The emergence of subsidy-free solar in Italy has stalled because of plummeting energy demand and free-falling electricity spot prices in the wake of the coronavirus pandemic. Industry sources said projects are now being put on hold pending a return to more favorable market conditions.
In the future, said Cornwall Insight senior analyst Tom Andrews, “We would expect most of the new capacity to be subsidy-free. However, rock-bottom commodity prices will interrupt this process in the short term, and most developers will be putting projects into hibernation.”
This February, Andrews had predicted a “thriving” subsidy-free solar market in Italy after the country’s first contracts-for-difference auction saw just one 5-megawatt solar plant winning government support, against 495 megawatts of wind generation.
The auction, held last year with results announced in January, was due to be the first of seven from 2019 through 2021. “The format of the auction was technology-neutral, and wind proved to be a much cheaper option,” Andrews told GTM. “That said, only a handful of [solar] plants bid in.”
The main reason for this was that the tender conditions did not allow for plants to be built on agricultural land, and most of the non-agricultural locations available for solar were not big enough, cheap enough or well-situated enough to make projects economically viable, he said.
In contrast, subsidy-free solar had been gathering momentum in advance of the coronavirus pandemic, which forced Italians into quarantine on March 9. Last December, British developer Octopus Renewables commissioned 70 megawatts of unsubsidized solar across seven plants.
The projects, on the Mediterranean island of Sardinia, were backed by power-purchase agreements (PPAs) with Shell Energy Europe and Ego Group, an Italian energy trading and services company.
Andrews said: “There were indications that this market would expand considerably, and a wave of PPA-backed projects was expected.”
Wood Mackenzie estimates that 23 gigawatts' worth of solar projects originally expected to be completed this year around the world will be delayed or canceled.
PV auctions regain relevance in the age of coronavirus
The attraction of unsubsidized projects is that they can be built on low-cost agricultural land, which greatly increases the range of locations available for solar.
“At least 8 percent of developments are on agricultural land and cannot get into the auctions,” said Michele Appendino, chairman and CEO of Milan-based developer Solar Ventures.
And although less than a gigawatt of unsubsidized solar has so far been permitted in Italy, “Several gigawatts of large-scale plants [are] under development,” he said.
In some cases, too, the revenue available from corporate PPAs might outweigh the rates guaranteed under the contracts-for-difference system. The solar project that secured backing in this year’s inaugural auction did so with a bid of 60 euros ($65) per megawatt-hour.
But with the impact of the coronavirus pandemic now clouding economic forecasts, it is possible developers might switch back to the relative safety of government-backed contracts for difference if the auction scheme is reactivated.
Appendino said growing interest in subsidy-free plants would likely be accompanied by a rebound in auction-based solar. “They are two complementary strategies,” he said.
For now, of course, all bets are off until Italy emerges from its COVID-19 crisis.
Permitting puts squeeze on solar goals
The difficulties facing subsidized plants and the coronavirus paralysis affecting subsidy-free projects could pose a problem for Italy’s solar energy goals, which insiders said are already suffering from a pernicious permitting process.
“Italy's National Integrated Energy and Climate Plan [PNIEC] foresees the construction of about 30 gigawatts of new solar capacity between now and 2030, of which we expect two-thirds will be utility-scale projects,” said Carlo Zorzoli, head of business development at Enel Green Power. At the end of 2019, Italy had installed 20.5 gigawatts of solar in total.
But the rate of issuance of building permits is not fast enough to allow for proper implementation of this plan.
“Specifically, if the rate of issuance of building permits remains similar to that of 2017-2018, then in order for PNIEC to be carried out — with about 30 gigawatts of PV and 8 gigawatts of wind — it will take 67 years to achieve the target,” Zorzoli said.
It is unclear whether the Italian authorities will streamline the permitting process or relax auction rules on agricultural land once the country’s economy picks up enough to warrant new plant construction.
What is certain is that the short-term outlook for unsubsidized solar is murkier now than it was a couple of months ago.
“Looking at the current scenario and at the volumes entering authorization, it is conceivable incentive-free PV will require, even more than before, a further drop in development and construction costs, more competitive technologies and diversified commercial sales strategies for the energy produced,” said Zorzoli.