Markets & Policies

The Italian Energy Efficiency Certificates mechanism

The long lasting experience of Italy with the national Energy Efficiency Certificates incentive mechanism for energy efficiency projects shows how complex is the design of this kind of market based instruments can be, offering a good and interesting case study for other Governments

The Italian Energy Efficiency Certificates mechanismThe introduction of the Energy Efficiency Certificates mechanism in Italy was originally planned with the laws related to the electricity and natural gas markets liberalization, but the full implementation of the mechanism finally took place in 2005, after a number of consultations and a long fine tuning process on the technical and economic design features of the scheme.

Today it is the main national incentive to support the development and implementation of projects entailing energy savings, and its role has recently been reaffirmed with the National Energy Strategy

Energy efficiency obligation schemes

Energy efficiency is one of the main pillars of the EU 2030 Framework for climate and energy, which aims to help the Union to achieve a more competitive, secure and sustainable energy system and to meet its longer-term (2050) greenhouse gas reductions target.

Furthermore, based on Article 7 of the Energy Efficiency Directive: “each member state shall set up an energy efficiency obligation scheme”. The scheme is to be implemented to achieve a certain energy saving target over the period 2014-2020, although member states are granted the possibility to take other policy measures to achieve the target.

An energy efficiency obligation scheme is a policy instrument based on the setting of a mandatory energy saving target to be met by energy distributors or suppliers (obliged parties): the Government sets the energy efficiency target to be achieved, and identifies the energy companies (distributors or suppliers) that are obliged to meet the target. The certification  of the savings (Energy Efficiency Certificates) and the possibility to trade the certificates  are additional policy options that can be implemented.

The economic rationale behind the introduction of the trading option is that competition should lead to meet the target and achieve energy savings at the lowest possible costs, which means that the savings should progressively occur where they are more economic.

Framework of the Italian Energy Efficiency Certificates

The current framework of the Italian Energy Efficiency Certificates scheme is shown in Figure 1. The main steps and actors involved are the following.

  1. The Government (MSE with MATTM) sets the annual national primary energy savings targets and the total obligation (in number of certificates) for the obliged parties. The government, supported by AEEGSI (the Italian Energy Regulator), is also responsible for drawing the mechanism’s guidelines.
  2. Obliged parties and non-obliges (voluntary) parties have to deal with the final users/customers in order find and implement energy efficiency projects and pursue energy savings. All the sectors (final users) are involved (residential, services, industry, agriculture, transports), and basically every technology able to delivery energy savings over the baseline thresholds is eligible (with the only exception of projects aimed at increasing efficiency in electricity generation)
  3. Obliged and voluntary parties send to the GSE (Gestore dei servizi energetici, the state-owned company that operatively manages the Energy Efficiency Certificates scheme) a proposal for the acknowledgement of energy savings related to the projects they want to implement.
  4. ENEA and RSE (state-owned research agencies) support GSE in the evaluation of energy efficiency projects.
  5. If the GSE evaluation process has a positive outcome, the GME (state-owned company managing the Italian Power Exchange) issues the tradable certificates for the obliged or voluntary project proponents. 1 certificate = 1 toe of primary energy saved (1 toe = 11.63 MWh).
  6. The certificates can then be traded on the GME organized spot market platform or over the counter (OTC – bilateral contracts) between the obliged parties (demanders of certificates, and, eventually, also suppliers) and the voluntary actors (suppliers of certificates only).
  7. Compliance: the obliged parties are required to meet their annual obligation giving the certificates for redemption to the GSE. The certificates have no expiry date (un-restricted banking possibility).
  8. If the annual target is not met the obliged party is sanctioned by the AEEGSI. The sanction is calculated case by case.
  9. If the annual target is met the obliged party cost recovery is granted by AEEGSI.

The Italian Energy Efficiency Certificates scheme: framework

Obliged and voluntary parties 

Obliged parties are electricity and natural gas distributors (Distributor System Operators – DSOs) with more than 50,000 end-users. Main voluntary parties are:

  • Companies and public administrations with an appointed energy manager or with an ISO 50001 energy management system;
  • Energy Service Companies (ESCO)
  • Distributors with less than 50,000 end-users;
  • Companies controlled or linked to obliged distributors

Targets and obligations

The total annual national primary energy savings targets and the obligations for electricity and gas DSOs from 2005 to 2020 are reported in Table 1. The mechanism can be virtually dived in three phases according to the legislative/regulatory evolution: 2005-2012, 2013-2016, 2017-2020. The total obligations are allocated among the electricity and natural gas DSOs according to their share of the total electricity or natural gas distributed by the obliged companies two years before.

DSOs obligations and energy saving targets under the Italian Energy Efficiency CertificatesFollowing the introduction of the “tau coefficient”, from 2013 the annual energy efficiency savings target are no more equal to the total obligation burden for energy DSOs. At the time of the introduction of the tau the certificates were, in most cases, granted for the first five years of life of the projects (incentive period), and the saving achieved after the first five years were not subsidized (no issuance of certificates). With the tau an increased number of certificates was issued during the same incentive period, since the savings happening after the fifth year and up to the estimated technical life of the specific project were also included, and anticipated during the first five years (an annual discount factor of 2% was applied to the savings happening after the fifth year, to consider possible losses of efficiency due to aging of technical equipment).

The tau was meant to stimulate the implementation of more structural and costly interventions, mainly in the industrial sector, which usually entail substantial energy savings also after the five years of the incentive period (longer technical life), reducing the pay-back period of the investments.

Most of the energy efficiency projects subsidized in the first years of life of the mechanism were indeed focused in the household and commercial sectors (lighting and appliances), and the tau effectively supported the transition of the mechanism toward energy savings in the industrial sector. The introduction of the coefficient, which finally resulted in an increased emission of certificates, was also needed in order to support the level of liquidity of the mechanism, since from 2008 the market started to be short of certificates, and some compliance concerns arose; as a result the energy saving targets were reduced between 2012 and 2013.

More recently the Government removed the tau and increased to 7 or 10 years the incentive period due to concerns of over-incentivising the projects. This update leaded to a downscaling of the DSOs obligations between 2016 and 2017 (see Table 1) since the tau elimination entailed that a reduced number of certificates would have been issued.

The baseline

The baseline consumption specification is a key concept that needs to be properly set up when designing the scheme, since it is about the definition and identification of which are the “real” energy savings. In the Italian Energy Efficiency Certificates only the energy savings that are additional compared to the baseline are eligible for the issuance of the certificates. As shown in Figure 2 the baseline consumption level is the lowest between the ex-ante (before the energy saving project implementation), market average and the mandatory standards.

The baseline in the Italian Energy Efficiency CertificatesThe trading

Figure 3 shows the GME spot market trends (average prices and volumes) for the certificates from 2010 to November 2017.  Table 3 summarizes the average yearly prices and the total yearly quantities exchanged on the spot market and OTC and the total yearly obligations. The strong increase in prices started from 2016 is probably linked to the latest legislative updates (tau elimination). The data highlight the high level of liquidity of the Italian Energy Efficiency Certificates trading system, which is probably due the high number of market participants (obliged and voluntary) and the diversity of eligible projects/technologies

Energy Efficiency Certificates spot market trading prices and volumes

Energy Efficiency Certificates spot market and OTC prices and volumes and total obligations

Conclusions

The Italian Energy Efficiency Certificates scheme has a complex design, and during almost 13 years of existence a number of changes was needed to steer the mechanism toward the desired direction and address the issues that progressively appeared.

This long lasting experience could probably be a good case study for scholars and policy makers of countries that are planning to set up a new similar scheme.

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