Legal and Practical Considerations for the
Construction of Alternative Energy Plants

By Anthony Sistilli and Gianfranco Puopolo
January 1997

The Authors are partners in Puopolo Sistilli Geffers & Luise, an International law firm specializing in Environmental and Energy Law. They counsel foreign companies and multinationals in all aspects of Italian environmental and energy law, project finance and environmental audits. → See also:

This memorandum focuses on the legal procedures and documentary requirements for the establishment in Italy of an electrical energy plant that utilizes alternative energy sources, as well as a discussion of the procedures to receive governmental financing and other incentives available for such plants.

Contents

  1. Introduction
  2. Establishment of an Electrical Energy Plant - Law N. 9 of 9 January 1991
    1. Communication to the Ministry of Industry and ENEL
    2. Communication to the Ministry of the Environment
    3. Municipal Authorization
    4. Signing of the Standard Purchase Agreement and Determination of Price
      1. Prices applied when State grants received (LIT/kWh)
      2. Prices applied when State grants not received (LIT/kWh)
  3. Financing and Incentives for Alternative Energy Sources - Law N. 10 of 9 January 1991
    1. Procedure for the Granting of Funds
    2. Procedure for the Release of Funds
  4. Checklist: Establishment of an Electrical Energy Plant and State Financing
    1. Establishment of an Electrical Energy Plant Utilizing Renewable Energy Sources
      1. Authorizations
      2. ENEL
    2. Financing and Incentives for Alternative Energy Sources
      1. Application filed with Region
      2. Release of Funds

I. Introduction

Prior to 1991, the production of electricity in Italy was under the near exclusive control of ENEL, the State utility established in 1962 as a result of the nationalization of the industry. As such, energy production by independent operators was severely limited. The introduction of Laws n. 9 and 10 of 9 January 1991 substantially liberalized the market by lifting the restrictions on independent production of electricity by private operators. Although these laws did not result in a total privatization of the electrical energy sector, independent power producers may privately operate plants approved by the Ministry of Industry and sell the electricity to ENEL, which in turn has an obligation to purchase it at a price set by a governmental body, the Interministerial Price Committee (Comitato Interministeriale dei Prezzi or CIP). The CIP determines prices on the basis of the cost that ENEL would have incurred in producing such electricity. In addition to the base price, certain incentives are available to independent power producers whose plants are fed by specifically identified alternative energy sources.

The main steps in the procedure for new power plant projects involve obtaining approvals by the Ministry of Industry and the Ministry of the Environment, and the signing with ENEL of a Power Purchase Agreement. This agreement is divided into two stages, which are termed the Preliminary Purchase Agreement (Convenzione Preliminare) and the Standard Purchase Agreement (Convenzione Tipo).

II. Establishment of an Electrical Energy Plant - Law N. 9 of 9 January 1991 ("LAW 9/91")

  1. Communication to the Ministry of Industry and ENEL

    The establishment of electrical energy plants that utilize renewable resources is regulated by article 22 of Law 9/91. Pursuant to paragraph 2 of article 22, the producer that intends to construct an alternative energy plant must provide a communication to the Ministry of Industry and ENEL.

    In general terms, the communication must contain the following information:

    • project plans for the construction and operation of the plant;
    • energy output of the plant, with an indication of its destined use and quantity and quality of production;
    • technical characteristics of the plant;
    • the location where the plant will be constructed;
    • information on the producer.

    Once the above information has been deposited with the Ministry of Industry and ENEL, the contemplated energy project will be evaluated for the purposes of granting the authorization. This evaluation will be based on the following broad criteria:

    • the public need for the construction of new power plants as set forth in the National Energy Plan prepared by ENEL and approved by a special Joint Parliamentary commission. In particular, the need for new plant initiatives involving renewable or alternative resources pursuant to a decree issued by the Ministry of Industry on 25 September 1992 ("D.M. 25/9/92") favoring such plants;
    • the value of energy savings from the construction of such a plant, as well as the possible protection of the environment due to the use of renewable resources;
    • the geographic location of the plant, in relation to the general system of national production and delivery of energy;
    • the new plant will not interfere with the utilization of existing plants or those plants that have been authorized and are currently under construction;
    • the characteristics of the new plant will ensure adequate coordination with other programs developed for the electrical energy sector;
    • the technical ease by which the plant may be connected to the ENEL grid.

    During this evaluation period, the Ministry of Industry and ENEL may request additional documentation or clarifications. Should the Ministry of Industry and ENEL be satisfied that the construction of the new plant meets the objectives of the rationalization of energy use in Italy, as well as the development of facilities utilizing renewable resources, authorization will be granted to proceed with the construction of the plant and the signing of the Preliminary Purchase Agreement with ENEL.

  2. Communication to the Ministry of the Environment

    Pursuant to Italian environmental law and, in particular, Law 431/1985, a communication must be submitted to the Italian Ministry of the Environment prior to commencing building activities for the new energy plant. The communication must contain information regarding the type of plant proposed to be constructed and the geographic location. This information will be reviewed by the Regional, Provincial or Municipal authorities competent for the geographic location where the plant will be constructed. A special environmental impact study is also required for new combined cycle plants whose capacity exceeds 300 thermal MW.

    Should the competent authorities determine that the plant will not adversely affect any natural zone protected by Italian environmental law (this includes water tables, forest lands, and archeological sites), an authorization will be released permitting the construction of the plant.

  3. Municipal Authorization

    The final authorizations that must be requested are those issued by the Municipality governing the territory where the plant will be constructed. These authorizations consist of zoning and building permits, certificates from the local Sanitary authorities, and, if necessary, expropriation of private or public lands for the purposes of construction and operation of the plant.

    As with the previous communications, all documentation relevant to the technical characteristics and scope of the plant must be submitted for evaluation. In addition, the Municipality will require information regarding title to the land upon which the plant will be built, i.e., purchase, lease, etc.

  4. Signing of the Standard Purchase Agreement and Determination of Price

    Once the independent power producer has received all of the various authorizations indicated above, the purchase agreements with ENEL must be signed. As mentioned in the introduction, these purchase agreements consist of standard forms approved by the Ministry of Industry (D.M. 25/9/92) and are divided into two stages: the Preliminary Purchase Agreement (Convenzione Preliminare) and the Standard Purchase Agreement (Convenzione Tipo).

    The Preliminary Purchase Agreement is signed prior to the completion of the plant. This agreement sets forth the terms and conditions upon which ENEL will purchase the electricity produced by the plant. In addition, the producer undertakes certain obligations with respect to completion dates for the construction, testing and assessment review by ENEL, as well as connection to the ENEL grid.

    The Standard Purchase Agreement is the definitive agreement governing the sale of electricity to ENEL. This agreement will be signed upon the completion of the plant and the positive assessment of ENEL technicians of its operability. As the Standard Purchase Agreement is the definitive agreement, it incorporates and supersedes the Preliminary Purchase Agreement.

    The prices at which independent power producers may sell electricity to ENEL are established by the Interministerial Price Committee (Comitato Interministeriale Prezzi), commonly referred to as the CIP. Such obligatory pricing is based on the cost ENEL would have incurred to directly produce the electricity itself.

    The current price rates at which ENEL is required to purchase electricity from independent power producers are set forth in CIP ruling n. 6 of 1992 ("CIP 6/92"), as amended by Ministerial Decree 4/8/94. As illustrated by the table below, prices vary according to the energy source, hour of delivery and whether or not the producer has received State grants for the construction of the plant.

    In the event the producer has requested government assistance in the form of grants to finance the construction of the plant, the following prices will be applied to the sale of electricity to ENEL:

    (i) Prices applied when State grants received (LIT/kWh)*

    Type of Plant A) Entire production or fixed quota sold to ENEL B) Excess production sold to ENEL
    Peak Hours Low Hours Peak Hours Low Hours
    a) reservoir or flowing water hydroelectric over 3 MW 21447,9 172,6 +
    41,4xR**
    47,9
    b) flowing water hydroelectric up to 3 MW 120 125,9 +
    41,4xR
    c) wind and geothermal 147,6 172,6 +
    41,4xR
    d) photovoltaic, RSU, biomass 207,8 273,8 +
    41,4xR

    In the event the producer has not requested government assistance in the form of grants, the prices for the sale of electricity to ENEL will be increased and applied as follows:

    (ii) Prices applied when State grants not received (LIT/kWh)*

    Type of Plant A) Entire production or fixed quota sold to ENEL B) Excess production sold to ENEL
    Peak Hours Low Hours Peak Hours Low Hours
    a) reservoir or flowing water hydroelectric over 3 MW 274,347,9 232,9 +
    41,4xR**
    47,9
    b) flowing water hydroelectric up to 3 MW 144,1 166,8 +
    41,4xR
    c) wind and geothermal 183,7 232,9 +
    41,4xR
    d) photovoltaic, RSU, biomass 270,5 377,4 +
    41,4xR

    * prices in effect as of 1 January 1996
    ** R = 1 - 0,550 S/Ep
    S = the sum of the absolute value of discharges, positive and negative, of the energy ceded each month and the monthly average of the hours ceded on an annual basis.
    Ep = energy ceded annually for peak hours

    As indicated in the table, in addition to the base price, incentives are available to producers whose plants are fed by renewable or alternative sources. As the system is currently structured, independent power producers may transfer electricity directly to the end user, for example a steel mill or municipal utilities, but the bill is issued to ENEL. Please note that VAT taxes are not included in the base price, but must be added to the final invoice issued to ENEL.

III. Financing and Incentives for Alternative Energy Sources - 3 ("LAW 10/91")

Pursuant to Law 10/91, government financing is available to defray a portion of the costs of specifically authorized electrical energy facilities that are fueled by renewable resources. These incentives vary depending on the type of plant and the energy source. For example, hydroelectric and wind power plants with a capacity of up to 3 MW may recover up to 30% of the costs of construction, whereas cogeneration plants are entitled to grants up to 40%, and plants that utilize heat generated by thermoelectric facilities and other industrial processes may receive up to 50%. Limited funds are also available for feasibility studies and demonstration projects.

  1. Procedure for the Granting of Funds

    In accordance with Law 10/91 and subsequent implementing decrees of the Ministry of Industry (D.M. 15/2/91 and D.M. 7/5/92), the granting and release of financing for alternative energy plants is delegated to the Italian Regional authorities. The Regions, in turn, establish the relevant procedures and criteria for the granting of funds on the basis of Regional energy needs and, in particular, on the relationship between the energy savings that the proposed plant will produce and the costs of the government investment.

    In order to receive such funds, an application must be filed with the Regional office competent for the place where the proposed plant will be constructed. Although the procedure may vary slightly from Region to Region, in general terms the application must contain at least the following information:

    • data on the producer, such as Chamber of Commerce certificate; certificate of good standing; anti-mafia certificate;
    • declaration of all other financing received or requested for the same project;
    • detailed description of the technical characteristics of the project;
    • detailed description of the works program, including the specifications of all machinery and materials necessary for the completion of the plant;
    • estimate of total expenses and costs (in Italian lira) relative to the plant and its construction, including a breakdown of purchase of machinery and equipment, physical plant, building site works, services and labor;
    • declaration that the producer possesses the economic resources to complete and operate the plant, net of the amount of financing requested;
    • authenticated copies of all Ministerial, Regional, Provincial and Municipal authorizations necessary for the construction and operation of the plant.

    Once all of the above information has been submitted, the Regional authority will evaluate the application and issue its ruling within 210 days from the date of the completed filing. For new plants, the application will be evaluated on the basis of the following general parameters:

    • quantity of energy savings produced over the projected life of the plant, expressed in equivalent tons of petroleum (ETP) for each one million lira of financing. This figure must not be less than 0,2 ETP per year for each one million lira of financing (note that this final requirement does not apply to wind power or photovoltaic plants, pursuant to art. 4(2) of D.M. 7/5/92);
    • the overall technical, economic and financial characteristics of the producer in relation to the proposed project.

    Should a determination be made that the project and the producer meet the above parameters, the Region will issue a decree authorizing the granting of funds and establishing a time schedule for completion of the plant. The amount of funds authorized will be based on a fixed percentage of the total estimated expenses and costs accepted by the Region. In the specific case of wind power plants, this percentage is equal to 30% of such costs.

    Within 120 days of the date of the authorization of the grant, the producer must provide evidence that the works on the plant are either in progress or that orders for equipment and materials have been placed for at least 30% of the overall cost of the project. In addition, the producer must complete the works on the plant within 240 days from the date of the authorization of the grant. Should the producer fail to progress with or complete the project within such terms, the grants may be revoked. The Regions may, however, extend such terms at their discretion.

  2. Procedure for the Release of Funds

    Upon completion of the plant, the producer must submit a request for the release of the funds. This request must include a renewed certificate from the Chamber of Commerce, a certificate of good standing and the anti-mafia certificate, a declaration of the starting and completion dates for the works, and banking information for the deposit of the funds. The producer must also supply a certification from a licensed professional attesting to the conformity of the plant to the technical specifications and standards indicated by the producer in the application for financing. Finally, documentation on the expenses incurred, as well as copies of paid invoices relative to such expenses, must be provided.

    After the Regional authorities have received the above documentation, it will send a technical expert to inspect the plant for operability and compliance with the technical specifications, standards, and projected energy output contained in the application originally submitted by the producer. If the technical expert determines that the plant is in conformity with the terms of the grant, the funds will be released to the account of the producer.

IV. Checklist: Establishment of an Electrical Energy Plant and State Financing

  1. Establishment of an Electrical Energy Plant Utilizing Renewable Energy Sources

    1. Authorizations

      1. Ministry of Industry
        • project plans for the construction and operation of the plant;
        • report on the projected energy output of the plant, with an indication of its destined use and quantity and quality of production;
        • technical characteristics of the plant;
        • the location where the plant will be constructed;
        • information on the producer.
           
      2. Ministry of the Environment
        • clearance released by competent Provincial or Municipal authority
           
      3. Municipal
        • building/zoning permit
        • certificate released by Local Sanitary Authority
        • land title (ownership, lease)
    2. ENEL

      1. Preliminary Purchase Agreement (Convenzione Preliminare)
      2. Assessment of completed plant
      3. Payment of expenses for connection to the ENEL grid
      4. Standard Purchase Agreement (Convenzione Tipo)
      5. Pricing rates for sale of electricity to ENEL
        • Prices applied when State grants received
        • Prices applied when State grants not received
  2. Financing and Incentives for Alternative Energy Sources

    1. Application filed with Region

      1. Required Minimum Documentation
        • data on the producer, such as Chamber of Commerce certificate; certificate of good standing; anti-mafia certificate;
        • declaration of all other financing received or requested for the same project;
        • detailed description of the technical characteristics of the project;
        • detailed description of the works program, including the specifications of all machinery and materials necessary for the completion of the plant;
        • estimate of total expenses and costs (in Italian lira) relative to the plant and its construction, including a breakdown of purchase of machinery and equipment, physical plant, building site works, services and labor;
        • declaration that the producer possesses the economic resources to complete and operate the plant, net of the amount of financing requested;
        • authenticated copies of all Ministerial, Regional, Provincial and Municipal authorizations necessary for the construction and operation of the plant.
           
      2. Authorization of Grant
        • total costs and expenses accepted
        • percentage applied
        • construction and completion deadlines
        • compliance with 120 day term for commencement or orders of 30% of materials/equipment
        • compliance with 240 day term for completion
        • extensions granted
    2. Release of Funds

      1. Required Minimum Documentation
        • renewed certificate from the Chamber of Commerce
        • renewed certificate of good standing
        • renewed anti-mafia certificate
        • declaration of the starting and completion dates for the works
        • banking information for the deposit of the funds
        • certification from a licensed professional attesting to the conformity of the plant to the technical specifications and standards
        • documentation on the expenses incurred, as well as copies of paid invoices relative to such expenses
        • report of Regional technical expert inspection of plant

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For further information on the above or other issues of Italian law, please contact the following attorneys: Anthony Sistilli and Gianfranco Puopolo

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