The European regulatory framework
On April 7, 2016, the second phase of REMIT reporting began. The reporting is part of the market monitoring activities of the Agency for the Cooperation of Energy Regulators (ACER) and national regulatory authorities. As from that date, ACER also received data on transactions executed outside organized markets, transmission contracts and the use of LNG and storage facilities.
Entry into force of MIFID II/ MIFIR
On July 1, 2016 Regulation (EU) 2016/1033 and Directive (EU) 2016/1034 entered force, postponing the entry into force of the rules governing the provision of investment services in Europe (the MIFIR Regulation and the MIFID II Directive, respectively) from January 3, 2017 to January 3, 2018. Accordingly, the deadline for transposing the legislation by the Member States has been postponed from July 3, 2016 to July 3, 2017.
The “Clean Energy for all Europeans” package
On November 30, 2016, the European Commission issued the “Clean Energy for all Europeans” package of measures for proposed legislation on European climate and energy policy.
In particular, the package includes the following Regulations and Directives, some of which are revised versions, others newly issued: the Electricity Regulation, the ACER Regulation, a Risk Preparedness Regulation, the Energy Union Governance Regulation, the Electricity Directive, the Renewable Energy Directive, the Energy Efficiency Directive and the Energy Performance of Buildings Directive.
The legislative proposals will be discussed as from 2017 by the Parliament and the European Council for the purpose of their gradual and progressive approval. They are expected to come into force as from 2019.
In line with the sustainability and climate change mitigation objectives, new binding targets at the EU level for 2030 will be introduced: 27% of gross final energy consumption from renewable sources, a 30% energy efficiency target and a 40% reduction in greenhouse gas emissions.
The Renewable Energy Directive introduces a stable regulatory framework for investors. Member States will have to adopt a market approach to support renewables. Incentive mechanisms should follow harmonized principles such as cross-border opening, the non-retroactivity of measures and long-term visibility for support mechanisms (at least three years). Administrative barriers for corporate long-term PPAs to finance renewables must be removed where appropriate and authorization procedures simplified. The Commission proposal also requires Member States to increase the share of renewable resources in heating and cooling and sets more stringent criteria for the sustainability of bioenergy.
The Electricity Regulation and Directive propose an integrated revision of the design of the electricity market to make the integration of renewable energy more efficient and the treatment of different generation technologies (conventional and renewable) more equitable, introduce greater granularity in trade, move market close closer to real time, open the balancing market to all generation sources and demand (through aggregation), set non-discriminatory and marketbased dispatching rules (elimination of priority dispatch for new renewables plants above 500 kW).
It also introduces an opening to long-term contracting and remuneration of capacity mechanisms, subject to the results of a study of European capacity adequacy and to limitations in the atmospheric emissions of CO2 to access the same. Conditions for the emergence of signs of scarcity are improved and price caps removed.
With regard to new technologies and new market players, the package envisages measures to support the integration of storage technologies, aggregators and customer participation (demand-side response). Other provisions concern compulsory installation of charging points for electric vehicles in new public buildings and the promotion of smart grids and buildings.
The Distribution System Operators (DSO) are recognized as increasingly important actors in the electricity system and the proposals include the creation of a new European DSO entity, the introduction of harmonized principles at the European level for grid rates, the possibility of purchasing and providing flexibility services locally to solve congestion problems. There are no additional requirements on unbundling. Finally, the package establishes the centrality of consumers in the electricity market through their active participation by way of demand aggregation and demand flexibility services (demand response), removal of price regulation, the introduction of mandatory dynamic pricing options, price comparison tools and basic information in electricity bills.
The Energy Efficiency Directive establishes that Member States should contribute to the achievement of the European target with indicative national contributions. In addition, proposals include extending beyond 2020 the energy efficiency obligations of Member States for final consumption to be met through energy efficiency obligation schemes or alternative measures.
The European Commission proposes the introduction of a decarbonization target for 2050 in the building sector and changes aimed at encouraging the use of smart tools like automation and control systems and performance indicators, promoting charging infrastructure for electric vehicles and the correlation between the financing of measures with the results achieved in energy terms.
The European Commission also proposes a new plan containing a list of energy products to be evaluated, reviewed and subjected anew to regulations containing minimum energy efficiency requirements (including new products: building automation and control systems, photovoltaic panels and ICT products).
State aid for capacity mechanisms
On November 30, 2016 the European Commission published its conclusions for the inquiry launched in April 2015 by DG Competition concerning capacity mechanisms in Europe. The inquiry focused on 11 countries, including Italy, Spain, Portugal, France and Belgium and analyzed existing and future capacity mechanisms.
The final report acknowledges that European electricity markets suffer from a number of market failures that could undermine incentives to invest.
The Commission finds that it is reasonable for the Member States to address the problems of adequate current or future generation capacity. The implementation of a centralized market mechanism like the Italian system is considered to be one of the most appropriate forms of intervention.
The Italian regulatory framework The current structure of the Italian electricity market is the result of the liberalization process begun in 1992 with Directive 1992/96/EC, transposed into Law with Legislative Decree 79/1999. This decree provided for: the liberalization of electricity generation and sale; reserving transmission and ancillary services to an independent network operator; the granting of concessions for distribution to Enel and other companies run by local governments; the unbundling of network services from other activities.
The introduction of Directives 2003/54/EC and 2009/72/ EC (transposed with Law 125/2007 and Legislative Decree 93/2011, respectively) in Italy lent further impetus to the process, particularly through the complete opening of the retail market and the confirmation of the total independence of the national transmission network operator (already provided for in the decree of the Prime Minister of May 11, 2004) by separating its ownership from that of other electricity operators.
The process of liberalizing the natural gas market began with Directive 1998/30/EC, transposed in Italy through Legislative Decree 164/2000, calling for the liberalization of the import, production and sale of gas and the separation of network infrastructure management from other activities through the establishment of distinct companies. As regards the model for unbundling transport from other non-network activities, with Resolution 515/2013/R/gas, the Authority for Electricity, Gas and Water System (the “Authority”) mandated the transition to ownership unbundling pursuant to Directive 2009/73/EC.
The following sections discuss the general regulatory framework and the main measures taken in 2016 for the industry as a whole and for specific segments.
Wholesale electricity generation and market
Electricity generation was completely liberalized in 1999 with Legislative Decree 79/1999 and can be performed by anyone possessing a specific permit.
The electricity generated can be sold wholesale on the organized spot market (IPEX), managed by the Energy Markets Operator (GME), and through organized and overthe-counter platforms for trading forward contracts. The organized platform includes the Forward Electricity Market (MTE), managed by the GME, in which forward electricity contracts with physical delivery are traded. Trading can also be conducted in derivatives with electricity as their underlying are traded. The organized market for such transactions is the forward market (IDEX), operated by Borsa Italiana, while financial derivatives can also be negotiated on OTC platforms.
Generators may also sell electricity to companies engaged in energy trading, to wholesalers that buy electricity for resale at retail, and to the Acquirente Unico (Single Buyer), whose duty is to ensure the supply of energy to enhanced protection service customers.
In addition, for the purposes of the provision of dispatching services, which is the efficient management of the flow of electricity on the grid to ensure that deliveries and withdrawals are balanced, electricity generated may be sold on a dedicated market, the Ancillary Services Market (MSD), where Terna procures the required resources from generators.
The Authority and the Ministry for Economic Development are responsible for regulating the electricity market.
More specifically, with regard to dispatching services, the Authority has adopted a number of measures regulating plants essential to the security of the electrical system. These plants are deemed essential based on their geographical location, their technical features and their importance to the solution of certain critical grid issues by Terna. In exchange for being required to have electricity available and providing binding offers, these plants receive special remuneration determined by the Authority. Decree Law 91 of June 24, 2014 provides for all schedulable generation units located in Sicily with a capacity of more than 50 MW to be declared essential to system security under a cost reimbursement system. The rules took force as from January 1, 2015 until the completion of the “Sorgente-Rizziconi” interconnector between Sicily and continental Italy (May 28, 2016).
Since the launch of the market in 2004, the regulations have provided for a form of administered compensation for generation capacity. In particular, plants that make their capacity available for certain periods of the year identified in advance by the grid operator to ensure the secure operation of the national electrical system receive a special fee.
In August 2011, the Authority published Resolution ARG/ elt 98/11, which establishes the criteria for introducing a market mechanism for compensating generation capacity that replaces the current administered reimbursement. This mechanism involves holding auctions through which Terna will purchase from generators the capacity required to ensure that the electricity system is adequately supplied in the coming years.
With a decree of the Minister for Economic Development of June 30, 2014, the capacity market operational mechanism previously issued for consultation by the Authority was approved.
The mechanism is based on the allotment, by auction, of option contracts (reliability options) that provide for payment of a premium, established in the auction with the setting of a marginal price, against which a generator undertakes to return any positive difference between the price formed on the spot electricity and auxiliary services market and a benchmark price set ex-ante in the option contract. The rules approved provide for a cap for the premium to be paid for existing capacity and for newly constructed capacity.
With Resolution 95/2015/R/eel, the Authority proposed to the Ministry for Economic Development that the opening of the capacity market be moved forward, with an initial phase of implementation beginning on January 1, 2018 and ending no later than December 31, 2021, with the launch of full operation of the mechanism. Under the Authority’s proposal, during the initial phase, there would be no direct resources permitted in the market, but their contribution would be measured for statistical purposes. During the initial implementation phase, Terna would assign annual products with an increasing planning horizon of less than four years (the period between the auction and the start of delivery of the assigned products). Once fully implemented, explicit participation would be open to foreign resources, the horizon would be four years, while the duration of the product would remain annual.
The rules governing the capacity market must be approved by the Ministry for Economic Development subject to notification and approval of the mechanism by the European Commission.
On February 24, 2015, the market coupling model for the Italian, Austrian, French and Slovenian day-ahead trading markets was launched. Market coupling is a mechanism for integrating day-ahead markets that, in setting the electricity prices for the different segments of the European market involved, also allocates the transport capacity available between those segments, thereby optimizing the use of interconnections.
With regard to the scheme for greenhouse gas emission allowance trading established with Directive 2003/87/EC, in October 2016 the Ministry for Economic Development settled a second tranche of Enel Produzione’s receivable arising in respect of the failure to allocate free allowances and the absence of the right to flexibility in phase 2 (2008/2012).
In addition, the 2016 Stability Act (Law 208/2015) amended Article 19 of Legislative Decree 30/2013, eliminating the deadline of 2015 for payment of the receivables referred to above.
With Resolution 326/2016/R/eel, the Authority charged Terna with conducting the competitive tender for assigning contracts for the supply of replacement tertiary reserves in Sardinia for the period from July 1, 2016 to December 31, 2018. The contracts awarded by Terna establish a requirement to supply the Ancillary Services Market (MSD) at the variable cost paid to the plant for a premium established in the competitive tender. Following the tender, all of the capacity was contracted with Enel’s Sulcis plant.
With Resolution 342/2016/E/eel, the Authority ordered the start of a proceeding for the adoption of measures (prescriptive measures or asymmetric regulations) to prevent certain conduct by users of dispatching services in the wholesale electricity market that could constitute market abuse pursuant to Regulation (EU) 2011/1227 (REMIT).
With the subsequent Resolution 477/2016/E/eel, the Authority reported the conduct of a number of dispatching users delivering power operating on the Ancillary Services Market to the Competition Authority (AGCM) for an investigation of possible violations of competition rules. One of these users was Enel Produzione SpA with regard to the supply of power from the Brindisi plant to the wholesale market. Following the report filed by the Authority, on October 6, 2016, the Competition Authority began an enquiry involving Enel SpA and Enel Produzione SpA to determine the existence of a possible abuse of a dominant position in the Ancillary Services Market. The proceeding should be completed by the end of May 2017.
The extraction, import (from EU countries) and export of natural gas have been liberalized.
According to the provisions of Legislative Decree 130/2010, operators cannot hold a market share that exceeds 40% of domestic consumption. This limit may be raised to 55% if the operator commits to creating 4 billion cubic meters in new storage capacity by 2015. Under this provision, the Ministry for Economic Development approved Eni’s proposed plan to create new storage in early 2011. To date, 2.6 billion cubic meters in new storage capacity has been created. Law 9/2014 establishes that, in order to limit the costs for the system, the remaining storage capacity (up to 4 billion cubic meters) be created only if there is market demand for it. The operators have not shown any interest in the auctions held and, therefore, no further storage capacity has been created.
Following the approval of the Parliamentary committees and the positive opinion of the Authority, on March 6, 2013, the Ministerial Decree approving the rules for the natural gas forward market (“MT Gas”) was signed, with operations beginning on September 2, 2013. The forward market completed the structure of the Italian wholesale market, joining the spot trading platform (the “Gas Exchange”), which has been operating since 2010, and the balancing market begun in December 2011 under the rules set by the Authority.
Transport, storage and regasification
Transport, storage and regasification (of LNG) are subject to regulation by the Authority, which sets the rate criteria for engaging in these activities at the start of each regulatory period (lasting 4 years) and updates the rates annually.
Storage is carried out under a concession (for a maximum of 20 years) issued by the Ministry for Economic Development (MED) to applicants that satisfy the requirements of Legislative Decree 164/2000. The decree of February 6, 2015 of the MED retained the criteria established in 2014 for allocating capacity through auction for 2015 as well.
LNG activities are subject to the grant of a special ministerial permit.
Access to transport, storage and regasification capacity is provided through non-discriminatory mechanisms established by the Authority in order to guarantee third-part access (TPA). The Ministry for Economic Development may grant an exemption from the TPA rules to companies that own storage or regasification plants or cross-border gas interconnectors. The exemption is granted upon the explicit request of the companies involved and on the basis of an assessment of the benefits of the infrastructure for the system.
As to gas transport rates, the Council of State affirmed the voiding of the resolutions setting the rate for the 2010-2013 period, denying the Authority’s appeal and accepting the arguments put forth by Enel Trade. The Authority lodged an appeal against the ruling of the Council of State. The appeal of the resolutions establishing the rate criteria for 20142017 is pending before the Regional Administrative Court.
With reference to the amounts due to companies admitted to the mechanism for the promotion of renegotiation of long-term gas supply contracts (APR), with Resolution 649/2016/R/gas the Authority established the definitive amount, granting Enel the maximum amount possible under that mechanism, equal to €61 million in 2014-2016.
Distribution and metring
E-distribuzione provides distribution and metering services under a 30-year concession set to expire in 2030.
The distribution rates are set by the Authority at the start of each regulatory period based on covering the total cost of providing the services, considering operating costs, depreciation and providing an appropriate return on capital.
The rate component covering operating costs is updated annually using a price-cap mechanism (i.e. based on the inflation rate and an annual rate of reduction of unit costs called the X-factor). The return-on-capital and depreciation components are revised each year to take account of new investments, depreciation and the revaluation of existing assets using the deflator for gross fixed capital formation.
With Resolution 654/2015/R/eel the Authority, in conjunction with the publication of the mandatory grid rates to be charged to end users in 2016, specified the criteria for the new rate period for electricity distribution and metering, which will be in force for the next eight years (2016-2023).
The rate period has been divided into two sub-periods of four years each (NPR1 for 2016-2019 and NPR2 for 20202023), with an interim revision scheduled for 2020.
For the first sub-period (NPR1), while the Authority essentially confirmed the general regulatory framework, it introduced substantial amendments concerning the timing and procedures for remunerating new investments in rates.
More specifically, the Authority reduced the so-called “regulatory lag”, shortening to a maximum one year (from the two years in the previous regulatory period) the period before new investments are recognized in rates while at the same time eliminating the increase of one percentage point of WACC. The latter had been introduced by the Authority in 2012 to offset the financial burden imposed by the delayed recognition of new investments.
Operators are therefore required to notify the Authority by the end of the year of their preliminary accounts of investments made during the year, enabling the Authority to insert the data in the calculation of the mandatory rate published by the end of the year for the subsequent year. These investments are then inserted in the regulatory asset base as from January 1 of the year following their realization. Consequently, operators can match the revenue generated by the investments with their amortization.
The Authority also increased by five years the useful lives of low and medium-voltage power lines that entered service after December 31, 2007.
Finally, the level of operating costs recognized and the procedures for returning any extra efficiency gains to customers were also specified. More specifically, the Authority maintained the symmetric division of extra efficiency gains and the restitution until 2019 of gains achieved and temporarily maintained to firms in the third and fourth regulatory periods. The X factor used in updating eligible operating costs was set at 1.9% for distribution operations and 1% for metering activities.
For the second sub-period (NPR2), the Authority announced the transition to rate regulation based on total costs (the Totex method).
With Resolution 583/2015/R/com the Authority revised the method used to determine the rate of return on capital and set a rate of 5.6% for distribution and metering activities for 2016-2018. In particular, the Authority established a specific 6-year rate period for the WACC, with a mid-period update of the main parameters in the formula on the basis of macroeconomic conditions (interest and inflation rates) in 2018.
With Resolution 233/2016/R/eel, the Authority published the provisional reference rates for electricity distribution for 2016, which are used to determine the level of revenue recognized for each operator. Those rates, which reflect the changes introduced with Resolution 654/2015/R/eel, and specifically the elimination of the regulatory lag and the associated increase of one percentage point in the WACC guaranteed to operators to compensate for the fact that the corresponding remuneration was paid to them only as from the second year following the investment. Accordingly, those rates include the remuneration based on the WACC for regulatory capital employed for 2015 and the remuneration, calculated on the basis of the same parameters, of the one-off increase in net non-current assets for 2012-2014, following the elimination of the increase in the WACC mentioned above.
With Resolution 606/2016/R/eel, the Authority published the provisional reference rates for electricity metering for 2016 on the basis of preliminary balance-sheet data for 2015. According to the provisions of Resolution 654/2015/R/eel, the definitive reference rates for 2016, which represent the level of revenue recognized for each operator, must be published by February 28, 2017 on the basis of actual balancesheet data for 2015.
With Resolution 87/2016/R/eel, the Authority approved the functional specifications of second generation electronic meters, which also established performance levels for the new smart metering systems.
With Resolution 646/2016/R/eel, the Authority issued the rate rules for the recognition of costs for low-voltage electricity metering and established the provision governing the placement in service of second-generation smart metering systems. The resolution also established that investments for 2G smart metering system will be recognized using an incentive approach, anticipating on an experimental basis the Totex method, which will be adopted as from 2020.
With Resolution 458/2016/R/eel, the Authority issued the new Integrated Electricity Metering Code, which will enter force on January 1, 2017. The changes include modifications of the obligations of distributors concerning the reading of low-voltage meters, increasing the frequency of those readings and modifying the system of penalties for failure to carry out meter reading as required. The measure also extends the functions requirements for the 2G meters set out in Resolution 87/2016/R/eel to low-voltage generation metering points.
As regards service quality, the Authority, with Resolution 646/2015/R/eel, established output-based regulation for electricity distribution and metering services, including the principles for regulation for 2016-2023 (TIQE 2016-2023) and authorized the start of trials to test the advanced management functions for the distribution grid.
The resolution retains the existing general approach to regulation, which provides for the Authority to set annual trend levels for service continuity indicators. On the basis of those indicators, distributors receive bonuses or penalties each year, depending on actual performance.
The resolution also indicates the start of future regulation for innovative investment in the distribution grid.
Resolution 781/2016/R/eel supplemented the TIQE, providing for the extension of the time allowed for completing trials of the advanced grid functions in order to permit operators to submit more detailed analyses to the Authority.
With Resolution 549/2016/R/eel, the Authority introduced, for 2017-2023, the general principles for the experimental incentive-based trials (rewards only) aimed at reducing the duration of interruptions with notice on the low and medium-voltage grids.
With Resolution 377/2015/R/eel, the Authority completed the regulatory framework governing losses on the distribution grid, revising the conventional loss percentages as from January 1, 2016 and the equalization mechanism for losses to apply to distributors as from 2015. More specifically, the equalization mechanism takes account of the geographical diversification of losses on distribution grids.
With Resolution 782/2016/R/eel the Authority initiated, with effect from January 1, 2017, the second phase of the reform of electricity rates for residential customers. The goal of the reform is to eliminate the progressivity of the grid rate and system charges so as to encourage efficient consumption and to eliminate the existing system of cross-subsidies among various categories of residential customers in order to ensure that rates are consistent with the real costs of the service. The reform, which began in 2016, will be fully implemented in 2018 when the “progressive structure” that envisages a rising price per kWh as consumption increases will be completely abandoned.
More specifically, the new structure in force as from January 1, 2017 fully eliminates progressivity for the distribution rate. By contrast, the mechanism for system charges will initially reduce the effect of progressivity.
The same measure also introduced a number of temporary reliefs (for 24 months from April 1, 2017 to March 31, 2019) for connection fees and fixed fees pertaining to distributors for requests for changes in capacity levels. The resolution refers the specification of equalization mechanisms for distribution companies to subsequent measures.
In parallel, in order to neutralize any rate increases for customers in financial hardship, the Authority updated the amount of the social bonus for 2017.
With Resolution 268/2015/R/eel, the Authority established the Model Grid Code for transport services, which governs the relationship between sellers and distributors concerning the guarantees given by sellers to distributors, the payment terms for the transport service by sellers and the terms of payment of the system costs and other components by distributors to the Energy and Environmental Services Fund and the Energy Services Operator (GSE). The resolution also provided for the elimination starting from 2016 of the uncollectible portion of turnover withheld by distributors as a result of the strengthening of the system of guarantees.
As regards the calculation of the guarantees pledged by sellers to distributors in respect of transport services, the ruling of the Council of State of May 24, 2016 voided Resolution 612/2013/R/eel, establishing that those guarantees must be calculated net of system charges. The ruling nevertheless stated that the parties could govern this issue contractually in individual transport contracts.
Various sales companies and an industry association cited that ruling in appealing Resolution 268/2015/R/eel (CADE), asking for the provision that includes system charges within those guarantees to be repealed.
With the subsequent Resolution 751/2016/R/eel, the Authority, in rejecting a petition submitted by the trader E.JA, ruled that both the petition to reduce the amount of the guarantees net of system charges and to offset amounts already paid to distributors were unfounded, specifying that the CADE provides for system charges to be paid to distributors on the basis of amounts invoiced by them to the trader and not on the basis of the amount actually paid by customers to the trader.
As regards the procedures and financial terms for the connection of generation plants to distribution and transmission grids, the Authority published Resolution 424/2016/R/eel, which updated the Integrated Grid Connection Code, introducing differentiated fees for low-capacity plants.
Resolution 788/2016/R/eel completed the regulatory framework for private grids (specifically, closed distribution systems and basic generation and consumption systems), updating the register of internal user grids and postponing the entry into force of the provisions of the Integrated Closed Distribution System Code (TISDC) from January 1, 2017 to October 1, 2017.
On December 10, 2015, the Competition Authority notified Enel SpA and e-distribuzione of the start of a penalty proceeding aimed at ascertaining the existence of a Group strategy intended to hinder the development of the market for consumption monitoring systems. On May 19, 2016 the Competition Authority order the publication of the commitments proposed by the two companies, thereby ruling that they were not manifestly unfounded. Following the market test, on September 8, 2016 the Competition Authority announced that it had closed the proceeding with no finding of violation or levying of a penalty, accepting the undertakings given by the two companies.
Energy efficiency - White certificates
Energy efficiency in final uses has been promoted in Italy mainly through the Energy Efficiency Certificate mechanism (TEE or white certificates) launched on January 1, 2005 in accordance with the provisions of the related decrees of July 20, 2004.
The mechanism requires the Ministry for Economic Development (MED) to determine the national energy savings targets that must be achieved each year by electricity and gas distribution companies.
With the decree of December 28, 2012, the MED established the energy savings targets for the 2013-2016 period. Distributors must demonstrate by May 31 of each year that they hold a number of white certificates equal to at least 50% (60% for years 2015-2016) of their obligation, with the residual obligation be covered in the subsequent years.
The decree also set out the process for transferring management of the white certificate mechanism to the Energy Services Operator (GSE), while the Authority will remain responsible for determining the rate grant covering costs incurred by distributors under the new criteria set out in the decree. More specifically, the Authority provided for setting a provisional rate grant at the start of each year to be updated at the end of the year to take account of actual average prices registered on the white certificate market.
With decision 11/ 2016 of June 16, 2016, the Authority set the definitive rate subsidy for 2015 equal to 114.83 €/TEE. The preliminary rate subsidy for 2016 was set at €118.37 €/ TEE and will be revised based upon the final market price for the reference period.
As provided for by Directive 2003/54/EC, starting from July 1, 2007 all end users may freely choose their electricity supplier on the free market or participate in regulated markets. Law 125/2007 identified these regulated markets as the “enhanced protection” market (for residential customers and small businesses with low-voltage connections) and the “safeguard services” market (for larger customers not eligible for enhanced protection services).
Free-market operators are awarded contracts to provide safeguard services on a geographical basis through threeyear auctions. Enel Energia was awarded contracts to provide services to areas corresponding to the regions Veneto, Emilia Romagna, Friuli Venezia Giulia, Sardinia, Campania, Abruzzo, Calabria and Sicily for the 2014-2016 period. For the 2017-2018 period, following the competitive procedure governed by Resolution 538/2016/R/eel, Enel Energia was awarded the areas corresponding to the regions of Liguria, Piedmont, Valle d’Aosta, Trentino Alto Adige, Lombardy, Lazio, Puglia, Molise and Basilicata. The financial terms applied to end users were defined on the basis of the provision of the applicable primary and secondary legislation.
Enhanced protection service is provided by sellers connected with distributors. Prices are set by the Authority and are updated periodically based on criteria designed to ensure that the operators’ costs are covered. More specifically, the Authority updates the component for covering the operators’ costs in the enhanced protection market (RCV) annually so as to ensure that their costs are covered (operating costs, delinquency charges and amortization and depreciation) and that they receive a fair return on capital. Resolutions 659/2015/R/eel and 816/2016/R/eel established rates for 2016 and 2017.
In recent years, the Authority has adopted measures aimed at containing operators’ credit risk, which has risen in recent years due in particular to the economic crisis.
In 2016, the Authority lent significant impetus to the development and implementation of the Integrated Information System (IIS). This system was established under Law 129/2010 and is designed to manage the flow of information between gas and electricity market operators, based upon a central database of withdrawal points.
With a number of measures, the Authority has governed various services, some of which are already active with others at the implementation stage. For example, the Authority has sought to gradually centralize the management of the commercial processes for contract transfer and switching for both sectors (electricity and gas) and the aggregation of metering at hourly withdrawal points for the purposes of monthly settlement.
Thanks to the development work carried out, the IIS is increasingly operating as a central hub for the exchange of information among all system operators, thereby facilitating the management of certain processes. In view of these characteristics, Ministerial Decree 94 of May 13, 2016 designated the IIS as the mechanism for managing the process of billing TV license fees through electricity bills.
In February 2015 the government sent Parliament the “Competition Bill”, which provides for the repeal of the temporary rules governing gas and electricity prices as from July 1, 2018. The bill, currently being considered in Parliament, assigns the Authority the task of drafting the measures to ensure provision of last-resort services to customers who were previously served in the safeguard market.
In order to define a reform of existing market mechanisms for customer protection, the Authority issued Resolution no. 369/2016/R/eel providing for the introduction, as from January 1, 2017, of the Tutela Simile contract for users who have not yet elected a supplier on the free market.
With Resolution 209/2016/E/com, the Authority, in implementation of Legislative Decree 130/2015, regulated mandatory conciliation as from January 1, 2017 for electricity and gas sales activities as a prerequisite for taking legal action in disputes between end users and operators.
With Resolution 463/2016/R/com, the Authority issued the new Integrated Code for invoicing retails sales services (TIF), amending and introducing new invoicing rules for delivering electricity to end users and for using metering data.
Legislative Decree 164/2000 established that, as from January 1, 2003, all customers may freely choose their natural gas supplier on the free market.
However, sales companies must also offer a safeguard service to their customers (only for residential customers pursuant to Decree Law 69 of June 21, 2013), together with their own commercial offers, at the regulated prices established by the Authority.
If there is no company supplying this service, the continuity of supply for small customers not in arrears on bill payments (residential and other uses with an annual consumption of less than 50,000 standard cubic meters) and for users involved in providing public services shall by ensured by the supplier of last resort. If the customer is in arrears with bill payments or it is not possible for the supplier of last resort to provide service, supply continuity is ensured by the default distribution supplier selected, like the supplier of last resort, through voluntary tenders for geographically-based contracts.
The public procedures carried out in September 2014 identified the suppliers of last resort for the period October 1, 2014 - September 30, 2016. Enel Energia was selected as supplier of last resort for 7 out of the 8 geographical areas covered by the auction (the Valle D’Aosta, Piedmont and Liguria area was awarded to Eni) and as default distribution supplier for 6 out of 8 areas (the Friuli Venezia Giulia and Emilia Romagna and Tuscany, Umbria and Marche areas were awarded to Hera Comm).
With Resolution 465/2016/R/gas, the Authority updated the rules governing public tenders for the award of last-resort services for the period October 1, 2016 - September 30, 2018. Following the auctions held in September 2016, Enel Energia was designated as supplier of last resort for 7 of the
8 areas involved in the auction (Valle d’Aosta, Piedmont and Liguria; Lombardy; Trentino Alto Adige and Veneto; Tuscany, Umbria and Marche; Abruzzo, Molise, Basilicata and Puglia; Lazio and Campania; Sicily and Calabria) and as default supplier in 3 areas out of 8 (Abruzzo, Molise, Basilicata and Puglia; Lazio and Campania; Sicily and Calabria).
Starting from October 1, 2013, the reform of the financial terms and conditions applied to safeguard customers entered force. In this situation, the Authority modified the procedures for determining the raw material component, indexing it fully to spot market prices, introduced components to ensure a gradual transition (including one specifically for the renegotiation of long-term contracts) and increased the component covering retail sales costs to enhance cost-reflectivity (QVD).
With regard to the raw material (gas) cost component, on January 24, 2014, the Regional Administrative Court of Lombardy, in the course of an action brought by Enel Energia and Enel Trade, voided the resolutions by which the Authority changed the formula for determining (and thereby reducing) the QVD component for the 2010-2011 and 20112012 gas years. On April 10, 2014, the Authority filed an appeal with the Council of State. On November 18, 2016, the Council of State denied the Authority’s appeal, granting the appeal of Enel Energia and Enel Trade, finding the measures were in conflict with the statutorily established principle of the necessary “correspondence between recognized costs and actual costs”.
With regard to the definition of the component covering natural gas supply rates, the Authority also confirmed the current procedures for the period October 1, 2016 - December 31, 2017, extending their application by three months over the gas year, with full indexing to the spot prices reported on the Dutch Title Transfer Facility (TTF), pending the development of greater liquidity in the Italian wholesale markets. With Resolution 312/2016/R/gas, on October 1, 2016, the Authority, in implementation of Regulation (EU) 2014/312, launched the new balancing system in order to increase the availability of flexible resources for system balancing and to improve the information available to users.
General industry-wide provisions
With Resolution 137/2016/R/com, the Authority for Electricity, Gas and the Water System (the Authority) replaced the Accounting Unbundling Consolidated Text issued with Resolution 231/2014/R/com (in force until 2015) with a new text, with consolidated provisions for the water sector (in force as from 2016).
In 2015, with its Resolution 296/2015/R/com, the Authority regulated the functional unbundling requirements for operators in the electricity and gas sector. More specifically, the Authority confirmed that companies must maintain a separation between the brand, other distinguishing marks (including the company name) and communication policies of distribution companies and those of the companies that sell power that operate within the same group. Separation must also be maintained between those companies that sell electricity on the free market and those that do so on the enhanced protection market.
Between April and July 2016 the Regional Administrative Court of Lombardy rejected the appeals lodged by Enel Distribuzione, Enel Servizio Elettrico and Enel Energia. In implementation of the court’s ruling, Enel Distribuzione and Enel Servizio Elettrico modified their company name (and the associated brand) to “e-distribuzione SpA” and “Servizio Elettrico Nazionale SpA”. The companies e-distribuzione, Servizio Elettrico Nazionale and Enel Energia appealed the ruling of the Regional Administrative Court before the Council of State, which on December 7, 2016 suspended the effects of the resolution with regard solely to the obligation for the separation of information channels, physical premises and personnel by January 1, 2017. A hearing on the merits of the case is scheduled for April 13, 2017.
With Resolution 327/2016/R/eel, the Authority extended the deadline for sales companies operating in the enhanced protection market and the free market to implement the separation of their brands, other distinguishing marks and communication policies provided for in Resolution 296/2015/R/com to January 1, 2017.
With Resolution 333/2016/R/eel, the Authority established rules to govern actual imbalancing in the period July 2012 - September 2014 following the rulings of the Regional Administrative Court of Lombardy and of the Council of State which had voided the previous rules.
With Resolutions 444/2016/R/eel and 800/2016/R/eel, the Authority reformed the rules governing imbalancing prices for calculating actual imbalances, providing for the application of a mixed single price/dual price system to consumption units and production units not authorized to participate in the Ancillary Services Market. The system provides for the application of the single price for imbalancing in a bracket equal to 15% of the binding withdrawal/delivery program. For unschedulable production units, the single price system will apply. The resolutions also establish the transition to a system for determining the sign of macrozonal imbalancing based on actual metering of imbalancing as from May 1, 2017. The entry into force of the measure is subject to the Authority’s approval of a proposal from Terna for the algorithm for estimating that sign.
The regulatory framework for supporting renewable energy technologies in Italy envisages a range of remuneration systems. Incentives for technologies other than photovoltaics are awarded through competitive procedures established with Legislative Decree 28/2011 transposing Directive 2009/28/EC and the associated implementing decree of July 6, 2012. The decree of July 6, 2012 establishes:
- for plants that entered service by the end of 2012, the application of the green certificates mechanism, which uses certificates that can be traded in proportion to the electricity generated by a renewables plant, which remained in force until 2015. As from January 1, 2016 and for the remainder of the incentive entitlement period, the right to receive green certificates was replaced by a rate providing the same remuneration;
- for plants entering service after January 1, 2013, under the provisions of the ministerial decree of July 6, 2012, the application, for plants with a capacity of more than 5 MW, of a lowest-bid auction mechanism differentiated by generation technology and, for plants with a capacity of less than 5 MW, entry in a register with specified priority criteria.
The above incentive mechanisms will terminate when the indicative cumulative annual cost of the incentives reaches €5.8 billion.
At November 30, 2016, the indicative cumulative annual cost was €5.418 billion. With regard to solar generation, the incentive system provided for the application of a number of Energy Accounts, of which Accounts I, II, III and IV (from September 19, 2005 to August 26, 2012) were based on a feed-in premium (a rate premium over the hourly zonal price), while Energy Account V (from August 27, 2012) was based on a feed-in tariff (comprehensive price) and was terminated once a cost of €6.7 billion was reached on July 6, 2013.
Ministerial Decree governing renewable generation technologies other than photovoltaic system of June 23, 2016
On June 23, 2016, a new decree for incentives for renewable resources other than photovoltaics was published. The decree is a transitional measure (for 2016 only) that is based on the approach adopted in the decree of July 6, 2012. It provides for competitive mechanisms for access to incentives, such as auctions for plants with a capacity of more than 5 MW (which were completed at the end of 2016) and registers for plants with a capacity of up to 5 MW.
Remuneration of distribuition
On March 31, 2016 the Ministry for Industry, Energy and Tourism initiated the procedure for the introduction of a new ministerial order that will establish the remuneration of distribution activities for 2016, in accordance with the provisions of Order IET/2735/2015. Temporarily, the remuneration for 2015 will be retained until the new order is approved.
That order (IET/980/2016) was published on June 16, establishing the remuneration for distribution activities for 2016. Endesa was allocated a remuneration of €2,014 million. In addition, the incentives for service quality and nontechnical losses for Endesa were set at €7 million and €2 million respectively. That order also sets the base remuneration for the first regulatory period from January 1, 2016 to December 31, 2019.
On September 10, 2016, Order IET/1451/2016 was published, specifying the percentage allocations of the cost of financing the Social Discount for 2016. Endesa will bear 41.10% of the cost.
On October 24, 2016, the Supreme Court ruled that the system for funding the Social Discount was void as it was incompatible with Directive 2009/72/EC.
On December 24, 2016, Royal Decree Law 7/2016 was published, governing the funding mechanism for the Social Discount and other measures protecting vulnerable consumers. Under the provision of the law, the Social Discount covers the difference between the price for residential consumers (PVPC) and a base value, which can be diversified by category of vulnerable consumer and will be called the rate of last resort, which will be charged by the seller in utility bills to eligible consumers.
The Social Discount will be financed by the sales companies or the holding company for vertically integrated organizations. The percentage allocation of costs to finance the Social Discount will be determined annually by the Competition Authority (CNMC) and will be proportionate to the number of customers. On a temporary basis, Endesa was to fund 37.67% of the funding costs.
Royal Decree Law 7/2016 must be ratified by a Royal Decree within three months of publication.
Order IET/359/2016 of March 17, 2016 charged Endesa with a contribution to the National Energy Efficiency Fund of €29.7 million, corresponding to the energy savings obligations for 2016.
Sales margin incorporated in voluntary price for residential customers (PVPC)
On November 25, 2016, Royal Decree 469/2016 was published, establishing the method for setting the sales margin of the voluntary price for residential customers, thereby implementing a number of rulings issued by the Supreme Court voiding the margin set on the basis of the provisions of Royal Decree 216/2014.
On December 24, 2016 Ministerial Order ETU/1948/2016 was published, establishing, as from January 1, 2017, the value of the sales margin of the PVPC for 2014, 2015, 2016 and for the future.
Electricity rates for 2017
On December 29, 2016, Order ETU/1976/2016 was published, establishing electricity access rates for 2017. The existing rates were left unchanged.
Natural gas rates for 2017
On December 23, 2016, Order ETU/1977/2016 was published, establishing the natural gas access rates for 2017. In general, the existing rates were left unchanged, with the exception of the updating of the rate of last resort (TUR), which was reduced by an average of 9% as a result of the decline in the price of raw materials.
In the final months of 2015 the criteria for awarding incentives to new renewable energy plants were defined, in line with the new regulatory framework. This voided the moratorium imposed with Royal Decree Law 1/2012. The criteria, which provide for the award to be made through an auction system, had already been envisaged in the new law on electricity supply, although the details of application had not yet been specified. These were defined with Royal Decree 947/2015, Ministerial Decree IET/2212/2015 and the resolution of November 30 of the Secretary of Energy. The first auction, scheduled for January 14, 2016, involved 500 MW of wind capacity and 200 MW of biomass. For wind projects, the auction was completed successfully without incentives, while for biomass projects the only incentive awarded was that linked to the operating costs of the plants (the Ro component). Enel Green Power España, which participated in the auction for the award of wind capacity, was not awarded any project.
The new Spanish Government was formed in October with the appointment of Mariano Rajoy as Prime Minister, after 10 months of an interim Government. The new Secretary of Energy was appointed on November 15. Following the appointment, two important bills were drafted for renewables; the first regarded the revision of the remuneration parameters for 2017-2019 and the second a new royal decree and ministerial decree regarding the auctioning of 3,000 MW in 2017.
In October 2016, a new project for the drafting and application of the Grid Code was begun, an important step for the integration of renewable resources.
In February 2016, the Government endorsed bill 58 of 2015 amending a number of aspects of Law 09/2013. The bill allows renewables generators to also access low-voltage grids. The specific conditions for doing so will be specified and regulated subsequently. The bill also regulates aspects concerning the delivery of excess renewable electricity to the high-voltage grid.
On June 9, 2016, Law 48/2015 was published in the official journal. It organizes the electricity market and creates a new electricity regulator (ANRE). The new regulator will have to set electricity transport and distribution rates and eliminate discrimination in access to electricity transmission grids.
On June 24, 2016 the Government approved three decree laws that primarily reformed the operation of the Moroccan Agency for Solar Energy (MASEN). The decrees must now be approved by the two houses of the Moroccan Parliament. In the future, MASEN will replace the national utility ONEE in supervising renewables activities in Morocco, with the exception of renewables plants operated by private citizens (Law 13/2009) and pumping stations (STEP). In short, the reform transfers activities and duties from ONEE to MASEN. With the new changes, the ADEREE public agency will focus on energy efficiency issues.
In the 3rd Quarter of 2016, three new laws were published that modify the functions of a number of major energy regulatory agencies in Morocco:
- Law 37/2016, which amends Law 57/2009, providing for the reform of MASEN, renaming the agency the “Moroccan Agency for Sustainable Energy”. The Agency will be involved in developing the generation of electricity from all renewable resources (wind, solar, water) with objectives set by law (it will have to build new plants with a total capacity of 3,000 MW by 2020 and 6,000 MW by 2030). Private investors will be able to develop renewable energy plants in application of Law 13/2009;
- Law 38/2016, which amends Article 2 of Dahir 1-63-226, providing for the removal of all functions involved with renewable energy generation from ONEE, with the exception of so-called STEPs and renewables projects within the scope of Law 13/2009, and transferring all production assets (ER) and part of the employees of ONEE to MASEN (within a maximum of five years);
- Law 39/2016, which amends Law 16/2009, providing for the transfer of all ADEREE responsibilities concerning renewable energy generation to MASEN. ADEREE will essentially be responsible solely for energy efficiency and will change its name to ”Agence Marocaine pour l'Efficacité Energétique”.
Europe e North Africa
Capacity market and capacity payments
On June 27, 2016, Government Decree 563 was published, amending the calculation method used to determine capacity payments (DPM) that will ensure accurate determination of those payments for 2017 and beyond.
On July 25, 2016, the terms of participation in capacity market auctions were revised to permit demand to access the mechanism through the reduction of consumption.
The most recent capacity auctions (results published on September 20, 2016) set the parameters (price and quality) for 2020.
Government Decree 1458 of December 23, 2016 retained the coefficients for penalties for the lack of availability at the minimum levels for 2017 as well.
With Government Decree 850 of May 10, 2016, the following changes were made to the regulations governing renewables:
- the incentive system for photovoltaic installations and small hydro systems was extended to 2024 (from 2020);
- the capacity volume targets for solar and small hydro, which were not selected for previous auctions (20132015), were achieved and reallocated until 2024 (85.8 MW for solar and 168 MW for small hydro);
- the total volume target was kept at the initial level (5,871 MW).
On June 14, 2016 the final results of the auctions for investment in renewable resources for 2016-2019 were announced, with the award of projects for wind plants only. On September 29, the Government Decree on state compensation for the connection of renewable resource plants or peat-fired plants to the grid was published. The rules, which apply to plants with an installed capacity of up to 25 MW, establish that compensation may not exceed 70% of the grid connection cost or in any case 15 million rubles per plant.
On July 5, 2016, the Federal Antimonopoly Service (FAS) issued an official warning for T Plus to cease its unfair practices against Enel Russia in the heat market. More specifically, the warning requires T Plus to enter into a heat supply contract with Enel Russia for the SuGRES plant in Yekaterinburg.
With a decree of December 1, 2016, the Government established more stringent rules for Unified Heat Supplier (UHS) in the event of non-compliance with deadlines for payment to other suppliers and for network services. More specifically, UHS will lose its supply license if it fails to pay suppliers for two consecutive billing periods as well as in the event of repeated violation of other contractual terms. Any violation must nevertheless be certified by a court or the FAS.
Recognition of distribution investments in rates
In March 2016, ANRE approved a new procedure for recognizing investments for rate purposes, which will enter force in 2017 and in 2016 will serve as a recommendation for distributors.
The procedure establishes: (i) no recognition of inefficient investments; (ii) no recognition of costs for the works that exceed 10% of budgeted costs; and (iii) the possibility of modifying the annual investment plan by a maximum of 10% once it has been submitted.
Rates of last resort
According to the calendar for the liberalization of regulated rates for residential customers, the percentage of electricity that suppliers of last resort must purchase on the free market will be 80% in the 1st Quarter of 2017 and 90% in the 2nd Quarter of 2017.
Distribution rates for 2017
In December 2016, ANRE published distribution rates for 2017, equal to an average of 98.6 lei/MWh, down about 8% compared with distribution rates in 2016.
As part of the smart metering pilot project, at the end of 2016 110,000 meters had been installed. The results of the pilot project were transmitted to ANRE, which is preparing a cost-benefit analysis for approval of the mass roll-out project for 2017-2020.
Rebranding of distribution companies
On August 16, ANRE sent electricity distribution companies a letter containing the minimum measures distributors must implement with regard to rebranding.
Between October and December 2016, Enel notified ANRE that it had adopted a new name and logo for its distribution companies in Romania and modified the corresponding licenses.
The main form of incentive in Romania for all renewable energy resources is the green certificates system. The only exception regards hydroelectric plants with a capacity of more than 10 MW, which are not eligible for any incentive mechanism. Sellers are required to purchase a specified share of renewable energy each year through the purchase of green certificates on the basis of annual targets set by law for the share of gross generation from renewables.
Each year, the Romanian regulator publishes the mandatory share, recalculated to balance supply and demand. The value of the green certificates varies on the basis of coefficients that differ by generation technology. More specifically, these are 2 green certificates per MWh of generation from biomass, geothermal and wind until 2017 (after 2017, 1 green certificate), 6 green certificates per MWh of generation from photovoltaic, and 3 green certificates per MWh of generation from hydroelectric for new plants. The price of the green certificates is determined by law within a specified range (cap & floor). Sellers are subject to penalties in the event of non-compliance.
The ordinance EGO 57/2013 temporarily modifying the green certificate system established the temporary suspension (from July 1, 2013 to March 31, 2017) of trade in part of the green certificates due to renewables generators (1 green certificate per MWh for wind and mini-hydro and 2 green certificates per MWh for photovoltaic). Trading in the deferred green certificates could gradually resume after April 1, 2017 for photovoltaic and mini-hydro and after Janu
ary 1, 2018 for wind, continuing until December 2020. The Government is preparing a new program for the resumption period, however, which could be postponed until 20182025 for wind plants and 2025-2030 for photovoltaics. On December 30, 2016 the Government published the share of subsidized renewables energy for 2017, which was equal to 8.3%. The previous year that share was 12.15%.
The Greek incentive system uses a feed-in tariff differentiated by renewable energy resource. In the 2012-2014 period, a range of measures were introduced to reduce the system deficit, decreasing incentives. Based on the 20142020 guidelines on state aid, a new renewable energy resource support mechanism, based on feed-in premiums and tenders, entered force on January 1, 2016, replacing the existing system. The definitive scheme was approved by Parliament on August 9, 2016 (Law 4414/2016).
The Wholesale Electricity Market and the Capacity Assurance Mechanism (CAM) are undergoing reform. While the reform of the wholesale market should be completed by December 2017 and that of the imbalancing market by June 2017, in May 2016 a temporary model for the CAM (based on four pillars: capacity availability, flexibility, strategic reserve and demand-side response) was approved by the Greek Parliament. The temporary system will be replaced by a permanent mechanism that should enter force in 2017.
The Bulgarian incentive system is mainly characterized by a feed-in tariff differentiated by resource. The mechanism is open to onshore wind plants, photovoltaic plants, hydroelectric plants with a capacity of less than 10 MW and biomass plants with a capacity of less than 5 MW.
Between 2012 and 2014 many regulatory changes were introduced, including a local tax of 20% (later voided by the courts), an access fee and limitations on subsidized production. All of these were intended to reduce the system deficit created by the incentives.
The Turkish renewable energy system provides for a feed-in tariff mechanism denominated in US dollars, guaranteed for 10 years, with the option of transferring to the open market each year until 2020. If local components are used in construction, the system establishes a further five years of guaranteed incentives.
On May 1, 2016, the national regulatory authority (EMRA) modified the legislation governing the incentive mechanism with regard to the exemption from participation in the balancing market.
On June 17, 2016, the Parliament approved amendments to the Energy Act, including a change in the tender mechanism for renewables.
On October 9, 2016 the Regulation on Renewable Energy Resource Areas (RERA Regulation) was published in the official journal. It governs the special Renewable Energy Resources Areas (RERAs), allowing the granting of licenses, for these areas, to install renewable resource plants without having to wait for approval from the Council of Ministers.
Three support mechanisms are in place:
- a feed-in tariff, applicable for plants in differing amounts depending on the date of entry into service;
- a feed-in premium, calculated as the difference between the “applicable value” (ct/kWh) for each form of renewable energy and the monthly average electricity price;
The new RES law (EEG), which entered force in January 2017, replaces the feed-in tariff with a system of auctions for most renewables technologies. Offers will specify an amount of installed capacity each year in order to foster new lines of growth, which are: a) for onshore wind plants, 2.8 GW per year for 2017-2019 and 2.9 GW per year after 2020 (repowering included); b) for offshore wind plants, 15 GW by 2030. Two offers are planned for 2017 and 2018 of 1.55 GW each; c) for photovoltaic plants, 2.5 GW per year, of which 600 MW in auctions.
The Group operates in Latin America in Argentina, Brazil, Chile, Colombia and Peru. Each country has its own regulatory framework, the main features of which are described below for the various business activities.
Under the regulations established by the competent authorities (regulatory authorities and ministries) in the various countries, operators are free to make their own decisions concerning investment in generation. Only in Argentina, following the change in energy policy in recent years, is there a regulatory framework that envisages greater public control of investments. In Brazil plans for new generation capacity are imposed by ministerial order, and this capacity is developed through auctions open to all.
All of the countries have a centralized dispatching system with a system marginal price. Usually, the merit order is created based on variable production costs that are measured periodically, with the exception of Colombia, where the merit order is based on the bids of market operators.
Currently in Argentina and Peru, regulatory measures are in place governing the formulation of the spot market price. In Argentina, the measure, adopted in 2002 following the economic and energy crisis that affected that country, is based on the assumption that there are no restrictions on the supply of gas in the country. Nevertheless, in view of the current financial challenges faced by the wholesale market, the Government has announced its intention to modify the existing regulatory framework and, in 2013-2014, develop an electricity market based on a cost-plus model.
Long-term auction mechanisms are widely used for wholesale energy and/or capacity sales. These systems guarantee continuity of supply and offer greater stability to generation companies, with the expectation that this encourages new investments. Long-term sales contracts (up to 30 years) are used in Chile, Brazil, Peru and Colombia. In Brazil, the price at which electricity is sold is based on the average longterm auction prices for new and existing energy. In Colombia, the price is set by auction between the operators, which usually enter into medium-term contracts (up to four years). Finally, a regulatory framework recently introduced in Chile and Peru allows distribution companies to sign long-term contracts to sell electricity on regulated end-user markets.
Auctions are gradually replacing the practice of regulators setting a nodal price for supplying electricity to regulated customers.
Chile, Peru and Brazil have also approved legislation to encourage the use of unconventional renewable resources, which sets out the objectives for the contribution of renewable resources to the energy mix and governs their generation.
Distribution and sale
Distribution is performed mainly under concession arrangements, using long-term contracts (ranging from 30 to 95 years or in some cases with unspecified terms), with regulations governing prices and network access. Distribution rates are revised every four years (Chile, Peru and the region of Brazil served by Coelce) or five years (Colombia and the region of Brazil served by Ampla). As a result of the Ley de Emergencia Económica (the economic emergency law) of 2002, no rate reviews have yet been conducted in Argentina, despite rules mandating such revisions every five years. In Chile, Brazil and Peru, distribution companies hold auctions to procure electricity for regulated market customers, while in Colombia sales companies negotiate prices directly with generation companies, passing through the average market price to end users. In general, all countries have implemented a remuneration approach based on the RAB and a rate of return tied to the WACC, which ensures remuneration of the capital employed. The liberalization of the end-user market is generally at a fairly advanced stage, though not yet complete. Eligibility thresholds are set at 30 kW in Argentina (20% of volumes in 2010), 3 MW in Brazil (30% of volumes), 0.3 MW in Chile (40% of volumes), 0.1 MW in Colombia (35% of volumes in 2010) and 0.2 MW in Peru (44% of volumes). Free-market customers can sign bilateral contracts with generation companies for electricity.
The regulatory authorities set the rates for regulated market customers.
Limits on concentration and vertical integration
In principle, existing legislation permits companies to take part in a variety of activities in the electricity sector (generation, distribution, sales). Usually, greater restrictions are imposed on participation in transmission activities so as to ensure that all operators have adequate access to the network. There are special restrictions on generation and distribution companies holding stakes in transmission companies in Argentina, Chile and Colombia. Furthermore, in Colombia companies formed after 1994 may not adopt or maintain a vertically-integrated structure.
As to concentration within the industry, Argentina, Brazil and Chile have not set any specific restrictions on vertical or horizontal integration, while in Peru business combinations require prior authorization above certain thresholds. In Colombia, no company may control more than 25% of the generation and sales markets, while in Brazil, as previously mentioned, there are no explicit restrictions on integration in the electricity sector, although administrative authorization is required for business combinations that would result in market share of over 40%, or that involve a company whose annual turnover exceeds R$400 million (about €177 million).
Rate revision and other regulatory developments in Argentina
On January 27, 2016, Resolución 06 of the Ministerio de Energía y Minería was published. It approves quarterly summer reprogramming until April 2017 for the wholesale electricity market, to be carried out on the basis of new criteria that in determining the price take account of (i) the effective cost of electricity adjusted for subsidies; (ii) new price schemes that differ for each type of residential customer on the basis of the capacity for consumption savings and (iii) a new social rate. The resolution is an important step towards the reconstruction of the entire value change and the associated payment cycle for the electricity market.
Following that resolution, on January 28, 2016, Resolución 07 of the Ministerio de Energía y Minería, expressly targeted at the distribution companies EDESUR SA and EDENOR SA, instructs ENRE to exercise its power to increase rates, preliminary to the upcoming Revisión Tarifaria Integral (RTI), applying the above transitional rate regime for those two distribution companies. In addition, it terminates application of the PUREE and introduces a new social rate for all customers. It also establishes a deadline of December 31, 2016 for the definition of the RTI.
The new administration intends to return to the fundamental principles that inspired Law 24065 of 1991 and to normalize the electrical sector as requested by industry operators.
On January 29, 2016, ENRE therefore issued:
- Resolución 1/2016, which contains a new rate framework to apply to each category of customer as from February 1, 2016, and rules governing supply, which now provides for monthly invoicing;
- Resolución 2/2016, which provides for the closure of the FOCEDE as from January 31, 2016 and establishes a new system for funds received in application of Resolución ENRE 347/12. More specifically, those funds will no longer be managed by a trust, instead being deposited them in a current account held with a banking institution recognized by Argentina’s central bank.
On March 30, 2016, the Argentine Secretariat of Electricity (SEE), which reports to the Ministerio de Energía y Minería, issued Resolution 22/2016 updating the rates set with Resolution 482/2015, which would be applied as from February 2016. The increases regarded the remuneration of the fixed costs of thermal generation units (+70%) and hydroelectric plants (+120%), while the remuneration of variable costs was increased by 40% for both generation technologies.
The rates for the non-recurring maintenance component were increased by 60% and 25% for thermal and hydroelectric plants respectively, while the additional remuneration was left unchanged. In any event, the resolution is to be considered a temporary measure pending the new regulatory framework for the sector to be announced by the Government.
Development of new thermal generation capacity
On March 22, 2016, SEE Resolution 21/16 invited interested parties to submit bids for new thermal generation capacity until the summer of 2018. The tender is not open to units in existence prior to the publication of the resolution, units already connected to the Argentine interconnection system (SADI) or for which the power generated is already committed under other executive agreements.
The contract provided for in the resolution may have a duration of between five and 10 years with CAMMESA in representation of the operators of the Mercado Eléctrico Mayorista (MEM), with remuneration for capacity to be set in US dollars/MW/month and for power generated in US dollars/MWh, with the price differentiated by type of fuel. The disbursement and recognition of the cost of fuels will be carried out using existing procedures. Minimum capacity thresholds have been set for each grid connection point. On September 14, the results of the auction of new thermal generation capacity were published in the official journal, with the award of 1,915 MW. The capacity bids are staggered in time: 545 MW to enter service by December 2016; 685 MW by March 2017; 229 MW by June 2017 and the remaining 456 MW by 2018.
On November 16, 2016, with Resolutions SEE 420-16 and 455-16, the SEE convened those interested in developing infrastructure projects that help reduce costs in the electricity
market and increase the reliability of the Argentine electrical system.
“Bandeiras Tarifárias” update
On February 1, 2016, the highest generation costs classes, “Yellow” and “Red”, were subdivided into additional classes.
In any event, developments in water conditions in the period, which returned reservoirs to acceptable levels, gave rise to the repositioning of the “Bandeiras Tarifárias” to level “Yellow” in March 2016 and “Green” in April 2016. The mechanism, which provides for the application of an extra-cost differentiated by class of generation cost representing progressively worse conditions (Green, Yellow and Red) to be billed to end-users without having to wait for subsequent rate revisions, took effect at the start of 2015 in response to the increasingly large divergence between costs recognized in rates and effective costs, partly due to the continuation of drought conditions.
Conta de Desenvolvimento Energético (CDE)
Created with Law 10438/2002, the CDE is a government fund designed to foster the development of generation from alternative energy sources, promote the globalization of energy services and subsidize low-income residential customers. The fund is financed with a surcharge levied through rates for consumers and generators.
On December 15, 2015, ANEEL launched a public consultation with system operators to define the CDE’s provisional 2016 budget.
ANEEL’s initial proposal was to reduce the rate surcharge for the CDE by 36%, taking account of the fact that the substantial reduction in the cost of fuels, which had already begun in 2015, had not been promptly reflected in reductions in the rate surcharges in 2016.
Resolution 1.576 authorized distribution companies to offset the reduction in amounts billed (following application of the court ruling upholding the demand of certain appellants to be charged a lower CDE rate surcharge) in monthly installments. The difference between the normal rate and that established in the court ruling will be recovered by the distribution companies through smaller monthly payments to the fund.
Personnel sharing and contracts between related parties
On January 28, 2016, ANEEL approved new rules for sharing personnel and infrastructure among companies belonging to the same group and for approving contracts between related parties. The rules envisage the following measures:
- the sharing of personnel and administrative infrastructure between companies of the same group is permitted even if they operate in different segments (e.g. generation, distribution, transmission, sales and holding companies);
- contracting with personnel must evaluate the various possible approaches and contractual forms, taking care to select the most beneficial in financial terms. Contracts for the provision of services, which must comply with the principle of economic, financial, administrative and operational separation of the companies involved, may have a maximum duration of five years and can be renewed upon request if justified on economic grounds;
- approval of contracts between related parties must comply with the new rules set by ANEEL, which is also responsible for monitoring compliance with the specified limits.
On June 6, 2016, the Minister of Mines and Energy (“MME”) signed Portaria 237, which allows electricity distribution companies to ask the ministry for investments in high-voltage grids and substations to be classified as high priority. Such classification makes it possible to issue bonds for infrastructure projects, which are long-term financial liabilities with longer maturities than standard bonds and which also give issuers tax benefits.
Provisional Measure 735
Provisional Measure 735 of June 22, 2016 (subsequently ratified with Law 29/2016 on October 20, 2016) established the following in relation to additional system charges:
- as from January 1, 2017, the Chamber of Commercialization of Electrical Energy (CCEE) will replace Electrobras as the company charged with collecting the following “Encargos Setoriais”: RGR, CDE and CCC, and with the administrative management and operation of the associated sectoral funds;
- as from January 1, 2030, the allocation of the annual CDE charges will be proportionate to the power transported on the distribution and transmission grid of each operator in MWh. The geographical area and region served will no longer be taken into consideration;
- between January 1, 2017 and December 31, 2029, procedures will be established for the gradual and uniform reduction and final elimination of the existing allocation criteria;
- ad hoc remuneration for investments in modernizing the distribution network;
- greater flexibility for quality and grid loss targets for power distribution concession holders in the case of severe socio-economic conditions, extreme environmental events or challenging operating conditions due to mass theft of electricity.
Renegotiation of Ampla concession
On August 10, 2016, Ampla, in the wake of the impact of the economic crisis in Brazil on electricity consumption, especially in the state of Rio de Janeiro, petitioned ANEEL to modify a number of terms of its concession contract with a view to bringing forward the rate revision to March 2018 rather than 2019, and to ease the grid loss reduction and service quality improvement obligations. ANEEL called a public hearing for the end of October. Interested parties may submit comments in the 30 days following the hearing and at the end of 2016 a new concession agreement contract should be signed. The amendments would only regard certain financial terms of the agreement, not the expiry date of the concession.
On September 12, 2016, ANEEL approved regulation no. 733/2016 establishing the conditions for applying the new hourly rates for low-voltage power, the so-called white rate. The white rate is a new hourly rate option that changes depending on the time of day and will differ on the basis of the consumption level of each customer as from 2018. Initially, the new rate will apply to consumers with low-voltage connections (127, 220, 380 or 440 V, group B) and new customers. As from January 2020, it will be an option for any consumer, with the exception of those who already benefit from certain preferential rates.
The incentive system for renewable energy in Brazil was created in 2002 with the implementation of a feed-in mechanism (PROINFA), and was then harmonized with the sales system for conventional power using competitive auctions.
The system envisages different types of auction depending on whether participation is reserved to new plants or existing plants and primarily comprise:
- Leilão de Fontes Alternativas, reserved to renewable wind, biomass and hydroelectric technologies up to 50 MW;
- Leilão de Energia de Reserva, for which all projects that will enter operation within three years of the date on which the auction is held are eligible. These auctions are normally organized to increase reserve capacity and/or promote the development of certain technologies (such as renewables).
- Leilão de Energia Nova, for which all projects that will enter operation more than three years after the date on which the auction is held are eligible (in 2016, the period for entry into service was extended from five to seven years).
An auction typically has two phases: the descending-clock phase in which the auction organizer establishes the opening price for the auction and the generators submit decreasing bids; and the pay-as-bid phase in which the remaining generators further reduce the price until the supply of power covers all the demand up for auction. The winning bidders are granted long-term contracts whose term varies by resource: 15 years for thermal biomass plants, 20 years for wind plants, 25 years for solar plants and 30 years for hydroelectric plants.
In 2016, as a result of the continuing recession, the country found itself with excess electricity supply, which forced the Government to implement measures to reduce the excess contractualized power of local distributors. More specifically, the calendar of auctions in 2016 was revised, distributors were no longer required to renew expired contracts and bilateral agreements were permitted for the temporary partial and full reduction of PPAs signed in auctions carried out in previous years.
In November, the President approved Law 13.360 which introduced a series of amendments in the regulatory framework for the electricity sector, including:
- the authorization of distributors to sell, on the free market, any excess power available under contracts signed previously for the supply of customers on the regulated market;
- the elimination of the obligation to renew hydroelectric concessions for plants with a capacity of less than 50 MW through participation in a dedicated auction (renewal will now only involve the payment of a fee)
- the payment of an indemnity to hydroelectric generators in the case of generation shortfalls as a result of the dispatching of thermal plants outside the market merit order;
- an increase in the number of years in advance that power supply auctions can be called from five to seven.
Enel is promoting a demonstration project to install 50,000 smart meters in 2016, with the ultimate goal of replacing all existing meters (about 1.6 million) by 2020.
This investment will be recognized by Chile’s regulator (CNE) if it recognizes the legitimacy of including the cost of the operation in the Valor Agregado de Distribución.
In this regard, on September 5, Chilectra presented the CNE with a study prepared by Systeple to define the cost components of the VAD with a view to setting the rates that will enter force on November 4, 2016.
At the same time, Chile’s Parliament approved the “Ley de equidad tarifaria”, which modifies the rate structure in areas were generation plants are located in order to equalize these areas with the urban areas where greater economies of scale can be achieved.
The “Ley de transmisión eléctrica” achieved the objective of unifying the various electricity dispatching centers in the country, as well as eliminating the payment of transmission charges by generators and passing them on to society as a whole through rates.
Chile has a system mandating achievement of specified renewable energy targets for those who withdraw power for sale through distributors or sales companies. The law sets two different targets based upon the date the contract is signed:
- for all power under contract between August 31, 2007 and June 30, 2013, renewable resources are to account for 5% of the electricity starting from 2014, an amount that will increase by 0.5% per year to reach a share of 10% by 2024;
- for all contracts signed starting from July 1, 2013, Law 20698 of 2013 sets a target of 20% by 2025 to be achieved by gradually raising the initial share of 6% in 2014.
All renewable energy resources are eligible for the purposes of meeting the requirement. For hydroelectric plants with a capacity of up to 40 MW, the system provides for a corrective factor which counts all of the first 20 MW and a declining proportion of the capacity between 20 and 40 MW. The mechanism also establishes penalties for failure to achieve the mandatory share.
In May 2014, the country’s new Energy Agenda was presented by President Michelle Bachelet, setting out the primary energy policy targets, the next regulatory steps to be taken and the plan of investments that the Government intends to make in its next term. Specifically with regard to renewables, the Agenda confirms the target of 20% of power under contract by 2025 and introduces an additional target that 45% of new capacity to be installed between 2014-2025 be supplied by renewable power plants. As part of the Agenda, in February 2016, the Ministry of Energy published “Energía 2050: Política Energética de Chile” setting out guidelines for the long-term growth of the sector.
On July 20, 2016 the new Transmission Act was published and in August the second-level regulation process officially began. According to the Government’s calendar, the process will be completed in July 2017, with a preliminary consultation phase involving all of the industry’s main companies for the purposes of drafting the final documents. In addition to introducing a single system operator, the new law assigns a central role to planning the expansion of the transmission system and gradually transfers the transmission costs from generators to end users.
The recently installed Peruvian Government approved rules giving free-market customers and distributors access to the spot market.
On July 24, the implementing regulations for Legislative Decree 1221 were approved, governing the following issues:
- ZRTs (technical responsibility zones): in the next six months, the Ministry of Energy will define the ZRTs, which will be open for comment by distribution companies;
- the VAD surcharge for investment, operations and maintenance for technological innovation in distribution grids, including digital meters, which will become property of the local distribution grid;
- definition of a rate adjustment factor on the basis of the SAIDI and SAIFI values set by Osinergmin, Peru’s electricity regulator
New regulations for the wholesale market
On July 24, 2016 the Ministry of Energy and the Electricity Market published Decreto Supremo 018-2016-EM, followed on July 28, 2016 with the publication of Decreto Supremo 026-2016-EM to modify the regulations governing the wholesale electricity market (MME). The main changes introduced by the measures regard the following:
- the approval of the rules for the short-term MME, called the Mercado de Corto Plazo (MCP);
- operational mechanisms, procedures for the assignment of ancillary services, operational rigidities and procedures for the assignment of benefits in the case of congestion.
Entities authorized to operate on the MCP are:
- generation companies, to meet the requirements of their supply contracts;
- distribution companies to meet the demand of their freemarket customers up to a maximum of 10% of total demand; and
- large-scale customers to meet up to a maximum of 10% of their total electricity demand.
The Committee for the Economic Activities of the National Interconnection System (COES) will calculate the marginal costs of electricity and congestion, setting a provisional value on a daily basis for market transactions, with the results accessible on the COES web portal. Indemnities for congestion will be divided among all participants on the basis of the provisions in the rules. Penalties will also be levied for entities that do not meet their payment obligations.
The Peruvian renewables incentive system, introduced with Legislative Decree 1002 of 2008 (Decreto Legislativo de Promoción de la Inversión para la Generación de Electricidad), is a system of competitive auctions open to all renewable generation technologies (with the sole exception of hydroelectric plants, which are eligible up to a limit of 20 MW), usually differentiated by resource at the time of the publication of the associated decree by the ministry.
The auctions provide for a maximum bid price and a pay-as-bid mechanism. The winning renewables plants also benefit from dispatching priority and a variety of tax incentives, including accelerated amortization and early reimbursement of sales taxes. In May 2016 the fourth auction for renewables generation was completed with the signing of long-term PPAs, with a view to achieving the target of 5% for 2018.
On March 14, 2016 the Energy and Gas Regulatory Commission (CREG) defined a method for the remuneration of distribution activities. The regulator focuses on the definition of a new regulatory framework that would reduce the asset base, as recognized for rate purposes by 20% (about 1 trillion Colombian pesos). This could slow technological development and discourage the investment the country needs to expand and restructure grids and improve service quality.
The Enel Group is ready to expand its participation in distribution activities, such as the privatization of state distribution companies (Meta, Huila, Caqueta, among others).
The country’s energy policy is guided by the 2005-2030 National Energy Policy, approved by the Government in order to reduced Uruguay’s energy dependency and encourage investment in the energy industry. The policy sets out a series of short, medium and long-term objectives, including a goal of achieving 15% of generation from non-conventional renewables by 2015 (the target was achieved).
The success of the “Uruguayan wind revolution” led the country to an installed capacity of 1 GW as of September 2016, well over the national target.
As regards market access, private operators can participate in auctions called by the Government, normally differentiated by generation technology, for the award of long-term contracts for the sale of electricity to the national distributor UTE.
North and Central America
In November 2016, Republican Party nominee Donald Trump was elected President and Republicans retained control of both the House of Representatives and Senate. The incoming Trump Administration will appoint new leadership of federal departments and agencies, including the Environmental Protection Agency (EPA), Department of Energy (DOE), and Department of Interior. The incoming President will also appoint new commissioners to the Federal Energy Regulatory Commission.
The new Administration is expected to reconsider, rescind, or otherwise pullback the Clean Power Plan, EPA’s 2015 proposal to regulate greenhouse gas emissions from fossil-fired power plants. That regulation is currently undergoing legal challenge before the D.C. Circuit Court. The US Congress is also expected to consider comprehensive tax reform. The existing timeline for renewable energy tax credit qualification is expected to remain stable. Changes or decreases in the corporate tax rate or depreciation schedules could affect a range of infrastructure investments (including renewables, which could see hits to project economics in some scenarios).
In December 2016, the US Fish and Wildlife Service (USFWS) published updated finalized regulations for incidental take of eagles. The revisions intend to create a more efficient permitting framework and to support implementation of mitigation measures that avoid and minimize, and compensate for, adverse impacts from otherwise lawful activities.
On December 27, 2016, the Massachusetts Department of Energy Resources announced its intention to implement an energy storage target for electric companies, requiring procurement of cost-effective systems by January 1, 2020. Formal targets will be set by July 1, 2017.
On November 21, 2016, Canada’s Minister of Environment and Climate Change announced that the country hopes to generate 90% of its electricity from sources that don’t emit greenhouse gases by 2030. The country will phase out coal and use the Canada Infrastructure Bank to finance more clean-energy projects to achieve its goal to reduce greenhouse gas emissions by about five megatons each year.
Also on November 21, 2016, the Alberta government announced it will end its deregulated wholesale electricity market and move to a capacity market to reduce volatility and encourage the growth of low-emitting power sources. The move will dramatically reduce spikes and market uncertainty. The new market structure will be in place by 2021.
On November 24, 2016, the Alberta government reached agreements with TransAlta Corp., Capital Power Corp. and ATCO Ltd that require the companies to cease all coal-fired emissions by December 31, 2030. Alberta agreed to pay a total of $814 million in compensation over 14 years for them to phase out six coal plants. The payments will be funded by levies on industrial CO2 emissions and can be reinvested in Alberta’s electricity market.
During 2016, local authorities continued the implementation of laws and regulations needed to complete the restructuring of the energy sector. With specific reference to the electricity sector, in 2016 the regulatory process, which began with the constitutional amendments approved in December 2013 and continued in 2014 with the enactment of the legal framework for the electricity industry (Ley de la Industria Eléctrica, Ley de Generación de Energía Geotérmica and Ley de la Comisión Federal de Electricidad), has focused on horizontal and vertical restructuring of the former sector monopolist (Comisión Federal de Electricidad). This restructuring process, which is expected to be completed by the end of 2017, will create at least four generation companies, two transport companies (transmission and distribution), two sales companies and two branches to manage commercial relations with generators who opt to remain in the old market (independent producers and self-generators).
In line with the announced timetable, in January operations began on the short-term power market and during the year the first two auctions for the award of long-term contracts were completed. Under the contracts, distributors are required to buy the power and certificates needed to meet the target for generation from non-fossil sources in 2018 and subsequent years (30% in 2021 and 35% in 2024).
As regards the long-term development of the sector, in June the Ministry of Energy (SENER) presented the electricity sector planning document for 2016-2030 (PRODESEN). The document sets out to identify the electricity generation, transmission and distribution projects necessary to meet demand over the period. According to ministry estimates, demand is expected to rise by between 3% and 4%, which will require about 60 GW of additional capacity, of which about 32 GW of renewables capacity in order to meet the target of 35% of generation from non-fossil sources by 2024.
At the end of 2016 the regulatory process for the implementation of medium-term auctions began, representing one of the tools made available to the distributors to ensure achievement of the demand coverage parameters defined by the regulator.
The evolution of the Guatemalan energy sector has been driven by the Energy Policy and the Transport and Generation Expansion Plans, on the basis of which long-term auctions have been carried out in recent years to encourage investment in new generation projects. These actions, combined with the stability of local regulation, have enabled an increase in the country’s installed capacity and a change in the energy matrix, such that in 2016 about 60% of the country's generation originated from renewable resources.
The energy policy issued in 2016 sets a target for 2030 of 90% of generation from renewable resources.
During the year, distributors organized two short-term auctions for the supply of electricity and capacity, and in 2017 it is expected a new long-term auction will be organized for the construction of new projects. In February, regulations were issued to govern possible offers between Guatemala and Mexico, which will give the country a privileged position as an interconnection, being simultaneously connected to the Regional Electricity Market and to Mexico
Typically, renewables plants enter the market through participation in auctions organized by the system operator (ETESA), which acts as a single buyer. In 2016, however, the authority promoted mechanisms for the installation of renewable energy plants by final customers, strengthening the procedure for self-consumption.
In April, the Parliament approved the National Energy Plan for 2015-2050, which seeks to define a change in the energy matrix of the country, aimed at the reduction of CO2 emissions. In July, Resolution 10.143 was published, changing the method for the export of energy during periods of high water availability in the system. The new method is designed to reduce the risk of reservoir overflow.
Renewable energy accesses the market primarily through independent power producers (<20 MW), with rates set by the regulator (ARESEP), and BOT public auctions (<50 MW), with fixed prices for the definition of long-term PPAs with the Costa Rican Institute of Electricity (ICE).
The current Energy Plan, approved in September 2015 (Plan Nacional de Energía 2015-2030), identifies the short, medium and long-term planning objectives for the energy sector. With specific reference to the electricity sector, it identifies four objectives to be pursued with dedicated measures in the coming years:
- improving the energy efficiency of the country through the reduction of energy intensity and the emissions associated with energy consumption;
- ensuring efficient distributed generation, allowing the direct use of renewable sources;
- optimizing the country’s generation matrix through an assessment of available resources and their combination in terms of quality, availability and price;
- introduce a full system planning model that considers the economic, technical, social and environmental aspects as key elements.
Sub-Saharan Africa and Asia
India is a federal republic composed of 29 states, each of which has specific responsibilities in various sectors as well as shared responsibility with the Federal Government in the electricity sector.
The Ministry of New and Renewable Energy (MNRE) defines and implements policy for the development of renewable energy at the national level. In addition to the Ministry, the power market is supervised at the federal level by the Central Energy Regulatory Commission (CERC), which sets guidelines and standard rates, and by the State Energy Regulatory Commissions (SERCs), which implement them at the state level.
In June 2015 the Government headed by Prime Minister Narendra Modi approved a target of 175 GW of renewables capacity by 2022, including 100 GW from solar, 60 GW from wind and about 15 GW from other technologies.
The renewables industry is characterized by a high degree of fragmentation, as each state has introduced its own regulatory system for the development of new capacity.
In general, the main support mechanisms for the development of new capacity are auctions, preferred feed-in tariffs, Renewable Energy Certificates (REC) based on state-level Renewable Portfolio Obligations (RPO), Generation Based Incentives for wind power projects, currently in place until March 2017, and other tax incentives.
The most widely adopted incentive plan for wind power is based on preferred feed-in tariffs, defined by the SERCs at the state level and implemented through PPAs with state distribution companies with terms varying between 10 and 25 years depending on the state. The feed-in tariffs are revised periodically by the SERCs, are set at the time a plant enters service and do not change over the duration of the PPA. In June 2016, the Ministry of New and Renewable Energy (MNRE) published guidelines for the construction of 1,000 MW of wind capacity using competitive auctions, with that mechanism gradually replacing the feed-in tariffs.
The development of solar energy is primarily supported with the program called the “Jawaharlal Nehru National Solar Mission” (JNNSM) launched in 2010. It is based on an auction system managed at the federal level but implemented at the state level. The program is structured into three phases, of which the second is currently under way. The winning bidders are awarded a 25-year PPA at a fixed rate with the National Thermal Power Corporation (NTPC), the leading national electricity company.
In June 2016, the MNRE published a draft policy to define guidelines to support the development of mini/micro-grids based on renewables, with a goal of implementing at least 10,000 projects, equivalent to a minimum of 500 MW of installed capacity, in the next five years to supply electricity in rural areas.
On October 2, 2016, India ratified the climate accords reached at the Paris summit in December 2015, committing to reducing the intensity of carbon emissions (INDC - Intended Nationally Determined Contribution) by 33-35% by 2030 from their 2005 level, and to reach 40% of installed non-fossil electricity capacity (currently equal to 30% including large-scale hydroelectric and nuclear power). This commitment by the Indian Government further expands the ambitious target of 175 GW of renewables capacity by 2022 and should define the political agenda in that direction to attract investment to the sector.
At the end of October 2016 the MNRE published the final document setting out the operational procedures for the construction, for the first time in the country, of 1,000 MW of wind capacity through competitive auctions. On October 28, the auction was announced, with the pre-selection process beginning on January 9, 2017. Eligible projects for the auction are those developed in the eight Indian states classified as “windy states” (Andhra Pradesh, Gujarat, Karnataka, Madhya Pradesh, Maharashtra, Rajasthan, Tamil Nadu and Telangana) and connected to the national transmission grid. The winning bidders in the auctions will be awarded a 25-year fixed-price power purchase agreement (PPA) with Power Trading Company, which in turn will sell the power through power sales agreements to the state distribution companies of “non-windy states”. The competitive auction mechanism is expected to gradually replace feed-in tariffs for wind power.
During the 3rd Quarter of 2016, a broad reform of indirect taxation began in India with the introduction of the Goods and Services Tax, which should enter force on April 1, 2017.
Once approved, the reform will introduce new tax rates for goods and services, which will also impact the cost of plant construction in the country. Those rates have not yet been defined, making a postponement of the entry into force of the reform highly likely.
In May 2011, South Africa approved a target of 17.8 GW of installed renewable capacity by 2030 based upon the longterm energy strategy set out in the 2010-2030 Integrated Resource Plan. The primary tool to be used in achieving this target is the Renewable Energy Independent Power Producer Procurement Programme (REIPPPP), an auction system launched in 2011 that seeks to install around 13 GW in new renewable capacity between 2014 and 2020 (hydroelectric <40 MW, concentrated solar and photovoltaic, wind, biomass, biogas and landfill gas power). Currently, five rounds (bid windows) are scheduled, four of which have already been held, with the award of more than 5,000 MW of capacity. In 2015 an additional round – called the Expedited Round, or Round 4.5 – was added and held for an additional 1,800 MW, which have not yet been assigned.
After a pre-qualification phase, which is concerned with technical and financial issues, qualified projects are chosen based upon two criteria: the bid price (weighted 70%) and the economic development content of the project (weighted 30%). The latter is based upon a series of parameters focusing on the economic development of the country, including local content and the creation of jobs for South Africans, especially non-whites.
The winners will be invited to enter into a 20-year PPA with the national utility, Eskom, with payments guaranteed by the Government.
On November 22, 2016, the Department of Energy published new drafts of the revision of the Integrated Energy Plan and the Integrated Resource Plan, the long-term plans incorporating the development strategy for the development of the country’s energy and electricity sectors through 2050.
The public consultation process is open until March 2017 and the final documents are expected to be published in the 2nd Half of 2017.
In early 2015, NERSA, the national electricity regulator, had already initiated two reviews of the rules applicable to distributed generation and the use of the national grid for electricity transport (wheeling). The rules governing distributed generation will allow all end users the option of installing photovoltaic systems and to export their excess power to the grid (net metering). The rules governing wheeling will permit the sale of electricity through bilateral contracts between a private generator and end users (commercial or industrial enterprises; residential customers are not eligible). The dates for completion of those reviews have not been announced officially. In 2016, those reviews were not yet completed and the dates of completion have not yet been announced officially.
Finally, on the basis of the long-term rate planning mechanism, South African electricity rates should increase by an average of 8% a year until 2018.
While Kenya has not set official installed capacity targets for renewable energy, it strongly supports their development, mainly in order to reduce its dependence on hydroelectric power, seeking to attract private investors.
The main incentive mechanism for renewables, in use since 2008 and revised in 2012, is the feed-in tariff system (FiT), with a specified value determined by law by the Energy Regulatory Commission (ERC) for plants with a capacity of less than 10 MW and by auction for larger facilities. The support mechanism provides for 20-year power purchase agreements (PPA) with Kenya Power and Lighting Company (KPLC), the national operator in charge of transmission, distribution and supply of end users. Rates are differentiated by technology (wind, biomass, solar, mini-hydro and geothermal) and size of the plant. They are partly indexed to US inflation (US CPI).
The country’s legislative and regulatory framework has been under review since 2015, however, and a final version of the new Energy Bill is expected to be approved in the 2nd Half of 2017, following the elections. In addition, the FiT system will be gradually replaced by a competitive auction system.
The country has a rate of electrification of just 23%, making an increase in the rate of rural electrification through the extension and increasing the density of the national grid, the development of mini-grids and off-grid projects a major priority. The objective is to achieve a 100% electrification rate by 2030