The Italian PV market has been exploding with project announcements over the past two weeks. Among them is a 25 MW project to be constructed by Prime Sun Power, a 5 MW project that is already the largest using Evergreen Solar modules, a 9.8 MW turnkey project to be developed by Siliken for Fotowatio Renewable Ventures, and a 72 MW project by SunEdison that will become the largest PV project in Europe. In February, SunPower acquired SunRay, a Malta-based project developer with a 75 MW+ Italian pipeline, in no small part to gain better access to the Italian market. And that is without mentioning the continuous stream of just-under-1 MW project announcements that arrive daily (more on that later). Most importantly, all of these projects are intended for completion this year.
If the market keeps up this pace throughout 2010, Italy will experience triple-digit growth and could install a gigawatt of new PV capacity. But in doing so, Italy risks becoming the next victim of the PV gold rush. Over the past two years, this has happened in Spain (2008), the Czech Republic (2009) and, to a lesser extent, Germany (2009). Each of these countries had a national feed-in tariff without a hard cap, which enabled demand to expand far beyond the government's expectations within a single year. And in each market, the government responded drastically, either by slashing rates (Germany), instituting a strict program cap (Spain), or placing the program entirely on hold (Czech Republic).
In order to assess the likelihood of Italy as the next overheated market, there are three questions we need to ask. Why all the interest in the Italian market? How fast can it ramp up? And, what happens next?Why All the Interest in Italy?
Italy installed 544 MW of PV in 2009 to become the second-largest European PV market behind Germany. Italy's Conto Energia feed-in tariff program, which offered tariffs ranging from €0.37/kWh to €0.48/kWh in 2009, enabled increasingly attractive investor returns as module prices fell throughout the year. For 2010, we estimate that equity (levered) internal rates of return for projects generally range from 18 percent to 23 percent, well above typical investor threshold rates. In other words, there is gold to be found and prospectors know it.
The current phase of the Conto Energia ends in 2010 and is theoretically capped at 1,200 MW, which will be reached early this year. But there is a 14-month grace period for projects installed after the cap is reached, essentially guaranteeing that all projects installed in 2010 receive the current tariffs. Adding to Italy's growth this year is the fact that post-2010 rates have not yet been set by the government. Uncertainty regarding the severity of those cuts is creating an additional demand pull into 2010.
The Italian market was likely to grow substantially in 2010 regardless of external factors. But the feverish growth occurring now is as much a result of the German market as it is the Italian market. The lack of visibility into the second half of the year in Germany, both in terms of the magnitude of the feed-in tariff cuts and the impact of those cuts on demand, has led suppliers to seek a hedge against lost German demand. Italy is a popular choice -- it offers attractive returns, a relatively established integrator base and, as I mentioned, no market cap. So unless the German government pares back its planned feed-in tariff cuts, Italy will remain the European market's big hope for 2010.
If anything hinders Italy's growth this year, it will be administrative barriers. The Italian government requires every project over 20 kW to go through a "single authorization procedure" (Autorizzazione Unica, or AU) that can take over six months. Additional delays for environmental impact screening have also been reported. Even after the AU process has been completed, grid connection approvals are required from local distribution companies before a project can submit a feed-in tariff request to the GSE, the grid operator.
Recognizing the difficulty presented by the AU, a number of regions, mostly in Southern Italy, increased the capacity requirement to 1 MW, allowing smaller projects to receive authorization through a "start of activity declaration" (denuncia di inizio attivita, or DIA), which automatically authorizes projects if the public administration does not object within 30 days of receiving the DIA. This resulted in a wave of just-under 1 MW projects in these regions in 2009 that provided most of Italy's demand growth. However, the DIA benefit may disappear, as the federal government is challenging the regions on their ability to autonomously alter the AU requirements. The first hearings on the topic, in Apulia, began in January 2010. If the federal government prevails, the approvals process will become worse than it was previously and the project backlog will likely increase.
Source: GSE, GTM Research
However, 47 percent of Italy's demand in 2009 came in November and December. Many of these projects began development in the third quarter, once module prices had plummeted. The fact that so many projects were able to achieve completion during 2009 may be an indicator that the Italian market can ramp up faster than expected in 2010.What Will Happen Next?
The Italian government is in a strange position. The better it is at reducing regulatory delays, the more likely the market is to overheat in 2010. Similarly, the stricter its 2011 feed-in tariff cuts are, the larger the demand pull into this year. So the government has to weigh its desire to support a growing PV market with a need to avoid repeating the mistakes of other overheated PV markets.
We will soon gain a better picture of the 2010 Italian market landscape. In January, the Italian government announced that it would set a new goal of 8,000 MW cumulative solar capacity by 2020, and that it expected to introduce new feed-in tariff rates for 2011 onward at the end of the month. However, the government then stated that it would delay the introduction of new rates until sometime in March. The timeline is still in question, and the longer the delay, the more post-2010 uncertainty will drive demand in this year.
The best indicator of potential cuts in Italy is a proposal issued by Italy's three industry associations (ASOSOLARE, APER, and GFI) in November 2009. According to a draft decree passing through the Italian Parliament, the ground-mount tariff for projects over 1 MW will only be cut to €0.313/kWh, a smaller cut than proposed by the industry associations. This would decline to €0.2642/kWh at the end of 2011 and digress by 6 percent annually thereafter. While significant, these cuts would not seriously constrain the Italian market. Returns will remain sufficient even with module price moderation.
Proposed 2011 Italian Feed-in Tariff Rates
Source: ASOSOLARE, APER, GFI
Final passage of the German feed-in tariff cuts will also give us a window into Italy's near-term future. The worse things look in Germany after July, the larger the shift to Italy will become. Regardless, expect Italy to remain at the forefront of PV project development activity throughout 2010, and be wary of making any assumptions regarding its market size in 2011 and beyond.