The Italian Ministry of Economic Development has given its informal approval to proposals on changes to the Italian photovoltaic incentive regime submitted by the trade association representing heavy industry in Italy, Confindustria. Contrary to market speculation, a 30% tariff drop on 31 May is highly unlikely, but rather a 30% drop will be phased in gradually until the end of 2016. More worryingly for developers and sponsors is the likely introduction of a Eu6 billion ($8.5 billion) money-value cap on the total amount of tariffs paid to PV projects.

The Italian government passed a decree on 4 March halting the third energy bill (Conto Energia III) tariff regime on 31 May 2011, which shocked the market and puts at risk projects in construction whose sponsors had expected a gradual step down in tariffs through 2011.

The Confindustria proposals, which were presented to the Ministry of Economic Development on 18 March, involve gradually ramping down the tariff from 31 May, so that the tariffs will only be 1-2% lower than the published tariff under Conto Energia III in June, and around 5% lower at the end of the 2011. The new tariff regime, Conto Energia IV, needs to be published as soon as possible so that sponsors and banks can have certainty about their financing plans. The government has a legal deadline to publish the new tariff by 30 April, and the governments intention is to publish the tariff at the beginning of April to give the market a dose of much need certainty. Market participants, however, are sceptical that the government will move so fast.

As a representative of net polluters Confindustria is not particularly supportive of renewable energy and although the 30% drop in tariffs will be gradual until 2016, when in 2017 PV is expected to be at grid parity and all subsidies removed, possibly the most controversial aspect of the proposals is the imposition of a double cap: a yearly capacity cap and a money-value cap on the tariffs.

Confindustria has proposed that from the beginning of June and the remainder of 2011 a cap of 2000MW capacity is imposed on the tariff and developers on the list when the cap is reached will be eligible for the 2012 tariff. More restrictive in the medium to long term is the proposal to limit the aggregate amount of incentives to PV projects to Eu6 billion by the end of 2016. According to UBS Investment Research, as the approximate 8GW of currently installed solar uses Eu3.5 billion already, the cumulative installs remaining amounts to only an additional subsidy of Eu2.5 billion until the end of 2016 which UBS estimates translates to a maximum of 1GW per year.

The cap and ramp-down in tariffs are not the only downside for big sponsors, as there is concerted push to small and rooftop plants. The Confindustria proposals suggest that two-thirds of the annual incentive be allocated towards plants with a capacity of less than 200kw. And there has been a tightening on the permitting laws to reduce the amount agricultural land that can be used for ground-mounted plants.

Paolo Romani, the Italian Minister for Economic Development, is meeting with the regions and lobbies over the coming days to thrash out the detail of the Conto Energia IV. The solar industry has not been well represented by its associations. For instance, one of the associations, GIFI, has approved of the proposals despite hostility from the broader solar industry.

If, as is likely, the Conto Energia IV is passed as proposed, large developers and sponsors are will shift their medium-term plans elsewhere. AES Solar, the Riverstone-AES joint venture, is close to completion on a 125MW project, and SunPower and SunEdison/First Reserve are probably going to scale back their Italian operations.

Italys approach, like Spain, shows that governments cannot accurately move tariffs in-step with drops in the price of technology. According to a financier at one developer, a neater way of accurately aligning the cost of incentives with the cost of generation is to run competitive bids as you would on an IPP tender. Developers do not like this method of procurement because it is time consuming and squeezes margins. Competitive tenders were a feature of Conto Energia III for projects over 5MW but were easily avoided. Now that Italy has cooled from being the number one PV market in Europe there are no stand out European PV markets: UK has a promising regime but lacks the resource, France has all but abandoned any meaningful development with the imposition of meagre 500MW annual cap, and Spain and Germany have stepped back from their roles as market pioneers.

With the price of modules on a downward trajectory, those countries that wait will have a far superior cost advantage than those that moved first such as Spain. Countries that are likely to benefit include those in North Africa, particularly Morocco, Abu Dhabi, Mexico, and fringe European markets such as Bulgaria and Greece.

Until the new Italian tariff regime is announced those developers in construction are in limbo. There is a current debate among the Ministry of economic development, the banks and the industry around grandfathering of projects permitted but not yet installed. It is unlikely that the grandfathering provisions or grace period will be favourable for sponsors. A large part of the reason that Italy is changing its tariff so soon after the protracted delay in drafting the current tariffs is because of the number of applications state renewable regulator GSE received for new PV plants at the end of 2010. In total it received applications worth 3,771MW in 2010. Sponsors of projects that were racing toward connection by the end of 2010 were comforted by the so-called Alcoa law, which protected developers from instances where Terna, ENEL or the local grid operator had not physically connected the plant to the grid by 2011. This led to an unexpected surge in applications received by GSE that ultimately led to the shock decision to pull the current tariff regime on 31 May 2011. The government will not make the same mistake twice.