ve experienced so far, need to be negotiated quite a lot to secure bankability and also to make it – to make them appreciated by the sponsors. I would think that this product, might be more interesting for smaller retail plants out of bankability schemes on the offer side.

Daria Buonfiglio:

Okay, thank you. And, Stefano, you have been a trader for more than 20years. We know that the Italian Energy Market is a very complex one, highly regulated. So when signing a PPA, there are many risks to be considered, which are, as Carlo said, negotiated by the parties. So how do you think the GSE will manage in this new trader role, and do you think that the GSE will come ask for the support of the Italian traders in the implementation of this provision for any specific aspect considering their long experience?

Stefano Cavriani:

Thanks, Daria, for the question and for the invitation, and, of course, hello, everybody. Well, let me say, we as Ego Energy have quite deep experience in this area. We manage around 1,500power plants all around Italy, three gigawatts of nominal power. So let me say, thanks to these experiences, we can say that managing the route to market and the dispatching of renewable, not programmable and intermittent power plant generation, it is somehow complicated. Much more if the price of the contract, it is not a spot variable price but fixed and much more if it is a fixed price on the long term. So, I don’t want to say, of course, that GSE will not be able to do this job, absolutely, but I’m just saying that it is a specific job. In Italy, there is a certain number of players which are able to do this. In Italy, we already have, for example, Ritiro Dedicato, off-taking by GSE at a spot price, which is a public service which is offered to most renewable power plants, and all the medium large portfolios and often also the small power producer already choose to move to the free market, abandoning the GSE solution. Evidently thanks to a more competitive condition that market players are able to offer and evidently thanks to the capability that these market players have developed. So having said this, I would say that in Italy, quite often it seems that market players are considered somehow not really necessary, but on the contrary, they are the essential engine of any free market. So, why don’t consider the capability that these operators could put on the table and offer also to GSE. For example, why don’t consider that market players—specialized market players—could be the aggregators which put together different power plants, many power plants, and at that point, offer to GSE and more stabilized and more secure volume and profile. This is exactly what normally happens in front of Tso Terna for any new advanced service like UVAM meets aggregated metered units, capacity market, interconnector, and so on. So at the end of the end, traders could be the aggregators who propose to GSE a more stabilized profile and be the unique interface simplifying, reducing the costs—which, never forget, if there will be costs, this will be charged of the energy consumer, so they have to be reduced and really well-controlled. And so at the end of the end, allowing a more effective GSE PPA management.

Daria Buonfiglio:

Okay, that’s very interesting. And now a question to the both of you. For a few months now, since the start of the energy crisis then accelerated by the Russian war against Ukraine, we started seeing an incremental growth of the Italian PPA Market, with many corporates understanding the importance of having stable energy prices. So how do you think this provision will impact, and if it will impact the private PPA Market, will it slow it down? Maybe, Carlo, you can answer first and then Stefano?

Carlo Montella:

Of course. Thanks, Daria, again. And that’s a very good question. I think that from a renewable energy perspective and from the perspective of companies, industries being high-energy-demanding, this specific product might fail to reach the main goal it wanted to achieve, which I think was to alleviate the economic tension of big corporates, big industries, high-energy-demanding that’s so very much affected by the context that we are now living in. And offering at the same time an interesting product to renewable energy producers for the reasons I mentioned before, because the utilities scale renewable project markets might—that’s my main concern—not be so much interested in this product, and so this means that also the GSE might not have such high amount of capacity – of renewable capacity at the end – to supply to high-energy-demanding companies, and that’s why I’m saying that. Anyway, I think that it does not affect the PPA market at all. Should it be an PPA provider, whether a utility or a trader, I would not be so much concerned, honestly, and I think that it’s an additional product we can have in the market that might also probably give a boost to the competition leading to more interesting PPAs. And so at the end, it should also be in the interest of the energy producers, as they might have a more variety, let’s say, of PPA products both from private utilities and traders and by the GSE, even if probably alternatives to this specific measure would have been thought about and implemented.

Daria Buonfiglio:

Okay, Stefano, what do you think?

Stefano Cavriani:

Well, I totally agree with Carlo. Generally speaking, the PPA market in Italy, it is still in a starting phase, not because an off-taker like GSE was missing, but on the contrary simply because there are still very few real projects already authorised and ready to build, but this will be soon into the market. So, I’m pretty sure that anyway the PPA market will significantly have a boom in the next months or few years and now more than ever, because, exactly as Carlo was mentioning, consumers are now very wary about their procurement costs, so they are absolutely very much interested in signing PPA, which will be able to reduce and stabilize their energy costs. So, I would say GSE PPA will be simply another option on the market, and this, anyway, could be a good point. If this option would be managed in the right way, as I was trying to express in my previous answer, I think that this could be another booster for the PPA simply because it would be probably an opportunity of increasing the awareness of the PPA opportunity, also for, let’s say, small, medium-sized power producers. About awareness, I would like to say that, normally, the selling of the electricity to GSE, really speaking, determining a low awareness of the market’s opportunities for the power producers. It happens often that selling electricity to GSE inside the Ritiro Dedicato, normally at that point, the power producer approach, it is very passive, let’s say, not active, which is exactly not should have to happen, because in a complicated market, like energy market, it is important that the power producer has a good awareness of the market. So, just to be very brief, I would say this would be another option. It would be so probably an opportunity for the power producers and for the market to have other solutions managed in the right way, and let’s hope that this will be a useful tool in order to still increase the energy transition in an important market like the Italian Market.

Daria Buonfiglio:

Okay, thank you to both for your answers. So, one final question, and again, for the both of you. So, considering the aim of the provisions and the criticalities of this provision that you’ve both pointed out under a different perspective, which could possible alternatives the government could have thought of or maybe can still think of? And Stefano, maybe you can go first and then Carlo.

Stefano Cavriani:

Well, thank you Daria. Very, very simply, the best solution probably would have been a more flexible approach, which could be obtained by means of a financial management of the PPA. So not physical but financial. Exactly as it happens, and so we already have good experience about that in the so-called fair-won incentive scheme. So putting in place a two-way contract for difference, financial, flexible, avoiding to complicate the situation with the physical management, which is as I was mentioning before, complicated to manage for an operator which is not really specialized. Another point, very simple, could be to oversee the uniqueness of the dispatching management of the point of delivery for the electricity so avoiding to have only one balancing responsible party (BRP), and so giving again more flexibility on the supply of electricity to a POD, the point of delivery of the consumption, very simple, very potentially immediate. Personally, I think that these points could be put in place, allowing a more faster and effective development of the PPA market.

Daria Buonfiglio:

Carlo, do you agree? You have a different view?

Carlo Montella:

I completely agree with Stefano, and let me say, Daria, that since the approval of the decree to Decreto Sostegni Ter providing the price cap to renewable energy producers, and even if in different ways for different kinds of technologies, I thought that an alternative solution could be represented by forcing the GSE to virtually sell to the markets, and by which I mean at first high-energy-demanding companies, the energy that the GSE itself virtually purchased from renewable energy producers and the new CFD base tenders , so let’s assume that the GSE will virtually purchase energy from its sole asset having been awarded a CFD tariff for 65Euro cents per kilowatt hour, then the GSE could sell – virtually – sell that energy for, let’s say, 66 Euro cents per kilowatt hour to a big industry, it be high-energy-demanding company. If you combine this solution with a strong population of next tenders, because as we should expect more authorizations, so more projects should be eligible to join tenders , and so we assume that new tenders will be much more populated than the previous ones. These should lead to a dynamic that might generate a big opportunity to create a potential opportunity for the GSE sales, but not as a physical trader but as a virtual trader, let’s say, having the possibility to buy an incredible, significant capacity, from renewable assets that successfully joined CFD-based tenders and virtually could re-send that energy to the market. In my opinion, if the main goal, the main rationale, where the last measures starting from the Decreto Sostegni-Te come from is to help our industries mainly, our economy, I think that this solution could have been more effective and straightforward probably. And I hope that to the extent that is actually physical, there would be the possibility anyway to think whether implementing that.

Daria Buonfiglio:

Okay, thank you both. A very interesting conversation. And thank you all for listening. Stay tuned for more episodes. You can listen to our podcast on the Orrick website as well as on Apple Podcasts and on Spotify. Thank you, Carlo. Thank you, Stefano

Carlo Montella:

So long, Daria. Thanks to you, and thanks to Stefano.

Stefano Cavriani:

Thanks to you. Bye-bye.