A skyrocketing PV market in Italy. Will it soon find its right flying altitude?

Feed-in tariffs (FiTs) have spurred impressive growth in renewable power installations over the last decade. In Europe, 77 percent of all new electricity generation capacity from renewable sources installed between 1997 and 2008 occurred in countries using FiTs, making the continent the world’s largest renewables market. FiTs have also proven to be relatively popular: since 2005, 38 countries worldwide have adopted the measures (which reward renewable electricity producers with a determined tariff for the electricity they feed into the grid), whereas only 12 have introduced renewable portfolio standards (regulations requiring that a specified share of electricity come from renewable energy sources).

Yet while FiTs can create incentives for renewable energy deployment, proper design is critical. As some governments have already discovered, inflexible and overly high feed-in tariffs can cause renewable energy markets to overheat.

FiT-star Germany has tackled this problem by regularly revising its tariffs for photovoltaic (PV) installations, allowing fast but manageable growth of the market. The last tariff modification was made in February of this year and introduced a flexible mechanism to better adapt tariffs to market growth. The decision was reached in close coordination with the German Solar Industry Association and received broad consent.

Spain and the Czech Republic, on the other hand, have not been able to transform the booms in their respective PV markets into sustainable long-term growth. Rather than moderately adapting their tariffs, both countries drastically curtailed them, introducing installation ceilings and even calling for retroactive caps. Once considered infant prodigies of successful renewable energy support, these countries have stalled their PV markets and lost much of their credibility among investors and market observers.

Now, experts are turning their attention to Italy, which faces a similar challenge. Italy’s PV market exploded last year, installing an overwhelming 1.9 gigawatts (GW) of capacity. PV additions could potentially rise to 5.8 GW, as an enormous number of additional projects are in the pipeline that have not yet been checked for their grid-readiness. If these were connected, Italy’s PV installed capacity would have approached 7 GW by the end of 2010, up from only 100 MW four years ago—and only 1 GW below the country’s solar target of 8 GW by 2020.

Although renewable energy advocates are delighted about these developments—and especially about how effective feed-in-tariffs can be—the Italian government is now facing criticism for designing a FiT that is “too generous” and that has led to higher energy bills for Italian electricity customers.

Reports indicate that Italy will probably stop short of radical changes to its FiT, but the government still needs to reach a final decision before it implements new energy legislation in June. When considering next steps, the country should look to lessons from the past and learn from the effects that other countries’ policy decisions had on the renewables market.

Spain, for example, was caught off guard in 2008 when PV capacity additions skyrocketed after the country enacted a very generous feed-in-tariff for photovoltaics the year before. The regulation required utilities to pay up to €0.45 (US$0.59) per kilowatt-hour for solar installations connected to the grid—among the highest FiTs in Europe. As a result, total installations jumped from 695 megawatts (MW) in 2007 to more than 3.3 GW in 2008, transforming the country into the world’s largest PV market. In addition, government subsidies for solar power quintupled from €214 million ($306 million) in 2007 to €1.1 billion ($1.57 billion) in 2008.

In early 2009, the Zapatero government took drastic measures, slashing the FiT for PV by up to 45 percent and introducing a yearly installation cap of 500 MW for 2009 and 2010. In 2009, Spain added only 70 MW of PV capacity, yet another cut was announced in late 2010. Since then, the growth of the solar industry in Spain has slowed and many investors have announced intentions to turn away from the Spanish market.

One might assume that other countries have learned from Spain’s experience, yet just a year later the Czech Republic fell into the same trap. The country, with only 10.6 million inhabitants and the 45th largest economy worldwide, installed 411 MW of PV capacity in 2009, becoming the fifth largest PV market, just behind the United States. In 2010, another 1 GW was added. As in the Spanish case, a nervous Czech government cut tariffs harshly and introduced a harmful retroactive tax of 26 percent on PV installations in December 2010. In 2011, little growth is expected in the Czech PV market and the domestic industry is likely to continue to encounter severe problems.

What can Italy learn from these two cases? For one—that high initial tariffs, followed by capacity caps or drastic tariff cuts (retroactive or otherwise), can kill investments in PV installations. However, Italy can also learn from successes elsewhere Europe. Germany, for example, recently introduced a policy that links tariff cuts to the volume of capacity additions, potentially reducing the risk of boom-and-bust PV markets while preventing a rush on installations before scheduled tariff reductions. While lowering FiTs is necessary, Italy must find the right balance between cuts that are too sudden and severe and tariffs that are too generous. It would do well to find a tariff reduction mechanism that is less dependent on bureaucratic intervention.

Italy might also consider a more flexible “sliding” premium tariff that incorporates the ability to pay a minimum and a maximum price dependent on the market price for electricity. The Netherlands has such a mechanism in place. And there are many additional opportunities that Italy could consider. The U.S. National Renewable Energy Laboratory (NREL) recently published A Policymaker’s Guide to Feed-in Tariff Policy Design, which provides a helpful analysis of the advantages and challenges of FiTs, as well as interesting recommendations. Similarly, the International Feed-In Cooperation project is working on best practices for designing enhanced FiTs.

In the coming weeks, Italy’s policymakers will lay the basis for future policy adjustments that will occur incrementally rather than reactively, including a more flexible mechanism for adjusting feed-in tariffs. If the country chooses wisely, the amended FiT policy will help to avoid uncontrolled PV market growth and minimize the chance of imprudent policy changes. This, finally, would provide investors in renewable energy with investment security and enable Italy to continue on its path to a cleaner energy future.

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