Italy plans to become carbon neutral by 2050 and has set ambitious climate targets to achieve it. To support this, the Italian government has launched a new green auction scheme to motivate the development of renewable energy projects and reduce greenhouse gas emissions.
This article aims to provide a detailed overview of Italy's green auction scheme, including its characteristics, potential impact to the Power Purchase Agreement (PPA) market, and wider ramifications for the country's green transition.
FER X, the Green Auction Scheme
What is FER X? Italy’s FER X decree is a new legislation introduced by the Italian government to promote renewable energy development and accelerate the country's transition to a low-carbon economy. Additionally, the Italian government also launched the FER 2 scheme, for innovative renewable technologies.
Timeline: The details of the new "FER X" decree governing the auction scheme have not yet been officially published, however, the Italian government has indicated that the first set of auctions could be held by the end of 2024. The decree is currently undergoing feedback from regional and local authorities, and will then be submitted to the European Commission for a state aid assessment before it can be enforced.
The goal of the scheme is to help Italy reach its target of 131 GW in renewables by 2030, nearly doubling the 66 GW capacity seen at the end of 2023, accelerating the deployment of renewable electricity generation, drive down the costs of renewable technologies, and ensure a more efficient and cost-effective transition to a low carbon economy.
How does FER X work? The Italian State will run a competitive bidding process where large-scale renewable energy developers submit project proposals, which include the strike price needed to conduct each individual project, and the government selects the most cost-effective ones to award long-term Contracts for Difference (CfDs). When the electricity reference price is below the strike price, the beneficiaries will be entitled to receive payments equal to the difference between the two prices. However, when the reference price is above the strike price, the beneficiaries will have to pay the difference to the Italian authorities. These CfDs guarantee a long-term fixed price for the generated electricity, providing stability, reducing risk for investors by guaranteeing a minimum level of return, while at the same time ensuring that the beneficiaries will not be overcompensated by the State when the price of electricity on the market is high.
Challenges & Impact on the PPA Market
The cumulated volume of CPPAs almost doubled in 2023 in Italy, proving that the Italian corporate PPA market has been on the rise. This growth is due to key large-scale wind-based deals and traditional small solar based PPAs which still represent the majority of the deals signed in Italy.
The introduction of the green auction scheme has the potential to disrupt the existing PPA market in Italy, depending on the start price set by the government for these CfD auctions. In a second draft version circulated earlier by MASE (Italy's Ministry for the Environment and the Energy Security), the auction would start at 85€/MWh for solar and wind. The scheme may make it less attractive for renewable energy developers to sign corporate PPAs if they can get a more favorable price through long-term, government-backed contracts.
The Fer X scheme should also lower curtailment risks for the projects developers and investors by ensuring remuneration based on the contracted price. The draft decree also proposed to index the strike price to inflation, which is not a normal practice for corporate PPAs. These measures would of course entice developers to direct their attention towards regulated revenues through the CfD scheme rather than as a potential alternative to PPAs. The indicative volumes to be covered by FER X are quite large, expecting more than 62GW for plants with a power capacity above 1 MW. This suggests that the majority of the renewable energy volumes could go through the scheme, therefore potentially drying up the corporate PPA market.
Lastly, there are uncertainties on the timing for publication of the decree, impacting the date of the first auction for project developers. This only adds to the current uncertainties on the Italian PPA market.
Consequences for Italian corporate buyers
All this could lead to a reduction or slowdown in the number of corporate PPA deals signed in Italy, which could create new challenges for corporate buyers to secure long term renewable energy supply. The increased competition and availability of government-backed CfDs may lead to fluctuations in corporate PPA prices in Italy, potentially pushing prices upward. Some projects or types of technologies may have additional incentives and premiums.
Funding for Green Manufacturing
The investment in green electricity generation is expected to have several benefits, including reducing Italy's reliance on imported green technologies, creating new employment opportunities, and supporting the country's overall transition to a more sustainable energy system.
Moreover, the incentive mechanisms provided for by the Decree FER X are dedicated to the following four renewable technologies: solar PV plants, wind farms, hydroelectric power plants, power plants for the treatment of residual gas from purification processes.
In addition to the green auction scheme, the Italian government has also announced a 1.1-billion-euro fund to support the development of green manufacturing, including the production of hydrogen electrolysers, batteries and solar panels amongst others. This investment is aimed at strengthening Italy's domestic manufacturing capabilities and creating new jobs in the green economy. This funding, which will take the form of direct grants and is partially funded by the EU, has been approved by the Commission in March 2024.
What can STRIVE by STX do for your company
Italy's green auction scheme is a significant step forward in the country's efforts to achieve its climate goals. The scheme has the potential to promote the development of new projects, ensuring the target reach for the country.
However, the scheme also faces challenges, including the potential distortion of the corporate PPA market and the need to address the country's ongoing reliance on fossil fuels. Continued innovation, investment, and policy support will be crucial to ensure that Italy's green transition is comprehensive, equitable, and sustainable.
Moreover, at this time, it could be a challenging time for a company looking to secure access to renewable energy in the long-term. Decisions will be impacted by the costs of the diverse options, the ease of putting them into place, the security of supply and your company’s sustainability commitments.
Thanks to its teams of experts working in local markets and sharing their experience, STRIVE by STX is well positioned to guide you in the process.
