Policy meddling may curb Italy’s green boost

Italy lags behind many countries in harnessing its renewables potential, with the country’s energy transition hampered by cumbersome permitting rules. While that could be about to change due to government reform, other interventions such as taxes on green generators’ windfall profits may scare off investors. Listen to a discussion on the outlook for renewable energy in the country amid a scramble to replace Russian gas.

Host: Richard Sverrisson, Editor-in-Chief, Montel
Guests: Stefano Cavriani, Co-Founder & Director of Ego Energy, 
and Riccardo Rossi, Head of Southern and 
Central Europe Origination, Centrica Energy Trading

Transcript

Richard Sverrisson, Editor-in-Chief, Montel: 0:06

Hello listeners and welcome to the Montel Weekly Podcast, bring Energy Matters in an informal setting. Today's pod is recorded at Italia Milan, Italy is a country rich in renewable resources for the energy transition has been slowed down by complicated and cumbersome permitting processes, as well as by supply and chain constraints. What's more. Moves to tax winful profits, renewable producers, or to cap wholesale prices are making investors, developers, as well as utilities nervous. Joining me, Richard Sverrisson, to discuss the Greening of Italy is Stefano Cavriani of Ego Energy and Riccardo Rossi of Centrica Energy Trading. A warm welcome to you both. So if I can start with you Riccardo. You recently moved back to Italy from London. How would you assess Italy's energy transition at the moment?

Riccardo Rossi, Head of Southern and Central Europe Origination, Centrica Energy Trading: 0:59

I think right now Italy is lagging behind to what I believe are its energy resources. I think compared with other countries that are much less sunny and with less wind, I think that Italy can do more. We've seen very strong signals going in the right direction in the last, I'd say year or so. I wouldn't say changing policies, but spiting up policies towards 2030 targets and some, positive moves towards changing this administrative proceedings. But I think there's still a lot to be done. We are going to slow compared with what we should be going. But I think innovation is coming and I think we are we are we will be experiencing. The transition that we all want to see.

Richard Sverrisson, Editor-in-Chief, Montel: 1:45

Excellent. And how about you Stefano. What's your verdict?

Stefano Cavriani, Co-Founder & Director of Ego Energy: 1:47

I would say that Italy, at the end of the end have to be considered a front runner in the energy sector. Never forget this because at the beginning of the liberalization of the market, the beginning of years two thousands Italy experienced a super strong investment in new capacity, typically, CCGT. At a certain point, also renewable because the incentive were generals bring certificates at a in the, at a certain moment. The content G? No, the feeding premium for the vol tank. The big mistake was, I would say around the year 20 12, 20 13, to significantly reduce the pace of investing in new renewables. Okay. In those years, Italy was really the top market together with Germany. Exactly, because we have a lot of sun, we have quite good wind and we don't have natural resources, so we need absolutely need to invest in renewable. The big mistake was that I, let me say the big mistake it is that we lost at least seven, eight years now, there is a sense of emergency about energy because government finally understood that energy. It is a super strategic sector. Of course now the situation, it is complicated due to the war in Ukraine and what's, and a lot of other points, which are not only the war because market was tightening already before the war. No. So really speaking, I would say Italy have all the competencies. Deploy strongly. Deploy this new energy, which is renewable, and it is renewable plus storage. Never forget about storage, about the capability of managing the renewable production. But of course we have to manage all the points related to the permitting procedures to low, which are somehow complicated. But sincerely, I would not be really pessimistic. On the contrary, I would be optimistic because Italy have the competencies and have the natural resources related to the renewable, so I would expect a strong increase in the pace of the transition.

Richard Sverrisson, Editor-in-Chief, Montel: 4:02

Absolutely. Do you share Stefano's optimism here? Riccardo?

Riccardo Rossi, Head of Southern and Central Europe Origination, Centrica Energy Trading: 4:06

I think I do, but I think we need to see that change of changing pace. And we've been promised that, many times, and I think there are some, we've seen some numbers during the conference today of encouraging numbers about, changes compared with last year in terms of megabit that have been outed or built in solar. In, in particular, but I think we need to keep going that way to see that going. And just to share a little bit, the optimistic of Stefano, I think is. When we do things, we do it better than many others. But when we do things, that's the thing.

Richard Sverrisson, Editor-in-Chief, Montel: 4:37

The point is to do it, isn't it? I think. Exactly. But if I can stick with you, Riccardo, and say what have we heard is also at the conference some of the obstacles to, to green growth. Could you highlight some of those?

Riccardo Rossi, Head of Southern and Central Europe Origination, Centrica Energy Trading: 4:46

Surely I believe the administrative proceedings have been quite a key obstacle. What we hear about authorizations, it takes months or not getting even answers from from the local competent authorities or having negative answers for a lot of the requests that have been submitted. I think surely there are some. Issues that are related to the grid network. I think Stefano touched upon that point. We need to be careful. I've seen a slide from Turner, the TSO in Italy showing that, for instance, in Sicily, there have been where the peak demand is about four gigawatt of of electricity in, one, one hour. And they receive demand for connection demand at the to their network for around 40 gigawatts. Of course that is not manageable, and I think we will have to think fast and implement fast. Any kind of rule that needs to decide where to put where, what to put, where. Because the new, new resilience pro plan and the fit for 55. They're coming and we need to be fast in, in in developing those, ideas and instruments that would allow us to decide where to do things rather than saying nothing is possible to do at obstacles. I'd say to a certain extent you could say that credit could be an obstacle, but to be honest, we haven't got to that point in a sense that I think we, we stuck at, square one here with the, not having a sufficient number of projects that are there. I think that, that, in this journey there will be other issues that we, we have to manage. It could be credit good about risk sharing across counterparties. Because of course a project is a lot of risks and we need to make sure that these are spread along the value chain in a sensible manner, in a way that is not everything focused on one player or the other. But so far I'd say, it is gonna be a long journey and I think there is. We have the capabilities, we have trading companies, we have all the I believe all the engineerings to be able to do something that will deliver what is needed to deliver.

Richard Sverrisson, Editor-in-Chief, Montel: 6:52

As far as I can see it, Stefano, there are three main roots in which renewables, renewables can come to the market. So you have. Fully merchants. So you have no subsidies. They're fully exposed to market prices. You have, you can sign PPAs or you can participate in auctions or maybe a combination of some of those elements. What, what's currently most popular in Italy or what's currently the most commonly used?

Stefano Cavriani, Co-Founder & Director of Ego Energy: 7:16

For the new project, the, what we call fair one the incentive scheme, which is still in place. It is the best solution, at least from the point of view of the developers. This is simply because of the fair one scheme guarantee a 20 years fixed revenue. Okay? It is not the price of the electricity because in that case the power plant sell electricity exactly to the market, so typically to the spot market. But there reads in place in inside the incentive scheme. Two ways, contract for difference, which at the end of the end stabilize the revenue of the power plant because this financial edging of the position it is signed, it is defined with GSC. So at the end of the end, it is defined with the state owned. Company.

Richard Sverrisson, Editor-in-Chief, Montel: 8:09

So the GSE is a state owned agency.

Stefano Cavriani, Co-Founder & Director of Ego Energy: 8:11

Exactly. It is a state owned agency which manage all the, any kind of incentive scheme in the energy sector. In, no. The point it is that this tariff, at least with the third one, which is now in place, it is probably low because it is 65, around 65 euro per megawatt tower. And this price, it is fixed without any inflation linking for 20 years. Of course it is the best solution in order to be bankable. But more and more developers, more and more sponsors are now thinking if it makes worth or not to put in place this tariff because it is, let me say, only 65 or around 65 for 20 years fixed. So the tariff, it is applicable only to onshore wind and. Industrial areas, vol, tike. So the large amount of other projects, which are typically agricultural lands, vol, tike, are anyway outside of this incentive scheme. So anyway, they need to go merchant the solution to be totally merchant. So get the spot price as a revenue. It is absolutely not common in it. Because no Italian bank, at least for what I can see, it is happy to finance a project which is totally nt. So the solution which they look for, it is typically a long-term PPA. Of course, with affordable counterparties, like of course centric energy trading, for example, and maybe also ag energy itself. And of course many other players. Because in Italy, again, let me say, there is a strong. Knowledge of these markets. So there are not a super high numbers, but there is quite a number of specialized operators, not only ourselves, of course, at the end of the end I expect that the market will go more and more towards merchant PP. Probably it'll make sense. Not necessary to look for super long PPA, 10 years, 15 years, which in Italy are very complicated due to the volatility, to the x, to the cost of the hedging and so on. But probably it would make sense to think about let's say shorter terms. Shorter term. So for years, five years, which allow the maximization of the revenue for the generic. And in the same time allow the buyer, which is of course, first of all, the offtaker as trader, but also the corporate. If there is a corporate like Final Offtaker inside the PPA to manage in a better way a contract, which is somehow complicated, but not too much complicated. And I expect that more and more Italian banks or banks, not only from Italy, but which are active in the Italian market, in the Italian market, will understand more and more how to manage not only a super long fixed price, 10 years or more, but shorter terms with fixed price. For the future, we expect a new incentive scheme, new tariff. Which probably will be exactly the same as for one. We don't know exactly the amount it'll be defined by the government in the next month, but the mechanism will be the same. So a contract for difference. So a financial hedging signed with the GSE and the sale of the electricity to the market to typically traders which provide what we call route to market service.

Richard Sverrisson, Editor-in-Chief, Montel: 12:02

Is this a view you share as well then? Riccardo?

Riccardo Rossi, Head of Southern and Central Europe Origination, Centrica Energy Trading: 12:04

Yeah I would like only to point out who's paying for those. You, we'd have to remember that these, CFDs who's paying for them and of course is, in the end, all consumers, all of us, and this is where I'd say certainly from the viewpoint of the producers, this deal makes sense. And probably, I don't know what a indexation. Inflation is gonna be, added onto that. But I believe that if we want to see market par, if we want to see the market that is not, drawing on public financial resources, I think there needs to be more efforts or at least let the market, work because there are many alternatives. As Stefan was saying shorter term. Share, that's what I mean by sharing risks across the value chain. Reducing the short to shorter term means that the bank are more, willing to take, to lend money to somebody that doesn't have a certainty, full certainty, for 10 or 20 years. Having a different price structure means that simply the building or, the level of development of solar, for instance, is gonna be taken. So the risk, the profile risk is gonna be taken partially as well by the producers and not just by the offtaker on the other side where a pay has produced. PPA. So if we share those risks and if we provide effectively options along the way, I think this is certainly the way to go. I'm almost yeah, to a certain extent afraid that a market, the market could go, too much towards subsidy scheme and keep subsidy scheme in place. Because where I have a little view about, other markets like Germany, this is effectively. Is then keeping the market away from developing structures that, are not drawing from public finances. And this means that we're just delaying this rather than rather than getting, getting along with it and sorting the issue. Now and I think because we have so many issues in terms of already where to use that public money. I'd say there probably are better places where to put to use that public money.

Richard Sverrisson, Editor-in-Chief, Montel: 14:10

And Let the market find the best way of developing.

Riccardo Rossi, Head of Southern and Central Europe Origination, Centrica Energy Trading: 14:12

I think so. If there is just a willingness as well to take a bit more risk by anybody and not just by the trading companies.

Richard Sverrisson, Editor-in-Chief, Montel: 14:20

Exactly. Yeah. Exactly. So how does, Centrica is involved in several countries in Europe and probably even beyond, but how do you see Italy compared to, to, to its neighbors or to other countries on the continent?

Riccardo Rossi, Head of Southern and Central Europe Origination, Centrica Energy Trading: 14:32

We see it very attractive on the other side. We see it that as we say in the market is flourishing just very recently and therefore these kind of structures where there is more kind of a view of sharing risks is a bit more difficult to understand or is not yet in place. But I think where what we see elsewhere is effectively that people understood. We better that effectively, PPAs are nothing else, nothing more than ensuring a revenue stream for the producer and on the other side ensuring power at the reasonable price as well for consumers on the other side. In the Nordics where we are very much active, this has been well understood. I know that in that case, probably wind has been more kind of the technology and therefore base load PPAs are being more, more used. But I think that is. More understood than than it is in in Italy, for instance, another market where very active recently has been Spain and it's been booming with PPAs in the last few years. And I have to say that we've seen these opening in terms of different structures, different type of lenders, different type of IPP as well that have different how do you say risk appetite in a way. And I think this should be, should happen. I think the only thing that could be between us, and this is effectively additional intervention from the government or from any government really, with some kind of a strange intervention that could get investors and trading companies right away simply because they do not want to live with with this risk or just leaving. Italian companies to deal with that and and the like of ours then running away because it's too risky compared with other countries.

Richard Sverrisson, Editor-in-Chief, Montel: 16:12

We've seen Italy seen some, certainly some pro progress in terms of the permitting processes and it speeded up some of that degrees and the laws there. Stefano, but. At the same time today at the conference, you called the current situation a state of emergency because you know of, because of, precisely because of this interventions or these kinds of interventions that Riccardo has mentioned. Do you think there's a real threat that, that companies such as Centrica and others that we saw today and that have been active in Italy and are very interested in see the great potential in the Italian market could pull out?

Stefano Cavriani, Co-Founder & Director of Ego Energy: 16:46

I would say no, because at the end of course, Centrica itself, but I suppose, no. But anyway any large international company of course will evaluate of course, specifically by itself. But generally I would say Italian market, it is anyway quite interesting because Italian market, it is a big market. At the end of the end, the energy prices are high and will remain high. So generally I would say. There is a strong, there will be always a strong interest in being in this market. Of course, there is now a lot of noise. No. Also from the politics. No. The things, what we could say, what we could define instability from a regulatory point of view, it is sometimes also. Let me say fueled by the noise. No, but the end of the end maybe the solution which they find it is not totally without, without sense no. But many times there is a lot of noise, so a lot of confusion. But let me say very seriously and very simply, the business, it is so good that I don't expect really that. International companies with the good know-how, which have invested in the Italian specific market, which needs specific know-how. So there is a time of entering into this market. I don't expect very much that they will go away. Of course pol politics have to be careful about that.

Richard Sverrisson, Editor-in-Chief, Montel: 18:13

Okay. So barring any major disasters, it could, it should continue to flourish.

Stefano Cavriani, Co-Founder & Director of Ego Energy: 18:16

Exactly. Exactly.

Richard Sverrisson, Editor-in-Chief, Montel: 18:18

But we've seen this week as well Riccardo Spain introduce a cap on wholesale prices and wholesale gas prices in the power generation. What's your view here is there's also something that's looming in the background. In, in, in some countries within Europe.

Riccardo Rossi, Head of Southern and Central Europe Origination, Centrica Energy Trading: 18:31

We know that some. Countries and some governments are putting pressure, the European Commission to come up with similar measures. But I believe that it, it is very how to say we have to be careful in doing something like this. For two reasons. One is because we don't know what the effect could be on investors especially. It's true that. As Stefan was saying that the Italian market is big. The Spanish market is big too. But I've spoken with several developers that as soon as they've seen the first intervention back last year in September in Spain, this was they decided to say, you know what? We're not the global players. They would say let's leave Spain for the time being. We come back in six months, nine months, a year. It's not a priority right now. It's just changing priorities in the kind of investment. Ranking. The other reason is because, and I think Spain is, I believe right now an example on that is when you start intervening, then you don't know when you stop. And I think I've counted probably this is the fourth intervention in Spain that has been approved right now with, new, this kind of a cap on on, on bidding for for gas, fire, power plants. So already wondering what would be the next one. And this is where a people that needs to understand, okay, how it is going to have an implication on my portfolio, my assets or my day-to-day work. And then understanding, even though we may not pull out then it may slow down a lot, the activities because you have first to understand what's going on onto your existing portfolio before deciding to whether you want to enlarge it, what you want to do with the ongoing negotiations and so on. So this is I think what I believe it's probably, you can't measure it but it's something that we need to be again, careful that is not gonna ruin the path towards net zero.

Richard Sverrisson, Editor-in-Chief, Montel: 20:16

We talked a bit earlier as well, Riccardo, about the squeeze on supply chains globally we're in the middle of an energy crisis. The war in Ukraine is also what's happening in China. Is this also a concern that a lot of. Projects that have been announced and have been developed could be severely delayed in this part of the world or any part of the world really.

Riccardo Rossi, Head of Southern and Central Europe Origination, Centrica Energy Trading: 20:34

I think this is a concrete issue and probably what Efron was referring before that we see the marketing tightening even before the war started in Ukraine I think was referring to a value chain, and I'd say more in general the economy. We're showing signs of of increasing probably at the, at the fast pace more than the supply chain could say, look and try to buy a car, a new car. You have to wait for six to 12 months. I've been told. They're not arriving, they're not producing microchips. Yeah, there's a lot of things that are happening right now. I think that this is the, probably the real and more difficult to. To the real issue and the more difficult to be ma managed at a country level. Because in fact, if the administrative processes can be managed by, various regions, by the government and so on this is gonna take longer, but probably it's gonna be, when is gonna be sorted, it's gonna be all right. But, having COVID first and now this phase and a change in energy policy towards, cutting to zero, basically Russian gust towards Europe are going to make a. Kind of a bit of a difference for I'd say for a number of years. I wouldn't say how many because I don't know, but it's not gonna be something that is gonna last just a couple of weeks, a couple of months. It's gonna have some effects and it's gonna be sorted out like it has been in the past. But it's gonna take time.

Richard Sverrisson, Editor-in-Chief, Montel: 21:49

Yeah. A final question, Stefano. Italy's often cited as a country that is gonna face the most difficulties in winning itself off Russian gas. What's your view here? How easy is it gonna be to replace it? Are they, is this gonna provide extra incentives to speed up the energy transition, or is it gonna be, will the government need to go and find alternative supplies and do so quickly?

Stefano Cavriani, Co-Founder & Director of Ego Energy: 22:15

It will not be easy. We depend on natural gas for more than 40% of all Italian energy consumption. Not only electricity, 43% Germany, which is very much dependent on natural gas, depends for 26, so not half, but we are not far from the half. 40% of that 43% of global energy consumption. It is natural gas coming from Russia. So in terms of relative dependency on, on, on Russian gas, probably Italy, it is among the large industrialized countries, absolutely the most dependent. So the situation, it is absolutely not good, and it'll not be easy. We lost. As I was saying before, we made some mistake. We made some mis in the renewable sector. We made some mistake also in the gas sector because, for example, 15 years ago, we made so complicated to have the permitting for the regasification plants that some reification plans, some reification projects was abandoned. So now we don't need, we don't have. Enough reification capacity. Okay. So it is not only a matter of finding new suppliers the ministries are going to, to a lot of countries in Africa and so on. It would be, anyway, not so easy as getting the gas through a pipeline, which is already in place like the gas coming from Russia. But it'll be also a matter of. Reifying, this eventual LNG, which we eventually will buy from other suppliers. We, because we don't have the rega, the regasification, so it is really a big issue. So of course, from one side it is really a super big opportunity for the energy transition and for the renewable generation. It is clear. But on the other side, it is a complicated matter for the industry, for the economy in general. So the government have to be very careful to manage this point. So probably in this moment, of course, it is not on ourselves because to be in the government, it is a very complicated life and a very complicated role. If very modestly I could say, I would say it is not a matter of finding a way of reducing. Eventually we, what do they call, windfall profits. But on the contrary, it is a matter of making the investor investing and do whatever they can. And the money it is, luckily it is available and ready to do that, to invest a lot in order to. Substitute progressively the energy which comes from natural gas and specifically from Russia, substitute it with something else. But personally, I don't think that it'll be possible to cancel the natural gas supply coming from Russia. It's too much. It's too much.

Richard Sverrisson, Editor-in-Chief, Montel: 25:24

So do you agree with that, Riccardo? That in instead of maybe taxing. Renewable producers on their windfall profits. You should look at other ways to deal with the current energy crisis.

Riccardo Rossi, Head of Southern and Central Europe Origination, Centrica Energy Trading: 25:34

Yes. And I think it needs to be towards various type of infrastructures that we talked about. So it's about new renewable projects. It's about storage, it's about the grid. Anything that could incentivize investors to be here easy. The way in which business is done, including taxes, including everything, I think is the way it should be. The way to go. And not just trying to use the in effect the energy business or others as an ATM to say, okay, I have a problem now. Let me, press some buttons here and getting some cash back. This didn't happen with the financial crisis. So not sure why should happen right now with the energy crisis.

Richard Sverrisson, Editor-in-Chief, Montel: 26:13

Gentlemen, thank you very much for joining the Montel Weekly podcast this week. So listeners, you can now follow the podcast on our own Twitter account aply named the Montel Weekly podcast. Please direct message. Any suggestions, questions, or let us know if you think you have a good idea for a guest on the show, you can also send us an email to podcast@montelnews.com. Lastly, remember to keep up to date with all that's happening in energy markets on Montel News. You can subscribe on Apple Podcasts and Spotify or wherever you get your podcasts from. Thank you and goodbye.