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Investing in Italian Photovoltaics

Alberto Lanzavecchia and Anton Szpitalak
stage of PV diffusion: he European The European Union as a whole is on track to in Europe, only France Union is on exceed its self-imposed target of deriving at least and Italy are expected track to exceed to face a steadily growits self-imposed tar20 percent of its energy consumption from renewing market.5 get of deriving at able sources by the year 2020. Ten EU member least 20 percent of This article is states expect to exceed their targets. But Italy is its energy consumpmeant to be a step-bylagging behind. tion from renewable step practical guide However, Italy is the only country falling short sources by 2020. This for foreign investors of its goal that intends to make up the defitarget is part of the evaluating projects in cit by joint projects with other countries. This EUs so-called 20-20Italy in the PV busimakes Italy a good target for foreign firms who 20 strategy, which ness sector. want to invest in Italian photovoltaic technology, foresees a 20 percent according to the authors of this article. And they reduction of greenKEY STEPS TO TAKE offer a step-by-step guide for foreign investors. house gas emissions IN INVESTING IN 2011 Wiley Periodicals, Inc. below 1990 levels and ITALY a 20 percent increase in energy efficiency. The 20 percent figure is an aver- while the photovoltaic (PV) sub- Step #1: Which Business Area sector has fostered a 62.8 percent Within the PV Value Chain? age among its 27 EU member growth rate (Exhibit 1).3 states. Ten member states are The Italian PV value chain Although marginal today as expecting to exceed their targets presents a number of opportunia function of total energy pro(including Spain and Germany), ties for foreign equity investors duction, PV is expected to conwhile five other member states tribute up to 12 percent of Euro- (Exhibit 3). are expecting to have a deficit In order to identify which pean electricity supply by 2020.4 (including Italy).1 According to area of investment is particularly Most European member states the EU Commission, Italy is a have designed a legal framework interesting, we suggest considerparticularly interesting case as it is the only country anticipating a and incentive scheme to develop ing a comparison of the differmore attractive financial support, ing responsibilities, risks, and relatively large deficit in reachrewards to sponsors: ing its 2020 target and intending allowing the PV business sector to become more competitive to meet the deficit through joint Is the investment to be (Exhibit 2). projects with third countries.2 used as a beach-head However, a recent crossSince 1999, renewable power for an ultimately larger country forecast in PV evolution generation in the EU27 zone European renewable concludes that many countries experienced a 3.6 percent cominitiative? have already entered the mature pounded average growth rate,
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Published online in Wiley Online Library (wileyonlinelibrary.com). DOI 10.1002/jcaf.21723




The Journal of Corporate Accounting & Finance / November/December 2011

Exhibit 1

How long is the investing horizon period?6

Gross Electricity Generation from Renewable (in GWh)

Source Hydro Wind Biomass PV Geothermal Total 1999 341,125 14,204 36,613 76 4,483 396,501 2007 309,972 104,259 101,808 3,758 5,773 525,570 CAGR 19992007 1.2% 28.3% 13.6% 62.8% 3.2% 3.6% % (in 2007) 59.0% 19.8% 19.4% 0.7% 1.1% 100.0%

Step #2: Locating the Opportunity

Once the investment class has been designated, sourcing of high-quality opportunities is one of the key methods to minimizing project failure and capital loss this is particularly true of the photovoltaic sector, whose immaturity yet strong business prospects have created an enormous number of less qualified market participants. Scouting activities should be based on established and trusted local solar contacts; this is the best way to generate an embryonic short list for investments/partnership opportunities, especially in Italy where business culture privileges direct contacts within closed business networks. Other ways to generate a network could be via the following: professional services relationships (lawyers, accountants, business and management consultants, Italian branches of US banks,7 etc.), of which many are now specializing services in the renewable energy industry; photovoltaic component/ manufacturing equipment suppliers that have an existing presence in the region; solar trade fairs and technology seminars (e.g., SolarExpo held in Verona, Italy); local agents/intermediaries, many of whom have assisted Asian manufacturers in creating local Italian customer networks; and regional investment public offices.

Are there photovoltaic technical assets you are looking to deploy above and beyond financial and human capital? What financial capacity is the investment drawing upon and what are the goals and limitations of this financial capacity? What has the origin branch reserved as human capital that can be considered

dedicated to this solar initiative? Is there existing project management, manufacturing, or financial engineering expertise in-house? What level of cash-flow volatility is acceptable to the investor? What level of cash-flow return on investment is expected by the investor?

Exhibit 2 PV Incentive Schemes Around the European Union

Feed-in Tariffs Bulgaria, Czech Republic, Germany, Estonia, Greece, Spain, France, Italy, Cyprus, Latvia, Luxembourg, Hungary, the Netherlands, Austria, Portugal, Slovenia, Slovakia Belgium, Austria, Finland France, Estonia Estonia, Poland, United Kingdom Greece, Cyprus, Malta Belgium, Romania, Sweden

Investment Support Tax Deductible Reduced VAT Grants Green Certificates

Source: European Commission. (2009). Photovoltaic solar energy: Development and current research. Retrieved from http://ec.europa.eu/energy/publications/doc/2009_report-solar-energy.pdf.

It should be expected that a virgin market would take at least a few months to gain a network in;
2011 Wiley Periodicals, Inc.

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The Journal of Corporate Accounting & Finance / November/December 2011


Exhibit 3 PV Value Chain

Manufacturing of components Construction/ EPC Pure financial yield

There are current benefits for international manufacturers to supply local developers and installers directly from their country. This is still valid, for example, in module manufacturing, inverter manufacturing (Italy is still facing inverter shortage), minor components, etc. The preference for local suppliers would be derived from logistic and planned production flexibility and after-sales services.

International construction/engineering, procurement, and construction (EPC) providers can enter the installation phase both directly, by offering construction services, and indirectly, by providing management and financial strength to existing local EPC providers. Financial support is a key concern in a fast-growing environment as the bonding requirements (a contingent liability) are directly proportional to project size and frequency, both of which have experienced geometric growth. This is an opportunity for larger, wellfinanced, and reputable international construction and EPC companies.

Photovoltaics enjoy the highest subsidy rates in the form of long-term power purchase agreements and feed-in tariff contracts with government-like counterparties. This provides cash-flow assurances coupled with established PV technologies. As a consequence, PV solar farms yield a long-term steady income stream to investors, which, in many cases, is able to be highly leveraged via bank finance from local and international debt providers. As a result, return-on-equity capital is both high and stable.

this could differ depending on the specific regions history in photovoltaicsa more experienced solar region such as Puglia would be easier to generate dialogue than some of the northern areas photovoltaics have not yet dedicated. A longer period is expected to be able to understand deeper the local competitive landscape, worthiness of potential partners, understanding of local laws, business customs, and so on. In Italy, 46 percent of PV existing plants work in a range of 1,0001,250 standardized hours per year; 32 percent in a range of 1,2501,500;
2011 Wiley Periodicals, Inc.

5 percent in a range of 1,5001,750. Plant productivity is mostly linked to geographical location: in the North of Italy, the average hour production is 1,100 std hour/ year, where in the South is 1,370 std hour/year.8 Locating the plant in the proper place is a key driver for value creation.

Step #3: The Importance of Partnership and Stakeholder Selection

The identification and screening of potential partners

is the single most important step in the creation of any foreign photovoltaic transaction. Regardless of the industry dynamics, and the quality of the partnership legal documentation, a poor choice in partner significantly increases the risk of any project. It is a reality that photovoltaics is a nascent industry, hence leaving very few highly experienced business practitioners of which to build an opportunity around. This certainly adds additional emphasis to partnership selection, as the number of inexperienced entrepreneurs and managers is a much higher portion of the workforce than in more mature industries.
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The Journal of Corporate Accounting & Finance / November/December 2011

Depending on the origin firms policies and practices with regard to foreign investment, a choice between a joint venture or a shared ownership structure or the creation of a dedicated local team must be made. Regardless of the chosen path, a local collaborative partner that can contribute nonexistent strengths to your initiative and vice versa is key to a successful venture. Securing these relationships, with parties that are trustworthy and truly have value to offer, can extend the duration of the exploration process but represent the best way to ensure that your interests are well represented in the Italian market. Once a partner has been identified, a number of key questions should be answered: Between local partners/ stakeholders and the original investment company, is there a robust set of technical and commercial skills that can round out the requirements of the solar project? Is the partnership formed on equal footing? Or is there a disproportionate amount of contribution from any one side that may lead to an unsuitable partnership situation some time in the future? Local partners who share in a minor success of photovoltaic businesses but contribute a huge amount of value to the project may be incentivized to pursue their own project at some time in the future, thereby jeopardizing the stability of the venture. This is particularly true in the photovoltaic industry where there is a wealth of venture capital and private equity capital that is seeking

competent entrepreneurs/ management teams. Is there a shared vision for the collaboration? Are the ultimate goals of the project consistent across the partners? Consider that for many Italian entrepreneurs, nearterm profit-making opportunities are a secondary consideration to strategic growth and intergenerational wealth transferthis is just as true in the photovoltaic space as it is in any other industry in Italy. As a consequence, these aims may be at odds with an investment horizon of a few years shared by speculative equity investors. This particular type of problem often does not appear

try, there is often a lack of a long track record in the space; therefore, look to previous business ventures in related activity (such as electrical contracting, widget manufacturing, etc.) in order to provide reference analogues. The relationships are long term, and good working relationships are essential in such a dynamic industry, it is important that an intersection of personalities accompanies a business goal.

Step #4: Aligning of Interests and Long-Term Goals: Number of Levers to Pull
The alignment of long-term interests in a solar venture is not simply a negotiation process over equity shares or performance incentives. Alignment of long-term interests of local partners is an evolving process that must be considered periodically in order to maintain the right balance of a highly motivated local team and an equitable return on capital for the foreign investor in what has proven to be a very unpredictable macroeconomic backdrop. In the case of shared ownership, where a local partner is given a key management role, it is important that the structuring of employment contracts is done on a stand-alone basisthat is, a CEO or general manager should be paid, incentivized, and actually governed as such regardless of status as a co-owner of a business. This serves the purpose of recognizing the value of the contribution to the business while ensuring that performance of the individual is monitored professionally. A detailed consideration of synergistic cooperation is also

In the case of shared ownership, where a local partner is given a key management role, it is important that the structuring of employment contracts is done on a stand-alone basis.
until a successful venture is approaching the goal of one party, and when the conflict does emerge in the absence of well-considered prior planning, this can disrupt the exit process and potentially impair the exit value of the project. Does the local stakeholder have enough credibility in the local market to be considered worthy of leading the effort? A local partner is presenting itself as the domestic player of the initiative, a lack of industry credibility for a local principal can harm the market-entry process. Consider that in the solar energy indus-

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The Journal of Corporate Accounting & Finance / November/December 2011


needed in order to understand potential areas of competitive Exhibit 4 advantage and also conflicts of interest. It is not uncommon for an Italian entrepreneur to be involved in more than one busiAn Example of Investment Agreement Information ness: add this to the complica Detailing the contributions (in capital or in kind) from the parties tions of pressures exerted from Steps and timetable regarding the initialization of the transaction the origin firm. While significant Details of the financial claims of both parties advantages can be imparted into Director representation rules a young business from support Appointment of statutory auditors ive partners, a number of pitfalls Any related party transactions that form the core of the partnership must be avoided. Proper dialogue Representations and warranties surrounding the project and analysis of any related-party Disclosures surrounding the project exercises, and the creation of a sound governance structure are key to ensuring that benefits are to ensure that sensitive inforin any released document utilized without causing partnermation is not written into corresponds to books and ship dispute. these documents. accounting records. How The role of public notaries ever, a board of statutory Step #5: Project Structuring is significant during matters auditors and external audiof shareholder importance tors, assigned at the shareForeign companies wishing (such as yearly reporting, holders general meeting, act to form joint ventures with local investment closings, etc.). as an independent observer Italian entrepreneurs/businesses Only managers in charge of to each board meeting. usually underwrite two key preparing the financial report End-of-year accounts and documents to govern the transacof a listed company are financial statements need tion: an Investment Agreement responsible that the accountto be approved by the board (Exhibit 4) and a Shareholders ing information contained of directors formally and Agreement. Shareholders Agreements are compiled to cover the basic governance of the venture: detailed Exhibit 5 roles and responsibilities of both parties, monitoring and decisionmaking structures, key manageA Final Checklist for Foreign Investors ment position assignment, and Have you identified a credible and trustworthy local industry provisions for conflict between stakeholder to represent your interests in the new market? partners. Key provisions to conAre you well aware of the risks associated with the project, and is this sider in joint ventures deals are risk suitable within the investment mandate? Does the risk of a very a list of co-governance matters, volatile business sector in general match that mandate? which are essentially minorHas due diligence been conducted by local experienced legal and ity shareholder protections that business advisors who understand the solar energy industry? require dual shareholder repreHave management and governance roles been explored fully and sentative (board member) signrepresented well in the legal agreements of the new business? off to be implemented. Are internal resources experienced in a renewable energyrelated Italian governance issues are activity allocated in the original business to ensure that monitoring similar to other Western Euroand oversight is possible? pean domiciles with a few key Have international tax planning been carried out to ensure efficient distinctions: The by-laws of a company are on public record, so care should be taken when drafting
exit/profits repatriation to the foreign capital investor? Have any local financing opportunities been fully analyzed? Have you considered local banks devoted to financing green business?

2011 Wiley Periodicals, Inc.

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The Journal of Corporate Accounting & Finance / November/December 2011

Exhibit 6

Case Study: Institutional Investor Seeking Alternatives Exposure

In late 2009, a foreign institutional investor initiated a search for investment opportunities within the Italian photovoltaic industry. The profile of the investor was a very large long-term asset manager seeking uncorrelated returns from alternative energyrelated opportunities. The investor was encouraged to look into the Italian arena due to past experience in Italian infrastructure investments and the relative attractiveness of the Italian incentive structure versus other regions. 1. Identification The search was commenced seeking opportunities only in the solar farm subsector. The long-term predictable income stream matched the risk requirements of the investor, and the investor had a fixed appetite for the investment amount needed to generate a predictable yearly return. The investor ultimately found its way to a number of solar farm developers in the region through its existing legal and finance contacts, many of whom had collaborated with developers and, hence, had a good sense of their reliability. 2. Selection The ultimate skill set and strength the asset manager brought to the table were financial engineering and balance sheet, so the investor needed to seek a partner that had complementary core competencies in technical design, construction, and project management. Upon a detailed review of the shortlisted candidates, the investor chose the firm Sunparc S.r.l, which is the system development arm of Silfab S.p.A., a vertically integrated photovoltaic technology solution provider. The partner found three core reasons to choose Silfab over competing partners: Technical Skills: The team was very technology-oriented, with a deep understanding of the core installation, component manufacturers, and efficient project optimization. Track Record: The founders of the business all had a very long track record of building successful photovoltaic businesses and had garnered significant presence in the Italian photovoltaic market. Fair Partnership: Silfab was to contribute a portion of the equity capital needed for the project, further underpinning the collaborative nature of the investment. In addition to this, performance incentives were given to the developer to ensure the investors goals were aligned with the local partner. 3. Outcome The entire process from idea conception to closing was undertaken over a five-month time frame, with the outcome of a slated 10 MW (approximately 40 million euros of capital expenditure) of solar farms distributed around two southern Italian states to be installed in late 2010 but prior to the end of the current incentive program, which will expire on December 31, 2010. The capital structure is planned at 80 percent debt from a syndicate of European lenders and 20 percent equity, shared between Silfab and the foreign investor.

verified by statutory and external auditors. Exhibit 5 is a final checklist for foreign investors in the Italian photovoltaic industry.

In Italy, the PV business sector offers large capital investment opportunities, mostly

due to a government incentive framework and the geographical proximity to the rest of Europe. However, project risks mainly hinge on stakeholder governance, project location, and industry dynamics rather than commercial pitfalls. Dollar-based capital investors should evaluate the expected EUR/USD exchange rate: since capital expenditure is an up-

front cost while operating cash flows are spread over a long time period, a weakness of the Euro versus the US dollar might increase the dollar return on investment. This is the last call for foreign investors: due to the economical downturn and incoming sector maturity, PV public incentives are going to be squeezed or even abolished.

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As a result, investment returns on assets will be reduced and, as the market matures, the ability of new entrants to gain market share in the engineering, procurement, and construction (EPC) and manufacturer field will be greatly diminished. In Exhibit 6, we present a case study for institutional investors to consider before they invest.



1. Source: European Commission Transparency Platform (in accordance with Directive 2009/28/EC on renewable energy), http://ec.europa.eu/energy/renewables/ transparency_platform/forecast _documents_en.htm. 2. European Commission Transparency Platform. (2009). Summary of the member state forecast documents (p. 3). Retrieved 5.


from http://ec.europa.eu/energy/ renewables/transparency_platform/doc/0 _forecast_summary.pdf. European Commission. (2010). EU energy and transport in figures: Statistical pocketbook 2010. Retrieved from http://ec.europa.eu/energy/publications/ statistics/doc/2010_energy_transport _figures.pdf. Menna, P., Gambi, R., Hercsuth, A., Gillett, W., Tondi, G., & Piontek, A. (2009). European photovoltaic actions and programmes (p. 5). Retrieved from http:// ec.europa.eu/energy/renewables/studies/ doc/photovoltaics/2009_pv_conference _hamburg.pdf. Guidolin, M., & Mortarino, C. (2010). Cross-country diffusion of photovoltaic systems: Modelling choices and forecasts for national adoption patterns. Technological Forecasting & Social Change, 77, 279296. As an example, an American pension fund seeking to gain renewable energy exposure as an income-generating ini-

tiative to satisfy future member claims would be better suited to solar farm equity deployment than investing in an emerging engineering, procurement, and construction provider, whose income stream is considerably more unstable. However, a venture capital fund with a long-term investment horizon, seeking to gain access to an emerging technology class, would be better suited to investment in a growing manufacturer of specialty components. 7. None of the Italian main banks may be good partners in this stage, as they are not used to collecting information on potential deals, whether from customers of theirs or not, and as they no longer have an effective presence in the US credit markets (it is unlikely a US investor would be a customer). However, there are several local smaller Italian banks, mainly cooperative ones, that are devoted to financing green energy businesses. 8. Source: GSE (2011). Rapporto statistico 2010. Solare fotovoltaico (p. 30). Retrieved from: http://www.gse.it.

Alberto Lanzavecchia, PhD, MSc, Revisore Contabile (CPA), ADEIMF member, is assistant professor in corporate finance at the University of Padova (Italy) and adjunct professor in Business Schools, where he teaches courses on managerial accounting, capital budgeting, and economic value added. Dr. Lanzavecchias teaching and research interests focus on corporate governance, long-term management compensation, bank lending to small enterprises, and microcredit. He has written books and articles in a number of academic as well as practitioner-oriented journals. Anton Szpitalak, BSc, is the president and cofounder of Pan Asia Solar Ltd., an international investor in and founder of photovoltaic companies. In addition to his work with Pan Asia Solar, he also serves on the boards of a number of solar energy companies, including REgeneration Finance Inc., GridCo S.p.A (holding company of Silfab S.p.A), BrightGrid Solar Inc., and the holding company of Sunrise Global Solar Energy Company, Ltd. Szpitalak works closely with a number of growing European, Asian, and American renewable energy companies on strategy, mergers and acquisitions, capital raising, and corporate governance.

2011 Wiley Periodicals, Inc.

DOI 10.1002/jcaf

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