The main new provisions (and critical issues) of the third draft of the Fer X Decree

With this note, we intend to summarize the main new provisions resulting from the latest draft of the so-called “Fer X Decree” circulated on May 31, 2024, compared to the previous one, as well as to comment on the main issues that remain unresolved or have arisen as a result of these new provisions[1].

To get an overall view of the structure and content of the Decree Fer X, please refer to our article published on 10 April 2024.

Power Quotas Allocated for Tenders

The power quotas allocated for each tender are not fixed but are determined by the MASE (with the technical support of Terna and GSE) based on, among others:

• - the demand curve;

• - the technology;

• - specific coefficients identified for each market zone;

• - the expected evolution of electrical demand;

• - the number of authorization processes initiated and completed;

• - the expected evolution of the transmission grid, and

• - the realization times, useful life, and costs of the various renewable energy technologies.

The demand curve is determined by interpolating five pairs of electricity quantity/price according to what is detailed in Annex 2 to the new draft decree.

Compared to other incentive mechanisms, the integration of market regulation is quite pronounced, but the reasons are clear: to avoid excessive burden on electricity tariffs considering the significant power that needs to be incentivized and to avoid aggravating grid instability while optimizing secure system management, considering the non-programmable nature of the energy volumes to be produced.

Overall, the incentivized quotas have been reduced for photovoltaic plants with a power higher than 1 MW (from 45 to 40 GW) and increased for photovoltaic plants that access directly through registration, i.e., those with power equal to or lower than 1 MW (from 5 to 10 GW).

Finally, among the photovoltaic plants incentivized under the new draft, those installed on water surfaces are now included.

Tariffs

The percentage reduction offer is no longer necessarily at least 2% but will be determined from time to time with each publication of the call for tenders.

For plants with a power higher than 1 MW, the tender base price now varies depending on particularly high or low-cost conditions. Specifically, the following have been introduced:

• the higher operating price and

• the lower operating price,

respectively equal to 95 Euro and 70 Euro for both wind and photovoltaic.

Specifically, the “higher operating price” is defined as the base auction price in the case of particularly high-cost conditions.

The “lower operating price”, on the other hand, is the base auction price in the case of particularly low-cost conditions.

Thus, the “awarding price” should be the operating price (higher, lower, or otherwise fixed within this range) reduced by the percentage discount offered and accepted in the tender. However, the draft decree, in defining the “awarding price,” seems to have not considered the introduction of the higher and lower operating prices, referring only to the higher one.

This misalignment between the awarding price and the higher/lower operating price is also replicated in the provisions regarding the execution of offers (Article 4, paragraph 3) and in determining the demand curve.

Relations with Long-term PPAs and the Dispatching Service Market

In the previous version of the draft decree, it was envisaged that the non-incentivized power quota could be subject to a long-term electricity supply contract (so-called Long-Term PPA). This provision was unnecessary since, regardless of the incentive, all the energy produced by the plant remains the ownership of the producer.

In the new draft decree, therefore, the reference to the non-incentivized energy quota has been removed, and as of today, even if the entire power of the plant is incentivized, the producer can freely enter into a long-term PPA to monetize all the energy produced by the plant.

Entering in a Long-Term PPA is still among the priority criteria.

However, many aspects related to the interaction between the Fer X CFD mechanism and the Long-Term PPA remain to be understood, including the fixed or necessarily indexed and variable nature of the consideration.

As for the obligation to participate in the Dispatching Service Market operated by Terna, this has been extended to all plants with a power higher than 1 MW, i.e., all those plants that will participate in the tenders.

In this context, it is provided that the payment of the awarding price by the GSE occurs based on producibility (rather than actual input) in cases of plants subject to production cuts resulting from orders issued by grid operators or dispatching orders issued by Terna on the Balancing Market (typically production limitation orders, i.e., grid input limitation) and/or on European balancing platforms. This leads to greater market integration of renewable energy plants and, at the same time, reduces the volume risk borne by these plants.

Currently, the relationship between the determination of the incentive tariff under Fer X and the consideration that will be set by the GSE, following the issuance of the relevant Ministerial Decree, for the so-called “second Energy Release” under Law Decree No. 181/2023 remains unresolved.

Specifically, it is noted that this latter mechanism is structured as follows:

• on the one hand, energy-intensive companies, in return for meeting certain commitments related to implementation, can purchase renewable energy and the related guarantees of origin in advance for a period of 3 (three) years through a two-way contract for difference at a price set by the GSE itself (“First Contract”) and in return for certain commitments by the energy-intensive companies (see below);

• on the other hand, and upon the commissioning of the plants (as defined below), energy-intensive companies enter into a contract for difference with the GSE for the return, over a period of 20 (twenty) years of the amount of electricity advanced (and the related guarantees of origin) during the period mentioned above (“Second Contract”).

To access the mechanism, energy-intensive companies must commit, at the time of the conclusion of the First Contract, to realize additional plants and thus new renewable energy generation capacity. Alternatively, energy-intensive companies can commit to purchasing the newly generated renewable energy from third parties through appropriate long-term supply contracts (i.e., Long Term Corporate PPA). In this second case, the energy-intensive company also commits on behalf of the third-party producers to the GSE for the future return of the advanced electricity.

It is not yet clear whether the outcomes of the Fer X tenders, and the related awarded tariffs will be considered in determining the consideration that the GSE will request for the purchase of electricity by energy-intensive companies under the mechanism of Law Decree No. 181/2023.

It should be noted, in any case, that the Fer X decree draft under review will not be the final one: indeed, the Director General of MASE, Mr. Noce, recently stated that the Ministry is incorporating ARERA’s indications aimed at making the tenders more competitive. In its opinion dated 6 June 2024, ARERA specifically suggested (i) to introduce a limit on the number of expressions of interest that can be filed with reference to each production plant (this should lead to the possibility of participating in no more than three tenders in the period 2024-2028); (ii) to discard (for a quota equal to a minimum capacity calculated in terms of the number of offers or percentage relative to the minimum contingent provided by the tender) the offers that are in the last useful positions even in case of offers lower than the minimum contingent.

On 11 June 2024, Mr. Noce finally stated that MASE aims to obtain “temporary” approval of the Fer X decree from the European Commission for a “transitional” period until 31 December 2025, in order to start the competitive procedures already by 2024. Consequently, once this “transitional” period is over, it will be necessary to proceed with a new approval of the incentive scheme for the subsequent period until 2028.

The content of this document is for information purposes only and is not and cannot be intended as legal advice on the topics dealt with. For further information please contact Piero Viganò and Ernesto Rossi Scarpa Gregorj. 
 

[1] www.advant-nctm.com/en/news/articles/the-new-draft-of-the-ministerial-decree-fer-x-relevant-changes-and-main-novelties.