Power Purchase Agreements (PPAs) in Italy have become noticeably more prevalent throughout 2024, more deals are being signed in the market compared to previous years. So, what’s the reasoning behind this? Why the change? What’s the market setup? This blog summarises the latest trends in the region and delves into the increase in activity, providing further context.
By 2030, Italy is looking to raise the market share of renewables to account for 70% of electricity production. With such an ambitious target set in place, plus historically a slow uptake in renewables so far, Italy is positioning itself to ramp up activity and proceed with significant growth in the sector. Recent edits to the country’s regulatory framework are shaped in such a way that assist the approval & planning process for assets, hence aiming to speed up the number of renewable energy projects that make it onto the grid.
Policy
Indeed, demand for PPAs in Italy is on an upward trajectory both from corporate buyers as well as utilities/sellers. One of the major drivers pushing this response from wide-ranging market players is what’s known as “FER X” legislation.
FER X is an upcoming Government subsidy-based decree, which intends to add 60 GW of new renewable capacity onto the Italian grid up until 2028. The auction splits technology into 45 GW of Solar and 16.5 GW of Onshore Wind. In the past, Italy has launched prior auctions for solar and wind energy, but arguably they have not been hugely successful. There are higher hopes for FER X, which published the 1st round of draft legislation in early March 2024, followed by a 2nd round in May 2024. Following publication there was a spike in interest, parties with vested interests were keen to understand not only how this will affect the renewable energy mix and economics, but also how the competitive PPA market is influenced by the scheme.
Originally the FER X auctions were scheduled for Autumn this year, however they are now expected to take place some time in 2025. There is also increasing concern amongst market players that such delays could be extended back further, meaning that sellers are exploring alternative routes to market to safeguard a stable hedge & secure return for their assets. Moreover, some corporate buyers also feel the urge to act promptly and procure PPAs now ahead of FER X, because there is the concern over whether this may also drain volumes from the competitive PPA market, impacting the price. Essentially, acting on PPAs now could provide some form of contingency plan. Alternatively, some sellers/buyers believe that FER X may have little impact on project availability and competitiveness in the corporate PPA market, so there will still be plenty of assets remaining post FER X with the aim of completing transactions, so there is a degree of uncertainty.
To narrow down to the specifics, in 2024 there have been numerous short term PPAs (<5 years) completed, with some long term PPA transactions (>8 years). As you’d expect, short term PPA deals are typically being executed for projects that are close to COD (pre/mid construction). For sellers, the short-term arrangement would seem like a logical stopgap solution, whilst waiting for clarity on the new decree & confirmation on dates. The alternative is immobilising the project whilst awaiting the Fer X incentive (with no guarantee of success) or being subject to spot price volatility. Although shareholders in some sellers may wish to pause their PPA activity due to the highly attractive prices tied into the FER X scheme, others are actively pursuing short term PPAs as evidenced by activity in the market, where their target investment returns are achievable.
Touching upon the pricing further, an interesting dynamic is that current PPA prices in Italy sit within a range of €60-80/MWh, compared with Fer X auction prices starting at €85/MWh and above (payment of FER X prices are also mandatory in any negative price or curtailment scenarios). This raises the question – if the state pays the seller above market, why go to a corporate end user? Where the credit risk for example is normally higher.
On the flip side, some large energy buyers/consumers also seem to be currently avoiding long-term PPAs in Italy, as they expect the price range to drop further when reviewing forward market projections. However, it could be said that energy-intensive firms and multinational corporations operating in Italy who need to adhere to decarbonisation targets/goals/deadlines, could well continue pushing ahead in executing long term corporate PPAs.
In summary, perhaps the FER X scheme could therefore be seen as generous to sellers. Despite this, some would argue that the upcoming FER X auctions have triggered a splurge of short-term PPA activity across all market participants.
Practical Market Arrangements
Another important factor to take into consideration in the Italian market when examining PPA activity is the zonal pricing arrangement. There are seven price zones in Italy. This complexity affects the supply and physical aspects of the market, consequently there are risks associated with electricity delivery. One asset delivering power into another zone means the party responsible needs to account for the delivery risk, there are few parties with the expertise willing to take on this process as things stand, so Physical PPA transactions are often completed between buyer/seller within zones. Historically, as seen through tender activity on the Zeigo platform, interest for portfolios located in the southern regions of Italy, gather a very strong level of competition. This is also expected to be the case in the aforementioned FER X scheme, it’ll be interesting to see what prices are attained once the auction process starts for projects in the southern zones.
Due to high interest amongst a lot of sellers/buyers for in country deals, for cross zonal PPAs to be completed, a Virtual PPA can offer a conventional solution, provided both sides are capable of handling the financial derivative aspects.
Additionally, although difficult to control, it’s helpful to understand that land ownership in Italy can be a key issue related to PPAs due to the lack of proper records on landowners. This can cause problems in large infrastructure projects, similarly there are challenges with undiscovered archaeological sites which can cause delays & hold ups, all of which slow down the number of PPAs signed.
Future PPA Activity 2024 & beyond
Linked to the price zone arrangement mentioned above, another key point which may influence PPA activity in the Italian market now & in upcoming years is the removal of the “PUN” (Prezzo Unico Nazionale) price. The Italian regulator, Gestore dei Mercati Energetici (GME), announced that the PUN will be abolished starting January 1, 2025, though it will continue to serve as a benchmark for long-term electricity contracts. The PUN is the national single price i.e. wholesale reference price of electricity purchased on IPEX – Italian Power exchange.
Since it was first announced that the PUN may be scrapped in 2021, there has been continued uncertainty around a new direction moving forward. The Italian regulator ARERA is in charge of defining the new mechanism for a new PUN replacement. Initially this was due prior to the end of 2022, but a lack of clarity remains and whilst any transition is expected to be gradual, the January 1, 2025 is fast approaching. In any case, buyers/sellers will want to feel protected from any drastic changes.
From 2025 on, it’s anticipated that only zonal prices will be considered as LMP price references for end users. Despite this, there is sustained interest in PUN-referenced PPAs among buyers and sellers. The expected elimination of the PUN settlement could move sellers into offering zonal settled bids, it will be interesting to see how competitive these are against PUN settled bids, whether this will accelerate or slow PPAs.
Finally, an important point to mention is that Italy is one of the most advanced European markets in terms of integrating battery storage, with a targeted battery storage capacity of 9 GW by 2030. The surge in storage is driven by attractive revenue prospects from TERNA’s Capacity Market and Fast Reserve auctions, combined with reforms that advance permitting for small-scale BESS assets. Hybrid PPA’s are considered the future (Renewable Project + Storage) for PPAs and being ahead of the game, could well position Italy in a positive place for PPA uptake.