Energy and Infrastructure M&A in Italy: An Introduction

The M&A market is booming, with a significant increase in deals during the first nine months of 2024. With a deal volume of about EUR61.1 billion, this is an impressive increase compared to the same period in 2023. This renewed momentum was bolstered by the conclusion of several high-value deals, with deals in excess of EUR1 billion contributing substantially to the total. Analysis of the main sectors involved in the deals shows that about 67% of the value of the deals is concentrated in three macro sectors:

• TMT (technology, media and telecommunications), with a countervalue of EUR16.1 billion;
• energy and utilities, which totalled EUR15.4 billion; and
• industrial markets, with EUR9.9 billion.

These figures show a significant recovery and indicate renewed confidence in the market, driven in part by opportunities for consolidation and innovation in key sectors.

The primary driver of the growth of the M&A market in the energy and infrastructure sector is the energy transition. In light of the ambitious objectives outlined in the European Green Deal and the Italian Plan for Energy and Climate 2030 (PNIEC), the renewable energy sector is undergoing a remarkable phase of development. For the first time, renewable energy production surpassed fossil fuel production in the first half of 2024, fulfilling 52.5% of electricity demand.

From a regulatory perspective, recent interventions in Italy are prompting a shift in how the renewable energy market is approached, leading to structural reforms that are expected to impact the entire sector. In order to accelerate authorisation processes, the Italian legislature has adopted numerous regulatory measures, delegating certain responsibilities to regional authorities for the implementation of operational rules.

However, this regulatory activity may inadvertently hinder development trends due to the introduction of unclear principles and restrictive positions taken by some regions. In particular, jointly with the introduction of restrictions on ground-mounted PV plants on agricultural land through Law Decree No 63/2024, new criteria for identifying suitable areas for renewable plants have been established by virtue of Ministerial Decree 21 June 2024, granting significant localisation power to regional authorities.

The Sardegna Region has temporarily halted ongoing authorisation processes while defining these areas, in a move that is being contested in the Constitutional Court. Sardegna is also drafting its own stringent regulations that could complicate the approval of new installations and potentially overturn existing permits.

Unlike the Sardinian case, Sicily has reassured investors with a commitment to issue guidelines by the end of the year, adopting a reasonable and constitutionally sound approach to protect ongoing projects. In any case, the photovoltaic sector continues to attract local and international investors. While interest remains high for large-scale photovoltaic projects, there is growing attention towards small assets, driven by streamlined permitting processes and local government support for smaller installations.

Meanwhile, the Italian government is working on a unified Energy Authorisation Code and reforming the Environmental Code, both of which are facing criticism. In positive developments, the upcoming Transitional FER X and FER X Decree will incentivise onshore renewable plants – with a regulation aimed at lower curtailment risks for project developers and investors by ensuring remuneration based on the contracted price – while the recently approved MACSE (Electricity Storage Capacity Procurement Mechanism) regulation will facilitate lithium battery auctions and extend the timeline for hydropower framework proposals. The first auction is expected to take place in the first semester of 2025.

This extensive legislative activity and the varying implementation at the regional level are redirecting the interest of local and international investors towards more synergistic forms of co-operation, such as the co-development of platforms, rather than of individual assets at an early stage. The latest demand is therefore to identify companies with know-how in development, in which to invest with the purpose of turning them into independent power producers in the long term and recalibrating the risk of change in law in the medium term, thanks to a qualified co-partnership.

Hydropower sector

Italy ranks third in Europe for installed hydropower capacity, following Norway and France. The number of hydropower plants in Italy, primarily located in the Alpine regions (Lombardy, Trentino-Alto Adige and Piedmont), has been increasing. In 2022, there were 4,702 plants, and this number rose by 158 in 2024. However, to achieve zero emissions targets, hydropower production must be doubled by 2050.

Hydropower capacity in Italy is governed by concession contracts due to the use of public water, which is considered a public asset. Concessions are classified into large-scale hydroelectric concessions (with a generation capacity above 3 MW) and small-scale hydroelectric concessions (below 3 MW). Unlike other countries in Europe, private operators can be concessionaires of large hydroelectric concessions.

Under the current national laws, large hydroelectric concessions are granted through competitive public tenders, while small concessions can be renewed without a competitive public procedure, provided specific requirements to preserve minimum water flows and ensure no other priority public use of the water derivation exists are met (although, with a very recent decision, the Constitutional Court has requested that the Court of Justice of the European Union expresses whether the renewal of the small concessions also has to be subject to the same competitive criteria). Regulations applicable to both large and small hydropower concessions in special-status regions (ie, Friuli Venezia Giulia, Sardegna, Sicilia, Trentino-Alto Adige and Valle d’Aosta) may differ from national regulations.

Approximately 17% of large hydropower concessions expired in 2023 (and will expire by 2024 for the Province of Trento and Bolzano). Approximately 69% of large hydropower concessions (most of them held by ENEL) are due to expire in 2029, with the remaining 14% expiring thereafter. Therefore, in the coming years, the re-assignment of existing large concessions should create significant investment opportunities.

For the time being, the regions (which are required to launch tender procedures by the end of December 2024) are advocating for the approval of laws that would allow the extension of concessions. Currently, only three regions have launched tender procedures: Lombardy, Piedmont and Abruzzo. If the regions fail to meet this deadline, the Ministry of Infrastructure can request that the government defines tendering criteria on their behalf and initiate the procedures (a substitute power). If tenders are conducted by the government, 10% of concession fees will be allocated to the State.

As a general rule, concessions can be tendered for a minimum of 20 years, extending up to a maximum of 40 years. An additional ten-year extension may be granted in the case of substantial investment plans. Fees payable by the concessionaire to the region include:

• a fixed fee based on concession capacity and a variable fee, expressed as a percentage of revenue from energy sales;
• the provision of 220 kWh of electricity for each kW of concession capacity at no charge; and
• an additional fee for concessionaires operating under extended concessions until a new concessionaire is selected.

One of the main elements of complexity in bidding is the identification of the value of dry assets (ie, terminal value) to be placed on the basis of the bid, which is to be paid by the new concessionaire to the outgoing concessionaire. The determination of such value requires full co-operation from the outgoing concessionaire, and the criteria for such calculation may differ under regional laws.

Despite being a mature sector, large hydroelectric concessions are expected to play a significant role in the future energy system, due to the system's ability to quickly adapt to changes in electricity demand, and in the M&A market, due to the incoming tender procedures. The MACSE mechanism is also expected to boost the market, as the conditions for the participation of hydroelectric storage will be defined by the first trimester of 2025.

One of the most significant transactions closed in 2024 was the sale by the Macquarie European Infrastructure Fund 4 of its stake in Hydro Dolomiti Energia, which, following a competitive procedure in which a consortium of foreign and Italian investors was the winning bidder, was instead sold to Dolomiti Energia Holding, the majority shareholder, which exercised its right of first refusal.

Biomethane sector

Although the biomethane industry is currently small scale, there is growing interest in several countries, particularly due to its potential to utilise existing infrastructure to provide clean energy to a wide range of end users.

Italy is the world's fourth largest producer of biogas, after Germany, China and the United States. According to data from the Italian Biogas Consortium, there are 1,803 agricultural biogas plants, while the remainder (about 20%) are powered by waste and sludge. The total number of operating plants exceeds 2,200. Their conversion offers numerous benefits, ranging from closing the cycle of organic waste, agricultural waste and agribusiness by-products to the production of renewable energy and combatting pollution.

The number of government measures supporting the decarbonisation of the natural gas supply and transportation network is increasing. Among these, the REPowerEU plan and the National Recovery and Resilience Plan (PNRR) aim to support investments for the construction of new biomethane production plants and for the total or partial conversion of existing biogas plants, with the ambitious goal of terminating dependence on Russian fossil fuels before 2030.

In this context, Italian Ministerial Decree 15 September 2022 supports biomethane fed into the natural gas grid through capital grants (of up to a maximum of 40% of capex) and an incentive tariff applied to the net biomethane production. According to this Decree, newly built agricultural or waste-based biomethane production projects are eligible for incentives, as are existing agricultural biogas-fuelled electricity production projects fully or partially converted into biomethane projects. To obtain these incentives, the biomethane projects must participate in public competitive procedures based on the downward auction mechanism (meccanismo delle aste a ribasso). All types of biomethane projects compete together in the same competitive procedure, and those projects that rank favourably in one of the lists drawn up by the Gestore dei Servizi Energetici (GSE – the Energy Services Manager) as a result of the competitive procedures will access the incentives.

To date, only five calls for participation in the competitive procedures have been provided by the aforementioned Decree: the last one will open on 18 November and close on 17 January 2025, and the relevant list of plants admitted to the incentives will be published on 17 April 2025. However, there are rumours suggesting that there may be room for a sixth and final auction. To be eligible, the plants must already be authorised and the relevant construction works must not have commenced before the publication of the ranking list by the GSE. In order to receive the capital grant, the projects must enter into operation before 30 June 2026; otherwise, only the incentive tariff will apply, with an additional nine-month delay and reduction mechanism. According to a recent change in law, the values of the incentive tariffs are updated by the GSE to account for average inflation.

In such context, while M&A transactions aimed at constituting joint ventures or acquiring biomethane assets are increasing, they are limited by the small number of plants that are already authorised. From a bankability perspective, full EPC contractors have a limited presence in the market. Nevertheless, with the right arrangements and co-ordination mechanisms among the various parties involved in construction and feedstock supply, the bankability of these projects has been made possible.

Battery Energy Storage Systems (BESS)

According to the International Energy Agency, the global energy storage market has expanded significantly, growing from an additional 33 GWh/17 GW in 2022 to over 100 GWh/42 GW in 2023. This upward trend in BESS capacity is expected to continue into 2024 and 2025, driven by decreasing costs per kW due to the falling prices of lithium, cobalt and nickel, alongside production levels now exceeding demand and the upcoming MACSE auction scheduled for the first semester of 2025.

To access project financing, banks have noted that, unlike in the wind and photovoltaic sectors, there will need to be a heightened focus on technological aspects for BESS. This is due to uncertainties and the lack of historical data regarding the lifespan and reliability of BESS components. Technological risks must be evaluated based on the commitments made by the operator to Terna regarding the utilisation of available capacity and the charge-discharge cycles of the BESS. In addition, it is essential to obtain guarantees from the battery supplier that align closely with the duration of the agreement with Terna, ensuring the components' lifespan meets contractual obligations.

Hydrogen

Europe has prioritised hydrogen as a central element of its energy policy, with Italy actively supporting this initiative through PNRR funding. In January 2024, Italy approved a EUR550 million incentive scheme to encourage investments in hydrogen for industrial processes, aimed at facilitating the transition to a net-zero emissions economy. This measure includes direct subsidies to support projects that replace methane and other fossil fuels with renewable hydrogen. The initiative also promotes the development of hydrogen valleys, with projects already approved for funding expected to become operational by 30 June 2026. The National Hydrogen Strategy is also nearing approval, and will outline the country's hydrogen production potential and the development of its supply chain.

Due to the fact that hydrogen is currently a costly energy source, the market is still at an early stage of development.

Data centres

Another significant trend is the proliferation of data centres across the country. Microsoft recently announced a EUR4.3 billion investment over the next two years (its largest commitment in Italy to date) to expand its hyperscale cloud and artificial intelligence data centre infrastructure. This investment also includes a training programme aimed at enhancing the digital skills of over one million Italians by the end of 2025.

The market for buying, selling or leasing infrastructure for data centre development reached EUR654 million in 2023, and is expected to double by 2025. New openings have significantly increased the total active nominal power of data centres in Italy to 430 MW. To ensure sustainability, especially in light of the Energy Efficiency Directive, which mandates that data centre providers disclose their energy performance and sustainability metrics, these centres are encouraged to utilise renewable energy. It is estimated that over 90% of the energy consumed by data centres will come from renewable sources by 2033.

Current geopolitical challenges have underscored the advantages of transitioning to locally produced renewable energy, prompting all major players in the sector to enhance the renewable energy components of their infrastructure, in alignment with Europe’s net-zero target for 2030.

Other key trends and developments in the energy and infrastructure M&A market

Energy prices as a key investment factor

High energy costs in Italy present an attractive market for international investors, despite existing regulatory uncertainties. The spot energy price is expected to stay relatively high due to the continued significance of gas imports, which influence the electricity spot market.

Interest in PPAs

Due to delays in approving the FER X framework and the consequent exclusion from auctions of many authorised projects already underway, PPAs are emerging as an alternative revenue option and as a preferred solution to mitigate such delays and to satisfy the rising energy demand driven by the expansion of data centres, the electrification of end-use consumption, electric mobility and climate change.

Wind sector

Current capacity targets for offshore wind are insufficient to realise its full potential and to establish a sustainable Italian supply chain in the long term (currently, only three offshore wind projects have competed the environmental authorisation procedure, which is the first step necessary to participate in the FER 2 auctions). However, large offshore wind projects are close to the end of their environmental authorisation processes expected in 2025, so that the FER 2 incentive mechanism (ie, the scheme of incentives granted to innovative RES plants, adopted in August 2024 and for which the operative rules are going to be adopted) would finally be active.

Hybridisation

Hybridisation has already been implemented in other European countries, and optimises connection capacity and minimises underutilisation. In Italy Arera is expected to issue new technical regulations, to facilitate this process, hopefully in 2025.