A merchant line across the Alps
Electricity exchanges between France and Italy currently rely on existing alternating current lines with a maximum exchange capacity of approximately 3,150MW; most of the time, they witness energy flow to Italy, given the evident differences in the mix of generation systems – and thus wholesale prices – between the two countries.
In light of the European strategy aimed at increasing interconnections between member states to strengthen security and integration of supply and market competitiveness, on November 30 2007 the Italian and French governments signed an agreement for the promotion of the development of the network, including the so-called Piemonte-Savoia project.
The project has been designed and planned by the Italian and French power transmission system operators respectively, Terna and RTE and, on the Italian side, approved by the Ministry of Economic Development (MiSE) with Decree No 239/EL-177/141/2011. It envisages building a new connection between the Piossasco, Piedmont, and Grande Île, Sainte-Hélène-du-Lac, Savoie, power stations, consisting of two bipolar extra-high voltage direct current (HVDC) lines.
The Italy–France connection is the only project of its type in the world given the technical and engineering solutions adopted: 190km of invisibly routed HVDC cable, 95km in Italy and 95km in France, which in part runs underground and in part is integrated into the existing motorway infrastructure.
Completion of the new Italy–France HVDC interconnection will increase the transmission capacity between the two countries by approximately 40%, equal to 1,200MW, reaching a maximum exchange capacity of 4,350MW. As a result, electricity imports and exports will be boosted and the price spread between the two markets lowered.
The project is synergetic to the creation of North–South infrastructure corridors for the transmission of electricity within the European Union. For this reason, it has been considered as a strategic project for the European continent and included, according to Regulation (EU) 347/2013, in the list of Projects of Common Interest (PCIs).
The regulatory framework
On July 23 2009 Italy adopted Law 99/2009. In particular, Article 32 provides that energy-intensive end-customers (assignees) may participate in tenders organised by Terna aimed at financing expansions of the Italian interconnection infrastructures up to a total increase of 2,500MW in overall transmission capacity between Italy and foreign countries.
Law 99/2009 sets out that assignees must enter into agreements with Terna for the engineering, construction, operation and maintenance of interconnectors, and bear the relevant costs. The effectiveness of the contracts is subject to the obtainment of an exemption under Article 17 of Regulation (EC) 714/2009, a provision allowing private investors to gain an exemption from the application of the ordinary regime applicable to transmission lines, including unbundling rules, regulated access and the obligation to reinvest the congestion rent into the transmission system.
In this context, the Piemonte Savoia interconnector, the merchant line, is the first contribution to the achievement of the goals set out by Law 99/2009, with a capacity of 600MW.
On March 27 2015, in accordance with a mandate granted by the assignees selected pursuant to Law 99/2009, Terna Group established vehicle company Piemonte Savoia Srl (PISA), which has been granted the single authorisation for the construction and operation of the merchant line. The merchant line will be built jointly with a public line owned by Terna with an overall capacity of 1,200MW.
The merchant line runs up to the Italy/France border while the French side of the interconnector will be owned and operated by RTE – Reseau de Transport d’Électricité – in its capacity as French Transmission System Operator. The French side of the interconnector was declared of public utility by the French Ministry for Energy on June 15 2012 and on August 28 2012 the Savoia Region chief administrative official issued the declaration of public utility.
Under Article 17 of Regulation (EC) 714/2009, on June 8 2015 PISA submitted to the MiSE an application for the exemption on the merchant line from the following provisions:
(a) Article 16 (6) of Regulation (EC) No 714/2009, under which the revenues resulting from the interconnection capacity allocation must be used for (i) guaranteeing the actual availability of the allocated capacity and/or (ii) maintaining or increasing interconnection capacities through network investments; and
(b) Article 9 of Directive (EC) 2009/72/EC, imposing the unbundling regime on transmission system operators.
On August 10 2015, the MiSE communicated the exemption request to the Italian energy regulator – Autorità per l’Energia Elettrica, il Sistema Idrico e il Gas (AEEGSI), which assessed the exemption request and on May 12 2016 approved the “Opinion on the Piemonte Savoia exemption application”. The exemption request was also sent to the French energy regulator – Commission de Régulation de l’Énergie (CRE), which on 11 May 2016 agreed on the exemption request.
On the basis of the opinions issued by CRE and AEGGSI, on July 20 2016 the MiSE issued Decree of Exemption No 290/ML/6/2016. The decree provides a 10-year exemption starting from the date of entry into commercial operation of the merchant line. During this period, a 7/12 share of the total congestion rent available to the Italian side of the interconnector, corresponding to a maximum capacity of 350MW, will be transferred to PISA.
Moreover, the decree sets out that the entire share capital of PISA must be transferred to the assignees. According to the decree, at the end of the exemption period, the ownership of the merchant line will be transferred back to Terna for a value not higher than the adjusted (rivalutato) book value determined on the basis of tariff methodologies adopted for similar regulated assets on the basis of efficient standard costs.
As provided under Regulation (EC) 714/2009, the decree of exemption was sent to the European Commission for approval. On December 9 2016, the commission issued a favourable opinion with Final Decision No. C(2016) 8592.
Consequently, on July 4 2017 the Terna Group signed a number of agreements with Interconnector Italia SCpA (Interconnector Italia), the sponsors’ consortium made up by assignees mostly operating in the steel, paper and chemical industries. Interconnector Italia was assisted by Paul Hastings on all the regulatory, contractual and financing aspects while Bonelli Erede acted as Terna’s counsel.
On July 4 2017 the entire share capital of PISA was transferred from Terna Interconnector Srl, a Terna Group company, to Interconnector Italia. On the same date, PISA and the companies of Terna group entered into, among others, the EPC contract, the O&M contract for the merchant line, the agreement for the purchase of the merchant line by Terna at the end of the exemption period, and the agreement for the sharing of the congestion rent.
The financing structure
The implementation of the project has been made possible with funds made available to PISA by its shareholders and by lenders according to a set of financing agreements executed in July 2017 with several commercial banks.
The financial institutions involved are Intesa Sanpaolo SpA, Natixis SA, Banca IMI SpA, UniCredit SpA and Cassa depositi e prestiti SpA. The agreements grant to PISA some facilities up to around €440m, in order to fund the construction, operation and ordinary and extraordinary maintenance of the merchant line; such facilities will be recognised in different instalments based on certain milestones.
In particular, the project has been financed through the following facilities:
* A non-amortised senior debt issue to pay the construction costs, relevant VAT and the interest during the construction period, for a total amount of €441m including a €9m line for the issuance of a first demand guarantee covering the borrower’s obligations under the sub-concession agreement to be granted by Società Italiana per il Traforo Autostradale del Fréjus SpA (SITAF – the company managing the existing relevant motorway infrastructure), made available by Intesa Sanpaolo, Natixis, UniCredit, Cassa Depositi e Prestiti and the European Investment Bank;
* An innovative junior product of the European Investment Bank comprising a €67m senior debt credit enhancement facility aimed not only at covering cash shortfalls to pay interest but also at reducing the senior debt in case of specific lack of performance of the project.
This instrument offers many advantages, including a classic debt service cover instrument, a way for the commercial banks to reduce their exposure in the event the project does not perform according to the expectations but also a secured, even though contractually subordinated, debt package for the European Investment Bank;
* Equity made available upfront by the sponsors for an amount of €160m without any contingent equity obligation. This was made possible through, notwithstanding the bullet nature of the facility, a cash sweep of the excess cash and the recourse to a public guarantee fund with Terna – funded by the private energy-intensive companies – aimed at covering the commitments of the assignees of the interconnector.
The facility is non-amortised and must be repaid in full at the earlier of December 31 2031 and the date falling 10 years from the date of the commercial operation date of the merchant line, with the proceeds of the purchase by Terna of the merchant line at the end of the exemption period.
The project cashflow derives from the auction of the cross-border electricity transmission capacity of the interconnector performed by the Joint Allocation Office (JAO), which acts on behalf of twenty TSOs from fifteen EU countries, Norway and Switzerland. In particular, PISA is granted a 7/12 share of the total congestion rent available to the Italian side of the interconnector, which, in fact, represents the spread between Italian and French electricity prices.
Apart from being the first ever project involving both private investors and TSOs having obtained an exemption and the first merchant line interconnector ever structured and financed in the EU, the paramount relevance of the Italy–France interconnector is due to the effects it is expected to have on the spread of the energy price and the increase of flexibility – considering it can transport energy from France to Italy and vice versa – between France and Italy. The importance of this infrastructure is particularly significant at a time when politics and regulators have a particular focus on the sourcing of energy and the way it is distributed to final consumers.
The project has been made possible not only thanks to the strategic vision of the consortium of private companies involved but also to the remarkable dialogue between public and private players led by the Italian industrial associations – Federacciai, Federchimica etc.
Considering the merchant nature of the line, the lack of guaranteed cashflows has been addressed by the obligation of purchase by Terna at the end of the exemption period and the credit enhancement of the European Investment Bank. The combination of these factors contributed to the realisation of such important infrastructure on a non-recourse project finance basis.
This cutting-edge approach is likely to be replicated for the development and construction of additional electricity interconnections between Italy and other countries that have already been planned, such as the 413km interconnector with Montenegro and the 309km interconnector with Tunisia.