By the end of June, an additional 465MW in capacity had been installed, bringing the national total to just over 5.3GW and making another year with installations of more than 1GW likely. The half-year indication was particularly encouraging since Italian installations typically take place towards the end of the year.
In its national renewable energy action plan submitted to the European Commission this summer, the Italian government also raised its expectations for wind power, suggesting further solid progress in the years after 2010. Italy now expects that it will reach its target of 16GW of wind farms operating by 2020, producing 24.095TWh of electricity annually. And, after seven long years of waiting, market players were finally rewarded with the publication this July of national authorisation and siting guidelines for wind and other renewable energy plants.
Yet things could be better. Forced production curtailments at Italian wind farms, which began in 2008, have continued through 2010 and show no signs of subsiding. The environment for sealing the project-financing deals needed to get turbines turning is still a difficult one. And, while 16GW by 2020 is generally seen as a feasible target, it requires Italy to continue to put up 1GW every year and, at times, the government appears intent on sabotaging its own efforts to reach the renewable energy objectives.
A case in point was a measure approved by the cabinet in late May to scrap an obligation for state energy management agency Gestore dei Servizi Elettrici (GSE) to buy surplus green certificates. That measure, had it been adopted, would have sent prices for the green certificates at the heart of the Italian incentive scheme down sharply and endangered future investments in the sector - just as the government was about to present its renewable energy action plan to Brussels. The buy-back had become essential in a market characterised over the past few years by an excess supply of green certificates.
Parliament helped to patch matters up somewhat - at least for the immediate term - with an amendment that reinstated the buy-back. However, the amendment also stipulated that expenditures for the buy-back would decrease next year so uncertainty about changes to the market framework remain high.
High energy prices
While Italy enjoys modest wind resources, producers in the country have traditionally been rewarded with some of the highest prices for wind energy in the world. This has served as a magnet for Italian and international investors over the years. On the other hand, legislative fine-tuning of the market framework has become increasingly frequent, raising the riskiness of investments. The likelihood of forced curtailments of electricity production - implemented by transmission system operator Terna since 2008 - must also be factored into investment decisions.
And, while still high in absolute terms, prices paid for wind energy in Italy have come down dramatically in the past few years. Companies receive revenues from the sale of green certificates, which are issued for a period of 15 years, as well as from the sale of the electricity itself.
As recently as 2008, some developers were citing combined revenues from these two sources of as much as EUR0.20/kWh. That figure has now dropped to roughly EUR0.14-0.15/kWh and it is anybody's guess where prices could be five years from now.
"From an investor's point of view, there's a market risk associated with green certificates and the instability of the incentive system," explains Giuseppe Mastropieri, head of renewable energy sources at energy research group Nomisma Energia. "And then there's the problem of the grid. You can't be sure that all the kilowatt hours produced will be fed into the grid."
What is more, Mastropieri notes that Italian wind projects are facing increasing competition for funding from solar photovoltaic projects. While Italian solar tariffs were recently reduced slightly, incentive prices remain strong. Even more important is the fact that the photovoltaic projects enjoy a feed-in tariff, steady over the 20-year period in which the incentive is paid out.
Incentives under review
Stefano Saglia, energy under-secretary for the ministry of economic development, has said that the government will review the green certificate scheme later in the year and has not ruled out extending the feed-in tariff scheme to wind power and other non-solar renewable-energy sources. The stated aim of the planned review is to find a balance between an economically sustainable incentive scheme and the need to encourage investments in renewable energy in light of Italy's 2020 obligations as an EU member state.
The theme is a constant one at Italian wind energy conferences, where investors increasingly make clear that they would gladly exchange slightly lower revenues for increased stability on the incentive front. That, in turn, would give investors and the banks financing them greater clarity on likely returns over the lifetime of a project.
"The problem is that a strategy for the medium and long term is lacking," notes Alessandro Marangoni, chief executive of strategic consulting firm Althesys. "The point is you can't have an incentive system that changes every time the government needs to find money. The hope is that, with the need for Italy to implement the national renewable energy action plan, it will be possible (for the government) to plan better."
Italy's binding 2020 obligation involves sourcing 17% of energy consumption - for heat, cooling and transport, as well as for electricity - from renewable sources by 2020. According to the country's renewable energy national action plan, a total of 15GW of onshore wind farms and 1GW of offshore facilities will be operating by 2020.
While the 16GW total represents a significant increase from the previous government's estimate of 12GW of installed wind capacity, the forecast for offshore wind has been halved. No offshore wind farms are yet operational, nor have any been completely authorised.
Electricity production objectives
Far more important than objectives for installed capacity are those for electricity production. In 2009, figures from Terna showed that wind energy produced about 6.1TWh of electricity, satisfying roughly 2% of Italian electricity demand. Terna data also indicate that wind farms had already produced 4.209TWh of electricity in the first half of 2010, equivalent to 2.7% of total electricity consumption.
The government forecasts that wind energy will represent about 6.6% of total Italian electricity consumption by 2020 and that all renewable energy sources will account for 29% of electricity consumption that year. Bolstering the Italian grid, which is in most need of modernisation in southern Italy where the country's wind farms are concentrated, will be essential to meeting both of these targets.
Terna plans to invest some EUR4.3 billion in developing the grid from 2010 to 2014 and work is progressing, although not as fast as some project developers would like. In July, Terna finally received authorisation for the last stretch of the 105-kilometre Sorgente-Rizziconi connection between Sicily and Calabria on the southern tip of the mainland. Terna estimates construction should be completed in three to four years and that the link should allow the export from Sicily to mainland Italy of a significant amount of production from wind and other renewable energies. The first phase of the Sapei undersea cable link between Sardinia and mainland Italy was inaugurated in 2009, and the entire project is due to be completed in 2011.
As Terna works on upgrading the grid and struggles with bottlenecks in the areas with the highest concentration of wind farms, power curtailments have became a regular feature of Italy's wind market since 2008. "Curtailments are still pretty dramatic," notes Christof Stork, Italy country manager with GL Garrad Hassan. "The highest level we have seen as an annual average was 15% in 2009 in the area of Foggia and Benevento." This is the area stretching over the southern regions of Campania and Apulia, which has the highest concentration of wind farms in the country.
Curtailments have an economic cost for producers, although Italian energy regulator l'Autorita per l'Energia Elettrica e il Gas (AEEG) earlier this year unveiled new procedures designed to compensate producers more accurately and fairly for lost electricity production. Producers do not receive the green certificates that would have been issued had the turbines been turning. Instead, the period for which certificates are issued for a wind farm is extended by the amount of time that production is cut off. This delay in receiving green-certificate revenue can also have a substantial impact on the returns of any project.
The need to look closely at likely curtailment is one factor that has increased the time required to work out the terms of project financing deals. "Curtailment is something that needs to be addressed in any project before financing can be arranged," says Stork.
Another factor is the current nature of project finance deals, which are typically structured as club deals in which a number of banks are lined up from the beginning to take a share of a loan. "Before, there was a lead bank and the other banks relied on the lead bank," says Stork. "Now, instead of having 20 questions on a project, we might have 200."
The more difficult environment for project financing, along with uncertainty on the incentives and authorisation front, is likely to lead to a profound restructuring of Italy's wind sector, believes Mastropieri of Nomisma Energia.
"I expect that the days of wind energy for everyone are over and perhaps for good," he says. "The risk and the complexity are just too high." In this environment, the big utilities and other large industrial groups are likely to be at an advantage.
"I expect there will be a wave of mergers, disposals and acquisitions which will result in a sharp drop in the number of market players," says Mastropieri. The most likely to disappear are the scores of small developers that had spotted a way to make money with Italy's high incentive prices but who now increasingly find themselves struggling.
On the other hand, Mastropieri believes that one positive development on the financing front is the return of Italian banks to backing wind and other renewable energy projects. "Once there is a problem on the market, the foreign banks flee," he says. "But Italians are used to operating with constant uncertainty and renewable energy is the only sector doing well despite all the problems."
Authorisation guidelines welcomed
Another welcome piece of news for the Italian wind industry was the publication in July of national guidelines for the siting and authorisation of wind and other renewable energy plants. The guidelines were first called for in a key Italian renewable energy law dating back to 2003, but developers have become accustomed to grappling with different regulations in different regions of the country. After the publication of the guidelines this summer, regions were to be given 90 days to comply with the requirements.
"In principle, the guidelines appear to be positive," says Stork of GL Garrad Hassan, "although it needs to be seen how they work in practice." If things go well, Stork believes the guidelines will put regions on the same page when it comes to environmental impact issues and the identification of suitable sites for wind farms.
"It should lead to a more homogeneous development, where there is a focus on developing in the windiest areas and not the particular position of a certain region towards wind," he adds.
What is now missing is a breakdown of Italy's 2020 renewable-energy obligations among the country's 20 regions. It is hoped that the process of assigning firm targets to each of the regions will further help to break down the barriers that some local governments have set up against the development of wind energy and also encourage growth in those regions that are best suited to the production of wind energy.
There is some reason for optimism that Italy will actually achieve its 2020 targets for wind energy, particularly if the regions are brought on board. Should Italian politicians occasionally forget the country's 2020 targets, the industry looks primed to remind them. This was clearly demonstrated when the government recently seemed intent on doing away with the green-certificate buy-back that had helped support the market. The renewable energy industry protested in a strong and unified fashion - and parliament bowed to the pressure.
THE PLAYERS - WHO'S WHO IN THE ITALIAN MARKET
The leading wind energy producer in Italy is International Power, with 550MW of operational wind farms at the end of 2009. It broke into the market in 2007 with the acquisition from Irish renewable-energy player Trinergy of a portfolio of wind farms developed by IVPC.
Italian Vento Power Corporation (IVPC), based in the southern region of Campania, was the driving force of Italian wind energy in its early days in the '90s and is still a major player. IVPC has developed more than 1GW of Italy's operational wind farms and is one of the country's most important producers.
Enel Green Power (EGP), the renewable energy unit of giant Italian utility Enel, has a significant presence in wind energy in its home market and is one of the old-timers of the Italian wind industry. EGP will test market sentiment for renewable-energy groups, with an initial public offering planned for this autumn.
Falck Renewables, the London-based wind development unit of Italian industrial group Falck saw its first Italian wind farm become operational in 2008 and is set to merge with clean-energy firm Actelios later this year. Actelios is listed on the Milan stock exchange and houses Falck's other renewable energy interests. EGP and Falck will join listed Italian developers Alerion Clean Power and Erg Renew, both of which have solid portfolios of operational and planned wind farms.
Italian utility Edison, German utility E.on and Italian firms Veronagest and Fri-el Green Power are among the other major players active in the Italian wind power industry. Fri-el does business with RWE Innogy, the renewable energy arm of the German utility RWE. Its former partner, EDF Energies Nouvelles (EDF-EN), is currently developing wind power projects in Italy on its own and the company also has the right to acquire 50% stakes in a number of projects being developed by Denmark's Greentech. That partnership kicked off last year with EDF-EN's purchase of 50% in Greentech's 99MW Monte Grighine wind project in Sardinia, which is Italy's largest operational wind farm.
Spanish wind giant Iberdrola has not overlooked the Italian market, either. Societa Energie Rinnovabili (SER), its 50-50 joint venture with Italian oil group API, bore its first fruit last year with the inauguration of the 66MW Sant'Agata di Puglia plant in southern Italy. Halfway through 2010, an additional 66MW had been brought online by SER across Italy.
One of the newest entries in the Italian wind market is EDP Renovaveis (EDPR), the renewable energy arm of Portuguese utility EDP. In January, the company announced the acquisition of a 520MW portfolio from Energia e Natura, a subsidiary of the Italian industrial conglomerate Cover Group. EDPR cited the high growth potential of the Italian market as one of the reasons for its interest.
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