Energy Release: What is the mechanism about and how are the stakeholders organized?

Energy Release: What is the mechanism about and how are the stakeholders organized?

Monday, January 13, 2025

By Sofia Ubaldini

Energy Release 2.0 is a mechanism introduced by the Italian state allowing energy-intensive companies to access electricity at capped prices, provided that, in order to return such cheap energy volumes, they invest in the creation of new renewable energy generation capacity. This investment can be carried out directly by the corporate or delegated to a third-party developer. Also, energy-intensive companies can participate in the mechanism either individually or through a demand aggregator, where the latter takes over the obligation to build new RES capacity or – more often – find a third-party developer to fulfill such obligation towards GSE. 

The entities that have so far emerged in the aggregator’s role are mainly industry associations, energy service providers (including some ESCos) and several utilities.  

From an economic perspective, aggregators are generally generously remunerated for their service by the industrial consumers for taking over all the obligations (and related risks) towards GSE and the relationship between the corporate and the aggregator often relies on a profit-sharing model. With a consumption strike price set at 65 €/MWh for years 2025, 2026 and 2027, the expected savings for the corporates generated by participating in the initiative lie in the range between 40-50 €/MWh (considering today’s electricity futures). Current aggregators profit sharing offers towards energy consumers span to as much as 50% of such expected profit, which has triggered a rather disorganized frenzy, even from operators not strictly qualified, to get their hands on these supposedly easy profits. 

 

Challenges behind the mechanism: guarantees, volumes, time 

Yet, the implementation of Energy Release presents a range of challenges for all the stakeholders involved. 

One of the primary issues is the extremely tight timeframe for execution. The challenge becomes even more pressing due to the overlap with the end-of-year holiday season and significantly limits the ability of aggregators and producers to negotiate the contract for delegating the asset development. This may result in a situation where aggregators and consumers will bid on the 14th of February without having a signed agreement with the generators to back their restitution obligations. 

Another major challenge arises from the guarantees involved. Firstly, GSE requests a first demand bank guarantee from corporates/aggregators to ensure the future construction of the renewable project. This requirement can be particularly challenging for some players, unless they are well-established utilities. The upside of this constraint is that it excludes less solid players from the system. However, even renown operators who have to create a new business vehicle for the purpose of becoming aggregators might face difficulties in quickly obtaining such bank collaterals.  

Secondly, aggregators usually require RES developers to provide a guarantee backing the responsibilities towards GSE related to the asset construction. This guarantee is typically aligned with the independent guarantee asked by the GSE (“garanzia autonoma”), but in some cases can range to the full value of the penalty imposed by the GSE in case of withdrawal from the restitution contract (“contratto di restituzione”) between the producer and GSE. In the first scenario, the aggregator assumes the risk of having to pay the penalty if the producer withdraws from the agreement. However, although they accept to remain liable for the entire amount of the penalty, very few producers would accept to provide a guarantee that matches the total penalty value. Indeed, even if the guarantee would be in place limited to the period between 14th February and the asset COD, such collateral would be both very difficult to receive from the bank and very inefficient from a cost perspective. 

Managing volume uncertainty between anticipation contracts and restitution contracts is another key challenge. Such difficulty is double folded as there is uncertainty in both the volumes that will be accepted under Energy Release and the actual volumes that the corporates will consume. The first risk is typically borne by the producer as almost all the delegation contracts include a condition precedent which ensures that the contract is only valid if the aggregator successfully secures volumes with the GSE, yet usually with a minimum volume being guaranteed to the producer. On the contrary, the second risk is often borne by the aggregator who takes on the responsibility of guaranteeing in the delegation contract that the quantity of energy returned cannot be lower than a minimum threshold agreed between the corporate and the aggregator. 

Finally, fiscal issues pose significant challenges for aggregators. The energy “borrowed” through Energy Release could be required to be booked as a liability on the corporate/aggregator’s balance sheet until the obligations towards GSE are fully taken over by the producer. While this remains one of the open points currently being investigated by the market, it could give large utilities a strong competitive advantage compared to other aggregators and corporates. To address this challenge, some players are willing to offer a dynamic price premium based on the asset COD: the earlier the operation date, the higher the premium on top of the 65€/MWh. This approach underscores their prioritization of quickly closing the liability line introduced by Energy Release in their balance sheet. 

 

Bankability of Energy Release mechanism and relationship with PPAs 

A final challenge of Energy Release is ensuring the bankability of projects where only 50% of the energy could be contractually secured at a fixed price, through energy release. Indeed, banks still have mixed feelings on what financing terms to agree on for such moderate Hedge Ratios. In this context, the Power Purchase Agreements (PPA) market is offering a viable solution to circumvent the problem. 

The restitution requirement under Energy Release operates at portfolio level rather with the only condition that each asset participates in the restitution with at least 5% of its energy production. This structure allows for a strategic distribution of the restitution obligations. For instance, most of the energy to be returned, (i.e. up to 95%), can be allocated to a single «master» asset, while only a small portion is assigned to a secondary «slave» asset (assuming assets of the same size and production factor). This approach ensures the full bankability, at competitive terms, of the master asset.  

For the slave asset, on the other side, long term PPAs can play a role. Indeed, a project that is in the process of signing or has already signed a PPA contracting less than 95% of its energy could potentially be used as slave asset. The only condition posed by Energy Release rules is that the slave asset has not yet achieved COD. In this way, it becomes possible to assign to this project the 5% restitution obligation with no impact on its bankability.  

 

In conclusion 

Energy Release offers significant opportunities for accelerating renewable energy development but comes with highly complex challenges in execution, risk management, and bankability. Success will ultimately depend on aggregators’ capabilities, producers’ flexibility and integration of out-of-the-box.  

Leveraging our experience in the PPA market, where we have closed 5+ GW of deals, as Our New Energy we are currently assisting a considerable share of the Italian producers in identifying the right partner to collaborate with under the Energy Release framework. Exploiting our unique experience on contract origination and negotiation, we support the asset in finding the right corporate or aggregator to participate energy release with, and – as important – negotiating the related agreement to ensure bankability and robustness of the transaction. 

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