In an earlier blog, we put on the table how the energy market in Italy has been radically affected by the Covid-19 health emergency. We recall that, among the different European member states, Italy was chronologically the first victim of the pandemic and a symbol of example for the rest of the European countries on the contagion containment directives.
The application of these directives led to a blockade of production activities and consequently a drastic fall in energy demand from 9th of March, the date on which the hardest restrictions came into force.
As a result of the fall in demand, energy prices fell significantly, reaching historic lows in an already downward trend due to the economic slowdown and oversupply of gas in the European market.
How does this effect affect the development of renewable energy in Italy? The fact that the current cost of electricity in the market is so low makes it less attractive to invest in a self-consumption installation, for example, as it would take much longer for the project to be profitable. The same applies to PPAs, where delays in finalising these contracts are expected due to the current low prices of gas and CO2 emission rights. But let’s see in more details the dynamics that influence the Italian green economy and generally the development of renewables in Europe.
In a self-consumption offer, the price of the installation depends on several concepts, but mainly on the material. We see how the difference between different installation companies is reflected in the type of solar panel offered. Currently the market offers a great variety of choices on the type of panel and the technology used, however most of the models are made by Chinese manufacturers. In fact, China represents the most profitable market for solar energy, dominating the top 10 of the world’s leading manufacturers:
Image 1- Top 10 World leading manufacturers of PV panels in 2020 Source: Electronics and You
At the beginning of the year, when Covid-19 was still an exclusively Chinese problem, the main concern was that there was a lack of supplies from the East, which could make it difficult to build the plants, however, without impacting on daily activity. In fact, the pandemic had a significant impact on the solar industry in China, where manufacturers faced major difficulties in manufacturing new modules.
According to a study carried out by Global Data Energy, the current supply shortage could lead to a short-term price increase. Existing stockpiles are expected to play an important role in limiting the strong post-Covid-19 price increase, which already in the first quarter of 2020 was up from the price in the fourth quarter of 2019 ($0.24/W). Despite the gradual recovery in other sectors, critical for module production, the persistent effect of production declines will see post-pandemic module prices at around $0.27/W in the second quarter of 2020. In a longer-term view, for the third and fourth quarters of 2020, most plants are expected to resume operation and the narrowing of the gap between supply and demand will facilitate the decline in module prices.
Image 2 – PV modules price evolution forecast in 2020 ($/W) Source: Global Data Energy
Returning to the Italian case, and in general on the European front, with the virus in our house, the concerns are of a completely different kind, with operators finding themselves in the material impossibility of closing open sites and developing new business. In particular, 74% of Italian operators have recorded a significant drop in orders since the beginning of the crisis, with a reduction currently ranging from 10 to 30%, to reach a 50% expected before the summer.
According to a survey carried out by Italia Solare, in order to overcome the crisis, operators are urgently asking for interventions to stimulate the relaunch of the solar sector, such as: the unblocking of the authorization procedures for new photovoltaic plants starting from those on the ground associated with agricultural activities; the departure of the energy communities; the reactivation of the credit transfer in a way that is attentive to the protection of craftsmen and small businesses, as well as the facilitation (on the authorization and GSE side) of the revamping and repowering of existing plants. A crucial issue is still bureaucracy, which is a major obstacle in Italy, as well as the procedures required by the GSE, which should be an aid to the development of the photovoltaic sector rather than a brake.
Apart from the administrative procedure, obviously it is strictly necessary the development of incentives by the government, considering that to all the problems mentioned above we have to add the spot prices of electricity that we are currently recording. These prices reach historical lows day after day, which significantly increases the expected years of payback from the investment of the photovoltaic project.
Image 3 – Italian electricity spot prices (€/MWh) Source: M-Tech
Power Purchase Agreements (PPAs)
The critical consequences of the Covid-19 pandemic in the photovoltaic sector also directly affect the Italian PPAs market. Virginia Canazza, general manager of the consultancy REF-E, announced in an interview with PV Magazine that PV projects without subsidies could still be financed through PPPs, but added that investors are unlikely to risk dealing with low margins. In fact, current prices do not justify investments and new participants prefer to wait for a return to the market stability.
Before the appearance of the coronavirus crisis, Italy was going through a positive phase in which the market parity scenario was favourable to investments financed through PPAs. We know that the LCOE of solar energy in Italy is between 38 and 52 €/MWh, depending on the geographical area of installation and the size of the project, so that quoting forward prices before the impact of Covid-19 ensured good margins of long-term benefit. However, in recent months, and mainly due to the oil price war between Saudi Arabia and Russia, future electricity prices have started to quote at very low levels. In addition, the Italian lockdown led to a sharp contraction in energy demand and a consequent decrease in the price of emission allowances, directly linked to the price of forward electricity.
Image 4 – Forward Calendar prices in Italy (€/MWh) Source: M-Tech
This scenario, certainly, has not favoured financing, however, the attitude of the banks does not seem to be of total closure but rather of increased caution and expectation to see how the current situation will evolve in the coming months. In fact, in general, the financial transactions that were being negotiated before the pandemic continue to be in the executing phase, albeit with appropriate adjustments. On the contrary, new operations are struggling to find lenders.
We do not think that the PPAs era has come to an end in Italy, or rather, nipped in the bud. On the contrary, we are talking about slowdowns and expectations at times that are certainly more certain and stable.
Determining the full impact of the virus on the photovoltaic sector, whether it is self-consumption or PPAs, is impossible due to the high uncertainty and any recovery depends on how quickly the mitigation measures implemented will help the solar industry to return to full production, together with the recovery of demand and consequently of national electricity prices. In the raw materials field, with the Chinese government working proactively to combat the spread of the virus, markets are expected to recover and the solar industry will gradually recover in the second half of 2020. In terms of recovery of demand and consequently of prices, everything will depend on the development of the virus, where the post-summer period will be crucial, with lower temperatures and a new possible peak of contagion.
Cristina Vitale | Energy Consultant