Investing in-renewables

ADVISORY

Investing in renewables

Trends, opportunities, prospects

kpmg.com/it

© 2011 KPMG Advisory S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

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IndexIntroduction

The renewable energy market in Italy 6

- The energy market in Italy and the importance of renewable sources- National energy policy and legal framework

The players in the Italian market and their performance 24

- Frame of reference- Benchmarking the companies in the sector

Investing today in renewable energy: key points 44

- Expected changes to the regulations and the relative impacts on returns- Conclusions

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

Country Focus 75

- Internationalisation in renewables by Protos


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*:

•companiesspecialisedinthedevelopmentandintheoperationofrenewable source power plants, comprising start ups as well as large conventional source energy companies

•financialinvestors,inparticularthoseoperatingininfrastructurefunding,and which are therefore attracted to the sector

•industrialcompaniesfromnon-energysectors,whichseerenewablesources 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:

•whatistheindustrialbackgroundandtheregulatoryframeworkwithregard to the renewable sector in Italy?

•whatarethecompanies’returnsandthecrucialfactorsofsuccess?


Investing in renewables 5


•whatregulatorydevelopmentscanbeexpectedinthenearfutureandwhat will their impact be on the companies?

This study, which brings together and elaborates a vast array of referencematerial, attempts to provide an answer (at least in part) to these strategicmatters. The first chapter provides a basic overview of the characteristicsof 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 AttanasioAssociate 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:

•energyefficiency,intermsofreductionofenergyconsumptionperunitproduced,whichinthecaseof

Italy involves principally the Energy Service Company (the so-called Es.C.O.)

•theKyotoprotocol,whichcentresonthereductionofpollutionandconcernssomesectorsofindustry

(e.g. metalworks, conventional generation, etc.) and transport.

The above matters are therefore not dealt with herein.


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 1National energy balance per source: gross domestic energy consumption, Mtep and percentage of total

National energy balance 2000 Mtep

2000 percentage

... 2005 Mtep

... 2010 Mtep

2010 percentage

Petroleum 92.0 50% 85.3 72.2 39%

Natural gas 58.3 31% 71.2 68.1 36%

Solid fuels 12.9 7% 17.0 14.9 8%

Imported electric energy 9.8 5% 10.8 9.7 5%

Renewables* 12.9 7% 13.5 22.9 12%

Gross domestic energy consumption

185.9 100% 197.8 187.8 100%

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.

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Graph 1

Electric energy per source: percentage of total domestic production (2010)

77%

18%

Thermoelectric * Hydroelectric ** Nuclear

Wind Geothermoelectric Solar and others

66%

4%

22%

6%

2%

49%

15%

20%

14%

2%

55%

4%

Italy Germany

Spain EU-27

Renewables5%

Renewables8%

Renewables5%

Renewables16%

Production: 625 TWh Production: 296 TWh

Production: 306 TWh Production: 3,335 TWh

12%

1%

28%

3%

2%

* 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



Renewables represent 12% of the peak power in Italy

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

2005 2010 2005 2010 2005 2010 2005 2010No. Plants 720 871 1,624 158,893 898 1,002 3,242 160,766

Efficient power (GW) 63 76 4 13 17 17 84 106

Production (TWh) 248 222 14 28 35 49 297 299

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

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.



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

Renewables Hydroelectric> 1 MW

Traditional thermoelectric

Total

2005 2010

100%

+15.1%+7.2%

-2.2%

0.1%

40%

-10%

CAGR

Var.%

1435

248

297

2849

222

299

+1%

CAGR: compound annual growth rate


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 2008. In particular, generation from renewable plants has recorded

growth over the last five years (CAGR 2005-2010: + 15.1%), while generation

from conventional traditional sources saw an overall decrease (CAGR 2005-

2010: -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 2005-2010: +27%) and energy production, highlight a



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

25%

+5%

9%

+2%97%

+14%49,471%

+246%

255%

+29%

CAGR

Var.%

GeothermoelectricMini-hydroelectric Bioenergy Photovoltaic Wind

2005 2010

419711

1,195

7

1,639

523772

2,351

3,470

5,814

CAGR: compound annual growth rate


Graph 4

Evolution of the efficient power in photovoltaic: percentage variation compared to previous year

2005 2006 2007 2008 2009 20100%

200%

400%

600%

800%

1,000%

1,200%1,143%

397%

164% 204%


The development trend of the renewable sources depends essentially on two

factors:

• theprofitabilityoftheincentive,relativetothecostsoftherenewable

technology

The last five years have seen renewable production double compared with peak power which has more than tripled



• theneedtohavesuitablesites,whichlimitstheapplicabilityofwindand

mini-hydro power, compared with the absence of limits for photovoltaic.

In the present case:

• theincentiveslinkedtophotovoltaicandcontainedwithinthemechanism

of the Feed-In-Tariff have been important for the acceleration of the

development of power plants

•mini-hydroandgeothermoelectrichaverevealedverylowratesof

development of the efficient peak power, as a result of the saturation of the

suitable sites in our country.

Table 3

Gross efficient power2010

GW %Wind 5.8 45%

Photovoltaic 3.5 27%

Bioenergy 2.3 18%

Geothermoelectric 0.8 6%

Mini-hydro 0.5 4%

Total renewables 12.9 100%

Table 4

Gross production2010

TWh %Bioenergy 9.4 34%

Wind 9.1 32%

Geothermoelectric 5.4 19%

Mini-hydro 2.3 8%

Photovoltaic 1.9 7%

Total renewables 28.1 100%

Domestic electric power plants per type of renewable source


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.5,500–7,000hours/year

•bioenergy:approx.5,000–6,000hours/year

•wind:approx.1,800–2,200hours/year

•mini-hydro:approx.1,500–2,000hours/year

•photovoltaic:approx.1,100–1,400hours/year

compared with a thermoelectric plant, which can operate:

•peak-loadtechnology,e.g.opencycleturbogas:1,500–2,500hours/year

•mid-merittechnology,e.g.combinedcyclegasturbine(CCGT):3,000–5,000

hours/year

•base-loadtechnology,e.g.coal,nuclear:6,000–7,500hours/year.



Graph 5 Macro-regional distribution of gross electric production per type of renewable source: percentage contribution of each macro-region in GWh (2010)

13,616

GWh

1%

65%

6%

28%

7,463

GWh

25%1% 10%

64%

7,014

GWh

4% 1% 6%

77%12%

Total renewables Mini-hydro Wind

Total renewables:1st Southern Italy and Islands, 2nd Northern Italy, 3rd Central Italy

Mini-hydro:1st Northern Italy (high availability of water resources)

Wind:Almost exclusively in Southern Italy and Islands

Photovoltaic:1st Southern Italy and Islands with 775 GWh (large photovoltaic plants),2nd Northern Italy with 741 GWh (mostly residential use),3rd Central Italy with 390 GWh

Geothermoelectric:Exclusively in Central Italy

Bioenergy:1st Northern Italy (high availability of agro-forestry waste),2nd Southern Italy and Islands

Photovoltaic Geothermoelectric Bioenergy


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.



Table 5Gross 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 83 76 80 5,376 378 5,993 21.3%

Puglia 2 2,103 412 1,298 3,816 13.6%

Sicily 0.2 2,203 97 150 2,451 8.7%

Lombardy 313 190 1,903 2,405 8.6%

Campania 17 1,333 46 827 2,223 7.9%

Emilia Romagna 65 25 153 1,580 1,823 6.5%

Sardinia 1,036 74 570 1,680 6.0%

Calabria 14 953 46 583 1,597 5.7%

Piedmont 517 22 121 450 1,110 3.9%

Veneto 248 2 129 367 746 2.7%

Molise 29 532 13 138 712 2.5%

Trentino Alto Adige 452 2 92 138 684 2.4%

Basilicata 14 458 46 162 680 2.4%

Lazio 34 15 152 318 520 1.8%

Abruzzo 48 329 40 40 457 1.6%

Friuli Venezia Giulia 161 44 241 446 1.6%

Marche 132 104 85 321 1.1%

Liguria 45 35 11 114 204 0.7%

Umbria 32 2 54 92 180 0.6%

Valle d’Aosta 39 2 6 47 0.2%

Italy 2,245 9,126 1,906 5,376 9,440 28,093 100.0%


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.

Thankstoanadvantageousincentivescheme,renewableplants–inparticular

photovoltaicandwindpower–experiencedaboominthe5-yearperiod

2005-2010. 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.



(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 …’.

Italy is committed to achieving the 2020 goal of 17% of energy consumption through renewables

National energy policy and legal frameworkPolicies for energy and the environment

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 2020 17% 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:

• thedeadlineoftheendofJune2011fordefiningandquantifyingtheregional

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;

•guidelinesforthesimplification of the authorisation procedure for

renewable energy plants, which must then be applied in other legislative

measures (e.g. Interministerial Decree, 5 May 2011).




InlinewithDirective2009/28/CE,Italyiscommittedtoachieving,by2020,17% 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

Electricity

Heating

Transport

Imports from other States

Total

Transport (towards objective of 10%)

2008

RES consumption

(Mtep)

Final gross consumption

(Mtep)

RES/consumption

%

5.2 30.4 17.0%

3.2 58.5 5.5%

0.7 42.6 1.7%

- - -

9.1 131.6 6.9%

0.9 37.7 2.4%

2020

RES consumption

(Mtep)

Final gross consumption

(Mtep)

RES/consumption

%

8.5 32.2 26.4%

10.5 61.2 17.1%

2.5 39.6 6.4%

1.1 - -

22.6 133.0 17.0%

3.4 34.0 10.1%

Overall situation

Source: Ministry for Economic Development

In summary, the NPA RES aims to:•stabilisetotalfinalconsumptionofprimaryenergyat133Mtep,promotingenergyefficiencyinitiativesaimedatthereduction

of final consumption by about 8.7%, compared with primary energy consumption for 2020 forecast at 146.6 Mtep.

• increasefinalconsumptionofenergyfromrenewablesourcestoa levelof22.6Mtep,withanexpectedincreaseof148% compared with 2008 consumption (9.1 Mtep) to be distributed as follows:

8.5 Mtep electrical energy from renewable sources-10.5 Mtep heating from renewable sources-2.5 Mtep biofuel-1.1 Mtep imports from other European Union States.-

2020 objectives for final gross consumption of electrical energy

Hydroelectric

Geothermic

Photovoltaic

Wind

Bioenergy

Total

2020

Final gross consumption RES

(Mtep)

Proportion of RES of final gross

consumption %

3.6 11.2%

0.6 1.8%

1.0 3.0%

1.7 5.3%

1.6 5.0%

8.5 26.4%

Electricity

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).

RenewableenergyobjectivesinItaly:the‘17/20/20Package’

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 5.348 MWh.





National Plan of Action for Renewable Energy (NPA RES)

The document, in addition to identifying specific interventions and quantitative

objectivesineacharea(electricenergy,heating/coolingandtransport)andfor

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

2003 2004 2005 2006 2007 2008 2009 2010

V.d’AostaLiguria

PiedmontUmbria

MarcheCalabriaVeneto

Molise Sardinia*

Friuli V.G.E.Romagna

Puglia

TuscanyLazio*

Lombardy*

SicilyAbruzzo

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 1997.

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.



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:

•anintricateincentiveschemebasedonthetechnologyandtheplantsize

•acomplexandirksomeauthorisationprocedure,basedonplantsizeandon

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:

•marketregimes(basedonquantity),forexampleGreenCertificates

•administeredschemes(basedonprice),suchastheFeed-InTariffscheme

(FIT,forexample,theTariffaOmnicomprensiva–onetariffforenergyprice

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 7Incentives linked to the energy policy objective of generation of energy from renewable sources

Applicable to Means of incentive Operative Renewable source

of application Length of incentive Total profits for producer

Renewable energy producers

CIP 6 *

From 1992 to 1999; not applicable to new systems

All sources, including some ‘high-efficiency’ conventional sources

Up to 15 years the first 8 of which with additional incentive

Assimilable to a Feed-in Tariff (TariffaOmnicomprensiva)

Green Certificates

Since 1999; being replaced by mechanism of feed-in tariff + fixed quotas of peak power

All sources except photovoltaic

15 years for systems operative by 31/12/2012 Regulations still being defined for systems operative after 2012

Sale of electric energy at market prices + variable incentive (value set on the basis of market price of GC)

4th FIT From5/5/2011 Photovoltaic

20 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 or predetermined value (as the producer prefers) + fixed incentive

Feed-in Tariff (TariffaOmnicomprensiva)

From1/1/2008

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



Compatibility between the various incentive schemes


While a single source can choose between the various incentive schemes, different systems may not be accumulated:

• theFeed-InTariff(Conto Energia) is only available for photovoltaic and, therefore, does not allow access to the Feed-in Tariff

(Tariffa Omnicomprensiva) or to Green Certificates

• forallothersources,theFeed-inTariff(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 Plant size (N.B. 1,000 kW = 1 MW)Incentive system

Feed-in Tariff (Omnicomprensiva) Green Certificates Feed-In Tariff

(Conto Energia)

Photovoltaic

Photovoltaic > 1 kW

Integrated photovoltaic from 1 kW to 5,000 kW

Concentrated from 1 kW to 5,000 kW

Thermodynamic

Electricity from bioenergyUp to 1,000 kW * *Over 1,000 kW

Cogeneration from bioenergy

Up to 1,000 kW * *Over 1,000 kW

Wind

Upto200kW(micro/miniwind) * *Over 200 kW

Offshore

Hydroelectric Upto1,000kW(micro/minihydro) * *Over 1,000 kW

GeothermicUp to 1,000 kW * *Over 1,000 kW

Tidal and waveUp to 1,000 kW * *Over 1,000 kW

* 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




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

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

CIP 6 (only renewables)

Green Certificates

Feed in Tariff (Omnicomprensiva)

PhotovoltaicFeed-In Tariff (Conto Energia)

TotalOf which in A3

2008

Energy Cost

TWh Mill. Euro 7.8 948

10.5 615

0.2 36

0.2 110

18.7 1,7091,109

2009

Energy Cost


17.4 1,296

0.7 112

0.7 303

25.7 2,5211,872

2011 *

Energy Cost


24.0 2,100

1.5 270

10.0 3,500

40.7 6,3905,690

2010

Energy Cost


21.2 1,580

1.2 212

2.0 826

30.7 3,3982,758

Incentive regime

* 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:

• thecostsassociatedwithGreen Certificates in 2010 were more than double

those in 2008. The total cost of this incentive system should reach 2.1 billion

euros in 2011, an increase of 33% compared with 2010

•althoughtheabsolutevalueoftherelativeexpenseswaslessthanthat

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).




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:

•aninstalledpowerplant,inparticularforphotovoltaic,isnotfullyexploited

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

• thecostoftheincentiveschemesisrapidlyincreasingandislikelytobe

unsustainable in the medium term in a context of policies of reduced public

spending.




Fragmentation of administrative procedures at regional level leads to uncertainty and delays for authorisation; the Legislator is attempting to remedy the problem

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 Plants with an average of over 1 MWDelegated Region or Province

D.Lgs.387/2003ands.m.i.andD.Lgs.28/2011

Simplified Licensing Procedure (Italian PAS) (formerly DIA - Declaration of Commencement of Works)

Plants smaller than the set limits (in general up to 1 MW)

MunicipalityL.244/2007,D.MSE10/09/10andD.Lgs.28/2011

Small cogeneration (capacity less than 1 MW or 3 thermic MW)

MunicipalityL.99/2009,D.MSE10/09/10andD.Lgs.28/2011

Photovoltaic panels on existing buildings MunicipalityD.M.06/08/10,D.MSE10/09/10andD.Lgs.28/2011

Communication of building operation

Microgeneration (capacity less than 50 kW) MunicipalityL.99/2009,D.MSE10/09/10andD.Lgs.28/2011

Close-fitting/integratedphotovoltaicplantsandsingle aerogenerators h<1.5 metres

MunicipalityD.Lgs.115/2008,D.MSE10/09/10andD.Lgs.28/2011

Photovoltaic, biomass, hydroelectric, geothermic plants in existing structures (capacity less than 200 kW)

MunicipalityD.P.R.380/2001,D.MSE10/09/10andD.Lgs.28/2011

Source: National regulations, adapted by KPMG Advisory Research Department

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

nationallegislation.Forexample,Lawno.129/2010validatedtheauthorisation

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.

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.




In this regard, norms and provisions recently passed are highlighted below:

• theDecreeoftheMinistryforEconomicDevelopment,10September2010,

lay down guidelines for the authorisation of renewable energy plants

•LegislativeDecreeno.28/2011introducedinnovativechanges,withparticular

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

operatorsand/orforpotentialpurchasersoftheplants,inparticular:

• inthecontextofthecurrentSinglePermitprocedure,forplantsofover1

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.

• forplantssubjecttotheSimplifiedLicensingProcedure(maximumcapacity

1 MW) there are no clearly defined regulations for determining so-called




‘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.




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:

•presenceinthevaluechain

•origin.

Figure 1 Value chain in the renewable energy sector

Plant producers Planning,

commissioning and construction

Scouting and plant development

OperationSale of energy

Plant maintenance

Focus of the present study

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 -atinternationallevel(solarpower–FirstSolar,Sharp,MEMC,Suntechetc.;

bioenergy–Babcock,Ansaldo,FosterWheeler,Alstometc.),aswellas

smaller national companies, and local companies dealing with assembly

and installation of the plants;

24



•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);

•companiesdealingwithoperation, 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:

•theinvolvementofsomeenergycompaniesalsointheearlystagesof

development and realisation of the renewable energy plants, as well as in

the production of technologies (as with photovoltaic, for example Enel Green

Power)

•theintegrationduringlaterstagesofsomefittersandinstallers(inparticular

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.



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:

• traditionalenergycompanieswhichhavedevelopedspecificdepartmentsor

businesses specialised in renewable energy, with the aim of achieving correlated

and synergic diversification

• companiesfromnon-energyindustrialsectorswhichhavediversifiedintothe

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.

• startupcompanies,thatisindependentbusinesseslaunchedtodevelop

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:

• fortraditionalenergycompanies,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;

•diversificationwithinasector(atleastuntil2010),characterisedbyapositive

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, medium-

sized companies and small businesses focusing on a single source and on a small

number of plants within a limited geographical area.



A dynamic business involving a multitude of players. Not an easy model to categorise

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.

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’:

• forthesakeofouranalysis,thesamplecomprisesonlythemainnationalor

international players operating in the Italian renewable energy market

•giventhescopeofthisdocument,onlycompanyoperationswithinItalyhave

been taken into consideration; therefore, only operational and economic-

financial indicators concerning renewable energy operations in the Italian

market have been used

• renewableenergycompanieshereinarethoseoperatingwind,photovoltaic,

geothermicandbioenergy,i.e.biomass(liquidand/orsolid)plantsforthe

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

• forgroups/companiesnotspecialisingexclusivelyinrenewableenergy

(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-holdingsbetweendifferentgroupshavenotbeendeducted

• inordertocarryouttheanalysis,data(operativeandeconomic-financial)

and information available to the public on company web sites, financial

statements and press releases have been used.



The sample of companies selected for benchmarking comprises the following

categories.

Figure 2Categories of companies considered for benchmarking

CLUSTER 1Traditional energy companies with divisions/subsidiaries in renewable energy (8 companies, 1 of which listed)

CLUSTER 2Non-energy companies diversifying in the renewable business (9 companies, 4 of which listed)

CLUSTER 3Start ups (8 companies, 1 of which listed)

Figure 3Composition of the benchmarking sample – focus on Italy

Traditional energy companies with

divisions/subsidiaries in renewable energy

Non-energy companies diversifying in the

renewable businessStart ups

List

ed in

Ital

yN

ot

liste

d in

Ital

y

CLUSTER 1 CLUSTER 2 CLUSTER 3

Enel Green Power Alerion Clean Power

Falck Renewables

Kinexia

K.R. Energy

api Holding

ERG Renew

Marseglia Group

Moncada Energy Group

TRE Tozzi Renewable Energy

Alpiq

BKW

EDF Energies Nouvelles

Edison

E.ON Climate & Renewables

International Power - GDF Suez

Sorgenia

Asja Biz

FRI-EL Green Power

Fortore Energia

ICQ Holding

I.V.P.C. Italian Vento Power Corporation

Marcopolo Environmental Group

Veronagest

ErgyCapital

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 marketinJune2011followingcompletionofthepublicofferoftotalitarianvoluntarypurchasepromoted by the parent company ERG (listed on the Italian stock market).




With over 5,000 MW of peak power the sample represents 43% of the national renewable power plant

The three clusters in the selected sample, with approximately 5,400 MW of total operational peak power (as at 2010), represent 43% of the Italian power plant from renewable sources (24% Cluster 1; 9% Cluster 2; 10% Cluster 3).

Graph 6Representativity of the sample relative to the national power plant from renewable sources (2010)

47%28%

19%

6%

* excluding hydroelectric

Wind Photovoltaic

94%

20%

5%

0% 20% 40% 60% 80% 100%

69%

proportion % of the power plant sample out of the national total

43% of the energy production (Italy)

Power plant (MW)

SourceSourceWindPhotovoltaic

ItalySample

Total power plant from renewable sources (sample)

5,373 MW

Total power plant from renewable sources (Italy)

12,408 MW

Bioenergy Geothermic electric

Bioenergy

Total renewable sources 5,373 12,408729 772473 2,352183 3,470

3,988 5,814

Geothermic electric

Source: Terna data and company data adapted by KPMG Advisory Research Department

With regard to the individual sources, the sample is representative of almost the whole national geothermic electric power plant (approx. 700 MW), of 69% of wind power (approx. 4,000 MW) and of 20% of bioenergy (approx. 500 MW); in the case of photovoltaic, the intrinsic characteristics of

the technology, in particular the small average size (between 1 and 5 MW) of

the plants, and the ease of installation result in a relative fragmentation of the

sector and therefore in a reduced presence in the sample compared to the

national total.




Graph 7Level of concentration for the different types of renewable sources: first 5 companies in the sample for each source (2010, peak power in MW and market share of national power plant)

IP

EDF EN Alerion Moncada Marseglia Sorgenia Remainder of sample

Marseglia FRI-EL Asja Biz Marcopolo api Remainder of sample

EGP Edison ES E.ON C&R IVPC Remainder of sample

500

–

1,000

1,500

2,000

2,500

571

10% 9% 7% 5% 5% 33%

0.7%2.0% 0.5% 0.5% 0.4% 1.2%

8% 4% 2% 2% 1% 3%

532 382 296 283

1,924

MW

Total wind farm Italy5,814 MW

Market share: Total sample: 69%; top 5 companies: 36%

10

20

30

40

50

60

70

80 69

23 17 16 15

42

MW

50

100

150

200

250

192

83

53 51 30

65

MW

Total photovoltaic power plant Italy3,470 MW

Market share: Total sample: 5%; top 5 companies: 4.1%

Total bioenergy power plant Italy 2,352 MW

Market share: Total sample: 20%; top 5 companies: 17%

Cluster 1 Cluster 2 Cluster 3 Remainder of sample

• Enel Green Power has a monopoly in geothermic electricity; the group accounts for almost all power plants in Italy

• in wind power, 36% of the peak power in the country is accounted for by the top five players, four of which are traditional energy operators which have diversified into renewable energy sources (Cluster 1)

• bioenergy, a more recently developed sector, is more evenly spread with the top five companies accounting for 17% of the national power plant

• photovoltaic is, on the other hand, somewhat fragmented, with the first five companies accounting for a mere 4% of the peak power, thanks to the reduced capital expenditure (CAPEX) for plant development.



High fragmentation in photovoltaic versus concentration in wind power

In 2010 the power plants managed by the companies in the sample generated

around 8,700 GWh, i.e. over 30% of the electric energy produced at national

level.

In terms of average efficiency of the plants, measured using the load factor, i.e. hours of operation that the technology is capable of generating per unit of

peak power (1 MW), the companies in each Cluster give homogeneous results

compared to all plants at national level, confirming the representativeness of

the selected sample.

Graph 8 Load factor for each source (2010, hours of operation per year)

Wind power Photovoltaic Geothermic electric Bioenergy

Sample Italy

8,000

hours/year

7,000

6,000

5,000

4,000

1,515 1,570

855 549

6,898 6,964

4,0144,373

2,000

3,000

1,000

0


On the basis of the evidence above, the operative data and the economics of the sample, analysed below, are a valid representation of the average trend of the renewable energy sector in Italy.



(1)

(2)

(3)

(4)

Main strategic-operative evidence of benchmarking the companies in the sector

Table 10Cluster 1 companies: traditional energy operators with divisions/subsidiaries in renewable energy

Company

Renewable energy company in Italy

Year of launch of

renewable energy activity

Company within group dealing exclusively in renewable energy

Nationality of parent company

Geographical location of plants belonging to group

Power plant in Italy

Total peak power (MW) in

2010

Source (in order of power)

Enel Green Power

Enel Green Power SpA (EGP)

2008 IT Italy,Europe,North, Central and South America

2,776(of which hydro

1,509)

International Power - GDF Suez

International Power Plc (IP)

n.d. UK Europe, Italy 571

Edison Edison Energie Speciali SpA (Edison ES)

2008 IT Italy 382

E.ON Climate & Renewables

E.ON Climate & Renewables Italia Srl(E.ON C&R)

2008 D Europe,North America,Italy

298

EDF Energies Nouvelles

EDF EN Italia SpA (EDF EN)

2002 FR Europe,North America,Italy

245

Alpiq Alpiq Holding AG (Alpiq)

2009 CH Europe, Italy 243(of which hydro

165)

Sorgenia Sorgenia SpA (Sorgenia)

2007 IT Italy, France 128 (of which hydro

32)

BKW BKW Italia SpA (BKW)

2006 CH Switzerland,Germany,Italy

93(of which hydro

43)

Geothermic electric Hydroelectric Photovoltaic Wind Biomass Biogas

(1) The Enel Group was operative in the renewable energy sector before 2000 with Enel Produzione and other specialist companies; in 2008 it proceeded with the establishment of Enel Green Power

(2) The Edison Group, through other subsidiaries (in particular Edipower, of which it owns 50%) is also operative in hydroelectric power, photovoltaic and bioenergy

(3) Until the end of 2010, Alpiq was operative in the renewable energy sector through subsidiaries of Alpiq Italia Srl

(4) In addition to the power plants recorded here, Sorgenia is currently also developing biomass plants. In July2011SorgeniaGreenwasestablished,anewcompanyintheGroupdedicatedentirelytorenewableenergy.


The companies concerned:

•beganoperatingonaverageinthesecondhalfofthedecade2000–2010

•havearangeoftechnologiesinthefieldofrenewableenergy

•havemademajorinvestments,withanaveragepeakpowerofover200MW

•areoftenconnectedtothemajorinternationalenergycompanieswhohave

invested in Italy.



Table 11 Cluster 2 companies: non-energy companies, diversifying in renewable energy

Company


Year of launch of






Total peak power (MW) in 2010


ERG Renew ERG Renew SpA (ERG Ren)

2008 IT Italy, France 246

Alerion Clean Power

Alerion Clean Power SpA (Alerion)

2004 IT Italy 225

Marseglia Group Ital Green Energy Holding Srl (Marseglia)

2000 IT Italy 209

Falck Renewables

Falck Renewables SpA (Falck Ren)

2010 IT Italy, Spain,France,UK

150

api Holding api nòva energia Srl and CER Srl (api)

2006 IT Italy 134

TRE Tozzi Renewable Energy

TRE & Partners SpA (Tozzi)

2009 IT Italy 107(of which hydro 21)

Moncada Energy Group

M&A Rinnovabili Srl (Moncada)

2008 IT Italy 105

K.R. Energy K.R. Energy SpA (KRE)

2008 IT Italy 13

Kinexia Kinexia SpA (Kinexia)

2008 IT Italy 6


(1) In 2011, the parent company ERG acquired from IVPC wind power plants totalling 112 MW; ERG Renew is also developing photovoltaic plants

(2) Falck Renewables also deal in waste to energy and waste treatment(3) Tre & Partners is 55% owned by TRE Tozzi Renewable Energy and 45% owned by Axa Private Equity;

the TRE Tozzi Renewable Energy Group also deals in photovoltaic and biomass(4) M&A Rinnovabili is 70% owned by Moncada Energy Group and 30% owned by Alpiq; it is also

developing geothermic plants(5) K.R. Energy also provides engineering services(6) Kinexia deals in the sale of thermic energy, generation plant management, cogeneration and teleheating

networks.



•onaveragebecameoperationallaterthanthoseinCluster1

•unlikethoseinCluster1,areallItalianandinonlytwocaseshave

undertaken a process of internationalisation, confirmation that the sector is

infrastructural, i.e. dependent on local knowledge, except for when dealing

on a very large scale

• likethoseinCluster1,haveanimpressiveportfolioofinstallations,albeitnot

quite as big, and featuring a wide variety of technologies.

(1)

(2)

(3)

(4)

(5)

(6)



(1)

(2)

(3)

(4)

(5)

(6)

Table 12 Cluster 3 companies: start ups

Company


Year of launch of






Total peak power (MW) in

2010


FRI-EL Green Power

FRI-EL Green Power SpA (FRI-EL)

2002 IT Italy 307

I.V.P.C. Italian Vento Power Corporation

I.V.P.C. Italian Vento Power Corporation Srl (IVPC)

1993 IT Italy 283

Veronagest Veronagest SpA (Veronagest)

2008 IT Italy 225

Fortore Energia Holding Fortore Energia SpA (Fortore)

2005 IT Italy 123

Asja Biz Asja Ambiente Italia Spa (Asja Biz)

1995 IT Italy,South America,Asia

108

ICQ Holding ICQ Holding SpA (ICQ)

1982 IT Italy 107(of which hydro

6)

Marcopolo Environmental Group

Marcopolo Engineering SpA (Marcopolo)

2004 IT Italy, Portugal 53

ErgyCapital ErgyCapital SpA (Ergy)

2007 IT Italy 15


(1) In 2011 IVPC yielded 112 MW of wind power plants to ERG (2) Veronagest is also developing photovoltaic plants (3) Holding Fortore Energia is also developing biomass plants(4) ICQ Holding is 21% owned by Fondo Ambienta(5) Marcopolo Engineering is 66% owned by Colombo Ambiente and 30% owned by Amber Capital; it is

also developing biomass and photovoltaic plants(6) Ergy Capital is also developing biogas plants.



• likethoseinCluster2,haveundertakenaprocessofinternationalisation,

confirmation that the sector is infrastructural, i.e. dependent on local

knowledge, except for when dealing on a very large scale

•unlikethoseinCluster2,therearethreecasesinthesamplewithpower

plants equivalent to that of the Cluster 1 companies, proof that as their equity

and sharing resources are less than those of the players in Cluster 2, the

‘specialisation’ factor becomes fundamental.



The sample’s power plants are mainly wind power (74% of the total plants installed)

Table 13Concentration of technologies for each company in the sample (2010, peak power in MW and proportion % of the company’s total power plants)

Company Total power plants Percentage of total accounted for by each source

MW Wind Photovoltaic Geothermic electric Bioenergy

EGP 1,267 42% 0.5% 57.5%

IP 571 100%

Edison ES 382 100%

E.ON C&R 298 99.5% 0.5%

EDF EN 245 72% 28%

Sorgenia 96 84% 16%

Alpiq 78 97% 3%

BKW 50 92% 8%

Total Cluster 1 2,985 72% 3% 24% 0.1%

ERG Ren 246 100%

Alerion 225 88% 10% 2%

Marseglia 209 8% 92%

Falck Ren 150 88% 2% 10%

api 134 72% 6% 22%

Moncada 105 75% 16% 9%

Tozzi 86 100%

KRE 13 46% 54%

Kinexia 6 100%

Total Cluster 2 1,172 71% 6% 23%

FRI-EL 307 73% 27%

IVPC 283 100%

Veronagest 225 100%

Fortore 123 99% 0.81%

Asja Biz 108 51.5% 0.05% 48.5%

ICQ 101 81% 19%

Marcopolo 53 5% 95%

Ergy 15 100%

Total Cluster 3 1,215 82% 1% 17%

Total sample 5,373 74% 3% 14% 9% Source: company data adapted by KPMG Advisory Research Department

Analysis of the technologies in the plant portfolios of the three Clusters shows that:

•windpoweraccountsfor74%oftheinstallationsand,albeitinvarying

proportions, is the main source in all three Clusters

• formsofbioenergy

did not interest the large companies in Cluster 1, probably due to the -

fact that they do not fully conform to the definition of ‘renewable’ (CO2

emissions parity rather than reduction) and because a specialised fuel

industry is required to maintain supplies

are significant for Clusters 2 and 3, thanks to those companies specialising -

in (Ital Green Energy of the Marseglia Group and Marcopolo Engineering) or

looking towards the development of biomass or biogas production plants



Plants are located above all in Southern Italy

•photovoltaic,consideringthelimiteddimensionsoftheplants(between1

and 5 MW), accounts for a limited proportion in absolute terms compared

with the other technologies (total power plants between 15 and 60 MW).

Geographical location is in line with the prevalence of the technologies in the

sample:

• for Cluster 1, geothermic is located mainly in the Tuscany Region

• foralltheClusters,itisclearthatwindpowerislocatedmainlyinSouthern

Italy and the Islands.

Graph 9Macro-regional distribution of the sample’s power plants (2010, MW and percentage of total company power plants for each Cluster)

Southern Italy and Islands 66%

Central Italy 33%

Northern Italy 1%

Total power plants Cluster 12,308 MW

Southern Italy and Islands94%

Central Italy 5.6%

Northern Italy0.4%


Southern Italy and Islands94%

Central Italy1%

Northern Italy 5%



Summary of the main strategic and operational evidence of benchmarking

The results emerging from the analysis of the three Clusters are summarised

in the graph below, in which the companies in the sample are represented in

terms of two variables:

• degree of geographical diversification of RES activity of the companies

(and/orofthereferencegroupstowhichtheybelong)inordertoevaluatethe

size of the markets reached: ranging from a low level of diversification in the

case of national markets, to international or global coverage

•degree of diversification in terms of renewable source (hydroelectric,

wind power, photovoltaic, bioenergy, geothermic) developed by each player

in the Italian market alone: measured by the presence of each source

compared to all the power plants run by the company.



Unlike diversification by source, achieved by almost all the companies, the thrust towards internationalisation is the prerogative of the main players

Graph 10Groupings in the renewable energy sector: location of markets/sources (2010)

Geo

grap

hica

l div

ersi

ficat

ion

Diversification by source LOW

Cluster 1 Cluster 2 Cluster 3

HIGH

ITALY ONLY

EUROPE

WORLD

>50.0% 0.0%÷ 24.9%>25.0% ÷ 49.9%

Circle area: MW operational in Italy (2010)

IP

EdisonES

E.ON

C& REDFEN

Sorgenia

AlpiqBKW

Ren

Alerion

Marseglia

Falck Ren

api

Moncada Tozzi

KREKinexia FRI-EL

IVPC

Fortore

Asja Biz

ICQ

Marcopolo

Ergy

Veronagest

EGP

ERGRen

Source: company data adapted by KPMG Advisory Research Department

The graph above illustrates the following two points:

• internationalizationcanbeachievedbylargegroupswithabackground

in the traditional energy sector; in addition to capital requirements

(theoretically similar for the markets of Central-Northern Europe, in terms

of absolute quantity required for the plant and the possibility of access

to credit locally), the existence of suitable organisational structures and

technical and managerial know-how are essential for managing the different

locations which, in the energy sector, both conventional and renewable, are

characterised by very different industries and regulations for each country

•whilethereistechnologydiversification,whatisstrikingisthatalarge

number of companies in the sample specialise in just one technology, which

in most cases accounts for more than 50% of their total power plant in terms

of MW.



Economies of scale have a positive impact on the profitability of the companies in the sector

Economic performance

The only recent arrival of renewable energy in Italy and the irksome task of

separating production of electric energy from alternative sources from any

other company activities, mean that it is complicated and not very relevant

to carry out a historical analysis of the financial data of the companies in the

sample. However, some sector characteristics may be identified by examining

the information available for 2010.

In particular, the graph below, which compares the turnover to the percentage

of Ebitda (or Gross Operating Margin) in the turnover, shows that the sample

has on average very positive correlation between the variables, i.e. for each

unit of additional turnover, profitability increases more than proportionally,

showing that there are important economies of scope and scale with reference

to the operating costs.

It should be stressed that for the companies in the sector:

• turnoverincludesbothprofitsfromthesaleofelectricenergyandthe

incentive

• theoperatingcostsbeforeEbitdaareforplantpersonnel,maintenance,

royalties paid to the Municipalities where the plants are located and charges

paid to the landowners.

Graph 11Relationship between profitability (Ebitda margin %) and turnover (2010)

Edison ES

EGPERG Ren

SorgeniaFRI-EL

Moncada

Alerion

KRE Tozzi

Kinexia

Asja Biz

api

Marcopolo

ICQ

Veronagest

10%

20%

30%

40%

50%

60%

70%

80%

90%

0 20 40 60 80 100 120 140 160 180 200 1,1001,000...

Turnover (million euros)

Cluster 1 Cluster 3Cluster 2

Ebitda margin %




With reference to the comparison between turnover and the margin of the

Ebit (or Operating Profit Margin), the above-described correlation is inverted, in

that for each additional unit of turnover the increase in profitability is less than

proportional. This phenomenon may be read in the light of the nature of the

expenses after Ebitda and before Ebit, comprising basically the depreciation

and any write-downs of the fixed assets. The trend revealed in the graph

highlights however both the positive impact on the profitability resulting from

economies of scale on the investments, and values of profitability which are

very positive, close to or higher than 20%.

Graph 12 Relationship between profitability (Ebit margin %) and turnover (2010)

Edison ESERG Ren

SorgeniaFRI-EL

EGP

api

Kinexia

Veronagest

Tozzi

Asja Biz

Moncada

Alerion

Marcopolo

50%

40%

20%

30%

10%

0%

-20%

-10%

-40%

-30%

20 40 60 80 100 160 1,000... 1,100140120

Ebit margin %




Also in terms of net profit most of the companies in the sample show very

positive results; the negative results shown in the graph below are often due to

financial expenses attributable to investments made.



Company investments are backed by loans, mainly from the banks, in a sector which is similar to the infrastructure sector (frequently resorting to project financing)

Graph 13 Relationship between profitability (net profit margin %) and turnover (2010)

Edison ESTozzi

Veronagest

FRI-EL EGP

Moncada

Alerion

Marcopolo

api

Kinexia

Asja Biz

...

- 45%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

20 40 60 80 100 120 140 160 1,000... 1,100

Net profit margin %




Financial data are available for a limited number of companies in the sample.

In general terms, with regard to the financial resources of the companies in

the sample it may be observed that:

•Cluster1companiesallbelongtolistedgroups;inthisCluster,EnelGreen

Power is the only company listed in Italy

•Cluster2and3companies,i.e.non-energycompanieswhichhavediversified

into the renewable energy business and start ups, typically have a financial

structure characterised by project financing (project financing non-recourse,

i.e. debt concentrated in the project’s special purpose vehicle, with no

guarantee from the shareholder); in terms of equity, development is often

achieved by opening up capital to third parties:

through listing on the Italian Stock Exchange (Alerion Clean Power, Falck -

Renewables, Kinexia, K.R. Energy, ErgyCapital)

resorting to financial investors, represented mainly by specialist funds -

(such as the Ambienta fund, present in more than 20% of the capital of

ICQ Holding) or by private equity funds, such as Amber Capital (which

holds 30% of Marcopolo) and Axa Private Equity Infrastructure Fund (45%

in TRE & Partners)



and yielding capital shares to other companies in the sector (30% of M&A -

Renewables of the Moncada group held by Alpiq).

The limited financial strength in equity is one of the factors that often

encourages such players to come to specific arrangements with other

investors or with other companies in the industry in order to spread the

investmentout–risksharing–forexample:

• jointventuresbetweenFRI-ELGreenPowerandEDFEnergiesNouvelles

(2001) for the development, realisation and management of wind power

plants and with RWE Innogy (2008) for the realisation of wind power and

solid biomass projects

• thephotovoltaicpartnershiplaunchedbyErgyCapitalthroughthejoint

venture between Ergyca Tracker and Beghelli Servizi.

An analysis of the financial structure of some of the companies in the sample

confirms these characteristics.

Graph 14 Level of debt (2010)

Edison ES

Veronagest

EGP

MoncadaFRI-EL

Asja Biz

Alerion

Marcopolo

Tozzi

0

100

200

2,000

300

400

500

600

...

0 100 200 300 400 500 600 700 8,000... 8,300

Net financial position (million euros)

Net invested capital (million euros)



The level of debt, represented by the relationship between the net financial

position and the net invested capital, of the companies in Clusters 2 and 3,

on average 0.7, reveals a high level of borrowing, above all from the banks, to

support business investments, typical of this sector. In the case of Cluster 1,

note that the financial structure of Enel Green Power has a very low level of

debt (0.2), thanks to the support of the parent company.



Main economic evidence of benchmarking: size counts

The sample companies’ accounts for 2010 show that performance in terms of

economic marginality is proportional to company size, highlighting economies

of scale and scope in the sector, in terms of both operational structures and

investment burdens.

In absolute terms the sector reveals very positive Ebit marginalities on the

turnover, with an average of over 20% for the sample.

In terms of investment funding, it is similar to the infrastructure sector, i.e.:

•extensiveuseofprojectfinancingnon-recoursestructures,withahigh

degree of leverage (70% on average for the sample), at least until the end of

2010

•strengtheningofownresourcesthroughstrategicactionssuchasstock

exchange listing and entrance into the capital, with minority interests, of

funds or of other companies from the traditional energy sector

•useofstrategicpartnershipswithothercompaniesinthisandothersectors,

for targeted investment initiatives; on the other hand, there are no cases of

entrance into the capital of other companies in the renewable energy sector.

However, the analysis results must be reconsidered in the light of the recent (photovoltaic – September 2011) or future (wind and biomass – end of the current year 2012) regulatory changes, aimed at significantly reducing the incentives, which will influence:

• theexpectedprofitabilityofnewinvestments

• thelevelsofleverageachievableontheinvestments,certainlylowerthan

in the recent past, and the structure of the investments themselves, with

the possibility of passing from project financing non-recourse (increasingly

complicated given the demands placed by the banks) to funding through

leasing, which means that financial structures need strengthening.

The next chapter therefore seeks to define the likely regulatory changes and the relative impacts on the companies.



© 2011 KPMG Advisory S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.© 2011 KPMG Advisory S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.



Investing today in renewable energy: key points

by Gianpaolo Attanasio, Associate Partner KPMG Advisory

Expected changes to the regulations and the relative impacts on returnsReturns under the 2010 regulations

On the basis of the current regulations concerning incentive schemes, and

disregarding the effects of ongoing changes, the returns of the companies in

the renewable energy sector are shown below (as an example).

Table 14Average indicators forming a typical business plan for wind power and photovoltaic (2010)

Current industrial reference criteria Wind power PhotovoltaicPower (MW) 36 5

Price of energy (€/MWh) ~ 65 ~ 78 (1)

Incentive (€/MWh) 85 346 (2)

Production capacity (hours) 1,850 1,400 (3)

CAPEX ALL-IN (‘000€/MW) 1,800 3,800

Royalty (% of total revenue) 3 3

ICI(*) (‰ of asset value) 4 4

OPEX (‘000€/MW) ~ 50 ~ 100

Leverage (%) 75 80

Repayment period (incentive period less than 2 years)

13 18

Fixed rate debt capital (%) 5.5 5.5 (*) ICI: Italian - Imposta comunale sugli immobili (local property tax)(1) The price differential is explained by analysing the production time frames of the two different

technologies during the day; wind power works well as the ‘base load’ while photovoltaic has production peaks when the market price of electric energy is higher

(2) Incentive for ground plants of over 1 MWp(3) The photovoltaic operative hours refer to a plant located in Southern Italy (average value) Source: adapted by KPMG Advisory

44



Revision of incentives for photovoltaic encourages development of roof plants

The table below illustrates the returns relative to the industrial economics of

the above plants.

Table 15Simulation of current yields for wind power and photovoltaic, average values (2010)

Wind power PhotovoltaicIncentive Green Certificates

(15 years duration)Feed-in premium

(20 years duration)

DSCR (1) average >1.3 x >1.2 x

Equity IRR (2) (%) >11% >10%

(1) Debt Service Cover Ratio: represents the relationship between total cash flow and debt cash flow(2) Internal Rate of Return: compound annual rate of return generated by capital invested by shareholder

Source: adapted by KPMG Advisory

Regulatory changes with regard to incentives – photovoltaic

Given the steady rise in total costs to the Country System of renewable energy

incentive schemes, the Legislator proceeded, last May, to revise the Feed-In

Tariff for photovoltaic, with a reduction of the incentives as well as limits on

the installable capacity. The 4th Feed-In Tariff (FIT) scheme (see the relevant

sectioninthepreviouschapter)complieswithLegislativeDecreeno.28/2011,

which establishes, among other things, that an incentive for the production of

renewable energy must guarantee equitable remuneration for the investment

costs and the plant operating costs.

The 4th feed-in tariff scheme reduces the incentive tariffs originally established

in the 3rd FIT; the Legislator’s intention is that this will lead to an alignment

between the level of support and the generation costs of photovoltaic.

Furthermore, the 4th FIT, by varying the tariffs depending on the size and the

location of the plant (on the ground or on a building), aims to promote the

development of small plants located on buildings rather than large plants on the

ground, typically on agricultural land.



The new incentive scheme includes:

•atransitoryperiod,forplantsduetobecomeoperativebetween1June2011

and 31 December 2012, during which feed-in premium tariffs will be applied

and a cost cap applied to large photovoltaic plants (580 million euros for the

entire transitory period).

During this period incentives for large plants will be regulated through a large

plant register;

•afullyoperativeperiod(plantsduetobecomeoperativebetween2013and

2016) during which feed-in tariffs will be applied with no limit to the cost of

the incentives, but with automatic tariff-reduction mechanisms should costs

exceed the thresholds set by the Decree for the various periods in which the

4th feed-in tariff scheme is divided.

During this period all plants are subject to a minimum reduction of the tariffs

every six months, with reductions increasing over time, until in 2016 there is

an expected reduction of 30% from one six-month period to the next.

The main reasons for the regulatory changes to photovoltaic are summarised in

the figure below.

Figure 4 Main principles behind the revision of the feed-in tariff scheme for photovoltaic (4th FIT)

STABILISE INCENTIVES OVER TIME, ON THE BASIS

OF THE YEAR OF ENTRY

Producer can be certain that the incentive value acquired, depending on the year of commencement, is stable throughout the incentive period

BRING INCENTIVE IN LINE WITH FALLING COSTS

OF TECHNOLOGY

GUARANTEE AND LIMIT THE FINANCIAL BURDEN OF INCENTIVES ON COUNTRY SYSTEM

Fixed cost of incentive for 20 years linked to limits on installation capacity/production/incentive tariff with clearly defined incentive costs (e.g. €280 mill. for 2012, €440 mill. for 2013, etc.)

PROMOTE GENERATION THROUGH INCREASING

NUMBER OF SMALL PLANTS

Promote small plants, for more widespread generation, rather than large plants (~5 MW); e.g. tariff for small plants (~1 MW or less) 1/3 larger than for large plants)

Average annual reduction of 30-40% of the incentive, in line with the expected reduction of CAPEX and operating costs, due to economies of scale following more widespread adoption of photovoltaic technology

Pri

nci

ple

s o

f 4t

h F

eed

-In

tar

iff

sch

eme

(FIT

) (p

ho

tovo

ltai

c)

Source: KPMG Advisory



The new structure of the Green Certificates (GC) includes, depending on plant size, premium feed-in tariffs and a bidding system

New plants operational before the end of 2012

Regulatory changes to incentives – wind power and biomass

In like measure, the Legislator is proceeding with a revision of the Green

Certificates system, reducing the incentive and limiting the installable power; in

the light of the incentives introduced for photovoltaic, similar changes may be

expected, to be issued by the end of 2012.

Todate,LegislativeDecreeno.28/2011determinesthatthecurrentincentive

system will cease to be valid when the transitory period ends at the end of

2015 (see the relevant section in the previous chapter). The general principles

on which the revision of the Green Certificates is based are that the incentive

must aim to provide remuneration equal to the costs of investment and

operation.

The regulation guidelines contained in the Decree define, on the basis of the

‘starting date of plant operation’ and ‘peak capacity’, an incentive system

staggered over time as shown below.

Figure 5 Evolution of the Green Certificate system as defined by Legislative Decree no. 28/2011

2011 2012 2013 2014 2015 2016 2017 ...

n.a.

TRANSITORY PERIOD OPERATIVE PERIOD

An annual reference price for withdrawal of Green Certificates to be applied by GSE for withdrawal of all the available supply

DIMENSIONS (date of entry into operation/peak capacity)

PLANTS OPERATIONAL OR ENTERING INTO OPERATION BEFORE 31/12/12

NEW PLANTS after 31/12/2012

Capacity under 5 MW

Capacity over 5 MW

Establishment of a constant system of premium feed-in tariffs for the entire lifespan of the plant

Establishment of a bidding incentive mechanism through ‘cap’ and ‘floor’ price

Migration of the Green Certificates system towards a constant premium feed-in tariff for the entire lifespan of the plant

Source: adapted from Legislative Decree no. 28/2011 by KPMG Advisory

On the basis of the new rules, plants becoming operational before the end of 2012 may benefit from the current incentive scheme. For these plants there

is a transitory period from 2012 to 2015 during which:

• theshareofenergyfromtraditionalsourcesthatproducersmustinputinto

the grid will decrease linearly during the three-year period 2013-2015, until it

is extinguished

• thepriceofwithdrawaloftheunsoldGreenCertificateswillbe78%of

the price of yielding Green Certificates held by the GSE (Gestore Servizi

Energetici – Energy Services Manager).

At the end of the transitory period, as of 2016, Green Certificates will no longer

be issued and in their place there will be the right to a constant incentive

rate fixed to guarantee the profitability of the investments made, on top of



the market price for electric energy produced; the actual modalities of the

transaction will have to be laid down during implementation of Legislative

Decreeno.28/2011.

The new regulations to be implemented have yet to be defined, but it is likely

that they will be along the lines of those recently adopted for photovoltaic, as

illustrated in the figure below.

Figure 6Principles on which revision of the Green Certificates system is likely to be based (wind power and bioenergy)

Like

ly p

rin

cip

les

new

GC

sce

nar

io

Incentive is calculated on basis of financial and operational costs of plant to:- permit the plant’s debt service (share capital + interest) as opposed to covenants in terms of DSCR

- permit remuneration of the shareholder higher than the relative WACCReduction of the unit incentives to reduce expenses for the Country System must be staggered over time

The Country System must have a fixed and monitored budget for renewable energy incentives based on:- fixed rates per MWh produced- estimate of installable capacity in the medium term (until 2020)

Promote small plants (up to 5 MW), rather than large plants (more than 5 MW)

The incentive granted depends on the year of commencement and may not be modified at a later stage (guaranteeing stable incentive throughout the incentive period)

STABILISE INCENTIVES OVER TIME, ON THE BASIS

OF THE YEAR OF ENTRY

BRING INCENTIVE IN LINE WITH FALLING COSTS

OF TECHNOLOGY

GUARANTEE AND LIMIT THE FINANCIAL BURDEN ON

COUNTRY SYSTEM WITH REGARD TO INCENTIVES

PROMOTE GENERATION THROUGH INCREASING

NUMBER OF SMALL PLANTS


The key theme to these regulatory changes is thus based on two factors:

• identificationofascenarioforeachlevelofincentive,validforallplants:

as of 2016, both those already operational and those due to become -

operational by the end of 2012

as of 2013, for plants operative from that date-

• formulationofabiddingsystem,inordertoreachtheinstallablecapacityfor

which the incentive is valid, applicable to large plants operational as of 2013.

In order to quantify the incentive required to make an investment profitable the

Legislator could follow the scheme outlined in the figure below, identifying the

current industrial reference parameters and the constraints of the debt service

and of obtaining minimum profitability for the shareholder.



New plants operational as of 2013

Figure 7 Simulation of level of incentive for plants operational before the end of 2012 (wind power plant)

• Power: 36 MW

• Price of energy (€/MWh): ~ 65 €/MWh

• Production capacity: 1,850 h

• CAPEX ALL-IN (‘000€): 1,800 ‘000€/MW

• Royalty: 3% of total revenue

• ICI: 4‰ on the value of the asset

• OPEX : ~ 50 ‘000€/MW

• Leverage: 75%; duration: 13 years (2 years before the end of the incentive) • Fixed rate debt capital: 5.5%

Average DSCR > 1.2x(Project Financing Covenant)

2. Constraints

~70 € / MWh

IRR shareholder > 7.5%

Value of premium compared to market price of energy

Duration of incentive: 15 years

1. 3.

Current industrial reference parameters (as at 31/12/2011) for a wind farm


In the simulation, the minimum value of the premium compared to the

market price of electric energy, with respect to the financial covenants and to

areturnfortheshareholderofmorethan7.5%,isequaltoabout70euros/

MWh (more than 20% less than the price established in the existing Decree of

89.7euros/MWh).

Regardless of the level of premium feed-in set by the Legislator, it must remain constant over time, while the plant on the other hand, given that its base industrial cost may no longer be modified, would be in breach of the covenant of the project financing contract.

It should also be stressed that a return for the shareholder of 7.5% is a very low threshold for an industrial and/or financial investor, such that it would not be possible to count on the company’s permanent investment in the sector.

The renewable energy plants (except photovoltaic) becoming operational after 31 December 2012 should have access to new incentive schemes:

•aminimumleveloffeed-inpremium,guaranteeingadequateprofitabilityfor

the plant

•amechanismfortheallocationofcapacitywithincentivebasedonbidding

for the incentive (feed-in premium) for larger plants.



The level of incentive capable of guaranteeing adequate profitability to those

plants that become operational from 2013 could be set by the Legislator

according to the scheme illustrated below which identifies:

• thecurrentindustrialreferenceparametersandtheefficiencypotentialfor

subsequent years

• theshareholder’sobligationswithregardtothedebtandminimum

profitability service. In particular, it is likely that the Legislator will resort

to corporate financing rather than project financing, with a subsequent

reduction in the financial covenants to be met.

Figure 8 Simulation of the level of incentive for plants becoming operational after 2012 (wind power plant)

• Power: 36 MW

• Price of energy (�/MWh): ~65 �/MWh


• CAPEX ALL–IN (‘000€): 1,800 ‘000€/MW

• Royalty: 3% of total profits

• ICI: 4‰ of the asset value

• OPEX : ~ 50 ‘000€/MW

• Leverage: 75%; duration: 13 years (2 years before end of incentive)

• Fixed rate debt capital: 5.5%

• Power: 36 MW

• Price of energy (�/MWh): ~65 �/MWh


• CAPEX ALL–IN (‘000€): 1,400 ‘000€/MW

• Royalty: 1.5% of total profits

• ICI: 4‰ of the asset value

• OPEX : ~ 35 ‘000€/MW

• Leverage: 70%; duration: 13 years (2 years before end of incentive)

• Fixed rate debt capital: 5.5%

Average DSCR > 1.15 ÷ 1.20 x

(from Project Finance to corporate financing)

IRR shareholder >WACC > 7.5%

Duration feed-in premium: 15 years

1 .Industrial reference parameters on basis of efficiency (at 2015-16; wind farm)

2. Constraints

Minimum tariff > 50 euros / MWh (with plant cost based on efficiency)

3. Value of premium with respect to the market price of energy

Current industrial reference parameters (as at 31/12/2011) for a wind farm


It should also be stressed that a return for the shareholder of 7.5% is a very low threshold for an industrial and/or financial investor, such that it would not be possible to count on the company’s permanent investment in the sector.

Reduction of CAPEX in relation to economies of scale is not considered

relevant for the Italian market, in that the total peak power, due to the nature of

the technology and to site availability, will also be low in the future.

For the simulation, the reference feed-in premium must remain constant

over time, otherwise the plant, given that its base industrial cost is no longer

modifiable,wouldnotbeprofitablefortheshareholderand/orthedebtservice.



The bidding system is being defined for large plants

For larger plants (probably over 5 MW) operational after 31 December 2012 a

bidding system has been introduced, the precise rules of which still need to be

defined.

The bidding system, managed by the GSE, is designed to allocate precise

quotasofinstallablepowerforeachsource/technology.

Base (cap) and minimum (floor) price are to be defined, based on the return requirements of the investments made, as outlined in the simulation

above.

In summary, the bidding system should be based on the following:

•maximumquantityofpowerwithincentivebelowthecompanies’actual

request (so as to achieve competitiveness between the companies)

•allocationtoallcompaniesofthelowestoffermadeintheauction,withfloor

price to guarantee sustainability of the plants

•allocationofincentivesonthebasisofoffersreceiveduntiltheallotted

quantity is reached (maximum quantity of power with incentive).

Figure 9Auction price: probable dynamics

MWh

Euro/MWh

Maximum quantity established by the legislator at the time of bidding

Actual request made

Floor

Cap


In concrete terms, if the GSE puts up for sale a quota of installable power

which is less than the companies’ annual installable capacity, the bidding

system obliges companies to make their offers in line with the floor price, to

avoid losing their right to the incentive.

The starting bid will however be set to guarantee an investment return in line with Legislative Decree no. 28/2011.



The provisions laid down in article 81 of Legislative Decree 138, 13 August 2011, will have major effects on the

financial returns of renewable energy companies. Indeed, the recently approved Budget Law includes newly introduced

measuresrelevanttothe‘RobinHoodTax’,theadditionalcompanyincometax(IRES)introducedbyLaw133/2008and

applied to businesses in the traditional energy sector:

• increasefrom6.5%to10.5%oftherateofadditionalIRESforcompaniesoperatingintheenergysectorforthetax

periods between 2011 and 2013

•extensionoftheadditionalIREStocompaniesoperatinginboththeelectricityandthegassector(transmission/

dispatch and distribution) and it is prohibited to offset this tax on the end user

•extending application to companies producing electricity from biomass, solar-photovoltaic and wind sources,

to date excluded

• reductionoftherevenuebracketdeterminingapplicationofthetaxfrom25to10millioneuros.

The‘Robin Hood Tax’

The bidding system, one of the most innovative elements introduced by

LegislativeDecreeno.28/11,isasourceofuncertaintyforcompanies

operating in the sector. Indeed, while waiting for decrees to be implemented,

there are several unknown factors with regard to the system; the main

problems arise:

• fromthefrequencywithwhichtheauctionsareheldduringtheyearand

from the relative power quotas, given that they enable projects that were

not selected to enter the bidding at a later stage, increasing their chances of

success. The power quotas could refer to specific geographical areas and be

defined in line with the regional planning

• fromthetypeofprojectadmittedthroughauction,inparticularbythe

definition of any minimum requirements (technical and financial) of the actual

projects and of the companies’ financial security

• fromtheexclusioncriteriaofthetenders(forexampleonthebasisof

the date that the company can declare the works started; of the date of

presentation of the tender; etc.).

The bidding requirements, which ought to include appropriate guarantees (for example sureties) to ensure that the plant is actually built once the incentive is allocated, should mean that the market is reserved for medium-large companies, with or without a background in the energy sector, thus strengthening the sector, unlike the current situation characterised by a large number of private companies (so-called ‘developers’).

With regard to the regulations outlined above, the recently approved ‘Robin

Hood Tax’, should be in effect for 2013 alone, as it was intended for three

years, beginning in 2011 (see in-depth study below).




The new Feed-In Tariff should produce a reduction in the average return of the shareholder

Impacts of the new laws on returns – photovoltaic

Application of the 4th feed-in tariff scheme, in force since last May and

applicable to all plants becoming operational by 31 December 2016, should

lead to a reduction of the average return of the shareholder (see tables below).

Table 16Development of the average indicators at the basis of a typical investment in photovoltaic following the introduction of the new Feed-In Tariff

Industrial reference parameters2010

(average recorded values)

2012 (simulated

values)Power (MW) 5 5

Price of energy (€/MWh) ~ 78 ~ 78

Incentive value photovoltaic (€/MWh) 346 (1) 156 (2)

Production capacity (hours) 1,400 (3) 1,400

CAPEX ALL-IN (‘000€/MW) 3,800 2,300Royalty (% of total profits) 3 3

ICI (‰ of asset value) 4 4

OPEX (‘000a/MW) ~ 100 ~ 50Leverage (%) 80 80

Repayment term (incentive period less than 2 years) 18 18

Fixed rate debt capital (%) 5.5 6.5 (4)

(1) incentive for plant of over 1 MWp, installed on the ground, operational since 2010(2) incentive for a plant of between 1 and 5 MWp, installed on the ground, operational as of 2012(3) operating hours are for a plant located in the South of Italy (average value)(4) The simulated debt rate is higher than that recorded in 2010, given the current liquidity crisis of the

financial institutions


Table 17Development of expected returns for photovoltaic following introduction of the new Feed-In Tariff

2010(average recorded values)

2012 (simulated values)

Incentive Feed-in premium (20 years duration)

Feed-in premium (20 years duration)

Average DSCR >1.2 x >1.1 x

IRR equity (%) >10% 7.5%


The new regulatory provisions produce the following effects on the economics

of photovoltaic companies:

• reductionofshareholderreturns

•maintainingdecentprofits(despitesaidreduction)thanksto:

the re-alignment of the industry towards lower CAPEX unit values, thanks -

to technological developments in photovoltaic and to the important

economies of scale in the production of the panels

the expected reduction in the premium currently awarded to plant -

developers

the major restructuring of the industry in terms of the operational costs. -




The new regulations for wind power should have a limited impact on average shareholder profits

Impacts of the new laws on yields – wind power

Changes being made to the regulations could produce effects on company

profits in the wind power sector as outlined in the tables below.

Thesimulationprovidesanincentiveof130euros/MWh.

Table 18Development of average values underlying an investment in wind power resulting from possible new incentives schemes

Industrial reference parameters 2010 (average recorded

values)

2016

(simulated values)

Power (MW) 36 36

Price of energy (€/MWh)~ 150

~ 65~ 130

~ 65

GC/Feed-in premium (€/MWh) ~ 85 ~ 65Production capacity (hours) 1,850 1,850

CAPEX ALL-IN (‘000€/MW) 1,800 1,600

Royalty (% of total profits) 3 1.5ICI (‰ of asset value) 4 4

OPEX (‘000€/MW) ~ 50 ~ 35Leverage (%) 75 70

Repayment term (incentive period less than 2 years)

13 13

Fixed rate debt capital (%) 5.5 5.5 (1)

(1) The hypothetical rate of debt is based on 2010 levels, once the current liquidity crisis of the financial institutions is over


Table 19Development of expected profits in wind power following changes in the incentive regulations

2010 (average recorded values) 2016 (simulated values)Incentive Green Certificates

(duration 15 years)Feed-in premium

(duration 20 years)

Average DSCR >1.3 x >1.4 x

IRR equity (%) >11% >10%


The effects of the new regulatory provisions on the economics of the

companies in the wind power sector should have a limited impact on

shareholder profits so long as the CAPEX and OPEX costs adapt to much lower

incentives.

Covenants will have to be respected with a higher level of capitalisation of the

plants.



Conclusions

In recent years, the incentive systems in Italy have been essential for

renewable energy development. Despite continual changes to the regulations,

the incentives have remained sufficiently ‘predictable’ with regard to the

investment return and it has therefore been possible to fund the works.

In this perspective, and leaving aside the ongoing debate, it should be

stressed that incentives are important for achieving the EC renewable energy

objectives and they also have an important role in promoting productivity and

employment.

However, the steadily increasing expense of the incentive systems has often

had a negative effect on consumers in terms of increased costs, to such an

extent that the economic sustainability of renewable sources of energy has

been questioned.

In this context, the appropriate level of incentives must be decided, in terms of:

• trendofthecostsofthetechnologiesandtrendofthetimingforachieving

so-called ‘grid parity’

•sustainabilityofthecosttotheCountrySystem.

These questions have for a long time been at the centre of a lively debate at

both political and economic level: the central theme is the attempt to achieve a

balance between system sustainability and making it worthwhile for companies

to continue to invest.

The positions emerging from the revisions of the incentives (both for

photovoltaic and other systems) and the first such interventions in recent

months open the doors to several possible developments in the renewable

energy sector in Italy.

In any case, leaving aside the development of the incentive system, other

crucial factors for companies are the size of the operation and access to large

economies of scale. Dimensional growth permits a structural reduction of

the company’s capital investment costs and plant management costs, thus

guaranteeing the sustainability of the new investments.



Frame of reference for sector development

01. uncertainty in legal framework due to lack of National Energy Plan and ongoing revision of the incentive systems

02. long waiting periods for authorisation: the result of administrative ‘fragmentation’

03. increasingly expensive incentive system, not sustainable in the medium term for the Country System

04. with the exception of the main players, reference market mainly national or, at most, European

05. profitability on average positive thanks to economies of scale

06. possible reduction in average profits: the result of changes to incentive schemes

In recent years the sector underwent major growth,

thanks also to an advantageous incentive system; further

development is based on the following principal drivers:

•companygrowthandachieving economies of scale

•achievinggridparity

•developmentoflegislation

•wideningthereferencemarket through

internationalisation.

The ultimate goal should be market-driven development.

56




Insights




Renewable energies and achieving grid parity

by Luca Mazzoni, Managing Director Protos

Achieving grid parity is the real key to sector development

Alternative energy sources and their development, in the light of changes

in EU and national energy policies, closely linked to the need to reduce

energy dependence of many countries in the European Union, require further

evaluation, regardless of the incentive schemes which it is expected will

no longer be necessary in the future, examining the economic viability of

the production of electric energy from renewable sources compared with

traditional sources.

The goal of achieving so-called grid parity (i.e. the same cost for producing

energy from conventional or alternative sources) for renewable energies is

therefore crucial; achieving this objective within a short time would mean that

new sources of energy could begin their own development, no longer tied to

government incentives but led exclusively by strictly market dynamics.

The ‘traditional’ energy sources (coal, gas and nuclear) which have been the

main contributors to the production of electric energy, offer limited scope

for technological improvements, while the ‘new’ sources of energy reveal

interesting development potential but, at present, do not seem to be as

competitive.

The production cost of energy from traditional sources, based on tried and

tested technologies, can change on a yearly basis simply because of fuel

prices, since there is no technical progress enabling further reduction in

expenses.

In the field of renewable sources, on the other hand, technological

development, linked both to growing investments in research, and to the ever

more widespread adoption of these forms of energy production, results in

steadily diminishing production costs thanks to the creation of economies of

scale and to the emergence of incremental innovations among other things.

The graph below presents the most recent data available to compare the

production costs per kWh of the various sources of energy.

58



Production costs of renewable energy sources are falling sharply as a result of technological progress and economies of scale

Graph 15Cost of kWh for various sources of energy, Europe (2010, in Euro cents/kWh)

18

14

12

10

8

6

4

2

0

16

ToFrom

Coal(2009)

Gas(2009)

Nuclear(2007)

Wind(2007)

Photovoltaic(2010)

Source: World Energy Council (2011)

The costs do not include the social and environmental costs arising from the

use of different energy sources. For coal and gas the ‘maximum’ price includes

the tax on CO2 emissions (not however applicable in all European countries).

As already mentioned, the production costs from fossil sources (coal, gas,

uranium) do not vary greatly from year to year, it may, therefore, be assumed

that the 2007 and 2009 values remained unchanged in 2010:

•coal:3.5Eurocents/kWh(+2.5Eurocents/kWhoftaxonCO2)(European

Wind Energy Association, 2010)

•gas:4.6Eurocents/kWh(+1.1Eurocents/kWhoftaxonCO2) (European

Wind Energy Association, 2010)

•nuclear:2.5-5.5Eurocents/kWh(average4Eurocents/kWh)(WorldEnergy

Council, 2010)

•wind:6-9Eurocents/kWh(EuropeanWindEnergyAssociation,2010)

•photovoltaic:11-17Eurocents/kWh(EPIA,2010).

Taking into account the production costs, falling sharply as a result of

technological progress and economies of scale, it is important to invest in

renewable sources for as long as they are competitive even without incentives.



The principal factors determining the trend of the production costs of wind energy are represented by the investment costs and by the energy which the wind turbines are capable of producing

The cost of production of energy from renewable sources varies depending

on the availability of the natural resources (wind or sun etc.) in the power plant

location; this affects the ever-changing cost dynamics with an increase in the

initial investment costs, and a general reduction in the total production costs,

when the source is plentiful.

Below is a description of the expected evolution of the costs of production

from wind and photovoltaic sources.

In the wind sector, the main factors determining the trend of energy

production costs are represented by the investment costs and by the energy

that the wind turbines are able to produce in line with the availability of the

wind resource.

For wind plants connected to the grid, in recent years it has been possible to

record a general reduction in the production costs in terms of cost of kWh.

This trend may be mostly explained by the increase in the average size of the

generators installed, as well as by the progressive improvement of wind power

technology, especially in relation to the reliability and efficiency of the wind

turbines.

The effect of a steady increase in the average size of the wind turbines has, in

fact, led, as a result of the introduction of economies of scale, to a reduction in

the initial investment costs. In parallel, the steady annual increase in the overall

efficiency of the wind turbines, equal to 2-3 percent in recent years, has led to

a corresponding increase in the energy produced.

Graph 16Hypothesis of development for wind turbines, average size 2MW, until 2015 (Euro cents/kWh)

Inland

Eur

o ce

nts

/ kW

h

Coastal site

12

10

8

6

4

2

01985 1987 1990 1993 1996 1999 2001 2004 2006 2010 2015

Source: RisØ / DTU (National Laboratory for Sustainable Energy of Denmark)

The rapid drop in production costs came to an end in 2006 (see graph above)

due to the increasing demand for wind turbines, which led to a demand for a

period of realignment of the production capacity by the producers, and to the

increase in prices of raw materials such as steel.



The production cost of solar energy is closely linked to the cost of technologies used for making the photovoltaic panels

The wind power market has recently recorded very rapid development,

characterised by an average annual growth rate of between 25 and 30 percent

in the last ten years, which according to recent estimates (World Wind Energy

Association) may last until 2015.

This trend was forecast on the basis of the following hypotheses:

•reductionoftheunitcostoftheproductdependingonaconstantpercentageof

10 percent, in correspondence with a doubling of the accumulated production

•doublingoftheaccumulatedpeakpowerpotentialeverythreeyears(assuming

that the recent rate of growth remains constant).

The photovoltaic sector has seen, as of the year 2000, development at an

exponential rate of growth which has continued to the present at an increasing rate

despite the global economic crisis and the changes in energy policies which have

been implemented in various countries.

The trend of production costs from solar sources is closely linked to the cost of the

technologies used to make the photovoltaic panels.

Graph 17 Historical trend of the cost of the photovoltaic modules

Cumulative output of modules (MW)

Pric

e ph

otov

olta

ic m

odul

es (U

SD

/W)

100

10

1

Trend thin film Trend silicon Thin film Crystalline silicon

Crystalline silicon

Shortage of silicon2007

2009

1979

2009

1 10 100 1,000 10,000 100,000 1,000,000

Thin film

Source: EPIA (2010)

The above graph shows the variation over time of the costs relative to the

different photovoltaic technologies, from which it is possible to highlight the

significant reduction in the price of the production of the panels following the

introduction of new technologies (thin film).

Over the next twenty years it may be presumed that new technological leaps

will be revealed in the learning curves, with the possibility of seeing new

technologies.

Photovoltaic panels represent at present approximately 50 percent of the

investment value; they are therefore central to future reductions in the cost of

this technology.



Technological research in photovoltaic could further improve the effects of decreasing costs, significantly reducing the time required to achieve grid parity

Graph 18Forecast of costs of photovoltaic plants (in Euros)

- 66%

- 56%

1,229

875

1,301

993

1,378

995

1,460

1,062

1,549

1,135

1,644

1,214

1,804

1,409

1,982

1,640

2,193

1,908

2,445

2,215

2,800

2,600

2010 2012 2014 2016 2018 2020 2022 2024 2026 2028 2030

Price range

Source: EPIA (2010)

On the basis of the price ranges observed in October 2011 it is possible to

revise downwards the values cited in the EPIA forecast: the price of ground

plants operational in the first half of 2012 varies between 1.8 and 2.2 million

Euros per MWp, with an additional reduction of approximately 8% compared to

the initial estimates.

In the case of steady market development, it is possible to forecast, taking into

consideration the composition of the costs to establish a photovoltaic park, a

reduction in costs over 20 years of between 56 and 66 percent; however, if

there are ‘quantum leaps’ in the learning curve, due to technological research,

the effects of cost reduction would increase, significantly reducing the time

necessary to achieve grid parity.

This would bring the production costs, currently between 11 and 19 Euro

cents/kWh,tobetween6and10Eurocents/kWhin2020and4-7Eurocents/

kWh in 2030 (see graph below).

Graph 19 LCOE forecast* for photovoltaic (range in Euro cents/kWh)

Hours of operation kWh/kWp

Euro cents/kWh

25

20

15

10

5

01,200 1,300 1,400 1,500 1,600 1,700 1,800 1,900 2,000 2,100

20.118.7

11.8

8.78.35.9

12.611.7

7.45.45.23.7

2010

2020

2030

High 2010 High 2020 High 2030 Low 2010 Low 2020 Low 2030

* LCOE Levilized Cost of Energy: result of the relationship between total energy produced by the plant during its life cycle, and the discounted investment costs, interest rates and all related costs (both during construction and when operational).

Source: EPIA (2010)



For photovoltaic the best case scenario forecasts grid parity by 2013

On the basis of this description it is possible to hypothesize certain scenarios for achieving grid parity in Italy for the energy produced by the potentially

most abundant source in terms of available resources and their distribution

throughout the national territory, i.e. photovoltaic.

Three different scenarios have been adopted for the increase in the sale price

of energy, in line with market analysis expectations (high price, average price,

low price), while for the evaluation of photovoltaic energy costs a range has

been used (High photovoltaic and Low photovoltaic) using the figures in the

preceding graph.

Graph 20Hypothesis of grid parity for photovoltaic

Low price Average price High price High PV Low PV

0.30

0.25

0.20

0.15

0.10

0.05

0.00

2010 2015 2020 2025 2030

Source: Protos (2011)

There is assumed an increase in the sale price of energy which, from 6 Euro

cents/kWhin2010,risestoarangeof7-18Eurocents/kWhin2020toreach,in

2030,9-25Eurocents/kWh.

It is interesting to note how, in the best case scenario, grid parity may be achieved as early as 2013.

The current global economic crisis, however, whose effects include a reduction

in consumption and in industrial production, is the cause of deflationary

mechanisms which may lead to a delay in achieving grid parity.

In any case the proposed scenario does not take into account possible

technological innovations and leaps in the learning curve which, in the medium

term, will contribute further to the technology’s competitiveness.



Project Financing in the renewable energy sector

by Marco Serifio, Partner KPMG Advisory

(1) Source: ‘Guida agli Operatori del Project Finance 2010’ Finlombarda. The amounts funded and the number of operations backed by the banks refer to the beginning of the activity through to the first semester of 2010. With regard to the banks’ data of the projects, past and present, it should be noted that the same project may have been backed by more than one bank at the same time, each with a different role (Advisor, Arranger, Asseverator etc.).

(2) DSCR is an expression of the relationship between operating cash flow and debt service (share capital and interest). It is a measurement of the project’s capacity to generate sufficient cash flow to repay the debt.

Renewable energy is one of the leading sectors in terms of project financing

In Italy project financing in the first semester of 2010 had reached in

cumulative terms(1) a total value of around 158 billion euros with 611 financial

closes. Compared with the market as a whole, financial closes in public and

private works for the renewable energy sector, as at the first semester of 2010,

numbered 342 operations, for a total value of around 50 billion euros.

In terms of both number of operations (about 56% of the total) and value

financed (about 32% of the total), renewable energy is a primary sector for

project financing (surpassed only by telecommunications for value of financing).

Compared with the first semester of last year, the energy sector saw an

increase of 112 financial closes (out of a total of 131) for a total value of about 7

billion euros.

Analysis by the banks of projects past and present reveals how the debt-capital

relationship of the project financing operations is equal to 80%-20%, with base

facilities lasting between 10 and 20 years.

Expectations with regard to the spread applied to the interest rates of the main

base facilities ranges from 240 to 280 base points, at least until 2010, currently

undergoing a sharp increase as a result of the recent macroeconomic trends.

For debt repayment, almost all the banks consider it fundamental that the

DSCR(2) (Debt Service Cover Ratio) settles, for the duration of the project, at

around 1.3 to guarantee the sustainability and ‘bankability’ of the investment

made.

Until 2010, the banks involved in the analysis considered the renewable energy

sector to be in a stable period with further growth likely, indeed with the

greatest growth potential in the national project financing market.

However, during 2011, uncertainty with regard to the incentives has de facto

hindered the completion of project financing operations.

64



Of all the banks, Unicredit and Intesa Sanpaolo are the main players in the sector at national level (backing 32% of all projects)

With regard to the role of the banks, note that Unicredit and Intesa Sanpaolo

are the main players in the sector at national level. Indeed, they represent, to

date, around 32% of all the projects (see graph below).

Graph 21The project financing market in the energy sector: major banks and their % proportion of the accumulated number of financial closes

Unicredit 17%

Intesa Sanpaolo 15%

Centrobanca 11%

MPS 11%

BNP Paribas 10%

Agrileasing 4%

Dexia 4%

WestLB 4%

Others24%

Market total:342 Operations

Source: Finlombarda data adapted by KPMG Corporate Finance

For the above-mentioned projects, Unicredit alone represents 25% of the

funding granted, followed by Intesa Sanpaolo with 16% and BNP Paribas

with 13% (the three banks account for more than 50% of total funding). With

regard to the other banks, they account for smaller but nevertheless significant

percentages, as shown below.



Wind power and biogas account for over 50% of projects funded

Graph 22The project financing market in the energy sector: major banks and their % proportion of the total value funded

Unicredit 25%

Intesa Sanpaolo 16%

BPN Paribas13%WestLB

5%

ING4%

Mediobanca4%

Banco Bilbao4%

Dexia4%

Centrobanca4% MPS

4%

Others17%

Market total: 50 billion euros


In terms of volume, wind power and biogas account for the greatest number of

investments.

Graph 23The project financing market in the renewable energy sector: investments divided by sector

Wind Biogas Photovoltaic Biomass Hydroelectric

39%

32%

13% 12%

4%

Market total: 342 operations


It can be seen that wind power and biogas, taken together, represent well

over 50% of the total projects funded. Photovoltaic, despite recent signs of

recovery, was subject to a sharp reduction in investments as a result of the

temporary uncertainty with regard to the incentives.



The South of Italy has the highest number of project financing operations

The graph below shows, in percentage terms, the geographical location of the

projects funded (Regions with the greatest number of operations).

Graph 24The project financing market in the renewable energy sector: investments divided according to geographical location

17% 17%

11% 11%10%

7%6% 6%

17%

Market total: 342 operations

Puglia

Sicily

Sardin

ia

Campa

nia

Lom

bard

y

E.Rom

agna

Tusc

any

Mar

che

Other

s


The South is without doubt the geographical area in the country with the

greatest number of project financing operations, due mainly to its territorial

characteristics which make its resources available for renewable energy

production.

KPMG carries out regular Financial Business Plan audits with regard to

operations for the construction and management of alternative energy plants,

so as to monitor both the companies and the banks in the sector.

Following years of experience it may be noted that in order for the sector trend

to pick up, the current period of uncertainty with regard to incentive schemes

must end.



Investment project plans in the renewable energy sectorby Stefano Cervo, Tax Partner KStudio Associato

The tax treatment reserved for operations may vary greatly depending on the specific subject of the project which may be the company or its holdings

The opportunities linked to the production of electric energy from renewable

sources (and particularly from photovoltaic sources) have for several years now

been the subject of special attention from various points of view.

Analysis of the tax variable is clearly of interest as it represents one of the

elements for a positive evaluation of an investment in the sector, permitting the

appreciation of its margins of profitability.

There are numerous considerations with regard to taxation and the tax

treatment reserved for the operations may vary greatly depending on the

specific subject of the project which may be the company or its holdings; it is

opportune, however, when examining tax matters, to carefully consider various

aspects.

Taxation considerations in the acquisition of an asset in renewable energy

Project carve-out

For example, a frequent pattern in photovoltaic includes:

•adeveloperwhodealswithidentificationofthesite,planning,liaisingwith

the authorities in charge of granting authorisations, and in some cases

obtaining grants for a series of projects (pipeline)

• thecarve-outofcertainprojectsinthepipelineinspecialpurposevehicles

(SPV)

• thetransferofsharesoftheSPVtoapurchaser

and various tax problems emerge with regard to the carve-out of the projects in

the pipeline and to the transfer of shares of the SPV.

Assuming that the projects are classed as ‘companies’, one possible

hypothesis is a contribution to a regime of neutrality and it may be possible

to make use of the disposition contained in Article 176, comma 3, TUIR

(Testo Unico Imposte sui Redditi–IncomeTaxConsolidation)No.917/86,

which explicitly considers ‘non elusive’ the successive transfer of holdings on

condition that it has been owned for at least one year.

68



The range of extra ‘tax neutral’ operations, such as partial division in favour

of a newly constituted or pre-existing beneficiary, poses the problem of the

elusiveness of the operation when it is followed by transfer of shares and,

therefore, careful evaluation must take place on the basis of the risk profile.

In this situation, there is the problem of the possible application of the so-called

regime of Participation Exemption (PEX, exemption of 95% of the gain deriving

from the transfer of the participation shares).

PEX, in reality, is conditioned by the effective operation of the business. It

is therefore necessary to question the emphasis given to the preliminary

activities upon completion of the plant which, together with a time profile

(transfer before three years, with the possible exception of newly constituted

beneficiaries), would appear to cast doubts on the applicability of the

exemption system.

The doubts cast on the application of PEX often recommend detaining the

SPV directly between foreign companies, so as to be able to transfer shares

by taxing capital gains exclusively in the place of residence of the transferor, in

the case in which the latter should benefit from the conventions against double

taxation.

Alternative structures: real estate fund

On the basis of the premise that defines a solar plant as real estate, it is

possible to hypothesise the structuring of investment projects via the use of a

real estate fund.

The system, not always simple to set up, is as follows:

EU investor

User of Property

Real estate investment fund

Asset

Rent

Return



The appeal of renewable energies must take into consideration the so-called Robin Hood Tax and its application to companies operating in this sector

With this structure, the investor purchases the property and stipulates a

contract (in general, a rental contract) with a third party for the use of the asset.

In this case the profits resulting from the real estate investment fund will be

exempt from tax, while on the other hand, the holders of the units will be taxed

depending on the participating companies:

• inthecaseofforeigninvestorsresidentin‘whitelist’countriesorso-called

‘institutional’ investors (banks, SIM (società di intermediazione mobiliare–

brokerage firms), etc.), the profit will be taxed at a rate of 20% applied on

perceived profits (rate which may be reduced on the basis of the conventions

against double taxation)

• inthecaseofnon-institutionalresidentinvestors,itdependswhetherthe

percentage of shares owned is above or below 5%; if greater than 5%, for

reasons of transparency, the receiver is subject to taxation of the investment

returns, regardless of the effective payment; while if 5% or less, there will

be a tax of 20% on the profit. In the case of transfer of the shares of the

investment fund by the investors, however, it will not be possible to make

use of the PEX mechanism.

Tax and renewable energy operations

Robin Hood Tax

The appeal of the renewable energy sector must take into consideration the

so-called Robin Hood Tax and its application to companies operating in this

sector, that is an additional IRES tax (Imposta sul Reddito delle Società–taxon

corporate income) applicable to larger companies (rising from 6.5% to 10.5%

for the three years from 2011), bring the total IRES tax to 38%.

Butthisisnotall.Newlyintroducedwiththelegislativedecreeno.138/2011

(the so-called supplementary budget law 2011) is the reduction also of the

minimum entry thresholds which were formerly 25 million euros for the tax to

be applicable and are now down to 10 million euros turnover. The tax system

takes into account the profits made by the company in 2010 (which must

be over 10 million euros) and 1.2 million euros of taxable income, with no

exemption from the new tax even for those who in 2011 should be below the

set thresholds.

In this regard it should be noted that the ordinance dated 26 March 2011 no. 9,

with which the Provincial Tributary Commission of Reggio Emilia questioned the

constitutional legitimacy of this tax at the Constitutional Court, affirming that it

is in contrast with the principle of equality as laid down in articles 3 and 53 of

the Constitution.

While waiting for the verdict (which if in favour would translate to a total of 3.6

billion euros not payable in tax), it may be observed that the tax represents,

among other things, a variable to be taken into account when drawing up an

investment project.



A source of operative uncertainty arises from the classification of the plants as immovable property or moving property

Thus one questions the compatibility with the current tendency of the law and

the financial administration in the field of law abuse, to constitute SPV in the

form of an unincorporated company, owned by partners in limited companies,

for which the Robin Hood Tax would seem not applicable given the exclusion

of these subjects from those referred to in article 73 of the TUIR. It must also

be verified whether or not it is possible structure a company (via extraordinary

operations of merging or separating), to be positioned beneath the threshold of

application of the tax in question, in the presence, of course, of valid economic

reasons which justify this kind of organisation (or reorganisation).

ICI (Imposta Comunale sugli Immobili – local property tax)

Another hot topic of debate and source of uncertainty with regard to taxation,

regardless of the presence of numerous ministerial statements on the matter,

is that regarding the nature and classification of plants and whether or not they

are immovable property or moving property, with particular reference to direct

taxation, ICI and the possibility of utilising the real estate fund.

OnthebasisofthepositionoftheRevenueAgency,expressedincircular46/E

in 2007: ‘… the photovoltaic plant located on the ground does not constitute

a plant fixed to the ground given that the modules used to compose it (solar

panels) may easily be removed and positioned elsewhere, maintaining

unaltered their original function …’. The nature of ‘moving’ property was

confirmedinthesubsequentcircular38/Ein2008bythesameRevenue

Agency, recognising the benefit of tax credits for investments in depressed

areas(art.1,commi271-279,law296/2006).

On the other hand, the Agenzia del Territorio(seecircular3/Tof6/11/2008)

has always maintained that photovoltaic panels positioned permanently on the

ground must be considered in the same way as the turbines of the hydropower

plants (representing an electric power station) and that the structure of the

property comprising the ground and the series of ‘… panels comprising the

photovoltaic plant, constitutes a plant with the characteristics of ‘real estate’

and with its own relevance in the land register (category D1)...’.

The contrast between the two financial administrations continues, even though

following the most recent intervention by the Revenue Agency (circular 11

March2011no.12/E),itmustbenotedthatthegeneralconsiderationisnow

that photovoltaic plants are considered immovable property, with important

consequences in terms of: amortisation coefficient to apply to the plant;

minimum duration of the financial leasing contract expected for the deductibility

of the relative license fees; applicability of the discipline relative to shell

companies; applicability of ICI to the plant, tax to be applied directly should the

plant change hands; and so on.



M&A activities in the renewable energy sector in Italyby Alessandro Zanca, Associate Partner KPMG Advisory

Despite reduced growth due to delays in changes to legislation and to the consequent uncertainty for equity and, especially, debt investors, the sector will become increasingly consolidated

The mergers and acquisitions market in Italy in 2010 and in the early months

of 2011 saw a reversal of the trend that, since the last quarter of 2007, had

seen the number of operations, in terms of countervalue, close to the number

recorded in the mid-1990s. The Energy and Utilities sector does not stray far

from the general context, with the added consideration, however, that in the

last three years the relative weight in terms of both number of operations and,

most of all, countervalue is much higher: 2009 represents the peak with almost

70% of countervalue, thanks most of all to the acquisition of Endesa by Enel,

further enhanced by the low level of transactions in the other sectors.

Graph 25M&A market in Italy in the E&U: countervalue and number of operations completed since 2008

11 233 2.5

56

2425

14

0

20

40

60

80

0

10

20

30

2008 2009 2010 3rd quarter 2011

No.

Ope

ratio

ns

Cou

nter

valu

e (b

illio

n eu

ros)

Source: KPMG Corporate Finance Mergers & Acquisitions Report

The sector continues to grow because it is basically countercyclical (or at least

more so than other sectors, considering that reductions in industrial production

have had major effects also on energy consumption), and within the sector

itself waste and water operations counterbalance the energy sector’s volatility;

its continuing development is also due to the dynamics of renewable energy.

Renewable energy, despite delays in changes to legislation which slow down

the rate of development and produce uncertainty in equity and, above all, debt

investors, continues to grow; these uncertainties or gaps in legislation are

a problem at European level and have been a major constraint both to new

investment initiatives and to potential aggregations.

72



The renewable energy sector attracts interest also from investors who do not belong to the energy sector

Investors who until a few years ago were interested in the acquisition of

medium-long-term development projects at high prices now concentrate

mainly on production assets and increasingly less on hypothetical pipeline

developments with uncertain returns (and possibly without even having all

the necessary authorisations). This is particularly the case with photovoltaic,

where the tariff reductions introduced by the new Feed-In Tariff (despite not

having effectively made any real change to the investors’ return thanks to a

perhaps more than proportional decrease in costs for the plant systems) led

to an increase in the interest in plants already connected to the grid, especially

from institutional traders, for example Private Equity specialist funds, but also

international pension funds willing to recognise investments in multiples of

over 5 million euros per MW installed. In Italy, in particular, the difficulties

obtaining authorisation and the necessary permits for the construction

of photovoltaic plants and wind farms means that investors often opt for

acquisition of already operative businesses.

Of the various kinds of renewable energy, and leaving aside hydropower (which

still represents the main source of non-fossil production in Italy, but which has

already been almost fully exploited), it is believed that the development of

wind power in the next few years may be less than that of photovoltaic and

biomass. As with other sources of renewable energy, biomass gives quite

high economic returns in a relatively short period, but unlike wind power and

photovoltaic, they are not subject to transport and distribution problems as

production is easier to plan, although there are risks connected to the difficulty

of obtaining supplies and the constantly changing prices of biomass supplies.

It is interesting to note the interest in the renewable energy sector shown by

investors who do not come from the energy sector (for example the announcement

that Google is to invest in wind farms) and by investors who belong to the sector

but pursue other activities (Total recently bought the majority in Sun Power Corp.

for 1 billion euros; in Italy Erg and Sara were among the first to invest in the

sector). In general in Italy there is a process of risk spreading which is leading many

investors to substitute that which in the past may have represented the real estate

market with investments in renewable energy.



The renewable energy sector takes on, in this perspective, an increasingly

important role in the M&A market not only in terms of the number of

operations but also in terms of countervalue (for example the acquisition by

Terra Firma of the photovoltaic plants in Terna for over 600 million euros),

considering also the fact that, when investing in the energy sector, renewable

energy represents an alternative to other activities which are subject to

environmental and safety risks as well as supply and price fluctuation risks.

Another sector in which investors are showing great interest (especially

institutional investors) is ‘cleantech’ and companies operating outside of

energy generation. This sub-sector includes (the list is not exhaustive) all those

companies operating in efficiency and energy storage, emissions reduction,

recycling and the production of biodegradable materials. It is widely thought

that, in addition to the production of energy from renewable sources, in the

coming years it will be energy saving in the widest sense that gives the best

(and perhaps most immediate) results in terms of energy sustainability.




Country Focus




Italy has been, in the last two years, from 2010 to 2011, a

world leader in the development of renewable energies, in

particular in the photovoltaic sector.

Italian companies operating

in the sector (development, planning, construction,

maintenance, services) have acquired an excellent level

of know-how, thanks in part to opportunities to interact

with companies (investment, componentconstruction,EPC/

O&M contractors) from all over the world.

Internationalisation in renewables

by Protos

7076




The new scenario, resulting from the economic-financial crisis as well as the complexity of the regulations is taking Italy towards an inevitable reduction of the market for new renewable energy plants.

In the current situation, a winning approach may be a move towards the internationalisation of activities through the export of experience to markets which whilst not yet mature offer great growth potential.

The challenge is not a simple one. The organization required to carry out similar activities in another country, the socio-cultural differences, the different ways of ‘doing business’, the different legislative bodies which regulate business and the different ways of managing administrative matters represent often insurmountable obstacles.

Without doubt assistance can be provided from the external support of professionals familiar with the new local operational context and who can help the company develop the appropriate modus operandi through which they can seek out their own niche in the new market.

The natural alternative to the national market, to which Italian companies can turn to in order to find new opportunities, comprises countries currently undergoing major economic expansion.

In particular those realities which are implementing renewable energy development programmes (the so-called ‘BRICS’, Brazil, Russia, India, China and South Africa). The opportunity becomes more concrete given the lack of experience in the sector which is often lamented by the local banks and by investors, both at a qualitative level (availability of suitable competences) and at a quantitative level (availability of an adequate number of professionals/consultantscomparedtothepotentialsizeofthe market).

Another interesting issue is the attempt to export to different geographical areas the virtual synergies which have involved investors, banks and advisors in the national territory.




Country Focus:South Africa

Advantages

•Goodavailabilityofsolarsource(the

best sites have irradiation 30% higher

than the best Italian sites)

•Goodavailabilityoflandfor

installations

•Advantageoustariffs(despitebidding

system) for solar energy

•Entryintoamarketwith42,600MW

of potential new sites by 2030.

(1) Integrated Resource Plan for Electricity 2010-2030, to be revised every two years by the Department of Energy.

Development Plan

The Republic of South Africa has planned(1) that the development of renewable

energy, over the next 20 years, will come to account for 42% of the electric energy

generation plants and 19% of the total electric peak power (see table below).

Table 20Evolution of power plant (power in MW)

Source Existing plants*

New plants (until 2030)

Total (as at 2030)

% of total power plant

Photovoltaic solar 8,400

Concentrated solar 1,000

Wind 8,400

Total renewable 1,000 17,800 18,800 19%

Coal 45,600 6,300 51,900 54%

Nuclear 1,800 9,600 11,400 12%

Hydroelectric 2,150 2,600 ** 4,750 5%

Turbogas (closed + open cycle) 3,400 6,300 9,700 10%

Total other sources 52,950 24,800 77,750 81%

Total power plant 53,950 42,600 96,550 100%

* including those already with authorisation** from import

Government incentive programmes

The Renewable Energy Independent Power Producer (REIPP) Purchase Programme includes the development of a further 3,725 MW of new power

from renewable sources with entry into commercial operation by 2016. The

tariffs will be allocated through five bid rounds to be held by 2013 (precisely on

4/11/2011,5/3/2012,20/8/2012,4/3/2013and13/8/2013).Theminimumsize

for the projects is currently set at 5 MW; the programme for smaller projects is

expectedtobeissuedon23/8/2012.

Table 21Development objectives for renewable power plant and incentives

Renewable source REIPP objectives (MW new power)

Auction-based tariff (euros/MWh)*

Photovoltaic solar 1,450 258

Concentrated solar 200 258

Wind (on shore) 1,850 104

Biomass 12.5 97

Biogas 12.5 72

Landfill gas 25 54

Hydroelectric (small size) 75 93

Other (< 5MW) 100

Total 3,725

* 1 Rand = 0.09 euros

78



Authorisations

Authorisation for a renewable energy plant is obtained when the Department of

Energy recognises the status of ‘Preferred Bidder’ within the REIPP Procurement

Programme.

In order to enter the bidding, a project must have obtained final authorisation from

the Department of Environmental Affairs following the Environmental Impact Study;

this can take between 9 and 24 months. Other necessary authorisations are:

• thetechnicalsolutionandthepreliminaryconnectionestimate(issuedbyESKOM)

• depositmadewiththeresponsibleMunicipalityforre-registeringfees(forland

originally for cultivation).

Land

Ownership rights are sanctioned in the Constitution of the Republic of South

Africa (Section 25). Land and property registration is regulated by the 1937

Deeds Registry Act. Most land is privately owned. The purchase of publicly

owned property (government agencies or Municipalities) is subject to public

tender. There are no restrictions on land ownership by foreigners. The land

registration system is reliable and no particular problems arise with regard

to land rights. Ownership is registered at regional level (Regional Deeds

Registries) and documentation may be viewed by the public.

Grid

South Africa’s national public utility (practically a monopoly) is ESKOM, Africa’s

largest electrical energy producer and one of the world’s biggest companies

in terms of production capacity; among other things, it owns and manages a

1.9 GW nuclear power plant in Koeberg (about thirty kilometres north of Cape

Town), currently the only nuclear power plant in South Africa and the whole of

the African continent.

South Africa’s national grid is owned entirely by ESKOM and it is considered

the most advanced on the African continent. In order to satisfy the increasing

demands on the grid for energy distribution, ESKOM has allowed over the next

five years for a budget of around 30 billion euros (300 billion Rands).

NERSA (National Energy Authority of South Africa), founded in 2004, is South

Africa’s Authority for electricity, gas and pipelines. Application for a license to

produce energy must be made to NERSA once ‘Preferred Bidder’ status has been

acquired (in the field of REIPP).

Financial system

The banking system is dominated by five main banks, Standard Bank, ABSA,

Rand Merchant Bank, NedBank and Investec, each one able to provide a range

of funding for renewable energy projects, for example on a non-recourse or

limited-recourse basis.

The ‘go ahead’ for funding is generally achieved with acceptance of the Power

Purchase Agreement for the sale of energy produced.

Solar and wind availability

Figure 10Map of solar radiation in South Africa (annual irradiation)

6,000-6,500 MJ/m2

6,501-7,000 MJ/m2

7,001-7,500 MJ/m2

7,501-8,000 MJ/m2

8,001-8,500 MJ/m2

8,501-9,000 MJ/m2

9,001-9,500 MJ/m2

Annual solar irradiation (1,000 MJ/m2 = 277.8 kWh/m2)

Source: CSIR, Eskom Corporate Technology, Minerals and Energy

Figure 11 Map of average wind speed in South Africa (m/s)

Source: Hagemann (2008)



Country Focus:India

Advantages

• Fast-growing nation (PIL increasing at more than 8% per year)

•Goodavailabilityandvarietyof

renewable energy sources: solar

irradiation reaches, in the best

cases,2,500kWh/m2 per year

•Availabilityofhighlyqualifiedand

specialist labour force.

Development Plan

On30/06/2008theNationalActionPlanonClimateChange(NAPCC)was

issued outlining eight National Missions, including the National Solar Mission

(NSM) which aims to promote the use of solar energy to compete with

traditional fossil fuels (grid parity by 2020).

Energy policies are laid down by the Ministry of New & Renewable Energy

(MNRE).Asat31/07/2011twentyplantshadbeeninstalledwithnominal

power of at least 1 MWp for a total of about 45 MWp. Historically, the most

developed renewable resource is wind power (fifth place in the world), while

also the biomass sector, thanks to a still mainly agricultural economy, shows

good development potential. There is also high availability of hydropower

sources.

Incentives are granted for energy produced and inputted into the grid, and

also in the form of Renewable Energy Certificate (REC); furthermore, most

plants using renewable energy benefit from the profits coming from the sale of

carbon credits as per the Clean Development Mechanism.

Table 22 Evolution of India’s power plant (power in MW) and present incentive system

SourceIncentive

(USD cent/kWh)

Existing plants *

Total plants (as at 2020) Variation %

Photovoltaic solar 27-40 4520,000 +44,344%

Concentrated solar 22-31 -

Wind 8-12 14,157 50,000 +253%

Biomass 6-11 2,673 10,000 +274%

Hydroelectric (small) CAPEX 3,043 6,000 +97%

Hydroelectric (large) - 38,106 n.a. -

Total renewable energy (except large hydro) 19,918 86,000 +332%

*AsatJune2011

Government and state-run incentive programmes

•Jawaharlal Nehru National Solar Mission (JNNSM): includes installation

by 2022 of 20,000 MWp of solar power; incentives (feed-in tariff, all-inclusive

tariff) last 25 years. Plants, to have access to the incentives, are admitted to

a procedure incorporating a lowering of the reference tariffs (variable within

therange27-40cents(USD)/kWhforphotovoltaicandwithintherangeof

22-31USDcents/kWhforconcentratedsolar)setbytheCentralElectricity

Regulatory Commission (CERC)

80



Table 23Solar power plant development objectives

TypePhase 1

(2010-2013)Phase 2

(2013-2017)Phase 3

(2017-2022)Solar collectors 7 million m2 15 million m2 20 million m2

Off grid plants 200 MW 1,000 MW 2,000 MW

Utility grid power (including roofs)

1,000-2,000 MW * 4,000-10,000 MW 20,000 MW

* In 2011-2012 it is estimated that 350 MW of photovoltaic plants will have access to incentives

• Gujarat State

- Solar Power Policy 2009 (2009-2014): 500 MW of solar generators with

incentives for 25 years

- WindPower Policy 2009 (2009-2012): incentives for 20 years

• Rajasthan State: Policy for Promoting Generation for Electricity from Non-

Conventional Energy Sources (2004)

• Karnataka State: Karnataka Renewable Energy Policy 2009-14 (2009).

Authorisations

In the context of the National Solar Mission, NTPC Vidyut Vyapar Nigam Ltd

(NVVN) issues tenders and stipulates PPA (Power Purchase Agreement)

contracts with the selected companies proposing to install photovoltaic plants.

Selection takes place through the evaluation of technical and financial criteria,

including use of national components. For example, for the period 2011-2012,

projects were chosen for plants with power of between 5 and 20 MWp,

connected to 33 kW grids which, at the time of application, had already been

successively evaluated for interconnection by Transmission Utility. The PPA

tariff is defined by the CERC (Central Electricity Regulatory Commission) so

as to avoid having to lower the total power of the successful plants in order

to make sure they all fall within the maximum power for which incentives can

be granted (in a single tender): to this end those plants which have offered the

greatest discount on the CERC tariff (bidding system) are preferred.

At the end of the selection process, a Letter of Intent is signed between NVVN

and each of the selected companies, and within a month the actual PPA is

reached. The date of signing of the PPA is the date of reference for financial

closing (within 210 days of signing the PPA) and for the plant to become

operational (within 13 months of signing the PPA).

Grid

At present there is no electric grid unified at national level; in 1989 Powergrid

Corporation of India Ltd was commissioned to bring together the regional grids

(five in total: NR Northern Region, ER Eastern Region, WR Western Region, SR

Southern region and NER North-East Region).

Banks

92% of the sector is under state control (there are, for example, nineteen

nationalised banks), even if at the beginning of the 1990s the drive towards

liberalisation brought about the creation of some private banks.

Solar and wind source availability

Figure 12Map of solar radiation in India (annual irradiation)

Accumulated annual average (2005-2010)

Source: GeoModel Solar

Figure 13 Map of average wind speed in India (m/s)

0.0 – 2.0 m/s

2.0 – 2.5 m/s

2.5 – 3.0 m/s

3.0 – 3.5 m/s

3.5 – 4.0 m/s

4.0 – 4.5 m/s

4.5 – 5.0 m/s

5.0 – 5.5 m/s

5.5 – 6.0 m/s

> 6.0 m/s

Source: AL-PRO

<1,2501,4001,5501,7001,8502,0002,150<kWh/m2



Country Focus:Israel

Advantages

•Goodavailabilityofsolarsource

(best sites have irradiation 15% hi-

gher than the best Italian sites)

•Entryintoamarketwithpotential

for new plants with 300 MW by

2017.

Development Plan

The total peak power supply in Israel in 2010 is about 13,000 MW, with a

total national energy production of 56,432 GWh. The current main energy

sources are gas and coal, accounting respectively for 39.8% and 37.9% of the

energy supply installed in Israel (Table 24). Until 2010, renewable sources and

hydropower accounted for less than 1% of energy resources.

The Ministry of National Infrastructure (MNI) of Israel planned (‘Policy of MNI to

incorporate renewable energies in the electricity production sector’, February

2010) the development of renewable energy, and in the next ten years it

should account for 10% of the country’s total energy production. Israel looks

mainly towards solar power (1,750 MW planned by 2020).

Table 24 Evolution of Israel’s power plant (composition %)

Source 2001 2005 2010Coal 50.0% 48.4% 37.9%

Gas oil 22.6% 10.3% 3.4%

Fuel oil 27.4% 28.4% 18.9%

Gas - 12.9% 39.8%

Total 100.0% 100.0% 100.0%

Table 25 Evolution of the demand for electrical energy (TWh) and of the power plant in Israel (power in MW per source)

Renewable source 2014-2015 2016-2017 2018-2019 2020% of peak

power 2020

Total electrical energy demand (TWh) 60.4 61.5 64.5 64.3

Wind power 250 400 600 800 29.0%

Biogas and biomass 50 100 160 210 7.6%

Solar thermic and large photovoltaic plants

700 750 1,000 1,200 43.5%

Medium photovoltaic plants 350 350 350 350 12.7%

Small photovoltaic plants 200 200 200 200 7.2%

Total renewables 1,550 1,800 2,310 2,760 100%

% production in renewables 5.3% 6.5% 8.3% 10.2%

82



Availability of solar source

Figure 14Map of solar radiation in Israel (annual irradiation)

Total irradiation (kWh/m2)

Source: Ecole de Mines de Paris

<1,200 1,400 1,600 1,800 2,000 2,200 2,400 2,600 2,800>


• Decision of the board of Public Utilities Authority – Electricity (28 December 2009): the plants are classified as ‘small’ (up to 50 kWp),

‘medium’ (up to 5 MWp) and ‘large’. Medium and large plants input all the

energy produced into the grid (unlike the small plants) and the energy they

produce is repaid through a feed-in tariff. The incentive system sets a base

tariff(1.49NIS/kWh),updatedeveryyearinlinewithinflation,theEuro/NIS

andUSD/NISexchangerates,andadecrementalfactor.Thedecrementis

applied until either:

- a cap of total peak power (300 MWp) is achieved or

- the year 2017.

Table 26 Incentive system: reference scheme (MW)

Year Maximum annual quantity Accumulated quantity

2010-2011 50 50

2012 65 115

2013 85 200

2014 100 300

The decrement is bound by further annual caps on accumulated power until the

point shown in Table 26 is reached.

If the power cap of a given year is reached before the end of the year, the tariff

for the following candidate will be that set for the following year.

The tariff is recognised from the moment that the Provisional Tariff Approval

is issued. The tariff is for twenty years from the date that the plant becomes

operational. A time constraint exists in that it is necessary to prove to the

Public Utility Authority-Electricity (PUA) that the forms and inverter have been

handed in on site no later than eight months from the financial closure. What is

more, connection to the grid cannot be more than 42 months from the date of

issue of the Conditional License.

National Outline Program 10/D/10 for PV installation (December 2010):

this document provides guidelines for the construction of photovoltaic

plants and promotes the use of this type of energy source minimising the

environmental impact. In particular, instructions are given for obtaining building

permits for plants on roofs and walls of commercial buildings, and special

installations such as deposits, cisterns, car parks etc.



(1) Source: Israel Electric Corporation (2009 figures)(2) Source: Business Atlas 2010(3) Source: BOI news releases

Authorisations

For plant authorisation it is necessary to first obtain a Conditional License,

issued by the PUA and which must be countersigned by the MNI, in order to

operate as an Independent Power Producer (IPP) of solar energy. In this stage

the applicant must show that there exists a link with the area on which the

plant is to be built (preliminary agreement with the owners) and that it holds

at least 20% of the investment value in equity, with as reference a normative

costof5,000USD/kWp.ThisfigurehasbeenrecentlyupdatedbythePUA

fortheyearsafter2011:3,700USD/kWp(2012),3,480USD/kWp(2013)and

3,270USD/kWp(2014-2015).TheapplicationforProvisionalTariffApproval

may be made with or without funding. In order to not lose the provisionally

recognised tariff it is necessary to stipulate a Power Purchase Agreement (PPA)

for withdrawal of the energy by the grid company (IEC) and any funding within

ninety days.

Authorisation for plant operation is granted once the Operational Permit is

recognised by the MNI.

Other necessary authorisations are:

• technicalsolution(Technical Coordination Appendix) and the preliminary

connection estimate

• feasibilityStudybytheIEC,onlyiftheplantisconnectedinMT

•checkandgo-aheadofIECbeforeobtainingtheOperationalpermit.

Land

Most land is publicly owned. Land is easily rented for long periods (up to 90 years):

land purchase, on the other hand, is subject to detailed procedures depending on

municipal, regional and national regulations, and is greatly conditioned by the very

scarcity of land. For this reason, the relative cost of purchase can be very high.

Ownership is registered at municipal and regional level and documentation is

available for public viewing.

Grid and Authority

Israel’s national grid company is the Israel Electric Corporation (IEC), the country’s

only integrated electric utility and almost entirely state owned (99.85%). Established

in 1923, IEC is one of the largest industrial companies in Israel and owns the national

distribution and transmission grids. Furthermore, it owns and manages the seventeen

main generating plants (including the five large thermoelectric plants)(1) with a total

production capacity of about 11,000 MW (13,000 MW estimated for 2012). The main

sources of generation are also coal and gas.

In addition to IEC, the generation sector includes private investors (IPP Independent

Power Producer); the State depends on them for satisfying a part (target of 20%) of

the national energy demand, which from 1999 to 2009 increased at an annual rate

of 3.6%.

Wind power availability

Figure 15Map of average wind speed (m/s) in North Israel

Average wind speed – 50 m

-1 – 1 m/s

1 – 3 m/s

3 – 4 m/s

4 – 6 m/s

6 – 8 m/s

Red dots indicate zones with greatest potential at height of 50 m

Source: Gotland University

Figure 16Map of average wind speed (m/s) in the Northern Area of the West Bank on the border with Jordan

Average wind speed – 50 m

3.8 – 4.4 m/s

4.4 – 5.0 m/s

5.0 – 5.6 m/s

5.6 – 6.2 m/s

6.2 – 6.8 m/s

6.8 – 7.4 m/s

Orange dots indicate zones with greatest potential at height of 50 m

Source: Gotland University



The national distribution medium tension grid varies between 22 kV and 33 kV (and

12.6 kV in some urban areas), and a production plant (or a consumer) of up to 12

MVA can normally connect to this grid. Plants of up to 630 KVA can connect with

the grid in BT, while over 630 kVA and up to 12 MVA, the connection must be made

in MT or above.

The Israeli Authority (for electricity) is the Public Utility Authority – Electricity (PUA).

It receives license applications for energy production as an Independent Power

Producer andapplicationsforaccesstotheincentivetariffsintroducedinJune2008

for producers of solar power.

Banks

The banking sector is dominated by three main banks: Bank Hapoalim, Bank Leumi

and Israel Discount Bank(2), which account for about 76%(3) of all the commercial

banking business in Israel, and finance renewable energy (in particular solar power).

The two other important banks are United Mizrachi Bank and First International

Bank of Israel. These five major banks control about 96%(3) of the banking sector in

Israel.

The international banks most active in the country are City Bank, BNP Paribas,

HSBC. The essential requirement for the sponsor in order to obtain funding for

photovoltaic solar plants is having a ‘Provisional Tariff Approval’ recognised by the

PUA. The timescale for financial closure is closely linked to the ‘Provisional Tariff

Approval’, which is confirmed by the PUA only if within 90 days the funding is

finalised and the Power Purchase Agreement signed with IEC for the sale of the

energy produced.



Current situation and Development Plan

Brazil is one of the ‘emerging’ countries known as ‘BRICS’ (Brazil, Russia,

India, China, South Africa).

Regulation of the electric energy sector in Brazil began, in 1996, with the

creation of ANEEL, the National Electric Energy Agency, which is responsible

for regulating and supervising the production, transmission, distribution and

sale of electric energy, as well as for regulating the concessions of public

services associated with it.

Brazil has large reserves of petroleum, but it is also the world’s biggest

producer of biofuels and has enormous hydropower and wind resources. It is

a leader in the sector of renewable energies, which satisfy about 45% of the

domestic energy demand.

With regards to the production of electric energy, renewable energy sources

account at present for around 84% of the peak power in the country, about

76% of which is represented by large hydro, 4% by biomass, 3.5% by small

hydro and a smaller percentage by wind power (data from 2010).

InJanuary2010theBrazilianEnergyMinisterlaunchedanewten-yearplan

for energy expansion by 2020 (PDE 2020) which, in response to an expected

increase in demand and supply of energy resources during the next ten years,

establishes an investment plan for the creation of new infrastructures for

energy supply (see table below in MW).

Table 27 Evolution of power plant (power in MWp)

Source Existing MWp (2010)

New MWp (2010-2015)

New MWp (2015-2020)

Total (2020) Variation %

Biomass 4,496 2,857 1,810 9,163 103.8%

Wind 831 6,191 4,510 11,532 1,287.7%

Small-scale hydroelectric 3,806 1,151 1,490 6,447 69.4%

Hydroelectric 82,939 11,114 21,070 115,123 38.8%

Natural gas 9,180 2,479 0 11,659 27.0%

Coal 1,765 1,440 0 3,205 81.6%

Oil fuels 2,371 6,419 0 8,790 270.7%

Diesel 1,497 -376 0 1,121 -25.1%

Process gas 686 0 0 686 0.0%

Nuclear 2,007 0 1,405 3,412 70.0%

Total renewables 92,072 21,313 28,880 142,265 54.5%

Total other sources 17,506 9,962 1,405 28,873 64.9%

Total renewables + other sources 109,578 31,275 30,285 171,138 56.2%

Country Focus:Brazil

86

Advantages:

•Gooddevelopmentpotentialof

the various technological options,

especially in a very promising wind

market, with installation potential,

by 2020, of around 11 GW

•Goodavailabilityoflandforplants

•Presenceofaconstantlyexpand-

ing domestic consumption market

• Increasingimportanceintheworld

economic scene and increasing

economic development

•Highpotentialofthephotovoltaic

sector, particularly suited for the

electrification of internal rural ar-

eas, where connection to the na-

tional grid would be too expensive.



Graph 26 Evolution of power plant (power in MWp)

11 232.50

50,000

100,000

150,000

200,000

Existing MWp(2010)

Renewables Other

New MWp(2010 - 2015)

New MWp(2015 - 2020)

Total(2020)

[MW

p]

2311

92,072

142,265

17,50621,313 28,880 28,8739,962 1,405


• Programma de Aceleraçao do Crecimiento 2 (PAC2). The programme,

launched in 2010, includes two phases for investments: the first between

2011 and 2014 and the second after 2014, to a total value of 1,590 billion

Reais (around 680 billion euros). PAC 2 defines six priority sectors, including

energy, construction and transport. The majority of investments will be

destined for energy projects, to a total value of 1,092 billion Reais (around

470 billion euros).

For the production of electric energy, the creation of 76 power stations is

planned for a total peak power of approximately 26,252 MW.

•Bill 2562/2011. While awaiting the final word of the Mining and Energy

Commission following recent approval from ANEEL, the bill establishes

the energy compensation system for those generation plants which use

renewable energy (mini-hydro, solar, biomass, wind and cogeneration), up

to a maximum of 1 MW. Energy produced and not consumed by the unit of

installed generation capacity will be put into the distribution system and a

credit recorded to be used up within 36 months. Photovoltaic plants up to a

maximum of 30 MW will be exempt from tax for use of the network, with

the possibility for tax payers to deduct from their income tax, up to 2020, a

part of the costs relative to goods and services needed to use solar energy.

A progressive deduction is planned, starting at 25% and up to 100% for

individuals and small businesses.



•Carta do Sol.ApprovedbytheBrazilianstateofRiodeJaneiro,thedocument contains 14 proposals to promote the photovoltaic technology

within its own territory. The proposals include, in particular, exemption from

charges for distribution and transmission of electric energy and inclusion of

photovoltaic in the Programa de Incentivo de las Fuentes de Energia Electrica

(Proinfa), a programme established in 2002 with the aim of promoting

renewable sources, in particular wind, biomass and small hydro.

Authorisations

The Brazilian electric energy sector is regulated by the Federal Government

which operates through the Mining and Energy Ministry (MME), responsible for

development policies, and through ANEEL.

ANEEL, acting as an independent regulator, delegated by the Federal

Government, is responsible for holding public tenders (auctions) for the

construction and maintenance of the new segments of the Brazilian RTN

(National Transmission Network) and for handing out and supervising

concessions for the production, transmission and distribution of electric energy.

In order to participate in the auction, a project must obtain an environmental

license, including an environmental impact study carried out by independent

experts, and which must be given to the federal or state authorities for

appraisal and approval.

The approval procedure is divided into three stages:

1) initial provisional license following assessment of the project’s

environmental feasibility

2) installation license

3) operating license.

In particular, the environmental license is granted by the Brazilian Institute

for the Environment and Renewable Natural Resources (IBAMA), executive

organ of the National Environmental Agency (SISNAMA) which carries out the

national environmental policy and is responsible for verifying, monitoring and

promoting the use of Brazil’s natural resources.

Land

In Brazil, land ownership is certified by property deeds, duly registered in the

competent Property Register.

With regard to urban property, each city has its own development plan

(‘Plano Diretor’) which defines the intended use of each area: residential,

commercial, industrial and agricultural. As for rural areas, if by definition they

are not destined for urban development, they may be considered agricultural

or protected reserve. In Brazil it is forbidden for persons not resident in

thecountrytopurchaseareasdefinedasrural,aslaidoutinlawn°5709/

71, except in the case of legitimate succession. Consequently, a foreigner

must create a Brazilian company which is the legal owner of the property, or

alternatively be already resident in Brazil.



Brazilian companies, with majority ownership of foreign capital, may be

subject to restrictions for purchase, which must be approved by the Ministry

of Agriculture and by the Department of Commerce and Industry in Brazil,

depending on the circumstances. The president of the Republic may permit

exemptions when a project is in the interests of national development.

Grid

In Brazil, the electric energy sector, with particular reference to generation and

transmission, is dominated mainly by large Government-controlled companies,

above all Eletrobras owned by the federal government, but also other state-

owned companies, while a smaller proportion of the assets is currently in the

hands of private investors.

The companies (or agents) are classified according to their activities:

generation, transmission, distribution.

In 2004, the federal Government established a new model for the Brazilian

electric sector and defined the creation of two energy trading markets: a

regulated environment (RCE), where a pool of distributors purchases energy

from the producers in public auctions, and a free trading environment (FCE),

where consumers, traders and free producers, can freely negotiate contracts.

The Chamber of Electric Energy Trading (CCEE) was created under law 10848,

in March 2004, and is responsible for administrating and regulating both trading

environments under the supervision of ANEEL.

Requests for licenses for new production plants are made to ANEEL.

Banks

The National Bank for Economic and Social Development (BNDES), created

in 1952, with the aim of implementing the investment policies of the Federal

Government, is one of the main funding agencies for the development of

Brazil. In 2011, BNDES received a loan to the value of 500 million euros

from the European Investment Bank (BEI) with the aim of contributing to the

development of renewable energies and energy efficiency in the Country.

Thanks to this loan, the Brazilian bank is able to back small and medium

investments; in particular various investment programmes will receive funding

in the sectors of renewable energy and energy efficiency.

The selection of the projects which must be carried out in Brazil will be

entrusted to BNDES, on the basis of the criteria for eligibility established in the

loan contract undersigned with the BEI.

Solar and wind source availability Figure 17 Map of solar radiation in Brazil

Source: Atlas Brasileiro de Energia Solar – 1st edition 2006

Figure 18 Map of average wind speed (m/s) in Brazil

Source: CRESESB

3.153.503.854.204.554.905.255.605.956.306.65KWh/m2

<3.5 4 4.5 5 5.5 6 6.5 7 7.5 8 8.5 >9

The analyses contained in this publication come from publicly available data and information, for which KPMG Advisory S.p.A. cannot guarantee the accuracy, completeness and correctness. This publication is neither a sales offer nor a solicitation for purchases of any type. Similarly, it does not intend to provide any suggestions or recommendations in terms of operational decision making or investment. KPMG Advisory S.p.A. will not accept any responsibility for loss or damage deriving from the improper use of this report or the information contained herein. © 2011 KPMG Advisory S.p.A., an Italian limited liability share capital company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

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