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EC approves Italian support for low carbon power

Renewables and gas benefit from new rules at the expense of coal

The European Commission (EC) has approved two schemes aimed at supporting the development of new power generation capacity in Italy. The first is directed at promoting renewable energy while the second revises a capacity market scheme to almost certainly exclude coal-fired power.

The EU's executive arm gave the go-ahead, under state aid rules, for a €5.4bn renewable incentive scheme to be in place until 2021. Renewable installations within the scheme will be awarded a premium on top of the electricity market price, which cannot exceed the difference between the average production cost using each renewable technology and the market price for electricity.

The scheme also includes a clawback mechanism; installations would have to return the additional revenue if the electricity price exceeds average production costs. For projects above 1MW, the premium will be set through a competitive bidding process. Smaller projects will be selected on a combination of environmental and economic criteria.

The clawback clause reflects a new direction for the structure of renewable energy schemes. Whereas previous schemes effectively provided direct subsidies, the new scheme would work primarily as a price signal. The aim is to provide long-term certainty for new investments while ensuring that state support is limited to a necessary minimum.

The change reflects the falling costs of renewables production on the economic viability of renewable installations, which, an industry source in Italy told Petroleum Economist, are approaching price parity with other forms of generation.

Capacity market revision

The second EC approval, a revision to a capacity market scheme, is to be implemented in Italy later this year. The introduction of "stringent CO2 emission limits" to the capacity mechanism "will prevent high-emission electricity generation, such as coal-fired power plants, from participating", the EC stated.

The measure will contribute to ensuring the security of supply and increase the level of environmental protection "without unduly distorting competition in the single market," it added.

The aim is to provide long-term certainty for new [renewable] investments

Italy has been mulling adoption of a capacity market for several years, as a sharp rise in renewable output threw into question the future of fossil-fuel power plants. Under an energy strategy approved by the government in 2017, all coal-fired generation must be phased out by 2025, eliminating 8GW of generating capacity. An additional 9GW of gas-fired generation is set to be retired by 2030.

Only around 9GW of this is expected to be offset by new renewable capacity, backed by battery storage and improved demand management. The capacity shortfall of 8GW by 2030 makes the capacity market scheme particularly important, the industry source said.

The capacity scheme will entail yearly auctions, held four years ahead of delivery. Existing capacity would be awarded one-year duration contracts, while contracts for new capacity, if needed, would have a duration of 15 years.

Italian electricity association Elettricita Futura welcomed both schemes, stating they were "essential measures allowing Italy to reach its 2030 objectives, while, at the same time, ensuring economic and environmental sustainability, system adequacy, security of supply and market competitiveness".

Thermal power bias?

The solar association Italia Solare and Greenpeace oppose the capacity market scheme's introduction. They wrote to the EC in May asking for the measure to be blocked, on the grounds that it would favour fossil-fuel generation and didn't account sufficiently for the potential contribution of renewables and demand-side changes to the electricity market, Emilio Sani, legal advisor at Italia Solare told Petroleum Economist.

Although the scheme doesn't preclude renewables and the demand side from participating, it is most likely to award contracts to thermoelectric generation—mainly gas—that can provide back-up generation for the hours of the day when renewable generation decreases and demand picks up, the industry source added.

8GW — Power shortfall faced by Italy in 2030

Andrea Zaghi, general manager at Elettricita Futura, said he believed achieving a target of 55pc renewables in the electricity mix by 2030 would be very hard without thermoelectric back-up. Italy's installed thermoelectric capacity has fallen from 77GW to 61GW since 2012, leaving the system less able to cope with peaks in demand, he said.

Enel stated in a parliamentary hearing in May that it is planning the construction of 3GW of gas-fired generation, pending the implementation of the capacity market mechanism.

Despite the EC approval, there is a chance that Italy—and the rest of the EU—may need to rethink its whole strategy for power generation support. On 1 January 2020 a new EU directive on electricity markets will come into force, aimed at prompting countries to move away from capacity market schemes in favour of alternative measures to support electricity generation.

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