From National Price (PUN) to Zonal Price – regulatory change in Italy and how it affects PPAs

REGULATORY UPDATE

As part of the Energy Security Decree¹, the Ministry of Environment and Energy Security (MASE – Ministero dell'Ambiente e della Sicurezza Energetica) will publish a new decree.

After consulting the National Regulatory Authority for Energy Networks and Environment (ARERA – Autorità di Regolazione per Energia Reti e Ambiente), MASE will publish a decree, which will:

• detail the conditions and the criteria for applying zonal electricity prices calculated on the basis of the wholesale energy market fluctuations for final clients, starting from 1 January 2025. The zonal prices will apply rather than the currently applicable national electricity price (PUN), ie the average of the zonal prices shown in the six Italian electricity market zones weighted based on total energy purchases; and
• grant a mandate to ARERA to define a “temporary equalization mechanisms” with final clients, compensating potential price differentials between: the zonal price, and a new reference price calculated by the GME (ie the electricity market manager) in continuity with the current calculation methodology of PUN.

These regulatory updates have been introduced in light of the upcoming change (as from 1 January 2025) to 15 minutes (instead of the current 60 minutes) of: the Imbalance Settlement Period (ISP), for calculating unbalancing payments; and the Market Time Unit (MTU) (ie the reference period for transactions on spot markets).

 

Effects on medium- and long-term PPAs

The impacts of the regulatory change on PPAs needs to be assessed on a case-by-case basis, in the light of its structure, wording and model (eg physical, virtual, fixed or floating, based on PUN or Zonal Prices, based on EFET model or tailored).

The main aspects of a PPA that may be affected by the change in law are:

1. the reference price indices applied under the PPA (physical PPA structures providing a fixed price only and no floating components or the PPAs where the reference indexes are already the zonal prices instead of the PUN would be less or not affected);

2. the clauses relating to change in law / change in market design / market disruption event, to determine whether the agreement already provides the rules applicable to the event.
   

   In this regard, the PPA could deal with the change in law or the market change by providing that if the price reference index (PUN) will no longer be calculated, the parties need to meet and agree in good faith on a replacement index (eventually by deferring the replacement to a third party expert). Or the PUN can be automatically replaced by the new reference price calculated by the GME (being the same public entity currently calculating the PUN). Where the event is regulated by the PPA, if one of the parties refuses to apply the new index or to carry out the procedure to determine the new index without justification, it may be considered as a contractual breach or a violation of the Italian law principle that requires the performance of any contract in good faith (preserving the other’s party’s rights);

3. verifying whether the change in law may cause a material imbalance of the parties’ interests and benefits as crystallized at the date of the execution of the PPA (eg the change may affect either the financial benefit of the PPA or even the final purpose of hedging the fluctuation of the PUN) leading to the possibility that the most affected party may invoke the available hardship and similar remedies under Italian law to restore the balance of interests at the time of execution of the PPA or to withdraw from or terminate the contract;

4. ascertaining whether the PPA has been expressly qualified as an “aleatory contract” or if there is a risk allocation that may be considered as implicitly qualifying the agreement as aleatory, in accordance with Article 1469 of the Italian Civil Code. If the PPA includes the specification, the remedies available to the parties would be limited (eg the supervening excessive onerousness mentioned above may become irrelevant);

5. the calculation method of the termination amount and/or liquidated damages for delays and/or underperformance of the relevant plant, if applicable.

 

Assessing the impacts of the regulatory change in light of the nature of the PPA

As outlined above, the contractual impacts of the change in law may vary depending on the particular nature of the PPA(s).

From a general perspective, the hedging purpose of a PPA for the purchaser may be hindered by the change in law and this may become relevant, depending on the structure and wording of the PPA, to be carefully assessed:

• under a virtual PPA, the purchaser will receive a cash differential from the seller if the PUN is higher than the fix price (fixed price VPPA) or it will receive the agreed discount of the PUN (VPPA based on a discount on index). Starting from 1 January 2025, the purchaser, in consideration for the energy consumed, will pay the zonal price to its energy supplier. But the hedging reference of the purchaser pursuant to the virtual PPA will still be the PUN (or the “new” index replacing PUN). The effects and legal relevance of this mismatch may vary from case to case depending on the wording of the PPA (eg regarding the aleatory nature of the PPA or regarding the reference to the relevance of the actual consumption by the purchaser);
• under physical PPAs, the fixed price PPAs or zonal price-based PPAs may continue to apply without amendments, while the PUN-indexed PPAs may be affected;
• under the PPAs executed on an EFET model form providing for a price component linked to the PUN, the form already governs temporary or permanent objective unavailability of the relevant reference price (ie the PUN for Italian clients). And the “Market Disruption Event” may apply, to the effect that the parties would have to negotiate in good faith a different index as similar as possible to the past used index (which may either be the replacement index to the issued by the GME or a calculation made by the parties based on the same criteria of the PUN).

 

CONCLUSIONS

The effects of the change in law will only start to have an impact as from 1 January 2025. And a temporary equalization mechanism will be in place after that, so it could be the right time to assess PPAs portfolio of producers, traders or financing banks evaluating the effects of the change in law, the remedies available and the potential need of amending the PPA to the purpose of compliance with the new market regulation.

---

¹ Law Decree no. 181 of 9 December 2023, converted with modifications into Law no. 11 dated 2 February 2024 and published with the Official Gazette on 7 February 2024, introduced certain modifications to article 13 of Legislative Decree no. 210 dated 8 November 2021 (implementing in Italy EU Directive 2019/944 and EU Regulations 941/2019 and 943/2019).