The Italian PV market has been exploding withproject 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 Solarmodules, a 9.8 MW turnkey project to be developed by Siliken for FotowatioRenewable Ventures, and a 72 MW project by SunEdison that will become the largest PV project inEurope. In February, SunPower acquired SunRay, a Malta-based project developer with a 75 MW+ Italian pipeline, in nosmall part to gain better access to the Italian market. And that iswithout mentioning the continuousstream of just-under-1 MW project announcements that arrive daily (more onthat later). Most importantly, all of these projects are intended forcompletion this year.
If the market keeps up this pace throughout 2010, Italy willexperience triple-digit growth and could install a gigawatt of new PVcapacity. But in doing so, Italy risks becoming the next victim of thePV 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 ahard cap, which enabled demand to expand far beyond the government’sexpectations within a single year. And in each market, the governmentresponded 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 overheatedmarket, there are three questions we need to ask. Why all the interestin 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-largestEuropean PV market behind Germany. Italy’s Conto Energia feed-in tariffprogram, which offered tariffs ranging from €0.37/kWh to €0.48/kWh in2009, enabled increasingly attractive investor returns as module pricesfell 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 otherwords, there is gold to be found and prospectors know it.
The current phase of the Conto Energia ends in 2010 and istheoretically capped at 1,200 MW, which will be reached early this year. But there is a 14-month grace period for projects installed after thecap is reached, essentially guaranteeing that all projects installed in2010 receive the current tariffs. Adding to Italy’s growth this year isthe fact that post-2010 rates have not yet been set by the government.Uncertainty regarding the severity of those cuts is creating anadditional demand pull into 2010.
The Italian market was likely to grow substantially in 2010regardless of external factors. But the feverish growth occurring now is as much a result of the German market as it is the Italian market. Thelack of visibility into the second half of the year in Germany, both interms of the magnitude of the feed-in tariff cuts and the impact ofthose cuts on demand, has led suppliers to seek a hedge against lostGerman demand. Italy is a popular choice — it offers attractivereturns, a relatively established integrator base and, as I mentioned,no market cap. So unless the German government pares back its plannedfeed-in tariff cuts, Italy will remain the European market’s big hopefor 2010.
How Fast Can Italy Ramp Up?
If anything hinders Italy’s growth this year, it will beadministrative barriers. The Italian government requires every projectover 20 kW to go through a "single authorization procedure"(Autorizzazione Unica, or AU) that can take over six months. Additionaldelays for environmental impact screening have also been reported. Evenafter the AU process has been completed, grid connection approvals arerequired 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 ofactivity declaration" (denuncia di inizio attivita, or DIA), whichautomatically authorizes projects if the public administration does notobject within 30 days of receiving the DIA. This resulted in a wave ofjust-under 1 MW projects in these regions in 2009 that provided most ofItaly’s demand growth. However, the DIA benefit may disappear, as thefederal government is challenging the regions on their ability toautonomously 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 theproject backlog will likely increase.
Source: GSE, GTM Research
However, 47 percent of Italy’s demand in 2009 came in November andDecember. Many of these projects began development in the third quarter, once module prices had plummeted. The fact that so many projects wereable to achieve completion during 2009 may be an indicator that theItalian 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 atreducing regulatory delays, the more likely the market is to overheat in 2010. Similarly, the stricter its 2011 feed-in tariff cuts are, thelarger the demand pull into this year. So the government has to weighits 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 marketlandscape. In January, the Italian government announced that it wouldset a new goal of 8,000 MW cumulative solar capacity by 2020, and thatit expected to introduce new feed-in tariff rates for 2011 onward at the end of the month. However, the government then stated that it woulddelay the introduction of new rates until sometime in March. Thetimeline is still in question, and the longer the delay, the morepost-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) inNovember 2009. According to a draft decree passing through the ItalianParliament, the ground-mount tariff for projects over 1 MW will only becut to €0.313/kWh, a smaller cut than proposed by the industryassociations. This would decline to €0.2642/kWh at the end of 2011 anddigress by 6 percent annually thereafter. While significant, these cutswould not seriously constrain the Italian market. Returns will remainsufficient 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 awindow into Italy’s near-term future. The worse things look in Germanyafter July, the larger the shift to Italy will become. Regardless,expect Italy to remain at the forefront of PV project developmentactivity throughout 2010, and be wary of making any assumptionsregarding its market size in 2011 and beyond.