Following Mexico’s initiative to discourage the use of carbon-intensive fuels, Chile’s government has passed an environmental tax law with the objective of encouraging a shift to the use of clean air technologies. The government’s intention in passing this reform is for companies to incorporate technologies that will reduce pollutants or simply change the fuel they use.

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As part of a comprehensive tax reform, the reform contemplates two new types of green taxes:

Taxes on emissions from fixed sources. The law establishes an annual tax on emissions from fixed sources. This takes into account two categories of externalities: (i) the local damages to public health – emissions into the air of particulate matter (PM), nitrogen oxide (NO) and sulfur dioxide (SO2); and (ii) global damage due to climate change – emissions of carbon dioxide (CO2) from fixed sources made up of boilers and turbines with a thermal power greater or equal to 50 MW (megawatt thermal capacity) considering the limit superior to the fuel’s energy value.

In the case of PM, NO and SO2 emissions into the air, the taxes will be the equivalent of 0.1 US dollars per ton emitted or the corresponding proportion of said pollutants, increasing the result by applying a formula that takes into account the social cost of pollution such as the costs associated with the health of the population. In the case of CO2 emissions, the tax is equivalent to 5 US dollars for each ton emitted.

In order to determine the tax burden, the Superintendence of the Environment will certify in March of each year the amount of emissions by each tax payer or contributor during the previous calendar year. Each tax payer or contributor which uses any source that results in emissions, for any reason, shall install and certify a continuous emissions monitoring system for those elements listed in the first subparagraph.

Taxes on highly polluting light vehicles. An additional tax is imposed upon the importation of highly polluting light vehicles that use diesel as fuel with the objective of encouraging the use of vehicles that produce fewer pollutants. The importation of vehicles designed or adapted to use petroleum diesel, whether habitual or not, will pay an additional tax which will result in a one-time fixed cost on the importation of vehicles. This tax will be applicable only to light vehicles – basically, automobiles and light trucks.

An analysis of the impact of the new green taxes

The application of these new taxes upon local and global emissions has generated conflicting positions from different market players. These taxes have obvious costs for the country but with vague benefits, particularly with respect to the reduction of CO2 emissions. Chile has a cleaner matrix than the average of OECD countries and other developed nations. The question is, thus, if the primary emitting countries have not committed to concrete actions in this regard, is it convenient for Chile to be the pioneer in applying measures that will undoubtedly prove costly for the Chilean economy?

In the case of generating electricity – a necessary input for all productive activities – the tax increase will translate into higher rates for clients and, if we consider that the rates are already relatively high in relation to the rest of the OECD countries, especially for the industrial sector, increasing costs will undoubtedly affect Chilean competitiveness.

The impact of this tax for electricity-generating companies is directly related to diversification of the energy matrix, diversification of the geographical location of the operations of each company, and the contractual structure of each generating firm. Concerning contracts, the transfer of this tax burden to clients can only occur in those cases where there are contracts that contain clauses that allow adjustment of rates in the event of regulatory changes. This would exclude spot and regulated clients.

According to a report by the analyst Alfredo Parra of EuroAmerica Estudios, if this tax is considered on the basis of the effective generation of different firms, for the main firms – Endesa, Colbun, ECL and AES Gener – the magnitude of this burden, taking into account 2013 figures, would have been USD$186M (Endesa USD$35.3M, Colbún USD$21.7M, ECL USD$41.9M and AES Gener USD$87M).

Although the tax could serve to correct the externality, there are many doubts about its implementation. A tax that depends on a specific emission factor (by neighborhood and by contaminant) is being considered and multiplied by the social costs by neighborhood and by contaminant – with social costs being understood as public health costs. Implementing a policy without carefully analyzing its direct and indirect consequences could lead to undesired results that will later be difficult to reverse.

Even though the environmental regulation has some positive elements – such as the utilization of a policy to encourage a reduction of local pollutants – there are many doubts with respect to the proper implementation of same.

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This legal update was contributed through Norton Rose Fulbright by partners Elisabeth (Lisa) DeMarco, Simon Currie, Elisabeth Eljuri and through Carey & Allende by partner Luis Felipe Arze.

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From residential neighborhoods to commercial enterprises, energy is hugely essential for the completion of day-to-day activities, and is thus a vital component of any economy. In Turkey in particular, the energy sector attracts investment due to its vitality and profitability. The Turkish government expects a 7 percent growth rate in energy demand for each year until 2023.

To increase such demand, the Turkey Ministry of Economy is putting various incentives in place. These incentives are applied according to subsector or place of investment. The Ministry of Economy is focusing on the following subsectors:

• Electric power production;
• Natural gas distribution;
• Procurement of geothermic hot water;
• House heating by geothermic energy;
• Steam production; and
• Transportation by transit natural gas pipeline.

Depending on the subsector, investments in the energy sector are stimulated through a general incentive system, a regional incentive system or privileged investment incentives.

With the regional incentive system, the provinces that comprise Turkey are categorized into six regions, each of which has a distinct incentive provision. Regions are ranked based on the level of economic development of the provinces, with Region 1 being the most advanced and Region 6 being the least developed.

There are three fields of energy investment that can benefit from regional investment incentives:

• Coal gas (synthesis gas) production: Investment amount should be at least TRY500 for the incentives of Region 6 and TRY50,000 for the incentives of the other regions.
• Investment in house heating and cooling by geothermic energy or power plant waste heat: No minimum amount is regulated for any Region.
• Investment in drilling: Investments at the amount of at least TRY5,000 are subject to incentives of Region 2.

Applied Incentives

1. Value Added Tax (VAT)

Machines and equipment that are supplied domestically or from abroad and their accompanying importations and deliveries are excluded from VAT.

2. Customs Tariff

Machines and equipment supplied from abroad are excluded from customs tariff, which must be paid under Importation Regime Decision.

3. Tax Reduction

Energy investors benefit from a reduction of their income and corporate taxes. The incentive is provided until the total reduced tax amount reaches the contribution amount of the total investment amount. The following table provides the numbers according to Region.

Regions	Tax Reduction	Contribution Amount
Region 1	30%	10%
Region 2	40%	15%
Region 3	50%	20%
Region 4	60%	25%
Region 5	70%	30%
Region 6	90%	35%

For instance, a company investing in Region 3 with an total investment amount of TRY10,000 would have a tax reduction of 50 percent. However, the aforementioned reduction would end when total reduced tax amount reaches TRY2,000, which is 20 percent of TRY10,000.

4. Insurance Premium Employer’s Share

The amount of insurance premium employer’s share would be paid for the employment in addition to the overall employee number stated in Premium and Service Certificate that is submitted to Provincial Directorate of Social Security Institution on a monthly basis. Related to the country’s minimum wage, the amount is paid by the Treasury for the term stated below:

Regions	Term (Years)
Region 1	–
Region 2	–
Region 3	3
Region 4	5
Region 5	6
Region 6	7

5. Interest Support

The government provides support for the interest or profit share of the loans, which are used within the scope of the incentive certificate. The value, at the very least, is measured at 70 percent of the investment amount with a one-year term. The numbers are in the following table:

Regions	Domestic Loans	Foreign Currency Loans	Maximum Amount of Incentives
Region 1	–	–	–
Region 2	–	–	–
Region 3	3%	1%	TRY500
Region 4	4%	1%	TRY600
Region 5	5%	2%	TRY700
Region 6	7%	2%	TRY900

6. Assignment of Investment Place

The Turkish government may assign a place to the investors regarding the investments that have incentive certificates. The Turkey Ministry of Finance determines the terms and conditions that govern the assignment of an investment place.

7. Income Tax Withholding

The amount of income tax withholding—which is paid for the employment within the scope of the investment incentive certificate, in correspondence with the minimum wage—is reduced from the tax payments related to the investment. This incentive is effective for 10 years following the start of investment. Only investors in Region 6 can benefit from this incentive.

8. Insurance Premium

The amount of insurance premium employee’s share—which is to be paid for the additional employment made within the scope of incented investment, in correspondence with minimum wage—is fulfilled by the government. Only investors in Region 6 can benefit from this incentive.

The 2014 draft local content policy published by the Tanzanian Ministry of Energy and Minerals begins with the statement: “Natural gas resource found in Tanzania belongs to the people of the United Republic of Tanzania, and must be managed in a way that benefits the entire Tanzanian society.” Based on the fundamental premise that petroleum resources belong to a nation and its people, it is perfectly reasonable to expect them to be developed for the benefit of the communities of such nations. In reality, the value of petroleum exploration and production is rarely translated into economic and social benefits for indigenous workers and supply industries, even in the most resource-rich African countries. This is particularly the case in emerging frontiers such as East Africa.

While the investment from international oil companies (“IOCs”) through expertise-sharing and finance remains essential to the success of Africa’s oil and gas producing countries, national governments are seeking to maximise social and economic benefits from petroleum extraction activities by overhauling their existing, and often out-dated, petroleum laws and introducing new petroleum legislation. Such legislative overhauls have resulted, in many cases, in an increased focus on local content compliance and related obligations.

The case for local content

Local content carries an expansive meaning, but within the oil and gas industry it is generally recognised as an intervention by a national government aimed at ensuring that the majority of the goods and services required at each stage of the oil and gas value chain are locally supplied. For instance, in the context of indigenous employment, local content policies (“LCPs”) are about far more than securing an immediate increase in the percentage of local employees. Their aim is to compel IOCs to actively engage the local workforce as part of their conduct of petroleum operations, thereby facilitating the transfer of valuable skills and knowledge to the benefit of the indigenous communities as a whole.

There are many valid reasons why countries wish to employ LCPs. A country with a fledgling oil and gas industry will not have the specialised labour sector or pool of expertise required by the industry. To overcome this, IOCs necessarily have to bring in foreign workers and service providers with the relevant skills and knowledge. However, this leads to a vicious cycle where the local labour force is not employed because it does not have the required skills, but it will never be able to gain those required skills without the opportunities to learn on the job. Furthermore, international service providers have existing, well-established relationships with IOCs which makes it easy for them to displace small local firms from the value chain of the oil and gas industry.

This is not an issue that is unique to developing African countries. Both the UK and Norwegian governments took an active role in developing local content in the early days of their respective oil and gas industries. Both countries had highly educated workforces with technical competence in manufacturing, shipbuilding and engineering. What they did not have was a domestic oil and gas industry. The UK government used a number of measures such as discretionary licensing, strict audits of purchases by oil companies to ensure that domestic suppliers were used, transfer of R&D and the encouraging of joint ventures with domestic players. Predominantly through Statoil (the then national oil company), Norway undertook similar initiatives that essentially made it mandatory for IOCs to transfer technology and expertise to their Norwegian counterparts in order to participate in the Norwegian oil and gas industry. Neither the UK nor Norway set out specific employment or local content targets, and both focused on value addition rather than mere local incorporation or local ownership. Local content in the UK is today estimated at around 85% with nearly 100% in post-development operations.

Local content instruments

There are various channels through which national governments set out the guiding principles and objectives of their LCPs.

Primary legislation: Many countries use primary legislation aimed purely at enhancing local content in the oil and gas industry. A prime example of this is Nigeria’s Oil and Gas Industry Content Development Act 2010 (“NCDA”), which applies to all transactions or operations carried out in connection with the Nigerian oil and gas industry, as well as to all operators in the industry. The central aims of the NCDA are described to be:

• developing indigenous skills across the oil and gas value chain;
• promoting indigenous ownership of assets and use of indigenous assets in oil and gas operations;
• enhancing the multiplier effect to promote the establishment of support industries; and
• creating customised training and sustainable employment opportunities.

The NCDA goes on to specify targets and requirements in respect of local content, alongside detailed implementation and monitoring mechanisms to ensure compliance. Nigeria’s long-awaited Petroleum Industry Bill (the implementation date for which remains uncertain) is likely to bring further changes to the laws regarding local content in Nigeria’s oil and gas industry.

Ghana has followed the Nigerian example by codifying its LCP in primary legislation, namely the Petroleum (Local Content and Local Participation) Regulation 2013. The 2013 Regulation is presented in a similar format to that of the NCDA, and it begins by setting out fundamental guiding principles such as enhancing value-addition and job creation through local expertise, goods and services, local capacity development and increasing the capability and international competitiveness of Ghanaian businesses. Specific targets to achieve the guiding principles are then stipulated, followed by establishment of the Local Content Committee to act as a watchdog and oversee the implementation of the 2013 Regulation.

Secondary legislation: Countries like Angola and Mozambique have established their LCPs within broader legislation governing the oil and gas industry. The Petroleum Activities Law of 2004, the key legislation governing Angola’s petroleum sector, imposes an obligation on the Angolan government to “guarantee, promote and encourage investment in the petroleum sector by companies held by Angolan citizens and create the conditions necessary for such purpose” along with an obligation on Sonangol (the national oil company) to cooperate with the government in promoting the “socio-economic development” of the country. The Angolan government has since 2004 approved a number of ministerial orders that impose specific local content obligations on companies carrying out oil and gas activities in the country.

Similarly, the new Mozambican Petroleum Law issued on 18 August 2014 sets out the local content requirements that the government seeks to impose on the oil and gas industry to promote “the involvement of national entrepreneurship in petroleum enterprises” and to reinforce the role of the state and ENH (the national oil company) in the conduct of all petroleum activities. The industry awaits regulations setting out the details of how these wide-ranging policies will actually be implemented.

Upstream agreements: Some countries enshrine their LCP objectives and principles in broad statements of government policy, such as the 2011 report on Enhancing National Participation in the Oil and Gas Industry in Uganda. Such policy statements are combined with agreements such as concessions, leases and production sharing agreements (“PSAs”) which contain the legally binding requirements in respect of local content. Tanzania’s local content obligations are enshrined in its new model PSA and natural gas policy (both of which were published in 2013), and significantly, in the recently published first draft of the “Local Content Policy of Tanzania for Oil and Gas Industry”.

Kenya’s local content laws for the oil and gas industry are currently contained in the Petroleum (Exploration and Production) Act, chapter 308 and its model PSA. Following the examples set by its East African counterparts, the Kenyan Ministry of Energy and Petroleum has issued a 2014 draft National Energy Policy in which it highlights “inadequate manpower, technical capacity and local content in gas exploration and production activities” as key challenges facing the upstream sector, and sets out an implementation plan for the development of an LCP in the medium to long-term (2014-2030).

Local content design

Simply put, local content refers to value-add that is created anywhere in the domestic economy as a result of the actions of an oil and gas company. The terms of the value-add (which generally fall within two broad categories of capacity development and local procurement) vary from country to country, but typically include:

• Employment – minimum targets for the employment of local labour. Angola imposes a requirement for all companies to have a workforce consisting of at least 70% Angolan nationals, and restricts the hiring of foreign workers to circumstances in which no national worker with the equivalent qualifications is available. In Tanzania, where a foreign national is employed, a succession plan to a Tanzanian national must be submitted alongside any work permit application.
• Participation of local and locally-owned entities – local participation is usually expressed as either a preference or a mandatory requirement, and IOCs wishing to undertake petroleum activities in Africa will usually be required to form partnerships with local entities. Foreign companies who wish to do business in Libya are required to enter into a joint venture with a local entity, in which the foreign entity can hold a maximum equity stake of 49%. Similarly, in Uganda, where goods and services required by a contractor or licensee are not available in the country, they will need to be obtained from a company which has entered into a joint venture with a Ugandan company (provided the Ugandan company has an equity stake of at least 48% in the joint venture).
• Incentivising local participation in bidding rounds – local companies (and the IOCs in partnership with them) may receive preferential treatment in bidding rounds. Liberia’s 2014 bid round includes innovative “Local Content Participation” provisions which provide that bidding groups that include a significant West African company or a company operating in the Economic Community of West African States (along with a Liberian partner) will have their bids evaluated with a 20% uplift in their signature bonus proposal.
• Requirement to prioritise local suppliers – preference to be given to the procurement of local goods and services, with the aim of boosting local supply chain development. This requirement is often qualified by a condition that goods and services are of comparable quality and quantity to international materials and services, and that their price does not exceed foreign goods and services by more than 10%. This is the case in countries such as Angola, Mozambique and Kenya (although Kenya does not include reference to a 10% excess). In Nigeria, indigenous service companies must be given exclusive consideration if they can demonstrate the requisite capacity.
• Fiscal incentives – tax incentives may be given to companies establishing facilities to manufacture goods or provide services which would otherwise be imported. The NCDA provides that the oil minister will consult with the relevant arms of government on an appropriate fiscal network and tax incentives in such situations (although this appears to be discretionary as no further detail is provided in the legislation).
• Foreign investment in training programmes – a specified amount of expenditure to be invested in training programmes (which IOCs will often also be required to plan and implement) for local personnel involved with petroleum operations, to increase knowledge and technology transfer at all stages of hydrocarbon extraction. In Angola, companies are required to contribute US$0.15 for every dollar per barrel of oil produced each year towards the training of Angolan personnel, with companies in the exploration stage being obliged to contribute a fixed amount of US$200,000 each year.
• Increasing managerial opportunities for local personnel – a specific percentage of senior managerial positions to be reserved for nationals. In Ghana, for a company to be labelled as indigenous, 80% of its executive and senior management positions must be held by Ghanaian citizens (among other requirements).

Local content implementation

The increase in the rate of enactment of LCPs across Africa is a significant achievement in the campaign for local content, but national governments must overcome a number of hurdles relating to their implementation before the benefits of these policies can be fully realised.

A significant challenge with local content implementation relates to defining precisely what the localization requirements are. For example, Mozambique’s 2014 Petroleum Law currently provides that all “oil and gas companies” must be registered on the Mozambique Stock Exchange. While “oil and gas companies” is not defined, the law goes on to state that only foreign companies registered on the Mozambique Stock Exchange can carry out petroleum operations. “Petroleum operations” in turn is defined very broadly. This has the effect of creating confusion among IOCs currently active in Mozambique as to whether they are “oil and gas companies” for the purposes of the Petroleum Law, and whether they will need to be registered on the Mozambique Stock Exchange irrespective of whether they are carrying out “petroleum operations”.

Local content goals are inherently aspirational. In recognition of the need for substantial capacity building in some African countries, local content obligations are typically qualified by caveats. For example, IOCs are required to prioritise the procurement of local goods and services and the hiring of local service providers, but only to the extent that no better alternatives in terms of price or quality are internationally available. As many LCPs are in the early stages of their inception, the reality is that local capacity is often lacking, and IOCs who are (understandably) unwilling to procure sub-standard materials or hire unqualified personnel are able to easily opt out of their local content obligations. Even Shell (the oldest private sector energy company operating in Nigeria), whilst fully embracing its local content obligations under the NCDA, expressed in a report last year that waivers of local content obligations may continue to be needed from time to time until domestic capacity is in place.

Having an LCP in place is all well and good, but true value-add is impossible without establishing mechanisms for effective monitoring and enforcement. The reason that Nigeria is viewed as a local content success story is that its LCP is backed by the Nigerian Content Development and Monitoring Board (“NCDMB”) which is mandated to oversee, monitor and implement the provisions of the NCDA. The NCDMB has proven that, where necessary, it will wield its power to ensure compliance with the OGICDA. Earlier this year, it banned Hyundai Heavy Industries from participating in Nigeria’s petroleum industry until it started complying with the requirements of the NCDA with regards to the employment of local personnel. Ghana has followed Nigeria’s example in establishing its own “Local Content Committee”, mandated to monitor and coordinate all aspects of the implementation of Ghana’s 2013 Regulation. Tanzania’s 2013 Local Content Policy similarly evinces an intention to establish a “National Local Content Committee” which will be chaired by its Ministry of Petroleum.

Embracing local content

Local content is the right way forward for Africa, and it is here to stay. The importance of ensuring that countries with emerging oil and gas industries are able to efficiently implement an LCP has been globally recognised, with the World Bank making a loan of US$50m at zero interest to Kenya earlier this year to support the Kenyan government’s efforts in building capacity.

Compliance with, and the implementation of, local content is the joint responsibility of IOCs and national governments. Although the main responsibility for compliance necessarily rests with foreign investors, there is clear need for a collaborative effort from all stakeholders involved to achieve local content goals at all levels of an oil and gas project. National governments cannot simply enact an LCP, sit back and leave its implementation to the IOCs. Many LCPs already place an onus on governments to create an enabling environment for local content laws and to play an active role in facilitating the success of local content objectives. This requires ensuring a stable macro-economic environment is in place, for example, through improving public administration procedures and the strengthening of the education sector.

What is clear is that the value-add from local content will not happen overnight. However, the long-term advantages of enhanced local development, alongside the empowerment of a generation to participate directly in their nation’s wealth of resource, are well worth pursuing. The ultimate aim is simple: to ensure that natural resources are not a curse but a blessing, bringing sustainable social and economic benefits within the oil and gas sector and the wider economy.

New provisions on re-modulation and payment of incentives for photovoltaic and other renewable sources plants in Italy.

07.11.2014 – On 16th and 17th October 2014 the Ministry of Economic Development has issued three Ministerial Decrees implementing the general provisions contained in the Law Decree no. 145/2013 and in the subsequent Law Decree no. 91/2014 on re-modulation of feed-in-tariffs for photovoltaic and other renewables sources plants. The Decrees will become effective the day after their publication on the Italian Official Gazette (the first two Decrees analysed below have already been published on 24th October 2014 and therefore already entered into force).

In particular, the three Decrees provide for a specific regulation of:

1. re-modulation of feed-in-tariffs for photovoltaic plants with a capacity above 200 kW;
2. new payment modalities of feed-in-tariffs for photovoltaic plants; and
3. voluntary re-modulation of feed-in-tariffs for other renewable sources plants (different from PV source).

From the above mentioned measures, the Ministry of Economic Development will expect annual savings of about 500-700 million of euro per year, starting from 2015, which will allow the consequent reduction of the energy bills.

Below a summary of the main provisions of the above mentioned Ministerial Decrees.

I) Re-modulation of feed-in-tariffs for photovoltaic plants with a capacity above 200 kWI)

On 17th October 2014, the Ministry of Economic Development has finally issued the Decree on the re-modulation of feed-in-tariffs for photovoltaic plants with a capacity above 200 kW.

As already mentioned (for more details on this, please click here to read our previous article), the Law Decree no. 91/2014 (as subsequently amended by Law no. 116/2014 of 11th August 2014) introduced a third option for the payment of feed-in-tariffs by GSE (the selection among the three options shall be communicated by the owner of the plant to GSE within 30th November 2014). The selected option will apply starting from 1st January 2015.

Said third option provides that the current incentives granted will be reduced for an initial period by a certain percentage and increased, of same amount, at a later stage. The incentives will be granted for the remaining life period of the plant (still calculated on the 20 year period). From the reading of the Decree, it seems that the reduction period is 2015-2019, while the subsequent increase period will be after 2019.

As to the actual percentage of decrease/increase, Annex 1 of the Ministerial Decree contains a specific mathematic formula to calculate the new feed-in-tariffs (ie Inew = Iold * (1-Xi)), without however specifying the percentage of increase/decrease. In this respect, Article 3 of the Decree refers, on its turn, to a subsequent communication from GSE, already published on 27th October 2014, on the multiplication criteria to be applied to the previous incentive for the calculation of the new incentive. Please click here to read the criteria.

II) New payment modalities of feed-in-tariffs for photovoltaic plants

The second Ministerial Decree concerns the new modalities of payment of feed-in-tariffs from GSE for photovoltaic plants.

In particular, it provides that, starting from 1st July 2014, the feed-in-tariffs will be paid by GSE, as an advance, in a percentage of 90% of the actual production of the previous year of a specific plant or, if not available, on the basis of the regional forecast. Annex 1 to the Decree contains a table summarizing the average production hours for each region for 2014.

The GSE will pay then the balance within 60 days from the sending of the actual production data and in any event within the 30th June of the subsequent year. The aim of such Decree is to allow an efficient scheduling of the feed-in-tariffs payment by ensuring, as far as possible, the correspondence between the annual production forecast of a plant and the actual annual production of said plant.

It is worth noting that such Decree shall apply to all photovoltaic plants under the Feed-in-Tariffs Regulations (the so-called “Conto Energia”), independently of the capacity and/or the type of plant.

As to the payment terms, the Decree provides that the advance of the feed-in-tariffs will be paid at the following frequency:

1. every four months for plants up to 3 kW;
2. quarterly for plants above 3 kW and up to 6 kW;
3. every two months for plants above 6 kW and up to 20 kW;
4. monthly for plants above 20 kW.

In certain events (such as the assignment of receivables, the change of ownership or other amendments of the owner data) the payment of the feed-in-tariffs could follow a different payment frequency (in order to link the payment procedure to the specific event).

The Decree provides also specific mathematic formula for the calculation of the advance and the inspections from GSE to verify an adequate correspondence between the production forecast of a plant and its actual production (and consequently avoid undue payment). For 2014, the first inspection from GSE will be made in December 2014 in respect of the production data for the period July-October 2014.

III) Voluntary re-modulation of feed-in-tariffs for other renewable sources plants (different from PV source)

Finally, the third Ministerial Decree regards the voluntary re-modulation of the feed-in-tariffs for other renewable sources.

In particular, the owners will be offered to opt for a re-modulation of the incentives they get from the plant, providing the granting of a reduced annual incentive for the remaining life of the incentive scheme but extended for an additional 7 year period.

If the owner accepts the new mechanism they will get further benefits for any improvement they will made to the existing plant. On the contrary, if the owner decides to remain with the current incentive scheme, it cannot get further benefits (including the simplified purchase and resale arrangements -ritiro dedicato- and net metering -scambio sul posto-) for the ten-year period after the current life of the incentive scheme.

In case the owner accepts the new mechanism, it shall submit a specific application to GSE within 90 days from the entry of the Decree (in accordance with the guidelines that GSE will publish soon on its website) and the new reduced incentive will be paid starting from the first day of the month subsequent the above mentioned 90-day period.

Within 6 months from the entry into force of the Decree, GSE will notify to the regions and other competent authorities the list of the plants which have opted for the new mechanism, so that they can extend the validity of the authorizations to the new incentive period.

On July 15, 2014, NRG Energy, Inc. (“NRG”) announced that it is building a $1 billion project to capture carbon dioxide emissions from the W.A. Parish coal-fired power plant in Texas and ship them 82 miles away to help boost an oil field’s production. Construction for the project broke ground on September 5, 2014. The Petra Nova Carbon Capture Project (“PNCCP”), a joint venture between NRG and JX Nippon Oil & Gas Exploration in Japan (“JX”), will be the largest in the world to use a process that scrubs away the carbon dioxide (“CO₂“) after coal has been burned to produce electricity.

This is a revolutionary approach to reduce millions of tons of CO ₂ emissions from the atmosphere in a manner that, for the first time, attracted private, for-profit investment from the energy industry and that is likely to be repeated in the next few years.

PNCCP is innovative in four very significant ways.

First, the project acts as a bridge between the power industry and oil and gas industry. The power industry increasingly requires CO ₂ to be managed, while there is a huge demand for CO ₂ in the oil industry.

Second, the construction of PNCCP will not result in any unplanned outage at the W.A. Parish generation facility and will otherwise have no impact on the operation of the power plant. This is a significant accomplishment in light of the nature of the project’s construction and a testament to the innovative engineering that went into its design.

Third, PNCCP is the first carbon capture and sequestration project anywhere in the world to be developed and constructed by an independent power producer without the support of ratepayers of taxing entities. While the balance of the world’s other projects relied upon either a regulated public utility placing the project into rate base or a state-owned company developing the project on a state-subsidized basis, NRG created a structure to develop and finance PNCCP in a competitive marketplace.

Finally, the capital for the project was sourced from several entities to the extent that each participant was suited to manage the deal’s various risks. A $167 million grant from the U.S. Department of Energy’s Clean Coal Power Initiative Program covers the cost of the noncommercial demonstration aspects of the project. In addition, $300 million in equity came from JX to manage the oilfield exploration and production risks, along with $300 million from NRG to manage the power plant and regulatory risks of the deal. And finally, $250 million of project debt from the Japan Bank for International Cooperation and Mizuho Bank (with a NEXI guaranty) was structured to finance the less risky aspects of this combined carbon capture and sequestration/enhanced oil recovery project.

From a borrower’s perspective, and due to attempting to implement a novel technology on a large scale, NRG and JX were required to supplement the DOE grant to provide a very significant portion of the project cost as equity financing.

The lenders, on the other hand, needed to view what appeared to be a complicated project with multiple components principally through the lens of a loan made on the somewhat more traditional revenues from enhanced oil production.

Operationally, the project is designed to capture approximately 90 percent of the CO₂ from a 240MW slipstream of flue gas from NRG’s W.A. Parish power generation facility and to use or sequester 1.6 million tons of this greenhouse gas annually.

The captured CO₂ will be used to enhance production at mature oil fields in the Gulf Coast region. The first site to use CO₂ from the W.A. Parish carbon capture system is Hilcorp’s West Ranch Oil Field. Through enhanced oil recovery (“EOR”), oil production is expected to be boosted from around 500 barrels per day to approximately 15,000 barrels per day during the project’s peak years. This field is currently estimated to hold approximately 60 million barrels of oil recoverable from EOR operations.

The impetus for the project was born from the growing realization that CO₂ emissions will be significantly regulated in the United States sooner rather than later. For example, EPA proposed in June 2014 a rule to cut carbon emissions, a regulation that is really targeting coal power plants, which emit more CO₂ than natural gas power plants.

Carbon capture technology is one way for power plant owners to comply with any new rules that may eventually be enacted. But the technology remains largely in the research and demonstration stages, mainly because it is very expensive with no offsetting increase in revenues or cost efficiency to pay for the capture systems.

That’s where this project breaks through the status quo. PNCCP is the first carbon capture project that will pay for itself with incremental revenues (from oil sales) created by the project. NRG is already making plans to offer carbon capture development and construction to other coal power plant owners worldwide and will also encourage commercial lenders to enter the project finance market for CCS/EOR projects.

On balance, the project further reduces the carbon footprint of an otherwise highly efficient coal-fired generation facility, benefits the global environment by reducing CO₂ generally, and reduces the nation’s dependence on foreign sources of oil by enhancing domestic oil production from legacy oil fields. From the perspective of JX, it permits the company to increase the amount of oil available domestically in Japan while furthering its presence in the U.S. market. Perhaps most importantly, it positions NRG and JX to offer the market a blueprint for bridging the commercial gap between the power industry and oil and gas industry in a manner that benefits both.