Structure of the compensation mechanism for extraprofits arising from renewable energy plants law no. 25 of conversion of “Sostegni Decree”

published on 2 June 2022 | reading time approx. 3 minutes

  
On 29 March 2022 entered into force Law no. 25 of 28 March 2022 (hereinafter, “Law no. 25”) on “Conversion into law, with amendments, of Decree-Law no. 4 of January 27th 2022, on urgent measures in support of companies and economic operators, labour, health and territorial services, related to the Covid-19 emergency, as well as for the containment of the effects of price increases in the electricity sector” (hereinafter, “Sostegni ter Decree”).

Article 15-bis of Law no. 25 amends the original provisions of Article 16 of Sostegni ter Decree which have caused so much debate and complaints from the renewable energy producers in last months with respect to the adoption by the Italian Government of the compensation mechanism that shall be managed by Gestore dei Servizi Energetici S.p.A. (hereinafter the "GSE"), aimed at setting-off the selling prices of the energy produced by renewable energy plants in the period starting from 1 February 2022 to 31 December 2022, in order to tackle the sudden increase of the energy sale prices on the energy market (hereinafter, the "Compensation Mechanism").

1. Renewable energy power plants concerned by the compensation mechanism, as provided by law no. 25

Pursuant to Article 15-bis of Law no. 25, Compensation Mechanism shall apply to the electricity fed into the national electricity grid by the following categories of renewable energy power plants:

a) photovoltaic plants (hereinafter, "PV Plants") with a power capacity > kW 20 which benefit from fixed feed-in tariffs (hereinafter, "FiT") deriving from the relevant Conto Energia, not dependent on market prices (hereinafter, the "Plants Category A"). Therefore, Compensation Mechanism provided under Law no. 25 applies only to the PV Plants which have been granted with FiT pursuant to I Conto Energia (Ministerial Decree 28 July 2005), II Conto Energia (Ministerial Decree 19. February 2007), III Conto Energia (Ministerial Decree 6 August 2010)  and IV Conto Energia (Ministerial Decree 5 May 2011).

b) solar source, hydroelectric, geothermal and wind power plants with a power capacity > kW 20 which have not been granted with FiT and entered into operation before 1 January 2010 (hereinafter, the "Plants Category B"). In this regard, please note that it appears that are concerned by the Compensation Mechanism also the power plants which belongs to the Plants Category B that have renounced the FiT.

2. How compensation mechanism works

Article 15-bis of Law no. 25 has amended the parameters with respect the calculation of the values of the Compensation Mechanism as provided under Article 16 of Sostegni ter Decree.

First of all, GSE shall calculate the difference between two values as defined below:

• Value a) = a reference price as identified in the following table with regard to each national geographic market area:
    

• Value b) = a market price equal to:

i. with respect to Plants Category A, as well as for solar, wind, geothermal and run-of-river water (idroelettrico acqua fluente) plants that have not been granted with FiT (most of Plants Category B), which entered into operation before 1 January 2010:

• hourly zonal price¹ on the energy market; or
• the price indicated in the relevant PPA (as defined below), for power purchase agreements (hereinafter, the "PPA") executed before 27 January 2022 which do not comply with the conditions referred to in paragraph 7 of Article 15-bis of Law no. 25 (for more details, please refer to section 3 (Cases where the Compensation Mechanism do not apply) below);

ii. with respect to Plants Category B different from those indicated in point i) above:

• the monthly arithmetic mean of the hourly zonal prices on the energy market; or
• the price indicated in the relevant PPA, for PPAs executed before 27 January 2022 which do not comply with the conditions set out in paragraph 7 of Article 15-bis of Law no. 25 (for more details, please refer to section 3 (Cases where the Compensation Mechanism do not apply) below).

Depending on the outcome of the difference between Value a) and Value b):

1. if it  is positive, GSE will pay the relevant amount to the energy producer; and
2. if it is negative, either the energy producer will pay the relevant amount in favor of the GSE or the latter will set-off the relevant amount (conguaglio) (A and B, jointly, the "Economic Items").

In order to apply the Compensation Mechanism and let the GSE calculate the Value a) and Value b) indicated above, paragraph 2 of Article 15-bis of Law no. 25 provides that the energy producers concerned, upon request by the GSE, transmit to the same, within 30 (thirty) days of the same request, a sworn declaration, pursuant to the Decree of the President of the Republic no. 445 of 28 December  2000², certifying the information necessary for the application of the Compensation Mechanism, as identified by ARERA (i.e., Italian independent Regulatory Agency in the energy sector) in its subsequent application measures to the Law no. 25.

3. Cases where the compensation mechanism do not apply

PV Plants benefiting from the FiT granted pursuant to:

1. V Conto Energia (Ministerial Decree 05/07/2012); and
2. Ministerial Decree 4 July 2019 ("FER 1 Decree"),

shall not be concerned by the Compensation Mechanism because the FiT granted according to the incentive mechanisms provided under limbs (i) and (ii) above shall not be considered fixed.

With respect instead to the Plants Category B, Compensation Mechanism shall not apply, as way of example, to the following categories of power plant:

• power plants benefiting from all-inclusive FiT (Tariffa onnicomprensiva); and
• wind power, hydroelectric and geothermal plant that have been granted with FiT by means of auctions (aste) and registers (registro) or by means of direct access, pursuant to the Ministerial Decree of 6 July 2012 and 1 January 2016.

In addition to the above, Compensation Mechanism shall not apply with respect to the energy sold by means of PPA executed before 27 January 2022 provided that such PPAs are not linked to price developments in the "spot" energy markets (i.e., PPA shall be at fixed sale price) and that, in any event, are not executed at an average price that is 10 percent > the value referred to in table under section 2 (How Compensation Mechanism works) above, but only for the period of duration of such PPAs.

4. Does the compensation mechanism concern also GSE RID Conventions?³

Pursuant to paragraph 5 of Article 15-bis of Law no. 25, the Economic Items shall be calculated by the GSE in such a way that renewable energy producers who have executed a GSE RID Convention are entitled to an annual total economic remuneration not lower than that resulting from the guaranteed minimum prices (prezzi minimi garantiti or "PMG⁴"), in the cases provided for in the relevant GSE RID Conventions.

  
The content of such provision assures renewable energy producers who have executed GSE RID Conventions and have opted (where applicable) to the PMG, the latter set forth under the relevant GSE RID Convention shall not be affected by the application of the Compensation Mechanism.

 
For the sake of clarity, please note that according to Article 7.1 of Annex A of ARERA Resolution no. 280/07 only the following categories of plants shall have access to the PGM, by executing the GSE RID Convention:

• PV Plants with a nominal power up to kW 100 which incentive instruments on the electricity produced, charged to the electricity tariffs;

• hydroelectric plants with an electrical power output of up to kW 500 that have access to incentive instruments on the electricity produced, charged at electricity tariffs;

• in the case of hydroelectric plants with an average annual nominal capacity of up to MW 1 and plants powered by other renewable sources with a nominal active power up to MW 1, with the exception of hybrid power plants, which do not have access to incentive instruments on the electricity produced, from electricity tariffs.

The PMGs are differentiated by source, are defined in progressive brackets and refer to the calendar year. In all other cases, as for example:

• with a renewable source, incentivized, of a capacity of up to MW 1 (excluding the above cases);

• with a renewable source, whether incentivized or not, with a capacity greater than MW 1,

the energy price recognized is the hourly zonal price.

For the plants for which the PMGs are applied, an annual adjustment is recognized, if positive, with the application of the hourly zonal price; in this way the producers are in any case remunerated with the most advantageous price. In addition to the above, please note that the renewable energy power plants which are not included in those who can apply to the PMGs in the relevant GSE RID Convention shall be concerned by the relevant provisions of the Compensation Mechanism, as described under Section 2 (How Compensation Mechanism works) above.

5. Duration of the compensation mechanism

The Compensation Mechanism under Law no. 25 shall apply to electricity fed into the grid from 1 February 2022 until 31 December 2022. However, it should be noted that, for the purposes  the concrete application of Compensation Mechanism, it shall be necessary to wait for the subsequent regulatory measures which shall be enacted by ARERA for implementing such mechanism, as well as the procedures for the payment of the relevant Economic Items into a specific fund set up at the Cassa per i Servizi Energetici e Ambientali.

    
With respect to the effective duration of the Compensation Mechanism, although the new rules clearly indicate 31 December 2022 as the expiration date of the urgency measure enacted, it cannot be excluded that the Compensation Mechanism provisions may be extended, should the extraordinary and emergency conditions that required the Italian Government's intervention will stand  beyond 31 December 2022.

6. Judicial remedies and unconstitutional concerns of the compensation mechanism

Compensation Mechanism at issue has been raising various concerns of constitutional illegitimacy with respect to, inter alia, its effectiveness to tackle the sudden and continue increase of the energy prices on the electricity market.

  
It shall be noted, in first instance, that the application of the measure also to the Plants Category B which do not receive FiT raises a concern of respect of the principles of legal certainty and legitimate expectations, given that such plants were financed solely by private investors and have not been granted with any State's subsidies.

  
Therefore Compensation Mechanism applies for the Plants Category B an extra cost unforeseeable at the time when the investment was made and such plants realized.

  
Moreover, Compensation Mechanism has raised concerns of unequal treatment and discrimination, unsupported by adequate justification and therefore arbitrary, between the renewable energy producers and the energy companies operating plants from fossil or conventional sources which are not recipients of any emergency measure by the Italian government which affects their increased revenues resulting from the sudden increase of the energy selling prices on the market. Thus the Compensation Mechanism would be able of altering the dynamics of a competitive market such as the energy market.

  
In order to allow the renewable energy producers to appeal the Compensation Mechanism and claim for the unconstitutionality of its introduction by the Italian Government for the reasons expressed above, it shall be necessary to wait for ARERA's implementing decision with respect the Law no. 25, which can be challenged by the renewable energy producers before the Regional Administrative Court for Lombardia (Milan) which, in turn, should it considers the unconstitutionality concerns to be well-founded may refer the constitutional legitimacy of the Compensation Mechanism to the Italian Constitutional Court as the sole institution competent to sanction the illegality of the rules establishing the Compensation Mechanism.

¹ hourly zonal price means the price formed on the electricity market that varies according to the time of day (expressed in hours) at which the energy is fed into the electric national grid and the market zone in which the plant is located.

² Please note that in the event of a false declaration, the legal representative of the energy company who will execute the declaration at issue is criminally liable for falsification of public documents.

³ GSE RID Conventions means the power purchase agreements executed by GSE and the relevant energy producer at the off-take regime, pursuant to Article 13, par. 3 and 4, of Legislative Decree December 29^th, 2003, no. 387.

⁴ PMG are minimum prices that the GSE undertakes to bear for the purchase of energy produced from renewable sources. The purpose of PMG is twofold: (a) to ensure the economic survival of smaller plants that exploit marginal or residual resources which, as such, could not otherwise be used; (b) to guarantee a minimum remuneration, whatever the evolution of the electricity market. This purpose implies that the PMG shall be related to the operating costs of the electricity generation plants and, as such, are subject to updating over time. The PMG were initially introduced by the ARERA Resolution no. 34/05 and subsequently confirmed with Resolution no. 280/07.