Edited by PwC TLS and PwC Business Services
On 4 June, the EU Commission approved, under state aid rules (aiuti di stato), the now familiar FER 2 Decree with the aim of supporting the construction of 4.6 GW of innovative or high-cost renewable energy plants with a series of competitive public auctions for the period 2024-2028.
The reference is to the following types of plants:
- offshore wind power (also with fixed foundations if the turbines are at least 12 nautical miles from the coast);
- geothermal energy;
- thermodynamic solar;
- biomass and biogas;
- floating PV plants (both at sea and on inland waters);
- marine energy from waves and tides.
For some of this renewable energy sources (e.g. biogas and biomass) there are caps on the nominal power that can be incentivized while others (e.g. PV plants and offshore wind) can access the tariffs regardless of their size.
The announcement of the adoption of the FER 2 Decree dates to 2018, in fact the FER 2 Decree should have been adopted in February 2020; however, health emergencies, first, and geopolitical emergencies, later, relegated it to the back burner, considerably delaying its implementation.
Having thus obtained the green light from Bruxells for the purpose of entry into force, is now expected the signature of the competent ministers (i.e. MASE and MASAF) and then the Court of Auditors (Corte dei Conti) for the usual registration and subsequent publication. Lastly, it will have to wait for the operating rules containing the detailed regulations for access to the incentives which shall be drawn up and published by the GSE within 30 days of the entry into force of the Decree.
The FER 2 Decree should provide for a total of EUR 35 billion in state aid, i.e. EUR 1.85 billion/year over the average 20-year life of the plants, although the actual budget will depend on future electricity prices on the market.
The measure will remain in force until 31 December 2028 and will be financed through a levy from the electricity bills of final consumers.
In this context, the purpose of this Newsletter is to provide a concise and schematic summary of the essential features of the new incentive mechanism envisaged by the FER 2 Decree, together with some preliminary comments on its potential practical declinations on both the legal and technical-economic sides.
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The reference incentives’ tariffs and payment methods
The incentives’ tariffs regulated by the FER 2 Decree vary in a range between 100 €/MWh and 300 €/MWh depending on the renewable technology and the installed power and have been regulated with the aim of guaranteeing a constant (or potentially constant) income to producers for the entire life of the production plant by reducing investment risks.
In this regard, the following is shown below a schematic table summarizing the incentives’ tariffs, specifying that these refer to the procedures that will be carried out in the course of 2024; for subsequent procedures, the reference tariffs set out in the auction will be subject to a progressive reduction equal to 3% for each reference year, with the sole exception of plants with a capacity of up to 300 kW for which this reduction will be applied as from 2026.
| Renewable source | Type | Power | Power Plant’s conventional service life | Tariff |
| kW | years | €/MWh | ||
| Geothermal | Traditional with innovations | All powers | 25 | 100 |
| Zero-emission | All powers | 25 | 200 | |
| Wind power | Off-shore | All powers | 25 | 185 |
| PV | Off-shore floating | All powers | 20 | 105 |
| inland floating | 1<P≤1000 | 20 | 90 | |
| P>1.000 | 20 | 75 | ||
| Biogas | using by-products and products listed in Table 1 | 1<P≤300 | 20 | 233 |
| Biomass | using by-products and products listed in Table 2 | 1<P≤300 | 20 | 246 |
| 300 <P≤1.000 | 20 | 185 | ||
| Tidal, wave and other forms of marine energy | All powers | 20 | 180 | |
| Thermodynamic Solar | 1<P≤300 | 25 | 300 | |
| 300<P≤5.000 | 25 | 240 | ||
| 5000<P≤15.000 | 25 | 200 | ||
The GSE disburses the incentives as from the date of entry into operation of the plants as follows:
- for power plants having a nominal power capacity lower than 300 kW, the GSE directly provides for the withdrawal and sale of the electricity, paying, on the net production fed into the grid, the applicable tariff in the form of an overall feed-in tariff (tariffa omnicomprensiva);
- for power plants having a nominal power greater than 300 kW, the electricity produced remains at the disposal of the producer which can value it on the market. The GSE calculates the difference between the due tariff and the hourly zonal electricity price (prezzo dell’energia elettrica zonale orario)(so-called CfD, Contract for Difference), and:
- if this difference is positive, the GSE pays a fee equal to the aforementioned difference on the basis of the net production fed into the grid;
- if the difference is negative, adjusts or claims the corresponding amounts from the holder.
The scheme, which has also already been implemented in relation to other incentive mechanisms, is aimed at trying to ensure long-term price stability for renewable energy producers by guaranteeing a minimum level of return while avoiding excessive overcompensation.
Procedures for accessing incentives and available contingents
Access to the incentives’ tariffs regulated by the FER 2 Decree takes place through participation in competitive public procedures, initiated by the GSE over the five-year period 2024-2028, in which power contingents shall be made available periodically.
These procedures take place as usual in telematic form and require applicants to offer, in their application, a percentage reduction on the reference tariff of no less than 2% (except for plants having a nominal capacity greater than 300 kW for which this reduction offer obligation shall not apply).
Within the power contingents made available by the Decree, the major part is reserved for offshore wind power with an available contingent of 3.8 GW, which is far greater than those allocated to the remaining incentivized technologies, as can be seen from the following schematic overview.
| Procedure | Type of Plant | Category | Power [kW] | Total available contingents 2024-2028 [MW] |
| Type A procedures | Biogas | New installations | P≤300 | 150 |
| Biomass | New installations | P≤1000 | ||
| Type B procedures | Small-scale thermodynamic solar | New installations | P≤300 | 5 |
| Type B-1 procedures | Medium/large thermodynamic solar power | New installations | 300 <P≤15.000 | 75 |
| Type C procedures | Traditional geothermal with innovations | New installations | All powers | 100 |
| Type C-1 procedures | Geothermal with zero emissions | New installations | All powers | 60 |
| Type D procedures | Floating PV plants on inland waters | New installations | All powers | 50 |
| Type E procedures | Off-shore floating PV plants | New installations | All powers | 200 |
| Tidal, wave and other forms of marine energy | ||||
| Type E-1 procedures | Offshore wind power | New installations | All powers | 3.800 |
| Type F procedures | Traditional geothermal with innovations | Refurbishment | All powers | 150 |
Based on the provisions of the Decree, at least one procedure per year shall be guaranteed for biogas and biomass plants and at least three procedures over the entire period for the remaining technologies eligible for the incentive.
At the end of each procedure, the GSE, within the limits of the available contingents, will prepare a ranking list that shall consider the percentage reduction offered with respect to the incentives’ tariff.
For maintaining the total tariff, it will have to be ensured the compliance with the maximum timeframes provided under FER 2 Decree for the commissioning of new plants, which depend as follows according to the individual type of plant:
- off-shore wind: 50 months;
- floating PV plant: 36 months;
- geothermal: 51 months;
- marine energy: 36 months;
- solar thermodynamic: 55 months;
- biomass and biogas: 31 months.
In view of the obligation to comply with the aforementioned deadlines, a reduction in the tariff shall be applied for each month of delay, which will lapse if the accumulated delays exceed the maximum limit of nine months.
Entry requirements
For the purposes of getting access to the incentive tariffs regulated under the FER 2 Decree, the following requirements shall be met:
- obtainment of the permitting title for the construction and operation of the plant[1];
- obtainment of the finally accepted power grid connection estimate;
- compliance with certain minimum environmental and performance requirements[2];
- compliance with the following dimensional and construction requirements:
- biogas plants: nominal power not exceeding 300 kW electricity;
- biomass plants: nominal power not exceeding 1000 kW electricity;
- thermodynamic solar power plants: power not exceeding 15,000 kW electricity;
- off-shore wind power plants: offshore floating wind power plants, i.e., offshore wind power plants on fixed foundations with a minimum distance from the coast of 12 nautical miles, with no nominal power limit;
- off-shore floating PV plants and floating PV plants on inland waters, with no nominal power limitation.
Plants that started construction work before the publication of the ranking list are not allowed to access the incentives.
Preliminary comments
FER 2 Decree is part of the multiple incentive measures aimed in various ways at achieving the EU’s strategic objectives of the European Green Deal, with the aim of ending dependence on Russian fossil fuels and accelerating the green transition.
The market, mainly driven by large energy-hungry companies also pushed by the transposition of the new European Corporate Sustainability Reporting Directive (CSRD), is increasingly demanding renewable energy supplies to comply with commitments made regarding Net Zero Plans (Piani Net Zero) and in particular the reduction of indirect emissions.
These dynamics can represent an opportunity for the entire supply chain, as:
- on the one hand, electricity producers – who will support the investment in new renewable energy sources – shall have the possibility of both pre-allocating large volumes of energy produced in the medium to long term (some Net Zero Plans envisage targets to 2050) and of having a stable unit sales price over time and related to the incentive tariff (a suitable instrument for this purpose could be the use of Power Purchase Agreements);
- on the other hand, large energy-intensive companies would have the opportunity to purchase large volumes of energy from renewable sources at a subsidized price, thus not only reducing their carbon footprint but also mitigating the risks due to the volatility of the electricity market.
The measure in question, as anticipated, is expected to cost a total of about EUR 35 billion in state aid, i.e. approximately EUR 1.85 billion/year, to be covered by bill increases in the Asos component, with the burden to be calculated in the delta between the producers’ demand in the competitive procedures and the electricity prices on the spot markets.
Based on ARERA’s recent findings, although it is complicated to make estimates already at this stage, the increase in the consumer’s bill resulting from the measure should be around 8-10 euros per MWh.
Net of the effects on utility bills, the FER 2 Decree does not seem to have been appreciated by the main trade associations[3] interested in the development of the plants in question, which, in recent months, already with reference to the previous version of the Decree, have raised quite a few qualms:
- for the associations representing solid biomass, a reduction of 3% in the auction tariffs in the years following the year 2024 was considered “punitive”, with a smaller reduction of 1% being more appropriate;
- regarding thermodynamic solar energy, it was emphasized that the incentives’ tariffs appear to be incongruent with current costs due to the large increases in materials and services. The reference is in particular to the 200 euro/MWh envisaged for plants from 5 MW up to 15 MW for which an increase of about 50 per cent (300 euro/MWh) is deemed necessary;
- with reference to biogas plants up to 300 kW, was requested to review the criteria for access to incentives and the values of the tariff, so that they consider the increase in plant construction costs and raw materials, as well as the effects of inflation.
The FER 2 Decree also recalls (like what has already been done by, among others, the CACER Decree and the current draft of the FER X Decree) the provisions of European Commission Communication 2022/C 80/01 by applying a particularly broad definition of the concept of “commencement of works” on the basis of which works are deemed to commence “at the time of the first obligation that renders an investment irreversible, such as, by way of example, the ordering of equipment”.
On this subject, it seems appropriate to highlight that the European Commission’s Communication 2022/C 80/01 referred to by the FER 2 Decree does not only concern incentives’ tariffs, but refers in general terms to state aid granted to facilitate the development of economic activities in such a way as to improve the protection of the environment, as well as of activities in the energy sector that are governed by the Treaty, insofar as such aid measures fall within the scope of Section 2.2 of the Communication (e.g. aid for improving the energy and environmental performance of buildings; aid for the purchase and leasing of clean vehicles used for air, road, rail, maritime and inland waterway transport etc.).
The abstract reference to the “first obligation” (without exclusion even if it is conditional or subject to an initial term) that makes an investment irreversible, including the order of equipment, may result in operators who are in the process of obtaining the qualification or who have recently obtained it suspending development pending the publication of the ranking list, also interrupting the activities of procurement of materials preordained and functional to the implementation of projects, with consequences on the entire market chain. This would not only have consequences on the entire supply chain but could also be incompatible with the timeframes prescribed for the entry into operation of plants pursuant to the FER 2 Decree, given the sometimes very long timeframes that operators shall wait for the supply of all the materials and equipment necessary to effectively launch the project.
In addition, the existence or otherwise of “irreversible investments” would not appear to be an easily verifiable element in concrete terms, with the effect that the GSE would find itself implementing controls in order to ascertain whether or not the operators have made, at a date prior to the publication of the ranking list, investments such as, for example, the order of the materials necessary for the realization of the project.
Ultimately, the parameters imposed by the EU Commission’s communication on green state aid in general terms, if, on the one hand, they appear to be consistent with certain types of subsidies and contributions (e.g. aid for the purchase and leasing of clean vehicles), on the other hand, they do not seem to be in line with the support mechanisms outlined in the current draft of the FER 2 Decree.
In any case, it is important to emphasize that these are merely preliminary comments; as the measure is still in an embryonic state and it will be necessary to wait for its actual implementation to understand whether or not there will be an effective reinvigoration of the market dedicated to innovative renewables or, if otherwise, as feared by some operators, the investment strategies of the majority of market players will continue to be for “traditional” and lower-cost green sources.
[1] It is possible to get access to the incentives’ tariff also by producing the positive Environmental Impact Assessment Resolution, if any (provvedimento favorevole di valutazione di impatto ambientale, ove previsto) in place of the permitting title (cf. Article 3, Paragraph 2 of the FER 2 Draft Decree).
[2] For more details on these requirements, see Annex 2 of the FER 2 Decree.
[3] These considerations came in some notes dated December 2022 commenting on the FER 2 Decree by Coordinamento Free and the Italian Biogas Consortium.
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