Hydroelectric, the relaunch comes from the node of the tenders

For those who study energy issues, as we have been doing for 30 years, that ofhydroelectric is a particular world. The oldest source of electricity, at the basis of the country's industrial development already two centuries ago, still plays a central role today – and will have even more in the future. Reduction of emissions and contribution to the stability of the system make hydroelectricity, and pumping in particular, a source with unique and strategic characteristics for the energy transition. On this point they are basically all in agreement. 

However, this convergence does not prevent an impasse from arising where all investment for the future seems frozen. We are talking about around ten billion euros by 2030 which are blocked today. Let's try to understand why and what might be the ways out. 

This impasse is substantially determined by the perplexities of companies about the 2018 reform (Simplification Decree, 135/2018) introduced - in the face of pressure from Europe - by the Yellow-Green Government and which provides for an increase in the role of the Regions in the governance of the hydroelectric system and an increase in charges borne by concessionaires. However, the real question seems to revolve around the tenders for the renewal of concessions, strongly pushed by the Commission which has placed practically all the member countries, and in particular Italy, in infringement proceedings. 

In August 2020, amendments were proposed to the so-called Simplifications law currently in the approval phase (September 1, 2020) to substantially dismantle the Yellow-Green reform and, among other things, extend existing concessions by a decade. As of the date of drafting these notes, no amendments have passed; useful in this regard is the contrary opinion of the Ministry of European Affairs reported here: 

(…) the amendment establishes an extension of hydroelectric concessions without a clear indication of the final term and therefore presumably censurable by the European Commission which, in the context of infringement procedure no. 2011/2026, currently undergoing a second complementary formal notice pursuant to art. 258 TFEU, has already censured the extension provided for by Legislative Decree 14 December 2018, n. 135 (Simplification Decree), converted by Law 11 February 2019, n. 12. The procedure is already at a concrete risk of aggravation. In particular, the extension of hydroelectric concessions is subject to the entry into force of national rules implementing European provisions which "must necessarily be issued in the near future by the institutions of the Union". To date, however, there is no new European legislation in the sector, nor can it be said with certainty that there is a competence of the Union to legislate on the matter. On the other hand, there are already European standards (services directive and internal market rules) applicable to the matter which, in any case, must be taken into account. In any case, the constraint on the exercise of a regulatory competence by the Union cannot come from the national legislator. 

We believe these observations need no comment. One point, however, is clear: the usefulness and urgency of seeking solutions that: 

• Are acceptable by the parties involved (Regions, Companies, European Union, local communities, etc.);  
• They allow for a rapid start-up of investments; 
• Take into account the de facto competitive structure at European level;
• They allow effective and balanced governance of the system. 

The crux of expired and expiring concessions 

As is known, companies operating in the so-called large hydroelectric derivations base their activity on concessions whose duration can vary significantly. In many cases, the concessions have expired or are about to expire, while in the case of Enel and the plants it sells (such as those in the Aosta Valley or Trentino-Alto Adige), the deadlines are set for 2029. 

Once the huge infrastructure investments have been made and amortized, hydroelectric power has allowed high levels of profitability over the years; this due to the absence of variable costs and the possibility of exploiting electricity price peaks at certain times of the day. Profitability has been reduced for some years both due to the generalized drop in energy market prices (the PUN), and due to the almost disappearance of consumption peaks and, last but not least, due to the constant growth of concession fees favor of local authorities and the Regions. However, significant income is still guaranteed today by the CVs issued in recent years against renewal investments made a few years ago. 

Overall, hydroelectric plants are quite dated, even exceeding the century in some cases. They would often need to substantial modernization and extraordinary maintenance investments. According to recent sector assessments, which are also indirectly confirmed in the PNIEC, the requirement by 2030 can be estimated at about 10 billion (just under one billion euros a year), around 70% dedicated to pumping (an issue that Terna considers central in relation to the energy transition) and the rest destined to recover the storage capacity of reservoirs, to local and environmental sustainability. It is to make these investments that the companies are asking for an extension of the concessions of at least 10 years, specific support interventions and some other bureaucratic simplifications.  

Recovery plan and return on investments 

And here we arrive at the crucial issue: it appears fundamental today develop an overall recovery plan of a hydroelectric infrastructural system which, due to its age and specific characteristics, requires decisive modernization and a wide range of interventions, above all with a view to energy transition.  

The realization of these interventions in many cases requires not only significant outlays, but also the suspension of production and the relative income, sometimes for not very short times. AND companies are reluctant to implement any initiative in a situation of uncertainty linked to legislative aspects in general and, in particular, to the return on investments. In particular, the major issues concern:  

• The recovery of the useful capacity of the original reservoir; 
• The construction of new pumping plants; 

• The modernization of the turbines and ancillary production plants; 
• The recovery of poorly used or abandoned plants; 
• Extraordinary maintenance or renovation of pipelines; 
• Digital management coordinated with weather forecasts for production and predictive maintenance programs. 

According to our summary estimates, taken however from concrete cases, the interventions can allow productivity recoveries from a minimum of 5% up to even 30%. Which, on an electricity production of approximately 50.000 GWh, means a presumable average value of 7.500 GWh which would help, among other things, to achieve the PNIEC objectives also in relation to the delays in the construction of the plants envisaged for the new renewables.  

It is evident that all of this requires specific actions first of all for planning by the Public Administrations and, secondly, for support and incentives for the realization of the works. And finally, adequate guarantee and control systems are also needed, especially on the part of the Regions.  

But how did we arrive at this impasse? 

As mentioned, in 2018, also as a result of the aforementioned community pressures and to avoid the risk of infringements, a law was passed by the Yellow-Green Government which entrusts the management of the concessions to the Regions, including the procedures for renewing them in any case based on competitive processes. The Regions should have implemented the indications of this rule by March 2020, but only Lombardy has complied with the deadlines. Other administrations (Piedmont Region, Veneto Region, Autonomous Province of Trento, Autonomous Province of Bolzano) would be about to legislate. 

In essence, the new legislation establishes the following fundamental principles: 

• The duration of the new concessions is set between twenty and forty years (plus a possible extension of ten years); 
• The free passage of the wet works to the regional heritage; 
• The valorisation of the dry works to be recognized to the outgoing concessionaire; 
• The obligation of the concessionaire to communicate and be transparent about the status of the works assigned for management; 
• The competitive procedure in the case of the adoption of the organizational model of the joint venture or concession; 
• The establishment of compensation measures and fees in favor of local communities. 

This has generated rather lively reactions from companies in the sector which have found (almost) formal unanimity in opposing these dynamics. At the same time, the Government challenged the Lombard law before the Constitutional Court and postponed the deadline for the promulgation of the regional laws to October 2020. However, this caused a reprimand by the Antitrust which reconfirmed what was declared in a formal report in 2018 in which it had asked the Government to provide in the shortest possible time, to the completion of the tender procedures; to the modification of the art. 12 of Legislative Decree no. 79/99, in the sense of providing for the transfer for consideration of only the dry works and the simultaneous free transfer of the wet works to the state property, stigmatizing the constant postponements regarding the execution of tenders for expired concessions. 

È unlikely that Europe will act as a support 

In the hearts of many insiders there is the hope that the European Commission will also apply to the renewals of hydroelectric concessions the suspension (very partial in truth) of the legislation relating to state aid referred to in the Communication of 3 April 2020, issued following the emergency of COVID-19. 

The subject is at least controversial, also in consideration of the continuing general opposition between the Commission itself, rigidly anchored to the Directives that protect competition, and the Member States of the Union, much more conservative in maintaining the status quo, regarding the obligatory nature of the procedures competitive in the selection of dealers.  

At this point the issue has taken on eminently political profiles involving the Government (and the Governments of the other States) and the European Commission directly, the outcome of which, despite the current emergency situation, is difficult to predict. 

The lines of a recovery plan 

Even if it is not easy to imagine a plan to relaunch the water sector in the situation described above, we believe that the fundamental points are the following: 

1. A general survey of the situation of the national hydroelectric sector; 

2. A focus on the possible or necessary interventions for the revitalization of the sector, taking into account the specificities of the individual local situations; 

3. The quantification of investment needs by category and by time horizon; 

4. Estimate of the relative impacts/returns in terms of productivity, environment, flexibility of the electricity system, etc.; 

5. Establishment of intervention priorities; 

6. Identification of governmental and regulatory provisions suitable for directing businesses and local and regional administrations in the desired directions, facilitating investment processes. 

This approach may seem trivial, and indeed it is, but the logics that have governed the governance of the sector up to now have been very different. With our research work we have moved in the indicated logic; however, here it is important to indicate a different path, still to be evaluated in all its implications, but which could allow the overcoming of many of the issues briefly described. 

Demanialize the wet works? 

Below we try to summarize the salient points of a discussion within our research group with the aim of reducing the obstacles for a solution to the impasse also to favor a rapid relaunch of investments.  

The idea, initially born from one of the writers also on the basis of experiences in other sectors, starts from the hypothesis of release from the state of part of the hydroelectric infrastructure that is, the so-called wet works (which in various cases are already privately owned). This step should be provided for by State law and granted as an option to the Regions owning the assets. The deprivation of the State should then be prodromal to the alienation with transfer to private individuals, with an option faculty in favor of the current manager and at a price in line with the revalued historical value of the works. In any case, the authorization for the derivation of the water resource (which cannot be de-owned) and the forecasts regarding the relative methods (minimum vital flow, fees and surcharges, investment obligations, etc.) would remain firmly in the hands of the Regions. 

The advantages of this solution would seem to be the following: 

• The release from the state would not create any market advantage, because nothing would prevent further transfers of the aforementioned works to a third party by the new owner. 
• De-statement has already been applied in some sectors, such as the public housing stock, where the sale of the units covered by the measure to the assignees who request it is envisaged. 
• The issue of tenders has been bypassed which, despite being the preferable solution in theory, appears in practice to be inapplicable throughout Europe in the energy network sectors (see gas tenders in Italy which have been substantially blocked for decades). 
• It is consistent with some applied and functioning European cases (which we are investigating) and in any case with a situation in Europe where foreign players do not touch the ball. 
• It would not harm the regional powers, indeed in a certain sense it would strengthen them, to define the methods of exercising the wet works towards the new owner of the works or any subjects delegated by him (in agreement with the Region). 
• It would not violate the principles of fairness because the works are largely depreciated by the concessionaires; any lack of recourse to the market for the sale of works with tender mechanisms would be justified by virtue of a declaration of public interest of the alienable assets (see SGEI) and a suitability judgment on the existing concessionaire. 
• The Regions would have two revenues: the one-off income from the transfer of the works deprived of the State and the continuous income from the authorisations, the durations of which could also have not very long time horizons and be suspended or revoked in the event of non-compliance with the provisions. 
• One could probably integrate the current legislative situation without upsetting it, as one would like with the rejected amendments mentioned above. 
• It could be acceptable by companies which, against an outlay that could be significant, have the guarantee of the availability of the plants (wet and dry) being able to make investments more easily. 
• The evaluation procedure of the works to be sold, starting from the values ​​put into depreciation by the concessionaires, could be much simpler than the delimitation and recognition of the state of consistency of the wet works to be tendered for the new concession. Among other things, the concessionaires would benefit from the dry works already owned by them. 

In the light of some informal checks, it seems that the European Commission cannot raise objections if they do not refer to the issue of a fair valorisation of the wet works subject to transfer. 

In conclusion, the one described would seem to be a "revolutionary" hypothesis for the sector in Italy (but not abroad). However, it is, in our opinion, undoubtedly deserving of appropriate technical and political insights. 

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