PPAs: why Italy only witnessed a few corporate cases

PPAs: why Italy only witnessed a few corporate cases

Gallanti (One): generators and off takers don´t share the same priorities, banks are cautious and there are accounting complexities. Yet the potential is about to break free

According to Dario Gallanti, Partner of the energy transaction firm Our New Energy, specializing in power purchase agreements (PPAs), there are different reasons why only a few long-term corporate PPAs are signed in Italy for renewable energy, despite the potential of the market. The main reason is the drop in energy prices which has cooled industries’ appetite for renewables and the divergence of approach among customers, seeking low-priced electricity, and investors, that instead need “tailor-made” deals. Moreover, the caution from banks, who tend to prefer the “mediation” of traders and utilities, and the unfamiliarity of the industry with the applicable accounting treatment.

“Given the potential,” Gallanti tells Staffetta, “one would think that many corporate PPAs have already been signed in Italy, but this is not yet the case”. The primary cause is the high transaction risk, “with agreements falling through shortly before signing, despite the efforts invested in the transaction by both parties.”

Gallanti also points out that falling market prices are playing a significant role: “forward prices have dropped substantially, and we now witness around €150/MWh for Italian Cal-2024. That’s still almost three times higher than the pre-pandemic spot market level, but somehow corporates simply seem less interested in securing long term fixed energy prices, believing that the storm is behind them and the need for PPAs is no longer so pressing”.

A key issue, Gallanti explains, “is that the asset owners and the energy-buying companies often don’t have the same view on PPAs: companies often approach long-term agreements as a simple commodity contract, with price as the main evaluation factor, while most sellers view PPAs as more complex commitments. As a result, Italian generators allocate less time and spend fewer resources to initiate dialogue with off takers, as they know that the opportunities for negotiating a tailored contract are limited”.

Additionally, there’s the issue of bankability: “financing bodies have been very reluctant to finance corporate PPAs unless the off takers have an investment-grade credit rating. The banks prefer trading companies or large utilities as off takers, who can manage the production risk profile of the renewables asset and then resell the energy to consumer companies with baseload profiles.”

Last but not least, Gallanti concludes, “financial PPAs in Italy are considered less attractive than physical PPAs in terms of VAT treatment. Besides, several companies (and their accountants) are less familiar with the accounting of these financial derivatives”.

The result is that so far, despite numerous announcements and press releases – sometimes concerning mere letters of intent or agreements on certificates (GOO) – the Italian PPA market for newly constructed assets has only secured a cumulative contracted volume of 1.4 GW from 2019 until now. But things appear to be changing.

“With a significant anticipated increase in market volumes, thanks to the growth in solar authorizations granted in the last six months, there will be only a limited number of ‘good priced PPAs’ available for the generator. In such a ‘buyer’s market’ context, we are confident that more Italian corporates will be able to unfold their full potential, sourcing energy through direct corporate PPAs with asset owners”.

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