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ELECTRICITY PRICES ANDRENEWABLE ENERGY

Lucia Passamonti

Strategy, Research and Documentation Dept.

Italian Regulatory Authority for Electricity and Gas

Milano, March, 4 2010

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List of topics

1. Italy’s electricity generation from renewable sources

2. Italy’s support schemes for renewables

3. Cost of support schemes

4. EU Climate and Energy policy

5. Expected compliance costs of EU policy

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Italy’s electricity gross generation

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

RES NON-RES

GWh

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Italy’s electricity by sourcegross production, 2008

RES19%

Electricity production: 319 TWh of which RES(*): 60 TWh

(*) It includes non-biodegradable waste

13%

54%

6%6%

2%

13%

2%

2%

0%

2%19%

coal

gas

oil

others

pumped storage

hydro

geothermal

wind

solar

comb. renew. & waste

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RES Support Schemes in Italy - 1

Quantity-based instruments

• Quota obligation to source a specific percentage of electricity from RES generation; Tradable Green Certificates (TGC) prove compliance with the obligation

Price-based instruments

• Feed-in tariffs: RES generators are paid a fixed price, irrespective of the wholesale price of electricity

• Feed-in premium: RES generators are paid a premium price in addition to the wholesale electricity price

• Investments subsidies granted mainly by local governments

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RES Support Schemes in Italy - 2

Incentive typology Plants involvedDuration of the incentivation

Incentivated volumes of energy

Green certificatesRES and "hybrid" plants entered into service since 1 april 1999

12 years for plants entered into service between 1 April 1999 and 31 December 2007; 15 years for plants entered into service since 1 January 2008

Net electricity produced by plants entered into service between 1 April 1999 and 31 December 2007; net electricity produced multiplied by a

coefficient for plants entered into service since 1 January 2008. Concerning "hybrid" plants,

incentivated energy is that attributable to RES.

Feed-in premium for photovoltaic plants

Photovoltaic plants entered into service after 30 September 2005

20 years Produced energy

Feed-in premium for thermodynamic solar

plants

Thermodynamic solar plants entered into service after 18 July

200825 years

Net electricity produced. Concerning "hybrid" plants, incentivated energy is that attributable to

solar source.

Feed-in tariff("all inclusive" tariff)

Plants entered into service since 1 January 2008; wind plants with

power capacity less than 200 kW; other RES plants, except solar plants, with power less than 1

MW

15 yearsElectricity injected in the grid. Concerning "hybrid" plants, incentivated production is that attributable

to RES.

Feed-in tariff(CIP 6 mechanism)

Plants alimented by renewable and "renewable assimilated" sources; the mechanism was replaced in 1999 by the green

certificates market

8 years for the incentive component, correlated to major costs relative to different plant typologies; mainly 15 years for

the component relative to avoided costs

Produced and injected energy

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GSE – Energy Services Operator

State-controlled company (fully owned by Ministry of Finance)

It owns GME (Electricity Market Operator) and AU (Single Buyer)

It is responsible for promoting and developing renewables resources:

• Buys electricity generated by renewable and assimilated sources and sells it in the market

• Issues Green Certificates and monitors producers’ and importers’ compliance with renewables obligation

• Certifies plants using renewables sources

• Issues the Guarantee of Origin (GO) of electricity generated by renewables

• Manages the scheme that stimulates electricity generation by photovoltaic plants and solar thermodynamic plants

• Certifies co-generation plants

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Breakdown of RES gross production

by support scheme, 2008

TGC17.7%

CIP612.4%

PV0.3%

Not supported69.1%

All inclusive0.4%

Total RES production: 60 TWh of which supported: 19 TWh

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Breakdown of costs by support scheme, 2009

Total estimated costs: - around 2,500 million euro in 2009 on an accrual basis

TGC49%

CIP634%

PV14%

All inclusive3%

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Renewables Costs and Electricity Prices - 1

SUPPORT SCHEMES

ELECTRICITY PRICE

TGC POWER SUPPLY

TRANSMISSION & DISTRIBUTION

CIP6

NON-TAX LEVIESPV

“All inclusive”

TAXES

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Renewables Costs and Electricity Prices - 2

Rough estimate of impact on electricity prices

• Around 8 euro/MWh in 2009 (on accrual basis)

Estimated impact of TGC on wholesale prices

• Around 2 euro/MWh corresponding to 3% of wholesale electricity price in 2009

Estimated impact of carbon costs (EU ETS) on wholesale prices

• Around 1 euro/MWh corresponding to 1.4% of wholesale electricity price in 2009

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Renewables Costs and Electricity Prices - 3

Electricity price for households: 166.25 €/MWh(3 kW, 2700 kWh/y, Euro/MWh)

-

20

40

60

80

100

120

140

160

180

OCT-DEC 09

Taxes

Non-tax levies

Transport

Power supply

37% of Non-tax levies to support RES (*)

around 3% of cost of energy to support RES and CO2 emissions reduction

14%

8%

15%

63%

(*) The percentage reflects the cost of incentives paid by the household end-user on a cash basis instead of an accrual basis

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EU Climate and Energy Policy

March 2007, EU Council

Climate and energy targets to be met by 2020:

• A reduction in EU greenhouse gas emissions of at least 20% below 1990 levels

• 20% of EU energy consumption to come from renewable resources (of which 10% in the transport sector)

• A 20% reduction in primary energy use compared with projected levels, to be achieved by improving energy efficiency

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EU Climate and Energy Package - 1

December 2008, EU Council and Parliament

Binding legislation:1. A revision and strengthening of the Emissions Trading

System (EU ETS). A single EU-wide cap on emission allowances will reduce the number of allowances available to businesses to 21% below the 2005 level in 2020.

2. An 'Effort Sharing Decision’ governing emissions from sectors not covered by the EU ETS, such as transport, housing, agriculture and waste. Specific national targets will cut the EU’s overall emissions from the non-ETS sectors by 10% by 2020 compared with 2005 levels.

3. Binding national targets for renewable energy which collectively will lift the average renewable share across the EU to 20% by 2020.

4. A legal framework to promote the development and safe use of carbon capture and storage (CCS).

The package does not address energy efficiency improvements. This is being done through the EU’s

Energy Efficiency Action.

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EU Climate and Energy Package - 2

Italy’s targets:

• 17% of energy consumption in 2020 to come from renewable resources

• A reduction in EU greenhouse gas emissions of 13% by 2020 compared to 2005 in sectors not covered by the EU ETS

• No specific target for sectors covered by the EU ETS since the cap applied from 2013 is EU-wide

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Compliance costs for Italy - 1

Based on EU Commission Impact Assessment (published in 2008)

Assumptions:

• Allowed use of CDM/JI credits (from Kyoto flexible mechanisms) to reach the emissions reduction target

• No RES trading within EU and with Third Countries to reach the renewables target

Estimated results for reaching simultaneously both RES and GHG emissions reduction target:

• Yearly compliance costs around 10 billion euro (2005 prices) from 2011 thru 2020

• Compliance costs around 0.9% of GDP in 2020

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Compliance costs for Italy - 2

AEEG estimates for RES only compliance costs

Assumptions:

• Italy’s potential for RES deployment: 21 Mtoe of which 9 Mtoe (104 TWh) for electricity generation (Italian Gvmt Position Paper)

• No RES trading within EU and with Third Countries to reach the renewables target

• Linear deployment of RES from current situation and extension of existing support measures thru 2020 while gradually halving support levels

• Energy efficiency measures to reduce final consumption by 17% with respect to EU baseline projection in order to meet the RES target of 17% with a deployment of RES power plants equal to the potential

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Compliance costs for Italy - 3

AEEG estimates for RES compliance costs

Results:

• Compliance costs accounting to more than 5 billion euro in year 2015 and around 7 billion euro in year 2020

• More than 3.5 billion euro in year 2020 for supporting PV plants deployment

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СПОСИБО ЗА

ВНИМАНИЕ !!!

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BACK-UP

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TRADABLE GREEN CERTIFICATES

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20

40

60

80

100

120

140

2002 2003 2004 2005 2006 2007 2008 2009

Eu

ro/M

Wh

TGC supply price IPEX Wholesale price

Tradable Green Certificates reference prices

• In the period 2002-2007 the reference price of TGCs, issued by GSE on his behalf and sold into the power exchange with reference to RES-sourced CIP6 plants, was based on the difference between the cost of purchasing electricity from supported CIP6 plants and revenues from the sale of such electricity

• Since 2008 the reference price of TGCs is computed as the difference between a predetermined price (180 €/MWh) and the sale price of electricity produced by RES and micro plants in the previous year