International law firm McDermott Will & Emery says new legislation passed by the Italian parliament last week could be in violation of the principles of the Italian Constitution, EU law and Italy's obligations under international treaties.
The Italian parliament t on August 7 approved legislation that reduces the countrys feed-in tariff (FiT) by 8% for photovoltaic plants bigger than 200 kW or, alternatively, a tariff reduction of between 17% and 25% against a four-year payment extension.
Under the approved legislation, which differs somewhat from the original draft, PV plants with of 900 kW or smaller will see a slightly lower FiT reduction. In addition, lawmakers added a third option that redistributes the incentives without extending the 20-year payment period.
Furthermore, the new regulations allow all operators of renewable energy plants the possibility of an early redemption of up to 80% of their incentives by selling them to a financial institution.
Subsidies for FiT loss
McDermott Will & Emery points out that the new law also provides assistance to operators suffering a diminished cash flow resulting from the implementation of one of the three options, including the possibility of bank financing for up to the difference between the current FiT and the reduced rate resulting from the changes.
The state-owned Cassa Depositi e Prestiti will either fund or guarantee the financing on the basis of agreements made with the banking sector and its exposure will be counter-guaranteed by the state.
Revised payment mechanism
According to the legislation, Italy's Gestore dei Servizi Energetici (GSE), which manages the country's electricity services and support schemes for renewable energy sources, will begin paying a fixed monthly payment of only 90% of the plants estimated annual electricity production. An adjustment taking into account the actual electricity production throughout the year will be paid by June 30 of the following calendar year.
Early redemption of 80% of incentives
McDermott Will & Emery describes one option in the new law as an interesting way for investors to reduce the negative impact of the FiT changes and their exposure to future regulatory risk. This is can be done by means of a securitization of up to 80% of their residual incentives.
The legislation calls for Italys Authority for Electricity and Gas (AEEG) to organize a public procurement process for the selection of a major European financial institution that would have to make available at least 30 billion for the purchase of incentive receivables from renewable energy producers. The AEEG and the GSE would then have an option, but not an obligation, to buy back the receivables from the financial institution.
Analyzing legality of new law
McDermott Will & Emery says it is questionable if the decree is compatible with the principles of the Italian Constitution, EU law and Italys obligations under international treaties.
The law firm points out that all of the legislations options will result in a reduction of PV plant owners investments. The two options providing for a redistribution of the FiT over a 20 or 24 year period do not compensate for losses deriving from inflation or the interest that would have accrued on an earlier payment of the full incentives, it adds.
It also argues that the degradation of modules, and thus their reduced productivity in the last four years of the incentive period, it is also likely that a redistribution of the incentives, whether over a 20 or 24 year period, will result in not even the full, nominal amount of incentives being paid.
McDermott Will & Emery adds that the 8% reduction rate for PV plants bigger than 900 kW is probably a good approximation of the minimum losses that plant owners will suffer when choosing one of the other two options."
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