GSE as Guarantor in PPA Contracts: the Reform of the Emergency Decree

Introduction
With the approval of Decree Law No. 208 of December 31, 2024 (“Emergency Decree”), the Italian Council of Ministers introduced a series of measures aimed at addressing contingent crises and implementing the objectives of the National Recovery and Resilience Plan (“PNRR”). Among these measures, Article 8 of the Emergency Decree focuses on mitigating financial risks in long-term energy purchase agreements from renewable sources, also known as Power Purchase Agreements (“PPAs”), in accordance with Regulation (EU) 2024/1747 of the European Parliament and Council (“Regulation (EU) 2024/1747”).

This article details the role of the Gestore dei Servizi Energetici – G.S.E. S.p.A. (“GSE”) as the guarantor of last resort and analyzes the anticipated impacts of this measure.

The Regulatory Context

As mentioned, the legislative measure aims to enhance the security and attractiveness of PPAs by amending Article 28 of Legislative Decree No. 199/2021 and removing certain legal, administrative, and financial barriers to their dissemination, thereby facilitating the achievement of decarbonization objectives through the use of renewable energy. Specifically, the first two paragraphs of the current Article 28[1] provide for the following:

• the establishment of a digital notice board by the Gestore dei Mercati Energetici – G.M.E. S.p.A. (“GME”) aimed at: (i) collecting announcements from operators interested in negotiating PPAs as sellers/producers or buyers, facilitating their interaction through the “Announcements Section”; (ii) enabling the registration of PPAs already concluded by operators registered on the notice board through the “Contracts Registration Section”; and (iii) managing the allocation procedures of electricity related to the so-called “energy release” mechanism as per the Ministerial Decree of 16 September 2022[2], through the “Energy Release Section” (“PPA Notice Board”).

• the establishment of an organized trading platform, managed by GME, based on voluntary participation and aimed at facilitating the signing and dissemination of PPAs among interested operators (sellers or buyers), thereby contributing to the achievement of decarbonization goals as encouraged by paragraphs (27) and (28) of Regulation (EU) 2024/1747 (“GME Platform”).

It is important to note that the GME Platform, at present, is not yet operational and is distinct from the PPA Notice Board, which is currently fully operational and functional. Article 8 of the Emergency Decree introduces two new paragraphs to Article 28 of Legislative Decree No. 199/2021. Specifically, the new paragraph 2-bis stipulates that, through a dedicated decree, the Ministry of Environment and Energy Security (“MASE”) will establish criteria and conditions for the GSE to assume the role of guarantor of last resort in PPA contracts, in line with a broader system of guarantees to be defined by the same decree through the identification of requirements and obligations for the contracting parties.

This initiative is part of the broader efforts under the Repower EU chapter of the PNRR to adopt primary and secondary legislation by 2024, aimed at increasing market operators’ confidence in negotiating PPAs, reducing perceived risks associated with PPAs, encouraging broader participation in the market, and stabilizing the market and prices related to long-term energy purchase agreements.

The Functions of the GSE as Guarantor of Last Resort

The new legislation provides that the GSE will step in for the defaulting party (producer or buyer) in a PPA to guarantee the fulfillment of the obligations undertaken by that party towards the non-defaulting counterparty.

It is worth noting that the new system appears to be limited in its scope to only PPAs concluded through the GME Platform. Supporting this are: (i) the reference in the opening lines of paragraph 2-bis of Article 28 of Legislative Decree No. 199/2021, which mentions the goal of the new guarantee system, namely, “the development of long-term contracts through the GME Platform referred to in paragraph 2, first sentence,” and (ii) the mention of the ministerial decree that will regulate the functioning of the GME Platform as the main implementing regulation of this new guarantee system.

Additionally, it should be clarified that the guarantee provided by the GSE, through stepping into the relevant contract, will only operate as a last resort. This means it will come into play only when the additional guarantees provided for in the ministerial decree fail to offer adequate coverage to the non-defaulting party in the event of the other party’s breach. In this regard, the second paragraph of the new Article 28, paragraph 2-bis, of Legislative Decree No. 199/2021 provides for the support of a guarantee system integrated with the rules of the GME Platform and potentially similar in operation to the mechanisms provided for participation in the Electricity Market.

Finally, as of now, as previously mentioned, the GME Platform has not yet been activated. Therefore, at this stage, the new guarantee system is not applicable to any PPA.

Estimates of the Economic Impacts at the Macro Level and on Individual PPAs

According to the technical report attached to the Emergency Decree, the guarantee system is designed to cover the needs associated with a total capacity of 10 GW[3] of renewable energy by 2030, equivalent to 15.7 TWh/year, about one-twentieth of the national electricity consumption.

The estimated costs for GSE (the energy services operator) are approximately €45 million per year for a five-year period, for a total of €224 million. These costs will be primarily covered by revenues from ETS auctions[4] and, to a limited extent, by system charges. Furthermore, as suggested by the technical report, the future guarantee mechanism, the subject of this contribution, could be less financially burdensome for GSE if the legislator were to provide for the availability of the energy subject to the PPA (Power Purchase Agreement) once GSE assumes the role of buyer rather than seller, eliminating the risk related to market fluctuations.

However, it is believed that the Italian legislator must carefully evaluate the feasibility and methods through which GSE can eventually obtain availability of the energy covered by the PPAs.

In this regard, less problematic seems to be the hypothesis of taking over the buyer’s contractual position, where it is assumed that, to obtain availability of the energy covered by the PPA:
(i) GSE could be appointed as the dispatching user concerning the plant covered by the relevant PPA, directly withdrawing the energy delivered to the plant’s POD (Point of Delivery) and thus obtaining its availability; or, in a less protective scheme for GSE,
(ii) the buyer could be required to transfer the energy produced and fed into the grid by the plant through the PCE (Energy Trading Platform) to GSE’s account, thereby making it available to GSE.

On the other hand, concerning the hypothesis of taking over the seller’s contractual position, it is hypothesized that: (i) GSE could be appointed as the dispatching user concerning the plant covered by the relevant PPA, directly withdrawing the energy delivered to the plant’s POD, thereby obtaining its availability, and then committing to transferring these volumes via the PCE to the buyer; or, in a less impactful scheme on the contractual structure,
(ii) GSE could take over the seller’s position only concerning the latter’s creditor position, giving up, however, the availability of the energy. In any case, the risk to which GSE would be exposed in this context is that the producer neglects the maintenance and management of the plant.

In any event, the possible availability of energy, combined with operational efficiency criteria, would contribute to minimizing the overall economic impact on the system, reducing price risk. Finally, the technical report attached to the Emergency Decree emphasizes that the effectiveness of the mechanism depends on conditions such as market price stability and the application of contractual clauses that limit the risk for GSE, ensuring a potentially zero economic impact[5].

As for the negotiation of individual PPAs, it will be necessary to verify how the implementing ministerial decree will effectively implement the guarantee mechanism and under what conditions. For now, it can be anticipated that the guarantee mechanism in question will not eliminate the need to require the parties to provide guarantees to support the fulfillment of contractual obligations, as the GSE guarantee will operate “as a last resort,” and therefore, likely, only after all other contractually provided forms of guarantee have been exhausted. In this regard, it will also be interesting to understand what type of guarantees operators will need to provide to access the GME Platform.

Moreover, it is expected that the measure in question will in any event have an impact on the costs relating to the guarantees that the parties will have to provide in the context of a PPA and, therefore, indirectly, also on the price of the energy subject to the PPA itself, even though, in this calculation, it must be taken into account that the guarantee of last resort mechanism will be the subject of a specific consideration.

Finally, as a negative side effect of the purpose of such guarantee system aimed also at breaking down the barriers to entry into the PPA market, there is the possibility of the spread of practices characterized by a higher degree of “moral hazard” dictated by the existence of a guarantee system based, in the last resort, on the takeover of a third entity as contracting party.

[1] These first two paragraphs remained unchanged from the text of Legislative Decree 199/2021 as originally published in the Official Gazette.

[2] Please note that this is not the recent energy release mechanism introduced by Decree Law No. 181/2023.

[3]Including 7 GW of photovoltaic capacity and 3 GW of wind power capacity.

[4] See paragraph 2-ter of the new Article 28 of Legislative Decree No. 199/2021.

[5] It should be noted that the new regulation was adopted considering price scenarios between 65 and 115 Euro/MWh on spot markets and an average PPA contract price of 90 Euro/MWh.