The Italian Job – the ‘spalmaincentivi’ Decree

December 2015 | EXPERT BRIEFING | SECTOR ANALYSIS

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Upon the enforcement of the so-called ‘Competitiveness Decree’ (the Decree) Italian PV operators had – mandatorily – to choose, by 30 November 2014, from three feed-in-tariff (FIT) reshaping options. They could chose from: (i) receiving a revised FIT over an extended period of 24 years as from the entry into operation of the plant (vis-à-vis the 20-year period provided under laws and regulations previously in force); (ii) maintaining the original 20-year incentive period, and receiving a reduced FIT at an earlier stage, and then an increased FIT (by the same amount) at a later stage; or (iii) maintaining the original 20-year incentive period, but with a flat cut of the FIT for the remainder of the incentive period by 6 percent, 7 percent or 8 percent (depending on the relevant PV plant power capacity).

The ‘Conto Energia’ is the Italian incentive programme introduced in 2005 which subsidises the production of energy from photovoltaic plants connected to the grid.

From a political standpoint, the FIT reduction provided by the Decree has been grounded on the necessity to reduce the energy costs borne by small and medium enterprises. The Decree had a significant impact not only on the return-on-investments for sponsors (who relied on the incentive amounts already acknowledged as of the date of entry of operation of the plants), but also on sustainability of the underlying financial structure, since the reshaping of incentives provided by the Decree adversely jeopardised the ability of the borrowers to comply with the financial covenants usually provided under project finance structures.

The reshaped FIT came into force on 1 January 2015. In the event PV operators did not voluntarily elect any option by 30 November 2014, the third option – the FIT ‘flat cut’– automatically applied.

Impact on IRR and financials

Considering the custom project finance debt structures and the rate of degradation of PV modules, both the first and the second FIT reshaping options have had a significant impact on IRR and debt service capacity. In particular, even though at a first glance the second option could appear ‘neutral’ (the initial cash flow reduction will be restored by a later corresponding increase); however, this is not totally correct, since the initial shortfall might immediately result in an inability to repay debt instalments and financing costs and the degradation of PV modules implies lower cash flow in the last years of operation.

From a bankability standpoint, the third FIT reshaping option has a linear impact on the cash flow profile. In such a scenario (excluding an extension of the tenor of the debt, which is difficult to accept by lenders’ credit committees considering the unaltered incentive period) an intervention aimed at reducing debt exposure and/or financing costs appears to be the only viable solution in order to preserve, as far as possible, financial ratios and investors’ profitability.

In fact, in most cases the operators chose the flat cut, preserving the original 20 year incentive period which is important for two reasons. Firstly, because the plant is subject to deterioration, and secondly, because usually the whole structure of the industrial and financing transaction was set up for a period of 20 years.

The intervention of the Constitutional Court

Several PV operators, have, in recent months, challenged the FIT reshaping provisions, by filing claims before administrative courts. Basically, operators have claimed the de facto retrospective effects of the Decree are in breach of the legitimate expectation of PV operators. In terms of claims, the remedies available to PV players against the Decree may be divided into two major categories: (i) domestic remedies (in particular, declaration of unconstitutionality of the Decree); and (ii) international remedies (in particular, international arbitration procedures).

Under Italian law, in order to have a declaration of unconstitutionality, the relevant party must file a lawsuit before the relevant (civil or administrative) court and then raise an ‘unconstitutionality objection’ during the relevant trial (an objection that may also be autonomously raised by the judge).

On 23 June 2015, the Administrative Court of the Lazio region (TAR Lazio) opted to refer the ‘spalmaincentivi’ matter to the Italian Constitutional Court alleging that, firstly, there had been a breach of articles three and 41 of the Italian Constitution. The TAR Lazio handed down the likely conflict between the paragraph three of article 26 of the Decree and the principles of legitimate reliance, as provided for under articles three and 41 of the Italian Constitution. The direct and immediate harm of the economic position of PV plant owners appears to unreasonably and disproportionally affect the individual rights of the latter. Secondly, the court alleged breach of articles 11 and 117 of the Italian Constitution. The TAR Lazio held that the credits of the plant owners were disproportionately harmed without any satisfactory counterbalance (i.e., the decrease of the electricity tariffs for certain consumers). Thirdly, the court alleged a breach of article 77 of the Italian Constitution. Lastly, according to the TAR Lazio, Article 26 lacks of an adequate reasoning behind the choice of an emergency measure, such as the law decree, even considering the heterogeneous scope of the Decree.

The referral to the Constitutional Court immediately suspended the other claims pending before TAR Lazio and the Administrative Court of Appeal in relation to article 26 of the Decree. Once the Constitutional Court provides its ruling (likely in the first half of 2016) the TAR Lazio and the Consiglio di Stato will resume the suspended trials and will rule in accordance with the interpretation of the Constitutional Court, whose rulings have retrospective effect, thus affecting ex tunc the validity and effectiveness of the provision declared contrary to the Italian Constitution (in this case, article 26 of the Decree). The effects of a possible declaration of unconstitutionality of article 26 of the Decree would, thus, not be limited to the claimants which have submitted a claim before the TAR Lazio, but would spread a binding effect with respect to all PV operators in Italy (the so-called ‘erga omnes’ effect).

Conclusions

The Decree created a massive strain on the so-called ‘Italian risk’ among the foreign investors operating in the PV sector – this is confirmed by, among others, the commencement by Energy Charter Treaty arbitration procedures, in order to limit the economic losses incurred upon the entry into force of the Decree.

Considering that the Decree has substantially retrospective effects on investments and has significantly affected the PV market in Italy, it is not difficult to predict the impact of a possible unconstitutionality judgment by the Constitutional Court. In this case, the Decree would retrospectively cease to produce effects toward all PV operators in Italy, with the paradoxical consequence that a law enacted in order to procure a saving to the Italian state would finally result in enormous compensation to pay for the same.

In conclusion, as of today, the entire Italian energy market is looking forward to the decision of the Constitutional Court, which currently holds in its capable hands the destiny of the Italian PV sector. Either the Court will decide to declare the Decree unconstitutional, or, should the FIT reduction remain valid and effective, the story of the ‘Italian job’ will finally come to an end.

Rosella Antonuccis is a partner at Legance Avvocati Associati. She can be contacted on +39 06 93 18 271 or by email: rantonucci@legance.it.

Rosella Antonuccis

Legance Avvocati Associati