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Renewable Energy Review – The new growth market

The incentives are in place and the need for additional generating capacity is clear. But will renewable energy play an important part in meeting Italy’s growing energy demand?Michael Taylor and SergioSambri, Norton Rose, Milan, Italy

Already this summer Italy has experienced widespread blackouts as peak power demand during a particularly hot spell proved too much for its meagre reserves of generating capacity. Trains and metros stopped, traffic was blocked by malfunctioning street lights, people were trapped in elevators, and huge losses were suffered by small, medium and large businesses when work came to a halt for hours at a time over a two-week period in June 2003.

Italy’s Minister of Productive Activity, Antonio Marzano, first warned of the risk of widespread blackouts in 2002, and his main comment following the events of this summer was a loud “I told you so”. The blackouts are therefore a timely reminder to the public, as well as local and regional government in Italy, that additional generating capacity is needed urgently and should at last jump-start the IPP sector which has made very little progress despite strong economic fundamentals and encouragement at national government level.

Most of the planned new capacity is gas-fired, but an increasing contribution will be made by renewable sources of energy (biomass, hydroelectric, wind, geothermal, solar and waste). Why? First, renewable energy has strong public support in Italy. Second, energy companies and financial institutions are showing signs of increased interest in investing in the renewable sector, and third, there are good incentives already in place in Italy which promote energy production from renewable sources.

Legal framework

EU resolutions adopted in 1998 during the Kyoto Conference on the Reduction of Harmful Emissions (the Kyoto Protocol), provide that by the year 2010 around 12 per cent of EU domestic energy consumption must be supplied by energy produced from renewable sources. Italy ratified the Kyoto Protocol with Law 120/2002, thereby establishing a national programme to increase energy production from renewable sources and encourage the use of renewable energy.

Figure 1. The Terni biomass power plant in Maratta Bassa, Umbria. The plant has a gross electricity generating capacity of 10 MW and will be fuelled primarily by biomass
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In order to ensure that the Kyoto Protocol targets are met, the EU passed Directive 2001/77/CE which obligates Member States to: (i) reduce existing barriers to the increase in production of energy from renewable sources, (ii) modify administrative laws in order to streamline and expedite the procedure for obtaining authorization to build new plants for the production of energy from renewable sources, (iii) fairly allocate the costs of making the technological adaptations to the national grid network which will allow for the easy integration of new producers of energy from renewable sources, and (iv) ensure that the fees charged by national grid operators for transmission and distribution do not discriminate against producers of energy from renewable sources. The Directive must be ratified by Member States by the end of October 2003.

Green certificates

In Italy, the CIP6/92 (CIP6) directive provided for premium prices to independent power producers from renewable sources (and cogeneration plants) for the first eight years of electricity

production, and minimum rates were guaranteed for the remainder of the project’s life. The subsidies, financed by a levy on electricity prices, were designed to compensate for higher production costs of renewable energy systems.

CIP6 was abolished in 1997 as part of the government’s reorganization of the electricity sector, aimed at cancelling all “overpricing” on energy tariffs. In March 1999, however, the Italian legislature passed the Bersani Decree and the system, designed to replace and improve on the CIP6 system, was established.

The Bersani Decree goes one step further than merely encouraging the use and production of renewable energy. It obligates all energy producers and importers, to deliver a fixed amount of renewable energy into the national grid by 2002. For the first year, this amount was equal to a minimum of two per cent of 2001 energy consumption levels. In order to meet this requirement, operators have to file with the GRTN (Gestore della Rete di Trasmissione Nazionale, Administrator of the National Transmission Network).

Green certificates are tradable certificates that renewable energy plants established after 1 April 1999 are entitled to receive. They are issued by the GRTN on the basis of the kWh produced, with reference to the previous year’s effective production or to the foreseeable quantity of energy that will be produced the following year by the requesting operator. Each certificate represents an energy value of 100 MWh. They may be traded independently from the related renewable energy (as long as the sale takes place in Italy) and there is no significant legal limitation on the possibility to freely and repeatedly trade before they are annulled by the GRTN. Therefore, operators are entitled to trade in Italy, privately or on the power exchange, throughout the entire period running from the date of issuance to the date of annulment.

Up to April 2005, the economic value of the certificates will be established by the GRTN, in order to prevent potential system malfunctions in the initial phase of the market due to considerable demand and insufficient offer. Thereafter, they will have a market value determined by the intersection of demand and supply.

In addition, the new green certificate system is also expected to promote the further development of new renewable energy plants, encourage competition between the different renewable sources, and also provide the incentives needed for companies to invest in R&D for technologies in producing energy from renewable sources.

Exploiting renewables

Italy continues to study and develop the exploitability of its inherent supply of renewable energy sources, which includes biomass, hydroelectric, wind, geothermal, solar and waste. Over the next six to ten years the most significant increases in production of energy from renewable sources will likely come from the exploitation of biomass. At present potentially valuable biomass residues are disposed of mainly by open field incineration, a practice abolished in a number of European countries, but still commonplace in Italy. The Italian Ministry of Agriculture has recently established a national plan for the exploitation of biomass which includes, among other things, incentives for more efficient disposal of by-products and organic residues, reforestation of marginal terrain, and the creation of more jobs in the biomass sector.

To a lesser extent there are also likely to be increases in the exploitation of hydroelectric, wind, geothermal and solar sources. The use of hydroelectric sources is already widespread, well-tested and relatively cost effective in Italy and there have been major advances wind farm technology. Proposed sites for new wind farms are mostly in the south/central Apennine region, near the coast. With regards to the generation of energy from geothermal sources, Italy is an international leader, having built its first geothermal plant in 1913. Lastly, Italy’s warm climate, the suitability of the majority of residential buildings for installation of solar panels and the widespread use of electricity for heating water used for domestic purposes are all reasons why there continues to be great interest in further developing solar energy capacity.

Figure 2. All technology for the Terni biomass plant was designed and provided by Lurgi. Since the area where the plant is located was designated as seismic, special precautions were also taken in the plant’s construction and engineering
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Financing alternatives

The availability of financing will of course have a major impact on renewable energy development in Italy. A number of minor economic incentives are in place, which include: (i) the taxation of carbon dioxide emissions, (ii) regional funds created by taking a small percentage of the excise on oil and/or gas sales, (iii) EU structural funds created to promote economic and social cohesion among Member States, and (iv) tariffs paid by customers who elect to pay a premium for renewable energy.

The most significant development as far as funding goes, however, is the increased use of project financing techniques made possible by changes in the Italian legal framework. One of the principal difficulties faced by an IPP developer in Italy was, until recently, obtaining the necessary permits and authorizations for a project. The process was long, cumbersome and not user-friendly. The time needed to complete the procedure was rarely less than two years because numerous permits had to be obtained from a maze of government agencies at the local, regional and national levels.

The delays and uncertainties in the authorization process made project financing difficult to achieve. Recognizing the need to simplify the process, the Italian government passed the “sportello unico” (one-stop-shop) law in 1988, which provided that a single application to the local authority would cover all required authorizations relating to planning, construction and development of a new plant. The entire procedure, under this new law, was to take no longer than 12 months from the date that the proposed plant received a positive environmental impact assessment (VIA).

In addition, Law 55/2002, also known as “sblocca centrali” or Marzano Decree, provided that until December 2003, only a single authorization from the Ministry of Productive Activities would be required for the construction of plants with a capacity of over 300 MW. This single authorization procedure would involve all various governmental bodies at one time and would take no longer than 180 days from the submission of the application, together with an executive plan and the VIA.

Renewable projects

An example of a recent successful project under CIP6 was the Tecnoborgo waste-to-energy project in Piacenza, which reached financial close in July 2001. TESA (a local public-sector waste collection company) and CGEA Onyx (a subsidiary of Veolia Environment) were shareholders in Tecnoborgo, the project company. With Tesa having a controlling stake (51 per cent), and CGEA Onyx operating the plant, the project is considered the first true “Public Private Partnership” transaction in Italy. Dexia Credit Local and its Italian subsidiary Dexia Crediop acted as arrangers of the financing for the project.

The plant was designed to meet the waste disposal needs of the province of Piacenza and has a treatment capacity equal to

105 000 t of waste per year, with a gross electricity production capacity of about 11 MW. The plant, designed for the treatment of urban solid and similar materials, has two incinerating lines with an hourly capacity of 7.5 t/hour of 2600 kcal/kg lower calorific value waste. The technology adopted allows the plant to recover energy from the combustion of waste through overheated steam feeding a condensation turbine generator.

Another successful renewable energy project, perhaps the last to take advantage of the CIP6 legislation, was the biomass-fueled power plant project in Maratta Bassa (Terni), in the Umbria Region, which reached financial close at the end of 2002. The new plant, built on property owned by Terni Ena (a project company of the Italian Agarini Group), covers a total area of 40 155 m2. Banca Intesa acted as lead arranger and agent on this project and other lenders included Banco di Napoli (Gruppo San Paolo IMI) and Banca Antonventa (Gruppo Antoniana Popolare Veneta).

Figure 3. The Terni project was one of the last in Italy to benefit from the CIP6 scheme
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The plant has a gross electricity generating capacity of around 10 MW and will be fuelled primarily by biomass, which will be stored at the site in storage pits capable of guaranteeing operation of the plant for 60 hours maximum of continuous operations. Methane gas will serve as an auxiliary source of fuel for the plant, but its use will be strictly limited, and employed for the most part only in emergency situations.

Particular attention was paid to the design of the plant and its technology in order to minimize its environmental impact, in particular in relation to controlling the emission of polluting gasses, liquids and/or solids, avoiding excessive noise pollution and offering a non-offensive visual impact. Since the area where the plant is located was designated as seismic, special precautions were also taken in the plant’s construction and engineering. Following an international bidding process, a consortium comprising Lurgi Entsorgung (German company) and Pianimpianti (Italian company) was selected to construct the plant.

Best technology

The Terni plant benefits from the most efficient technology for biomass plants, based on a moving-grill system which guarantees a continuous combustion and minimizes the percentage of CO emissions.

All technology for the plant was designed and provided by Lurgi, and basically consists of a series of specially designed systems, including a system for receiving and storing fuel, a system of incineration with heater and storage, a system of treating fumes, a system of vapour cycle and turbine, a system of storage of waste and inert ashes, and an auxiliary and service system.

Every particularity of the operation of the plant was designed and selected to minimize harmful environmental effects. For example, (i) the biomass is stored in a pressure controlled environment to avoid the release of offensive odours; (ii) the fumes from the combustion are purified by a NSCR (non selective catalytic reduction) system, with injection of urea in the heat system for the breaking down of NOx and successive de-acidification with a semi-dry system of lime and active carbon; (iii) the final phase of energy production involves a procedure designed to absorb polluting acids and eliminate solid residue products present in the fumes; (iv) the ashes produced and filtered are made inert by a specific chemical treatment and can be disposed of without any other precautions for the environment.

Green certificate scheme

The Tecnoborgo and Terni projects both had the benefit of CIP6 legislation. The first renewables project to go forward in a project financing under the new scheme is now unfolding. The project, for a 176 MW wind farm in southern Italy, is being sponsored by IVPC (Italian Veneto Power Corporation), a joint venture between US wind developer UPC and Edison Mission Energy. The Royal Bank of Scotland is acting as lead financial arranger.

Given Italy’s overwhelming need to increase its supply of energy, the incentives already in place to develop renewable energy capacity, and a successful track record in developing and financing renewable energy projects, we can expect growing interest in the construction of new renewable plants in Italy in the coming year.

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