Key Developments in the Photovoltaic Sector in Italy
The regulatory framework for solar photovoltaic plants in Italy is constantly evolving. Plant owners, asset managers and investors need to stay informed in order to adapt to developments in this sector and avoid adverse outcomes. The following highlights the key updates in this market in the last 12 months.
In 2015, solar photovoltaic (PV) systems in Italy generated 24,676 GWh of electricity, representing 9.1 per cent of Italy’s domestic electricity production and 7.8 per cent of the country’s overall consumption. Over half a million PV plants, with an aggregate production capacity of 17 GW, receive incentive payments in the form of feed-in tariffs (FiTs), totaling €6.6 billion per year.
Most of these PV plants were installed and started operations more than three years ago, but the regulatory framework is still constantly evolving. In 2015, the Gestore dei Servizi Energetici (GSE) carried out close to 3,000 investigations of PV plants, including over 2,000 site inspections. Around 10 per cent of the investigations resulted in negative findings, demands for the return of illegitimately received incentives, and reductions to future FiT payments. Plant owners, asset managers and investors need to stay informed in order to adapt to developments in this sector and avoid adverse outcomes. The following highlights the key updates in this market in the last 12 months.
Disputes Over Cuts to FiTs (Spalma-Incentivi)
On 23 June 2015, the Regional Administrative Tribunal in Rome (TAR Lazio) referred the question of the constitutional legitimacy of the spalma incentivi to the Italian Constitutional Court (please see our On The Subject from June 2015). The TAR confirmed the exclusive jurisdiction of the administrative courts and rejected the argument that the claims referred to a private contract and should therefore have been brought before a civil court. The TAR found that each of the three tariff options created an “immediate and direct” loss to the claimants and questioned the compatibility of the spalma incentivi provision with Articles 3 and 41 of the Italian Constitution (reasonableness of measures and protection of legitimate expectation) and with Article 77 of the Constitution (prerequisite to pass legislative provision as a Law Decree).
The referral to the Constitutional Court had the effect of suspending all similar appeals currently pending before the TAR or before the Head of the State until the Constitutional Court makes its ruling. The Constitutional Court has scheduled a first hearing for 6 December 2016. Nevertheless, in January 2016, the GSE started to upload on its web portal an “addendum” to each FiT agreement in order to adjust the existing contracts to the disputed spalma incentivi provisions. Many plant owners decided to challenge these amendments in court by filing new appeals or amending the previous ones. Others sent a formal statement of objection, while others remained passive, trusting that the GSE will not insist on the contract amendments should the Constitutional Court annul the spalma incentivi provisions.
In the meantime, indemnity claims have been filed against the Italian Government in respect to the spalma incentivi provisions, based on the alleged violation of the Energy Charter Treaty. Four claims are pending before the International Centre for Settlement of Investment Disputes and one before the Arbitration Institute of the Stockholm Chamber of Commerce (SCC).
In a similar proceeding brought against the Kingdom of Spain, an SCC tribunal, in an award rendered on 22 January 2016, dismissed the claims and ordered the claimants to bear the substantial costs of the proceeding, arguing that they could not have legitimately expected that the regulatory framework governing their investments would not change over the lifetime of the venture. On the other hand, on 20 April 2016, the Spanish Supreme Court ordered the Spanish Council of Ministers to reimburse a claimant the damages suffered as a consequence of the suspension of the pre-assignment of incentives to new PV plants enacted by Royal Decree 1/2012. According to the Spanish Supreme Court, this Royal Decree harmed the legitimate expectations of the investors that relied on the favourable legal framework established by a previous Royal Decree, i.e., 1578/2008.
GSE Guidelines for Modifications to PV Plants
On 9 July 2015, the GSE suspended the application of the Regole per il mantenimento degli incentivi in Conto Energia, which is a set of guidelines providing for the implementation and communication of modifications to PV plants receiving incentives under any of the five Conto Energia, basing the decisions on discussions ongoing with industry associations. All variations to PV plants therefore remain regulated by the previous rules, i.e., whichever is applicable of the Conto EnergiaI to V, until new guidelines are issued. Ten months later, the market is still waiting for the new guidelines, and it is likely that the GSE realised it does not have the power to issue the rules without legislative or regulatory basis.
Nevertheless, the GSE indicated to the largest Italian PV industry association, assoRinnovabili, that changes to any component that may impact on the awarding of the incentives must be notified to the GSE with a communication that includes a detailed technical report of the intervention. This update was not, however, included in an official GSE communication or publication and therefore has no legal relevance.
On 14 December 2015, the GSE published the Technical Guidelines for the Disposal of Incentivised Photovoltaic Modules, which states that owners of incentivised PV plants must appropriately handle the modules that are to be replaced or disposed, either themselves or by using an authorised third party.
The guidelines provide that the cost of the collection, transportation, disposal and recycling of PV modules shall be borne i) by the producer of the modules in cases of modules introduced onto the Italian market after 12 April 2014; or ii) by the owner of the PV plant in all other cases.
Starting from the 11th year of the incentivising period, the GSE will retain yearly a quota of the overall recycling fee equal to €10 per module from the incentives payable to PV plants. It will keep this fee in an interest-bearing deposit and return it only when it can be verified that the recycling was carried out correctly. In cases where the modules are replaced, once the GSE has verified the correct disposal of the modules, it will return the recycling fee for each replaced module and retain the recycling fee for each subsequent replacing module.
Reimbursement of FiT Payments From Conto EnergiaI Plant Owners
In January 2016, assoRinnovabili announced that it will coordinate legal actions against the GSE’s claw back of previously granted inflation index-based adjustments to the FiTs granted to first generation Conto EnergiaI plants.
The Ministerial Decree of 28 July 2005 (the original version of the Conto EnergiaI) provided for an annual inflation adjustment of the FiT. Ministerial Decree of 6 February 2006 removed this adjustment for inflation with retrospective effect, i.e., including for PV plants that had already qualified for the FiT under the original version of the Conto Energia I.
Based on a first decision of the Highest Administrative Court (Consiglio di Stato) in 2008, which annulled the Ministerial Decree of 6 February 2006, the GSE had continued to publish the inflation-adjusted FiT rates for early generation Conto Energia I plants year by year until 2012. In a parallel proceeding, however, the Consiglio di Stato decided not to follow its own 2008 decision and submitted the question to the Plenary Chamber which, in May 2012, overruled the 2008 decision and confirmed the legitimacy of the retrospective abolition of the inflation adjustment relating to early generation Conto Energia I plants. On 26 March 2013, the GSE stated that it would no longer adjust the Conto Energia I FiT rates to the inflation index but it did, however, continue to pay the increased rates that had already been generated by the previous inflation adjustments.
Only in 2015 did owners of early generation Conto Energia I PV plants start to receive letters from the GSE announcing that it will adjust the FiT downwards and claim reimbursement of, or set-off with, the excess payments it had made in past years (please see our Energy Business Law Blog of 1 April 2015).
Regulation (EU) No 1227/2011 on Wholesale Energy Market Integrity and Transparency (REMIT)
Since 6 April 2016, producers of electricity from renewable energy plants with a nominal capacity above 10 MW (this threshold is calculated as the nominal power of a single production unit, or as the sum of the nominal powers of more production units that are sold through one single contract) must register and comply with the reporting obligations set forth under the REMIT and the relevant EU Commission Implementing Regulation no. 1348/2014.
It is irrelevant whether the plants sell to the GSE (under the Ritiro Dedicato system) or to a private trader. The Italian Regulatory Authority for Electricity Gas and Water (AEEGSI) has invited the GSE and traders to take over the reporting obligations on behalf of the producers to avoid doubling-up on information and to place the reporting in the hands of a more professional entity. Accordingly, the GSE uploads the information over the Platform of Privileged Information made available by the Italian power exchange (the Gestore del Mercato Elettrico), in contrast with private power purchase agreements, in which this is agreed contractually.
The 2016 Stability Law (Law n. 208 of 2015, Article 1, paragraphs 21 to 23) has made changes to the rules governing the determination of the cadastral rent levied on certain productive assets, such as plants and factories. Specifically, the properties caught by these changes are the ones falling within cadastral groups D and E.
Cadastral rent is a parameter on which the calculation of the main property tax, the municipal tax on real estate property (the IMU) is based. The new rules, effective as of 1 January 2016, provide that equipment bolted to the ground (imbullonati), which includes machinery, devices, tools and other functional equipment necessary to the production process, must not be included in the determination of the cadastral rent of productive property.
The new rules aim to supersede a controversial interpretation of the pre-existing law that had caused significant increases in the IMU burdens for companies owning plants with imbullonati. For PV plants, this meant that the value of panels and inverters was fully taken into account in the determination of the cadastral rent, with negative financial consequences.
Following the enactment of the 2016 Stability Law, which did not make any express reference to PV plants, doubts immediately arose as to whether or not PV panels and inverters fell under the scope of the new rules. With circular no. 2/E, released on 1 February 2016, the Italian Revenue Agency has, however, clarified that, as a general rule, panels and inverters are not to be considered in the determination of the cadastral rent, with the only exception being panels that are structurally and architecturally integrated in the roof or on the surface of a building.
In late April 2016, the Revenue Agency, in a Q&A session with the specialised press and in a document addressed to its local offices, clarified that only the soil (or the underlying building) shall be taken into account for the calculation of the cadastral rent. Modules, inverters and mounting structures are therefore to be excluded from the cadastral rent, thereby causing a sharp decrease in the IMU burden for owners of PV plants.
In order to take advantage of the new rules starting from the IMU payments due in 2016, a new cadastral declaration (Docfa) must be submitted no later than 15 June 2016.
Tremonti Ambientale Tax Allowance
Article 6, paragraphs 13 to 19, of Law 23 December 2000 n. 388 (the Tremonti Ambientale), repealed in 2012, provided for a tax allowance for environmentally-friendly investments made by small and medium enterprises. To the extent that the cost of constructing a PV plant exceeded those of a comparable conventional power plant, that extra cost qualified as an environmental investment and could be deducted from the corporate income tax base.
The limits of the compatibility of this allowance with the FiT incentives under Conto Energia II were disputed for a long time, given that Article 9 of Conto Energia II excluded the grant of FiTs to any PV plants that benefited from public incentives exceeding 20 per cent of the investment cost. Only Conto Energia V clarified that the Tremonti Ambientale tax allowance qualified as a public incentive.
In June 2015, by means of an “informative note”, the Ministry of Economic Development provided further guidance on the computation of the “investment cost” to which the 20 per cent threshold referred.
In the meantime, there had been confusion over the means of recovery of the Tremonti Ambientale tax allowances which, either out of prudence or ignorance, had not been used when the investments had been made. In 2014, the territorial directorate of the Revenue Agency of Veneto, answering a formal request, ruled that recovery was possible through a mere “correction” of accounts as per Circular 31/E of 2013. Although unpublished, the ruling became soon known throughout the Italian PV community and, despite the doubtfulness of its legal reasoning, many took it as a point of reference to for the recovery of Tremonti Ambientale allowances.
In 2015, however, the same territorial directorate of the Revenue Agency of Veneto, in a different ruling that was not leaked to the market, stated exactly the opposite and excluded the means of recovery as per Circular 31/E, leaving as the only alternative a formal reimbursement request. Finally, in October 2015, the Revenue Agency, answering Parliamentary Interrogation n. 5-06655, confirmed that the only way to recover Tremonti Ambientale tax allowances is to submit a formal request for reimbursement.