ITALY: An Introduction to Energy & Natural Resources

The Italian energy market – Overview, trends and prospects

The Italian energy market has undergone profound evolution in the last ten years, with an increasing attention and focus on renewable energies, leveraging several European and Italian laws and regulations aimed at facilitating the development of renewable assets and power production plants with lower environmental impacts in terms of CO2 emissions.

Thanks to this favourable regulatory framework and to the attractive incentive schemes introduced by the Italian Government, installed capacity in the Italian renewable energy sector during the 2010s grew significantly from around 30GW to approximately 59GW. This resulted in a highly fragmented landscape, for the most part owned by independent developers through portfolios with an aggregate installed capacity of below 10 MW. Within this landscape, starting from 2016 the Italian renewable energy market witnessed intense M&A activity, with a strong trend towards aggregation and several transactions completed by large utilities and investment funds through the acquisition of small- to medium-sized portfolios. This process is still ongoing and it is predicted that this aggregation trend will continue at least until the end of 2024.

At the same time, with the introduction of new incentive schemes (particularly through the Ministerial Decree of 9 August 2019) and of simplified administrative procedures for revamping works on existing plants and for the authorization of greenfield projects (particularly, by means of the Ministerial Decree of 16 July 2020), since 2018 several investors have been promoting the development of new projects.

However, the regulatory framework for the authorisation of new projects is in constant flux, often overly complex and subject to political and administrative changes. As a consequence, the development of greenfield renewable assets must be assessed very carefully at every step.

This trend towards greenfield projects is expected to grow further thanks to the additional boost provided by:

• The “Green Deal” and “Next Generation EU” scheme provisions, agreed following the COVID-19 pandemic;

• Decarbonization targets set for the coming years at both an EU and Italian level;

• Further simplification of authorization procedures;

• The significant rise in energy prices which occurred in 2021, entailing changes in medium-term forecasts and consequently investor appetite for market parity projects;

• The growing efficiency of renewable technologies and reduced construction and maintenance costs;

• The need for Terna and the Italian Government to ensure both an appropriate energy mix and grid stability, which has involved the promotion of several pilot projects (storage systems and green hydrogen production) and will entail new forms of incentive.

It is expected that this new boost will lead to an increase in M&A activity in the renewable sector, starting from the end of the current aggregation process, in reference to greenfield and recently built assets.

The market has also seen a rise in long-term power purchase agreements, mainly taken up by corporations - a trend which is expected to continue.

Moreover, the COP21 agreement (2015), European directive no. 2018/2001/EU (“RED II”) and the COP26 agreement (2021) set goals regarding climate and energy transition, entailing a profound impact on policies to be adopted by governments in the years to come, with a particular focus on electrical energy production, transportation, industry and real estate.
These binding policies will be undertaken by national governments through an energy transition process of electrification and efficiency in consumption, considering that:
(i) renewable energy can support the growth of electricity consumption but with a lower impact on climate compared with traditional carbon energy sources; and
(ii) in order to limit an excessive growth in overall energy consumption, a reduction in energy intensity will be necessary in the future.

The Italian Government has implemented the RED II Directive by means of Legislative Decree no. 199/2021, although a significant number of measures will need to be implemented through further ministerial decrees.
Italy has also enacted the “National Recovery and Resilience Plan (Piano Nazionale di Ripresa e Resilienza)”, which is part of the “Next Generation EU” programme, developed around the definition of six missions. Most notably among these is the “Green Revolution and Ecological Transition” that foresees the distribution of a total of 68.6 billion euros, with the main goals of improving the sustainability and resilience of the economic system and ensuring a fair and inclusive environmental transition.

This energy transition process, together with other factors, has boosted M&A activity in the Italian energy efficiency market, the energy digitalization process and investments in new technologies applicable to the energy sector.

As far as M&A activity is concerned, it must be remembered that more than 78% of operators in the energy efficiency field are represented by companies with less than €10m of annual revenues. This landscape means, on the one hand, a compelling aggregation opportunity for more structured players like utilities, bigger ESCOs (energy service companies) and private equity funds. On the other hand, the structuring of partnerships between these players and smaller operators represents a great opportunity for the latter, having acquired crucial know-how of the energy efficiency market and a widespread network, to raise funds in order to foster their growth.

The M&A market is therefore expected to be a target for deals involving both renewable energy production plants and energy service companies.

Energy transition will be increasingly driven by an energy digitalization process aimed at enabling and interconnecting new technology applications with the energy system in order to make it more efficient, safe and dynamic. The increasing demand for digital energy represents a trigger for the implementation of these ongoing energy changes. Digital transformation is one on the most disruptive features of energy digitalization, which is actively transforming the processes through which energy is produced, distributed and consumed, from power plant management (leveraging predictive maintenance tools and artificial intelligence) to new consumer services (e.g. through home automation) and smart grids.

Finally, more and more investors are eagerly looking at companies developing the next generation of technology. The world of energy is attracting venture capital from large companies, utilities and venture capital funds which are interested in start-ups that are active in a variety of fields in the energy sector (smart grid, smart building, smart mobility, energy storage, energy efficiency and renewable energy). In fact, investments in innovative start-ups and scale-ups have increased remarkably and are being further nurtured by state-backed institutions.

In such a framework, the ability to understand aspects of intellectual property and the specifics of technology transfer transaction issues is (and will increasingly be) critical for all investors and players in the market.

In conclusion, energy transition in Italy may well unlock a new world of opportunities. In getting ready for this, players and investors alike will need expert advice and guidance.

Authored by Michele Di Terlizzi, Davide Pelloso, Bartolomeo Cozzoli, Pina Lombardi, Valentina Bonomo.