Investing in renewables

Transcription

1 ADVISORY Investing in renewables Trends, opportunities, prospects kpmg.com/it

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3 Index Introduction 1 The renewable energy market in Italy 6 - The energy market in Italy and the importance of renewable sources - National energy policy and legal framework 2 The players in the Italian market and their performance 24 - Frame of reference - Benchmarking the companies in the sector 3 Investing today in renewable energy: key points 44 - Expected changes to the regulations and the relative impacts on returns - Conclusions 4 Insights 57 - Renewable energies and achieving grid parity by Luca Mazzoni, Managing Director Protos - Project Financing in the renewable energy sector by Marco Serifio, Partner KPMG Advisory - Investment project plans in the renewable energy sector by Stefano Cervo, Tax Partner KStudio Associato - M&A activities in the renewable energy sector in Italy by Alessandro Zanca, Associate Partner KPMG Advisory 5 Country Focus 75 - Internationalisation in renewables by Protos

4 Introduction The renewable energy sector, comprising technologies for the generation of electric energy from sources other than fossil and nuclear, such as wind, photovoltaic, bioenergy, geothermoelectric and mini-hydro, has yet to achieve grid parity. The full cost of generating the energy produced, taking also into account returns on invested capital, is therefore still significantly higher than for conventional sources of energy with the result that incentives are necessary, to be decided by the Regulator. The sector concerns and appeals to three main types of companies*: companies specialised in the development and in the operation of renewable source power plants, comprising start ups as well as large conventional source energy companies financial investors, in particular those operating in infrastructure funding, and which are therefore attracted to the sector industrial companies from non-energy sectors, which see renewable sources as a potential opportunity to diversify their investments. It is a regulated sector with guaranteed returns against large initial investments, but which in reality presents two types of problems. First, there are significant difficulties at industrial level in carrying through the investments because of complex authorisation processes and because of the problems obtaining funding from the banks for these kind of projects. Furthermore, there are major inconsistencies in the regulations which have emerged for photovoltaic and they continue to be an issue for wind power and bioenergy. Inconsistencies which have not only brought about a significant reduction in the incentives and therefore in the returns, but have also introduced the principle of quota of installable capacity in a fixed period, generating much uncertainty in the programming of the investments by the companies. Faced with an ever-changing scenario and the complex nature of the sector, there is an objective need for knowledge to at least understand how the renewable sector is organised in present day Italy. The picture presented herein forms a basis for ensuing discussion with concrete facts about the development prospects for the future. In particular, it is necessary to try to reply to a series of questions of an existential nature with regard to the evolution of the sector; for example: what is the industrial background and the regulatory framework with regard to the renewable sector in Italy? what are the companies returns and the crucial factors of success?

5 Investing in renewables 5 what regulatory developments can be expected in the near future and what will their impact be on the companies? This study, which brings together and elaborates a vast array of reference material, attempts to provide an answer (at least in part) to these strategic matters. The first chapter provides a basic overview of the characteristics of the sector, for use by companies currently taking it into consideration; the subsequent chapters provide detailed studies. It is our belief at the present time, and not only in Italy, that Governments of the main western economies are obliged to pursue aggressive strategies of reform and spending cuts. Hence the question of whether or not to continue funding the development of green technologies becomes an issue of utmost importance. With the new phase of austerity now upon us it is likely that creative strategies will be necessary in order to support the development of the sector. It is certain that renewable energies can represent a clean engine for relaunching innovation. It is no coincidence that, for better or for worse, also in Italy the sector has generated new pipelines, with start ups launched by industrial companies, partnerships between industrial and financial companies, or spin-offs from players operating in the traditional energy sector. For a country like ours, with no fossil fuel sources and which has decided to turn its back on nuclear power, the development of renewables, and the ensuing process of productive reconversion, can represent a great opportunity and a possible driver to relaunch growth as a model of sustainable development. Gianpaolo Attanasio Associate Partner, KPMG Advisory Methodological note *It should be pointed out that this framework does not include, as they are not relevant, or not directly correlated from a regulatory point of view with regard to business operations or companies involved: energy efficiency, in terms of reduction of energy consumption per unit produced, which in the case of Italy involves principally the Energy Service Company (the so-called Es.C.O.) the Kyoto protocol, which centres on the reduction of pollution and concerns some sectors of industry (e.g. metalworks, conventional generation, etc.) and transport. The above matters are therefore not dealt with herein.

6 6 6 Investing in renewables The renewable energy market in Italy by KPMG Advisory Research Department The energy market in Italy and the importance of renewable sources National energy balance It is a well known fact that our country has a high dependence on energy from abroad. Indeed, imports account for 97% of the gross national energy requirements. Table 1 National energy balance per source: gross domestic energy consumption, Mtep and percentage of total National energy balance 2000 Mtep 2000 percentage Mtep Mtep 2010 percentage Petroleum % % Natural gas % % Solid fuels % % Imported electric energy 9.8 5% % Renewables* % % Gross domestic energy % % consumption Mtep: million tonnes equivalent of petroleum *including hydroelectric plants exceeding 1MW, not considered as renewable Source: Ministry for Economic Development data adapted by KPMG Advisory Research Department During the last decade, Italy has tried to diversify the sources of energy used, in an attempt to redress the energy imbalance towards other countries and to reduce the risks to supply resulting from this dependence. Renewable energy sources represent the most innovative tool for reaching greater energy independence, despite the fact that they still contribute in a very limited way to satisfying the national energy demand (including hydropower plants of over 1 MW, not considered renewable, 12% of the gross domestic energy consumption is reached), compared to traditional sources. Limiting the analysis to the domestic production of electric energy, Italy stands out, compared to the main European countries, for its high dependence on thermoelectric energy (77% of the total national production), the high proportion of the hydroelectric sector (mainly hydroelectric of over 1 MW) and the absence of nuclear power.

7 Investing in renewables 7 Graph 1 Electric energy per source: percentage of total domestic production (2010) Italy Germany Production: 296 TWh Production: 625 TWh 4% 18% 3% 2% Renewables 5% 22% 77% 66% 2% 6% Renewables 8% Spain Production: 306 TWh 15% EU-27 Production: 3,335 TWh 12% 20% 28% 49% 55% 2% 14% Renewables 16% 1% 4% Renewables 5% Thermoelectric * Hydroelectric ** Nuclear Wind Geothermoelectric Solar and others * thermoelectric includes combustion of biodegradable waste, considered renewable and a form of bioenergy ** hydroelectric includes also power plants of over 1 MW, not considered renewable Source: Enerdata data adapted by KPMG Advisory Research Department

8 8 Investing in renewables At present, renewable sources are the least problematic solution for redressing the energy balance in our country. The high level of social consensus contributes to this conviction. Furthermore, the presence of incentives helps the sector remain profitable. At present, the renewable energy sources are, indeed, cost-efficient, but not sustainable, if paid for at the market prices of electric energy, compared to conventional traditional sources (thermoelectric). Grid parity, i.e. the parity of the production costs of energy from conventional or renewable sources, has not yet been achieved and therefore incentives are necessary to allow the diffusion and profitability of renewable sources. Electric power plants in Italy At present, there are over 160,000 electric power plants in Italy, with an efficient power (corresponding to the maximum potential power of a plant, measured under optimal conditions) equal to approximately 106 GW and electric production of over 299 TWh (2010 figures). Table 2 Electric power plants in Italy Thermoelectric Renewables* Hydroelectric > 1 MW Total No. Plants , , ,002 3, ,766 Efficient power (GW) Production (TWh) Production (percentage) 83% 74% 5% 9% 12% 17% 100% 100% * renewables include hydroelectric plants of no more than 1 MW Source: Terna data adapted by KPMG Advisory Research Department Renewables represent 12% of the peak power in Italy In 2010, 74% of the national electric production came from traditional thermoelectric plants, over 17% from large hydroelectric plants (over 1 MW) and the remaining 9% from renewable sources plants. In particular, there are 871 traditional thermoelectric plants using fossil fuels, such as natural gas and coal, over 1,000 large hydroelectric plants (over 1 MW) and almost 159,000 power plants which produce electricity via renewable energy sources; it should be stressed that photovoltaic accounts for approximately 98% of the renewable plants.

9 Investing in renewables 9 Renewable sources Those forms of energy generated by sources intrinsically capable of regenerating more than their consumption or which are not exhaustible are considered renewable. Herein renewable power plants refer to mini-hydro (power equal to or less than 1 MW), wind, photovoltaic, geothermic and bioenergy (biomass and biogas) plants designed to produce electric energy, given that the other possible uses, such as heat production, are marginal. Graph 2 Evolution of energy produced: TWh, percentage variation and CAGR 0.1% -2.2% -10% % % 100% % 40% 49 Renewables CAGR Hydroelectric > 1 MW Traditional thermoelectric Total Var.% CAGR: compound annual growth rate Source: Terna data adapted by KPMG Advisory Research Department From 2005 to the present, electric power generation in Italy has seen good stability in the production of electricity in part due to the recession which began in In particular, generation from renewable plants has recorded growth over the last five years (CAGR : %), while generation from conventional traditional sources saw an overall decrease (CAGR : -2.2%) which levelled off in 2009, thanks mainly to the slowing of the economic recession. The recent financial crisis, followed by a drop in the consumption of electricity, has been borne in terms of lack of production, entirely by the traditional thermoelectric plants, since renewable sources benefit, by the Network Operator, from the so-called dispatching priority (i.e. guarantee of priority withdrawal) of the energy thus produced compared to that generated by conventional plants. The high rates of growth seen in the renewables sector, with regard to the peak power (CAGR : +27%) and energy production, highlight a

10 10 Investing in renewables The last five years have seen renewable production double compared with peak power which has more than tripled sector undergoing massive expansion, at least throughout 2010, thanks mainly to the favourable incentives system present in our country until that time. Analysing the evolution of the efficient power for each renewable source, it is possible to note how the highest growth rates have been recorded, in order, by photovoltaic, wind and bioenergy. Graph 3 Evolution of the efficient power for each type of renewable source: MW, percentage variation and CAGR +29% 255% +246% 5,814 +5% +2% +14% 97% 2,351 49,471% 3,470 25% % , ,639 Mini-hydroelectric Geothermoelectric Bioenergy Photovoltaic Wind CAGR Var.% CAGR: compound annual growth rate Source: Terna data adapted by KPMG Advisory Research Department Graph 4 Evolution of the efficient power in photovoltaic: percentage variation compared to previous year 1,200% 1,000% 800% 1,143% 600% 397% 400% 200% 164% 204% 0% Source: Terna data adapted by KPMG Advisory Research Department The development trend of the renewable sources depends essentially on two factors: the profitability of the incentive, relative to the costs of the renewable technology

11 Investing in renewables 11 the need to have suitable sites, which limits the applicability of wind and mini-hydro power, compared with the absence of limits for photovoltaic. In the present case: the incentives linked to photovoltaic and contained within the mechanism of the Feed-In-Tariff have been important for the acceleration of the development of power plants mini-hydro and geothermoelectric have revealed very low rates of development of the efficient peak power, as a result of the saturation of the suitable sites in our country. Table 3 Table 4 Domestic electric power plants per type of renewable source Gross efficient power 2010 GW % Wind % Photovoltaic % Bioenergy % Geothermoelectric 0.8 6% Mini-hydro 0.5 4% Total renewables % Gross production 2010 TWh % Bioenergy % Wind % Geothermoelectric % Mini-hydro 2.3 8% Photovoltaic 1.9 7% Total renewables % Source: Terna data adapted by KPMG Advisory Research Department As can be seen in the tables above, bioenergy continues to generate the highest quota of energy produced by renewable sources (34% in 2010), despite the fact that they represent 18% of the peak power of renewable plants. This phenomenon is represented by the so-called load factor, i.e. the hours of functioning that the technology, per unit of peak power (1 MW), is capable of generating: geothermoelectric; approx. 5,500 7,000 hours/year bioenergy: approx. 5,000 6,000 hours/year wind: approx. 1,800 2,200 hours/year mini-hydro: approx. 1,500 2,000 hours/year photovoltaic: approx. 1,100 1,400 hours/year compared with a thermoelectric plant, which can operate: peak-load technology, e.g. open cycle turbogas: 1,500 2,500 hours/year mid-merit technology, e.g. combined cycle gas turbine (CCGT): 3,000 5,000 hours/year base-load technology, e.g. coal, nuclear: 6,000 7,500 hours/year.

12 12 Investing in renewables Graph 5 Macro-regional distribution of gross electric production per type of renewable source: percentage contribution of each macro-region in GWh (2010) Total renewables: 1 st Southern Italy and Islands, 2 nd Northern Italy, 3 rd Central Italy 7,463 GWh 25% 1% 10% 64% Mini-hydro: 1 st Northern Italy (high availability of water resources) Wind: Almost exclusively in Southern Italy and Islands 4% 1% 6% Photovoltaic: 1 st Southern Italy and Islands with 775 GWh (large photovoltaic plants), 2 nd Northern Italy with 741 GWh (mostly residential use), 3 rd Central Italy with 390 GWh 7,014 GWh 77% 12% Geothermoelectric: Exclusively in Central Italy Bioenergy: 1 st Northern Italy (high availability of agro-forestry waste), 2 nd Southern Italy and Islands 1% 13,616 GWh 65% 6% 28% Total renewables Mini-hydro Wind Photovoltaic Geothermoelectric Bioenergy Source: Terna data adapted by KPMG Advisory Research Department As can be seen in the graph above, the geographic distribution of the renewable source electric power plants is not homogeneous in the national territory. Although renewable source plants are found in all the regions of Italy, the diverse distribution of natural resources and the layout of the land mean that certain renewable sources are concentrated in certain regions. The inhomogeneous geographical development of the renewable sources may be influenced by differing authorisation processes and uncertainties arising from the time required for and the modalities for being connected to the grid.

13 Investing in renewables 13 Table 5 Gross production of electric energy by region and by renewable source in GWh: regions ordered on the basis of total gross production (2010) Region Mini-hydro Wind Photovoltaic Geothermoelectric Bioenergy Total renewables production Percentage of national renewables total Tuscany , , % Puglia 2 2, ,298 3, % Sicily 0.2 2, , % Lombardy ,903 2, % Campania 17 1, , % Emilia Romagna ,580 1, % Sardinia 1, , % Calabria , % Piedmont , % Veneto % Molise % Trentino Alto Adige % Basilicata % Lazio % Abruzzo % Friuli Venezia Giulia % Marche % Liguria % Umbria % Valle d Aosta % Italy 2,245 9,126 1,906 5,376 9,440 28, % Source: Terna data adapted by KPMG Advisory Research Department The leading Italian region in terms of electric production from renewables is Tuscany, thanks to the load factor of geothermoelectric. In second and third place are Puglia and Sicily, respectively, with a high production from wind power, and then Lombardy with high use of bioenergy. Development: part public funding, part aiming for grid parity To redress the balance between the high dependence on imported energy and the risk of shortages, Italy has, in recent years, moved towards diversification of energy sources. In this context, renewable sources offer a solution for redressing Italy s energy balance; they are supported by public opinion and in line with EC directives. Thanks to an advantageous incentive scheme, renewable plants in particular photovoltaic and wind power experienced a boom in the 5-year period Other sources, such as mini-hydro and geothermoelectric, did not increase to the same extent due to the limited availability of suitable sites. Renewables have yet to achieve grid parity and incentives therefore continue to be crucial for sector development.

14 14 Investing in renewables National energy policy and legal framework Policies for energy and the environment Italy is committed to achieving the 2020 goal of 17% of energy consumption through renewables The world debate in the last ten years (since the Kyoto Protocol) concerning, among other things, the climate and environment, reliability of supplies and safe energy, has had repercussions in the European Union, leading to the definition of an integrated policy for energy and the environment. In 2009 the European Commission approved the so-called 20/20/20 Climate- Energy Package (or Green Package), with energy and environmental policy measures designed to achieve by 2020 the reduction of climate-altering emissions, the promotion of energy efficiency and the development of renewable sources. Directive 2009/28/CE, with its objective of 20% renewable sources for energy consumption (1) by 2020, obliged all the Member States to develop renewable sources, setting precise mandatory national objectives. Italy s assigned objective is to achieve by % of its energy from renewable sources (see the detailed study). The Directive also states that, by 2020, every State must guarantee that 10% of the energy used for transport comes from renewable sources. Italy responded to the 2009/28/CE Directive on renewable energy sources with Legislative Decree 28 on 3 March 2011; the Decree formally recognizes the national objectives for 2020 (17% of gross energy consumption and 10% of energy consumption in the transport sector from renewable sources) and is in line with the National Plan of Action (NPA); furthermore it establishes: the deadline of the end of June 2011 for defining and quantifying the regional burden sharing, as laid down in the Renewable Sources NPA (to date no specific measures have been taken); a revision of the incentives scheme for the production of electric energy from renewable sources (in particular, Green Certificates [GC] and photovoltaic incentives) with the aim of providing incentives to all the various sources of renewable energy; guidelines for the simplification of the authorisation procedure for renewable energy plants, which must then be applied in other legislative measures (e.g. Interministerial Decree, 5 May 2011). (1) defined as energy products supplying the industry, transport and tertiary sectors, as well as housing, with electricity and heating, taking into account electricity and heat lost during distribution and transmission.

15 Investing in renewables 15 Investing in renewables 15 Renewable energy objectives in Italy: the 17/20/20 Package In line with Directive 2009/28/CE, Italy is committed to achieving, by 2020, 17% of final gross energy consumption through energy produced from renewable sources. The Directive also establishes the objective of 10% of consumption in the transport sector from renewable resources. Given the national potential for the use of renewable sources, the National Plan of Action for Renewable Energy (NPA RES, Italian PAN FER) has converted the EC Directive objectives into specific objectives for the three sectors of intervention (electricity, heating and transport). Final gross consumption from renewable sources and 2020 objectives Overall situation Electricity Heating Transport Imports from other States Total Transport (towards objective of 10%) RES consumption (Mtep) 2008 Final gross consumption (Mtep) RES/ consumption % % % % % % RES consumption (Mtep) 2020 Final gross consumption (Mtep) RES/ consumption % % % % % % Source: Ministry for Economic Development In summary, the NPA RES aims to: stabilise total final consumption of primary energy at 133 Mtep, promoting energy efficiency initiatives aimed at the reduction of final consumption by about 8.7%, compared with primary energy consumption for 2020 forecast at Mtep. increase final consumption of energy from renewable sources to a level of 22.6 Mtep, with an expected increase of 148% compared with 2008 consumption (9.1 Mtep) to be distributed as follows: Mtep electrical energy from renewable sources Mtep heating from renewable sources Mtep biofuel Mtep imports from other European Union States objectives for final gross consumption of electrical energy Electricity Hydroelectric Geothermic Photovoltaic Wind Bioenergy Total Final gross consumption RES (Mtep) 2020 Proportion of RES of final gross consumption % % % % % % % Source: Ministry for Economic Development For each sector of intervention, the Plan establishes overall objectives which are not individually binding for the various renewable sources. In particular, with regard to the production of electric energy, it is expected that the greatest increases in the use of alternative sources for electricity consumption will be seen with wind and solar sources (especially photovoltaic). RES = renewable energy source Mtep = million-ton equivalent of petroleum: represents the quantity of petroleum released by the combustion of one ton of crude oil (approximately 42 billion joules) and is equivalent to MWh.

16 16 Investing in renewables National Plan of Action for Renewable Energy (NPA RES) The document, in addition to identifying specific interventions and quantitative objectives in each area (electric energy, heating/cooling and transport) and for each separate technology and application (see the detailed study), looks to apply the national targets at regional level through burden sharing designed to coordinate the various levels of public programming, the relative laws and the authorisation procedures for plants and infrastructures. The Regions, the principal authorities responsible for the country s energy policies following reorganisation, developed, through Regional Energy Plans (REP), a programme of interventions in the energy sector to include the promotion of renewable energy in the various regions supported by a system of incentives. Table 6 Regional and Provincial Energy Plans V.d Aosta Liguria Piedmont Umbria Marche Calabria Veneto Molise Sardinia* Friuli V.G. E.Romagna Puglia Tuscany Lazio* Lombardy* Sicily Abruzzo Campania Autonomous Province of Trento* Basilicata* * most recent approved updates of the Plans Source: KPMG Advisory Research Department on the basis of regional data Since 2000 the REP has been approved in every Italian Region. The Autonomous Province of Bolzano had already adopted a Provincial Energy Plan in Although the State did not oversee the drawing up of the plans and no reference model was provided, the REPs remain a useful guide for the evaluation of the potential energy production from renewable sources in the various regions and of their relative environmental and economic impact, and are a tool for the realisation of the National Energy Strategy and the burden sharing outlined in the NPA RES.

17 Investing in renewables 17 Legislative tools for the promotion and regulation of the development of renewable sources In Italy legislation for the renewable energy sector is based on the guidelines below: an intricate incentive scheme based on the technology and the plant size a complex and irksome authorisation procedure, based on plant size and on the Region of the site location. Incentive scheme for renewable energy plants Renewables have seen rapid development in the main European countries thanks to support programmes designed to make investments profitable; such programmes may be based on: market regimes (based on quantity), for example Green Certificates administered schemes (based on price), such as the Feed-In Tariff scheme (FIT, for example, the Tariffa Omnicomprensiva one tariff for energy price and incentive), Feed-In Premium (FIP, i.e. an extra incentive, in addition to payment for the electric energy sold at market prices), grants, tax incentives. Italy has adopted incentive mechanisms in both these categories, illustrated below. Table 7 Incentives linked to the energy policy objective of generation of energy from renewable sources Applicable to Means of incentive Operative CIP 6 * From 1992 to 1999; not applicable to new systems Renewable source of application All sources, including some high-efficiency conventional sources Length of incentive Up to 15 years the first 8 of which with additional incentive Total profits for producer Assimilable to a Feed-in Tariff (Tariffa Omnicomprensiva) Renewable energy producers Green Certificates Since 1999; being replaced by mechanism of feed-in tariff + fixed quotas of peak power All sources except photovoltaic 4 th FIT From 5/5/2011 Photovoltaic 15 years for systems operative by 31/12/2012 Regulations still being defined for systems operative after years for systems operative by 31/12/2016; fixed quotas of peak power for systems operative by 1/9/2011 For systems operative after 2016, regulations still being defined Sale of electric energy at market prices + variable incentive (value set on the basis of market price of GC) Sale of electric energy at market prices or predetermined value (as the producer prefers) + fixed incentive Feed-in Tariff (Tariffa Omnicomprensiva) From 1/1/2008 All sources (except photovoltaic) with capacity of up to 1 MW (200 kw for wind) 15 years for systems operative by 31/12/2012 Sale of electric energy at all-inclusive price comprising the incentive * Interministerial Price Committee Source: National regulations, adapted by KPMG Advisory Research Department

18 18 Investing in in renewables Compatibility between the various incentive schemes While a single source can choose between the various incentive schemes, different systems may not be accumulated: the Feed-In Tariff (Conto Energia) is only available for photovoltaic and, therefore, does not allow access to the Feed-in Tariff (Tariffa Omnicomprensiva) or to Green Certificates for all other sources, the Feed-in Tariff (Tariffa Omnicomprensiva) is not compatible with Green Certificates: a small plant may have access to the Feed-in Tariff (Tariffa Omnicomprensiva) or the Green Certificate system. Summary of the incentive system Renewable source Photovoltaic Plant size (N.B. 1,000 kw = 1 MW) Photovoltaic > 1 kw Integrated photovoltaic from 1 kw to 5,000 kw Concentrated from 1 kw to 5,000 kw Thermodynamic Feed-in Tariff (Omnicomprensiva) Incentive system Green Certificates Electricity from bioenergy Up to 1,000 kw * * Over 1,000 kw Cogeneration from bioenergy Wind Hydroelectric Geothermic Tidal and wave Up to 1,000 kw * * Over 1,000 kw Up to 200 kw (micro/mini wind) * * Over 200 kw Offshore Up to 1,000 kw (micro/mini hydro) * * Over 1,000 kw Up to 1,000 kw * * Over 1,000 kw Up to 1,000 kw * * Over 1,000 kw Feed-In Tariff (Conto Energia) * for systems with nominal capacity below 1,000 kw (200 kw for wind power), it is possible to opt, on request, for the Feed in Tariff (Tariffa Omnicomprensiva) Source: National regulations, adapted by KPMG Advisory Research Department

19 Investing in renewables 19 Estimated system costs of reaching the 2020 objectives The incentive systems so far described have to date been a significant factor in the growth of renewable energy in Italy. Concern has recently focused on the economic sustainability, in the medium term, of the incentive systems currently charged to the consumer. Table 8 Cost of incentive schemes for electric energy from renewable sources Incentive regime CIP 6 (only renewables) Green Certificates Feed in Tariff (Omnicomprensiva) Photovoltaic Feed-In Tariff (Conto Energia) 2008 Energy Cost TWh Mill. Euro Energy Cost TWh Mill. Euro , Energy Cost TWh Mill. Euro , * Energy Cost TWh Mill. Euro , ,500 Total Of which in A ,709 1, ,521 1, ,398 2, ,390 5,690 * estimate Source: Electric Energy and Gas Authority As can be seen in the above table, the total cost of incentives for renewable sources alone (i.e. excluding assimilated sources, as well as other incentive systems for achieving energy efficiency and pollution reduction objectives) reached 3.4 billion euros in 2010 and it is expected to exceed 6 billion euros by the end of 2011; of this sum, 80% has been dedicated to the A3 component of the electricity bill and is therefore paid by the end consumer. Specifically: the costs associated with Green Certificates in 2010 were more than double those in The total cost of this incentive system should reach 2.1 billion euros in 2011, an increase of 33% compared with 2010 The cost of incentives borne by the Country System (Sistema Paese) to support renewable sources will, by the end of 2011, exceed 6 billion euros although the absolute value of the relative expenses was less than that registered for the Green Certificates, the greatest increase was in the Feed- In Tariff for photovoltaic, which in 2010, with a twofold rise in the number of systems operative compared to the previous year, almost tripled compared to 2009, exceeding 800 million euros (+650% compared to 2008). Taking into consideration the further increase in the solar power plant in 2011, concentrated mainly in the first half of the year given the expected changes to the Feed-In Tariff (Conto Energia), further increases in the costs of this type of incentive are expected (over 300% growth compared to 2010).

20 20 Investing in renewables Incentives have accelerated development of the sector, but represent an unsustainable system Advantageous incentives, given the costs of renewable technologies, have resulted in a surge in the peak power from alternative sources, doubling over the last four years, in contrast with the cost of the incentives to the Country System which has increased fourfold. Although this incentive system has helped increase the development of renewable sources power plants in order to achieve the European Union targets, drawbacks have emerged: an installed power plant, in particular for photovoltaic, is not fully exploited considering the technologies adopted and the relatively low costs of plant construction expected in the near future, resulting in higher costs per TWh of renewable energy produced the cost of the incentive schemes is rapidly increasing and is likely to be unsustainable in the medium term in a context of policies of reduced public spending.

21 Investing in renewables 21 Legal framework: administrative procedures for plant authorisation The administrative procedures for the authorisation of renewable energy plants and related infrastructures may be divided according to type of plant or infrastructure, size and location. It is the Regions which are responsible for establishing the precise rules regarding licensing requirements in their own territory. The main authorisation procedures are laid out below. Table 9 Summary of the main authorisation procedures at national level for the realization of renewable energy plants Procedure Type of plant Competent authority Reference legislation Single Permit Simplified Licensing Procedure (Italian PAS) (formerly DIA - Declaration of Commencement of Works) Communication of building operation Plants with an average of over 1 MW Delegated Region or Province Plants smaller than the set limits (in general up to 1 MW) Municipality Small cogeneration (capacity less than 1 MW or 3 thermic MW) Municipality Photovoltaic panels on existing buildings Microgeneration (capacity less than 50 kw) Close-fitting/integrated photovoltaic plants and single aerogenerators h<1.5 metres Photovoltaic, biomass, hydroelectric, geothermic plants in existing structures (capacity less than 200 kw) Source: National regulations, adapted by KPMG Advisory Research Department Municipality Municipality Municipality Municipality D.Lgs. 387/2003 and s.m.i. and D.Lgs. 28/2011 L. 244/2007, D.MSE 10/09/10 and D.Lgs. 28/2011 L.99/2009, D.MSE 10/09/10 and D.Lgs. 28/2011 D.M. 06/08/10, D.MSE 10/09/10 and D.Lgs. 28/2011 L.99/2009, D.MSE 10/09/10 and D.Lgs. 28/2011 D.Lgs.115/2008, D.MSE 10/09/10 and D.Lgs. 28/2011 D.P.R. 380/2001, D.MSE 10/09/10 and D.Lgs. 28/2011 Local management of the authorisation procedures for renewable sources has led to fragmentation with major differences between regions, and bureaucratic problems often arising when local regulations are not in line with national legislation. For example, Law no. 129/2010 validated the authorisation procedure (known as DIA Declaration of Commencement of Activity) introduced for the construction of renewable energy plants in line with regional regulations; these regulations had set thresholds higher than the national limits and were subsequently declared illegal by the Constitutional Court. This kind of regional interpretation of the law resulted in a longer wait before authorisation could be granted (often more than the three months recently set by national law), subsequently higher costs for applicants, and a drop in Italy s popularity for investment in renewable energy sources compared to other countries, despite the favourable environmental conditions and the high level of incentives. Fragmentation of administrative procedures at regional level leads to uncertainty and delays for authorisation; the Legislator is attempting to remedy the problem For the renewable energy sector to develop in Italy, it is essential to introduce regulations designed to make authorisation procedures more concrete and homogeneous nationwide.

22 22 Investing in renewables In this regard, norms and provisions recently passed are highlighted below: the Decree of the Ministry for Economic Development, 10 September 2010, lay down guidelines for the authorisation of renewable energy plants Legislative Decree no. 28/2011 introduced innovative changes, with particular reference to: - introduction of a simplified procedure, applicable to plants of up to 1 MW, to resolve former problems with the DIA - introduction of a single procedure, involving all administrations, for a license to link up with the electric grid, to be issued by grid operators and which is separate from authorisations for the construction and operation of production plants. Appropriate tools are still required to coordinate territorial planning and facilitate identification of suitable sites free from environmental and landscape constraints for the construction of renewable energy plants, while increasing the involvement of the Regions and other administrations in the authorisation procedures so as to reduce the time required to obtain authorisation. Administrative processes: the order of the day is simplify The success of the strategy and of measures laid down in NPA RES depend on the simplification of the authorisation procedures in line with valid national criteria. The regulations currently in force produce constraints for renewable energy operators and/or for potential purchasers of the plants, in particular: in the context of the current Single Permit procedure, for plants of over 1 MW, the following constraints arise: - prior to issue of the Single Permit, the planning conference involving the competent authorities can involve up to thirty-four different public authorities or related institutions (for example Aviation Safety Authority etc.) and there is no obligation to respect a given time limit - there is no list of specific requirements to start the local authorities planning conference (for example the precise nature of the project and the land to be used), causing uncertainty as well as prolonging the process - there is no regional map of suitable areas nor are there predetermined criteria for evaluating suitability; therefore, each separate project necessitates a labour-intensive Environmental Impact Assessment. Such constraints lead to much uncertainty and a significant increase in development costs before work even commences, in turn discouraging the development of renewable sources, even when incentives are available. for plants subject to the Simplified Licensing Procedure (maximum capacity 1 MW) there are no clearly defined regulations for determining so-called

23 Investing in renewables 23 illegal sub-division, i.e. when a company requests different licenses for the development of different parts of a plant which is de facto single (for example, several plants close to one another, with one cabin for connection to the grid). Should such a discrepancy emerge during an inspection by the competent Authorities, an assessment of any irregularities in the administrative procedure would have to be carried out and, if necessary, the plant confiscated, whether during the development stage or already operative. In both cases there is no coordination with the licensing requirements for connection to the grid; this means that, both in the case of an Environmental Impact Assessment to obtain the Single Authorisation and in the case of the PAS, in reality two parallel and uncoordinated procedures must be followed to obtain authorisation. It is therefore important that suitable implementing regulations are issued by the competent authorities (the Regions) in order to overcome the constraints outlined above.

24 24 24 Investing in renewables The players in the Italian market and their performance by KPMG Advisory Research Department Frame of reference The renewable energy sector in Italy has a quite singular structure, resulting from the recent evolution and the uniqueness of the industries it comprises, characterised by a high level of fragmentation and involving a wide variety of companies. The players in the Italian sector may be divided according to the following factors: presence in the value chain origin. Figure 1 Value chain in the renewable energy sector Focus of the present study Plant producers Scouting and plant development Planning, commissioning and construction Operation Sale of energy Plant maintenance Source: KPMG Advisory Research Department Considering all stages in the industry and the activities carried out, the sector includes the following kinds of company: plant producers: a range of companies, usually specialising in just one source (wind, photovoltaic, bioenergy), each with its own place in the industry, for example: - the wind sector is dominated by a small number of major international companies, some of them specialised in renewable energy (Vestas, Gamesa, First Solar), others involved also in other sectors (Siemens, GE, Alstom), who tend to limit their involvement to the initial stages of planning and construction - the photovoltaic and bioenergy sectors also feature companies operating at international level (solar power First Solar, Sharp, MEMC, Suntech etc.; bioenergy Babcock, Ansaldo, Foster Wheeler, Alstom etc.), as well as smaller national companies, and local companies dealing with assembly and installation of the plants;

25 Investing in renewables 25 developers identify, promote and develop new sites and renewable energy projects, measuring the energy resource (for wind power), providing technical services (preliminary planning) and obtaining authorisation, as well as land contracting: - they generally operate in partnership with medium-large companies (for example, Sorgenia, Enel Green Power, Edison Energie Speciali etc.) or with financial operators (for example, infrastructure investment funds), alternatively they yield their own projects to bigger players - the role of the developer is likely to decrease in the near future as the rate of growth of the sector declines and reaches a stable level, also in relation to guarantees and sureties which are increasingly necessary during the development stage (for example for application for connection to the grid); fitters and installers, a heterogeneous group of companies, including large EPC (Engineering, Procurement, Construction) contractors and small and medium-sized companies, mostly already operative in other sectors (especially plant engineering and building); companies dealing with operation, sale of energy, and management and maintenance of renewable energy plants. With regard to the players in the value chain described, the various activities sometimes overlap, with: the involvement of some energy companies also in the early stages of development and realisation of the renewable energy plants, as well as in the production of technologies (as with photovoltaic, for example Enel Green Power) the integration during later stages of some fitters and installers (in particular with photovoltaic) who, in addition to acquiring contracts for third parties, realise their own plants (becoming renewable energy operators via generation activities) or plants as part of joint ventures set up together with traditional energy operators or financial investors, thus creating a captive market for their own technologies and infrastructures.

26 26 Investing in renewables A sector featuring Clusters of operators adopting very different strategies for getting into the business Considering the nature and the origin of the operators, the companies involved in the management of renewable energy plants and in the generation and subsequent sale of electric energy produced may be divided as follows: traditional energy companies which have developed specific departments or businesses specialised in renewable energy, with the aim of achieving correlated and synergic diversification companies from non-energy industrial sectors which have diversified into the renewable energy business, originally operating in food (such as Energhe of the Ferrero group), refinement (for example ERG with ERG Renew, Api with Api Nòva Energia), cement (Italcementi with Italgen) etc. start up companies, that is independent businesses launched to develop exclusively renewable energy sources. The heterogeneous background of companies in the renewable energy sector, compared to those in the traditional energy sector, is due to the wide variety of reasons for choosing to invest in this area: for traditional energy companies, synergy: - obligations imposed by the legislator concerning renewable energy, for example the law regarding producers of conventional energy and the input into the grid of a corresponding quota of energy from renewable sources (see the above section with the description of the various incentives); this provision is soon to be outdated - image and corporate social responsibility, especially for listed companies, with higher return differentials recognised by the market for renewable energy companies compared to traditional energy companies ( premium recognised by the analysts) - industrial synergy in plant development and construction activities and, above all, sale of electric energy and administrative management of the incentives; diversification within a sector (at least until 2010), characterised by a positive relationship between profit and the relative business risk: - high profits, guaranteed by an advantageous incentive system (under revision by the Legislator, as described in the next chapter) - relatively low investment, given the high degree of leverage granted by the banks - relatively simple technologies for plant construction and maintenance, at least compared with the sectors of origin (for example conventional generation or industrial processing sectors). The companies operating renewable energy plants are therefore of all shapes and sizes, depending on their background and the wide range of means at their disposal; renewable energy generation is in the hands of multinationals, mediumsized companies and small businesses focusing on a single source and on a small number of plants within a limited geographical area.

27 Investing in renewables 27 Compared with the electric energy sector as a whole, renewable energy workers tend to be young, due to the growing attractiveness of the sector (thanks in turn to an incentive system operative in Italy since the early 2000s) and to the increasing reliability of the technologies and the competitiveness of the relative costs. A dynamic business involving a multitude of players. Not an easy model to categorise The presence of a multitude of new companies with different ways of thinking, the articulation and fragmentation of the industry and the highly heterogeneous nature of the sector, are all factors contributing to making the renewable energy business very dynamic, with players that are not easily defined. Benchmarking the companies in the sector In the light of the above considerations, in order to benchmark the players in the Italian market operating in the renewable energy (RES) sector, certain considerations and limits must be imposed in order to draw up a standard sample : for the sake of our analysis, the sample comprises only the main national or international players operating in the Italian renewable energy market given the scope of this document, only company operations within Italy have been taken into consideration; therefore, only operational and economicfinancial indicators concerning renewable energy operations in the Italian market have been used renewable energy companies herein are those operating wind, photovoltaic, geothermic and bioenergy, i.e. biomass (liquid and/or solid) plants for the generation and sale of electric energy. Hydroelectric power plants have not been included in this analysis, as it is difficult to separate the quota represented exclusively by renewable energy (mini-hydro) from the power plant for this source for groups/companies not specialising exclusively in renewable energy (traditional forms of energy, other industrial sectors), only those operating and economic-financial indicators concerning exclusively renewable energy have been taken into consideration, wherever possible cross-holdings between different groups have not been deducted in order to carry out the analysis, data (operative and economic-financial) and information available to the public on company web sites, financial statements and press releases have been used.

28 28 Investing in renewables The sample of companies selected for benchmarking comprises the following categories. Figure 2 Categories of companies considered for benchmarking CLUSTER 1 Traditional energy companies with divisions/subsidiaries in renewable energy (8 companies, 1 of which listed) CLUSTER 2 Non-energy companies diversifying in the renewable business (9 companies, 4 of which listed) CLUSTER 3 Start ups (8 companies, 1 of which listed) Figure 3 Composition of the benchmarking sample focus on Italy CLUSTER 1 CLUSTER 2 CLUSTER 3 Traditional energy companies with divisions/subsidiaries in renewable energy Non-energy companies diversifying in the renewable business Start ups Enel Green Power Alerion Clean Power ErgyCapital Listed in Italy Falck Renewables Kinexia K.R. Energy Alpiq api Holding Asja Biz BKW ERG Renew FRI-EL Green Power Not listed in Italy EDF Energies Nouvelles Edison E.ON Climate & Renewables International Power - GDF Suez Sorgenia Marseglia Group Moncada Energy Group TRE Tozzi Renewable Energy Fortore Energia ICQ Holding I.V.P.C. Italian Vento Power Corporation Marcopolo Environmental Group Veronagest Note: Edison, parent company of Edison Energie Speciali, and CIR, shareholder in Sorgenia, are listed on the Italian stock market. The ERG Renew shares were delisted by the Italian stock market in June 2011 following completion of the public offer of totalitarian voluntary purchase promoted by the parent company ERG (listed on the Italian stock market). Source: KPMG Advisory Research Department