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Edited Transcript of FKR.MI earnings conference call or presentation 12-Mar-20 9:30am GMT

Full Year 2019 Falck Renewables SpA Earnings Call

Milan, Mar 12, 2020 (Thomson StreetEvents) -- Edited Transcript of Falck Renewables SpA earnings conference call or presentation Thursday, March 12, 2020 at 9:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Paolo Rundeddu

Falck Renewables S.p.A. - Corporate Accounting Documents Officer & Compliance Officer

* Toni Volpe

Falck Renewables S.p.A. - CEO, GM & Director

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Conference Call Participants

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* Alex Monk

* Emanuele Oggioni

Banca Akros S.p.A., Research Division - Analyst

* Paolo Citi

Intermonte SIM S.p.A., Research Division - Research Analyst

* Roberto Letizia

Equita SIM S.p.A., Research Division - Analyst

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Presentation

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Operator [1]

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Good morning. This is the Chorus call conference operator. Welcome, and thank you for joining the Falck Renewables Group Full year 2019 results and Strategic 2025 Road Map conference call. (Operator Instructions)

At this time, I would like to turn the conference over to Mr. Toni Volpe, CEO of Falck Renewables Group. Please go ahead, sir.

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Toni Volpe, Falck Renewables S.p.A. - CEO, GM & Director [2]

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Good morning, and welcome to our full year results presentation for 2019 and for our strategic plan up to 2025, our 2025 roadmap. We issued -- posted the video this morning of our presentation, which I hope you had the opportunity to listen to and today, we will be answering to questions and answers relative to the results of 2019 and also relative to the 2025 plan. As we are answering to this question-and-answer phone call from different locations, we will collect the questions one by one. And then we will take a lot of time to answer because we need to coordinate among different offices. Of course, sorry about that. But as you might understand it's a bit more challenging than usual, but still, everything is working very well with the coverage we have available, and so we would be able to answer all questions, as usual. So with that, I would probably leave it to (inaudible) who let -- allow each person to ask the questions, and then we will answer.

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Operator [3]

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Mr. Volpe, can we start the Q&A session?

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Toni Volpe, Falck Renewables S.p.A. - CEO, GM & Director [4]

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Yes.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Paolo Citi of Intermonte.

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Paolo Citi, Intermonte SIM S.p.A., Research Division - Research Analyst [2]

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Hello, hello. Good morning, everyone. Two questions, sir. The first one is on the market decline and the market fundamental, sir. I found really, very interesting discussion and thoughts regarding the potential evolution of the market and the Slide 14 and 15, in particular, clearly, recent date, the main concerns are related to the sharp decline in gas and electricity prices in Italy and also the rest of Europe, also clearly seems to be that the problem that we have seen also in the last few years for the fact that there's a pull, in particular, but also other prices are not offering the [live stream] in terms of costs or different technologies, this is even more strong in our recent days. So my question is that I understand you are discussing with other players about the possibility of discussions with the regulator about the introduction of different mechanism. We have seen for the first time and then also for [petroleum] also the introduction of the capacity market for certain regulator to market. Is that a possibility? But also for renewables could you consider a sort of regulated -- market regulatory term based on the cost of the investment, the cost of capital and the operational costs? Potentially the introduction of certain of RAB and then returns? Clearly, 3 PPAs, we have already achieved this result of regulatory term, but nowadays PPAs are starting from the (inaudible) electricity prices. So also on PPA, that is this -- kind of 5 years right now? The second question is regarding the current very tough situation, in particularly, is there a possibility that could be coming not just from the introduction of problems regarding your supply chain in relation to the plants you are delivering right now, take into account, in particular, the supply of the (inaudible) assets for the wind farm?

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Toni Volpe, Falck Renewables S.p.A. - CEO, GM & Director [3]

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Thank you, Paolo. So I would say, let me start from the last question, and let me say, first of all, that as of today, we have not had any specific disruption relative to the, let's call it, the coronavirus crisis in the sense that our plant continued to operate well and without the interruption. I think there is a bit of increasing advantage, if you want -- of having a distributed generation set of plants because, of course, we are a bit more -- we are a bit less dependent on 1 single point of failure. Even if you consider a wind farm, let's even imagine that 1 turbine fails and for some reason, we do not have the part, it still had all the other turbine, if you want, available for the wind farms. So, in essence, the infrastructure of our normal power generation have less single points of failure. Of course, we have some, for example, you have the interconnection station for a plant that if it fails, then you have the entire wind farm that stops, but still, you have the other plant. So of course, we are working on a business continuity plan, we are analyzing what the impacts could be. But I am happy to report that as of today, we don't have any issues. Of course, we also have plants, the biomass plant and the Trezzo, the waste-to-energy plant that work 24/7. So in those cases, we are also -- depending on the availability of other components, like reagents, of course, we need to have the workforce to do that, and working effectively. But so far, again, everything is working fine. For example, this week, we were supposed to complete the maintenance of Rende, which is a maintenance we do every 2 years. And notwithstanding maybe a couple of days of delay. But I think that up to yesterday night, everything was going well ahead and pretty much according to plan. Now, of course, the supply -- the global supply chain, it's not a question of whether or not it will be affected. The answer is it will be affected to some extent. Then the question is whether or not you will find alternative solution and workaround solution to still maintain the commitment. We have, in construction, the wind farm in Sweden, Brattmyrliden and for that, we have been corresponding with Nordics and while they're seeing some potential issues, we do not have concrete issues being communicated to us from Nordics on the construction of that wind farm. Construction of that wind farm also took place in 2 years. So last year, we already did a good portion of the civil work and this year is more about the erection of turbines, but for the largest part, those turbines have already been -- are in advanced stage of manufacturing. So again, Nordics is not providing us with a specific concern over the delay of that wind farm. We also have panels coming from China, which we are storing for [safe harbor] regions in the U.S. They are delayed, but also this delay so far has been managed in order to maintain if you want the -- all the regional value associated and plant associated with those potential new projects.

So let me say that today, we don't see concrete consequences. But this is a situation which is constantly evolving. So we need to keep monitoring and keep -- and we need to keep evaluating alternatives. That's why the best thing we can do is manage through things as best as we can and keep updating, of course, the financial community about the concrete impacts and of course, we will take the opportunity to do that. Also the quarter review in May, to see a little bit, if anything of this concern has translated into something effective. The other impact that we might have, again, today, it's very early to estimate if and how much we would have another one impact in relative to our services activity. So energy team. There's some services and activity where there are physical employees going to customers and installing devices and selling devices and so on. So of course, if the economy slows down, you might have an impact there. But to date, I think the activity of energy teams continued pretty much. And that's even though for the most part, we had implemented smart booking. We have actually implemented smart booking since the last -- the first Friday of the crisis in Italy, and we have continued to work without major problems. As you have seen, we did not have to delay any of our financial communication. We did not have to delay the full year -- the [launch] also the full year results and things like that. Also Vector Cuatro it is a service activity. So of course, if there is a slowdown of -- in the industry, we might be impacted. But again, it's very early to say. So just to conclude, the only thing we can do is manage through an update. But so far, I would say we do not have concrete impact on the supply chain for the things that we manage. But some impact is expected, I think, overall in the industry. When we go to market design, look, we are adding concrete discussions around these concepts that I illustrated in the presentation, which, of course, are a bit long term, if you want, in fact, we call it our 2040 suggestion or our idea of how our market would evolve. But some of these things are already not only on active discussion but fairly concrete. The fact that not only thermal power plants but also renewable power plants, we need to offer comprehensive services to the electricity sector is a fact. And as a matter of -- just to highlight that, for example, even though the capacity market for the Italian system is fundamentally designed for thermal power plants. But we engineered a solution with a combination of solar plants that we are developing an R&D authorization phase and storage and the plant where we bid for the capacity market, and we were awarded about 10 megawatts in 2023. So for capacity that we need to be operational from 2023 onwards provided, of course, we have all the consensus and meeting from regional authorities. And we see this revenue stream. This is additional component and is becoming more and more

especially when we are looking at '23 and onwards. Part of the norm, if you want, revenue streams that wind farms and particularly solar plants will have. Middleton, our storage project in the U.S. is another good example of a plant, which is 6 megawatts, sales energy, but also at a 3.6 mega -- I'm sorry, 6.6-megawatt hour battery and also sell capacity to the rig. And this is what we wanted to highlight in Page 16 in the second bar of the right as shown, when we were saying, at the end of the day, plant will be hybrid, and they will have different revenue stream. Then there is the CO2 component. The CO2 components today is very indirect. It's very inefficient. We could say that in the sense that you really need a super high price of carbon in order to have a material effect, which we think will be there. In fact, we do think that carbon will be much higher than what it is today, especially when we're looking at this kind of time frame, 2040, 2030 and so on.

But the point is, is there going to be something else where you're rewarding more directly for the decarbonization effect or what we do. Because at the end of the day, for example, I'm providing the normal energy, which is offsetting the use of coal or is directly affecting the use of natural gas or coal, then the question is, is there an additional benefit that should be captured there.

But we don't see that as part of the fundamental market estimates that we have, which is a part of potentially of an upside for renewables like that. So we have built the plant around if you are on the concepts that already, the fundamental long-term market curve estimation has not changed this year to take into account regulations, which is not yet there. So we have built a very solid plant.

On what is already known, but we think that over time, you will see an upside. And around this concept that you are illustrating, I will provide 2 elements. One is that the concept of our ramp, the concept of our -- so to speak, full return for the investment in renewables which, again, we see not only on the energy side but also on the capacity side is already present in some legislation, we can look just how effective it has been so far. But for example, the Spanish legislation had the concept. And as that concept for the determination of a certain mechanism in some cases, they need to be probably better defined, but it's the concept is there.

And when you look -- and we are, for example, taking part in active discussion in part to the reform of the CfD. So they're thinking about changing in the U.K. or updating the CfD system. And one of the concept is how to include not only something that covets for the investment of the energy component but maybe also for the component that is needed by the network to deliver to the consumer network and the rate and so on to deliver to the consumer, that's been changed in the renewable energy. So all these concepts are discussed. Even (inaudible), for example, in a discussion that we had recently is fully aware of the fact that the cannibalization effect is something that needs to be decoupled between renewable and nonrenewable. One of the means of doing that might be a different enterprises essentially.

But this is something that, especially right now that we are assisting to a shock, for example, to the oil market that is becoming more and more important, that is, for example, we have Oxford Institute in U.K., which we are a part -- which is now, I think, a couple of years being discussing new pricing models for the future, where you essentially

end up having a decoupling between the, let's say, the electricity prices for green electrons and the increase to prices, price for electrons, which are generating in the use of CO2. So short term, I think we should build business plans around what we have and what we have is a higher use of storage. Overtime what we had is a much more important role of energy management to manage all the risks, if you want all the aspects of how do you deliver the electrons from the producer to the consumer. I would say starting towards the end of the decade, 2020 -- from 2030, we will start to see probably some other mechanism. Because otherwise, the decarbonization goals overall will be difficult to reach. I think you will still see an important growth of renewables because in many scenarios renewables grow, but the growth necessary for the 2050 target of decarbonization requires some other mechanism.

So sorry for the long answer, but maybe I guarantee on point that were probably in your mind. I don't know if you have a follow-up to this or do you want to [move to the next question].

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Operator [4]

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The next question is from Alex Monk of Schroders.

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Alex Monk, [5]

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I was just wondering if you could comment a little bit on the debt market and how you guys are positioned in terms of debt repayments in terms of the need to refinance in terms of sort of leverage within the business? I know you guys use (inaudible) for certain things like that. So that will obviously have an influence, I guess, what we're seeing is credit starting to widen that market for coming on these a little bit constrained. So maybe you can provide a little bit of color in terms of how you see the debt markets and how Falck is positioned in terms of being able to pay down the debt on projects and other.

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Toni Volpe, Falck Renewables S.p.A. - CEO, GM & Director [6]

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Thank you, Alex. I will get to your initial question and then I will ask Paolo Rundeddu, of course, to add his view. The good thing what we see as a strong positive for our business plan is that we have an aggressive plan where we, by 2025, we want to double the instore capacity. And roughly speaking, we are going to need about EUR 500 million of cash over time. But we think, from our estimations, from our calculations, that we can support the growth with the existing corporate credit facility, which is EUR 325 million and is available to us until the end of 2023.

And we are only using minimally today, we are only using about EUR 30 million, Paolo can be more precise. But we can -- just with that, we had all the space to support our plan for at least 2, 3 years. So we are not in any immediate need to tap to the debt market to do anything. So we have what we -- of course, that is coupled with our cash generation from the existing asset, which is quite good. Now if the conditions of the debt market, where we're going to be back to what they were up to 3 weeks ago. Of course, we were -- the idea was to -- I think there were especially positive conditions in general for all financial markets

of course, we, opportunistically, we would have evaluated whether or not those conditions were still good and might have presented the right opportunity and timing to do something else, which in our mind was either going to accelerate what we were doing or just secure future resources at good conditions. But we always saw that optionality, and we continue to see that as an optionality, not as a need. Now let's see what happens, right? I mean, I think it's a bit early. I think that clearly, if you look at the financial markets today, and if you had to do something today, probably it would be a pretty tough moment, but the good thing is that we don't have to and we can wait without and see where the financial markets will be in later months. From a project finance standpoint, again, our plan does not envisage that we do anything in the immediate terms in the next few months. And so we actually concluded a couple of additional deals last year. One was the refinancing of Actelios Solar. And then we also refinanced some French assets. So we feel comfortable from that standpoint. And I would like to highlight, Alex, also another point, which I think, it's important. Our company, if you look at some of the deals is that -- I suppose net financial position to EBITDA, which is much lower, not everybody, but I would say that's a good number, that is a much higher net financial position to EBITDA. And I think at this stage, while we still support an important growth plan, but we maintain a ratio, which is around 4, I think at this stage, this is a plus, this is a positive. And -- so we are actually happy that we have always worked around this concept of any sustainable growth where we would, yes, push leverage, but only to a level that we felt was comfortable.

So I would like now to leave maybe Paolo commenting a bit more technically if you want some of the points. Paolo, I don't know if you want to add anything to Alex's question.

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Paolo Rundeddu, Falck Renewables S.p.A. - Corporate Accounting Documents Officer & Compliance Officer [7]

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Just 1 additional information. As Toni said, we are envisaging in our road map. A ratio of around 3.8, 3.7 ratio of net financial addition to EBITDA. These include also the amount of the debt in accordance with IFRS 16 which is in renewable, usually a very high number around EUR 70 million, EUR 80 million. So if you take out this, let's say, accounting treatment than our ratio is well below 3.5x. So as you can see, it's very, very conservative. And normally, another information, usually Falck Renewables anticipate some action. As Toni said, we renegotiated credit line, which was due in June 2020. So would have expired in 2020. We decided in July 2018 to renegotiate and now the new expiry date is the end of 2023.

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Unidentified Analyst, [8]

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Okay, great. That's really clear. And maybe just 1 quick follow-up question and then I'll pass on as I'm consuming everybody's time. Could you maybe just clarify a little bit in terms of when you are choosing project debt over the corporate debt. And you mentioned some of the projects that you'd refinance late last year. Could you just clarify in terms of when you're paying down that project debt, how aggressive are you on that pay down? Is it paid down over the course of the PPA or the contracts? And are you needing to refinance to meet your target IRRs or actually, is the refinancing opportunistic, which just allows you to sort of refinance and boost the IRR, if that makes sense?

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Toni Volpe, Falck Renewables S.p.A. - CEO, GM & Director [9]

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Paolo, do you want to?

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Paolo Rundeddu, Falck Renewables S.p.A. - Corporate Accounting Documents Officer & Compliance Officer [10]

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Yes. Yes, I can answer. Okay, first, let's look at our project financing. Project financing that we have actually in place. Usually, when we did those project financing, we had a very long duration because they were linked to the incentives. So for example, in the U.K., there are 20 years project financing. And in Italy, 15 years on the solar around 18 years project financing, so they are very, very long maturity. And the profile of repayment is in accordance with the cash flows of the project. We do not have cash sweep project financing. Second, how we decide whether to take project financing or to take corporate loan. It depends on each deal. Usually, we had always project financing. Maybe during the construction, we use the corporate loan facility, which is less expensive, but then we usually add project financing. And before the coronavirus, let's say, the last week's, say problems, issues, we usually add around 150 basis points over LIBOR or over Euribor for project financing. Because, as you may understand, either with the incentive or with the PPA, the -- those credit risk are seen as not as, let's say, some investment grade. But project financing was always seen as an investment-grade credit rating. That's why we had a margin of around 150. And even during the 2011, 2012 prices, we never had the project financing of more than 2% over Euribor.

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Toni Volpe, Falck Renewables S.p.A. - CEO, GM & Director [11]

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And the other point I wanted to add, Alex, just for clarity is that our investment policy has been very stable in the past 4 years, at least, in the sense that when we decide about our investment, we decide about the investment on an unlevered basis and on a concept of weighted average cost of capital plus profit and a certain spread. And so we see that the leverage return, essentially, is something that should, of course, boost that part, but not at the metric for the decisions such investment and the reason for that is because also when you -- should you take a decision based on the leverage return since it's unlikely that you can invest only when the debt side of things is completely clear also because it depends sometimes on the life of the project. But if you're investing a ready to build, for example, you don't know -- you can't put in place already the third loan if you want. So you're always assuming that -- so relying on our leverage is, of course, makes us less dependent, if you want, on the assumption for debt. So this has been the approach, and we are not changing this approach. So if there are direct conditions, of course, we use leverage, and we take advantage of that. The other thing is for projects that are new and have a long-term part project agreement, the idea is always to pretty much match the duration in terms of tenure of the debt as much as we can because, again, we can very sensible policy, we usually don't like a duration, which is much longer or longer than the PPA, we don't like to have in place things like cash sweeps or anything that could materially affect the distribution of cash. And then, of course, it's for the fact that we develop in-house. And it's might have been positive in some cases that we have both projects that were structure by somebody else. And so maybe the structuring in those cases might be a little bit different. But for -- if we have the ability to do things from the DevCo, we do it in this approach that I just described. So in fact, if you look at our -- the tenure of our debt in terms of project financing, usually, we provide all the information about this and the tenure of the PPA incentive, the things pretty much match up quite well.

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Operator [12]

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The next question is from Emanuele Oggiono of Banca Akros.

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Emanuele Oggioni, Banca Akros S.p.A., Research Division - Analyst [13]

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The first 1 is on your hedging policy, I saw the action for 2020. So could you give us an update on -- as regards to the hedging after this year so in 2021 in that? The second question is on the regulation. The regulation, not only in Italy, in general, and also in Germany, we have seen a fade during the auction. And so do you expect the government in general, Europe, not only in Italy, in all the Europe core countries to simplify the current framework in order to retain a recharacterization process and so to participate or you have plan in order to participate to auctions? And another question on the regulation is in the U.K., which is your expected ROC and the evolution if you could add more color on the regulatory evolution in the U.K.? The third question is on the PPAs return. I suppose the current power prices drop is lowering the assertiveness in -- to sign the short-term EBITDA. So what could be the PPA returns in this current environment? And I have a question for...

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Toni Volpe, Falck Renewables S.p.A. - CEO, GM & Director [14]

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Can I take the first 3 and then you will ask the other. Because I will write it down in front of me just because of the logistics, sorry. So let me start inquiring in terms of hedging, the U.S., of course, is already hedged because it has long-term PPAs and also when it's exposed to the market component, retail market components because of the nature of certain of those projects. So that moves a lot less than the wholesale. Hennoy, we hedged -- you saw the announcement for 10 years in January. So besides the hedging already in place for 2020, which was done by energy management on the short term, now we have a long-term for 2021. For 10 years onwards, Carrecastro is already hedged. France does not need any hedging. For 2021, neither in the U.K., we have not hedged anything else more than the incentives. But keep in mind, of course, that Italy has a natural hedge, which is the green certificate that even though it has a delay of 1 year, of course, in 2021, should the prices of 2020 be lower would cover for at least 70%, 80%. So for 2022, the situation is, of course, fairly similar. The question right now, if you hedge the calendar 2021, now -- I mean, prices probably will not be too attractive. The other thing about commodities, I would like to highlight is that there's been a movement of commodities starting from, I would say, the last month of 2019 to now but -- and it's been quite a big movement, but the movement in the past few days has not been that big. We actually monitor this thing on a daily basis. And so the commodity market seems to have reached some kind of resistance or saw whereby -- unlike the equity markets, they have not been affected dramatically by sort of the lead effect of coronavirus or other things. Because, again, they had essentially already discounted part of that. Part of other events, which have to do more with the natural gas movements and so on, because we need to see the long-term effect of the oil price war but keep in mind that oil over time in the past years is becoming a little bit less directly connected with natural gas. But if you want the significant supply of natural gas, which is affecting natural gas prices already -- took place in the past month.

Also, carbon, yes, had moved down a little bit, but it is holding up still. So again, we are monitoring that we haven't seen big movements in the past week. When it comes into -- so the other question was about PPAs, whether or not they move. Look, the best proxy I have for how much PPA moved relative to the fluctuations of the spot market is the Nordics market. And this is a market that we've been observing for now almost 3 years. And we don't see a big correlation between the spot price and the price of our 10-year product in the sense that, yes, of course, they moved, and they create, as you mentioned, maybe more or less incentive for companies to sign long-term PPAs, but they don't move as much as the spot market. For example, in Scandinavia, I remember, 2017, we had prices that were similar to what we have today. PPA prices were not too different from what we have today. But they also did not change much when prices went to EUR 40 at a certain point. So it is a much more -- so the volatility of the PPA market, at least, the market that we know now is a lot less influenced by the spot price. It is influenced, however, by fundamental sustainability decisions. So the people that took the decision to enter into long term PPAs and the ones that we see interested are people that do it, there are companies that do it, also not only for risk management issues, not only to get into a supply, which is fairly convenient and continues to be fairly convenient but they do it for sustainability. And final point, if I look at the today's commodity prices for 2020, the price is still a price that would be in line with probably what is the long-term low life cost of energy of most contracts and it's below -- has been below for a few months. So when you have to take a long-term decision, you have to take into account not only what happens right now, where prices might be much lower than what we had, but also what happens in the long run. For -- in terms of the auctions, as we mentioned in the past, in other conference calls, we never counted on the auctions in Italy because, as you know, we do not have in the pipeline, wind projects with consent in Italy, which is we think is the strongest way to participate in auction. And we don't have it because in order to add those projects Falck should have started to develop that 8 or 9 years ago when -- because this is the time it takes to get a wind project onshore consenting. And we didn't do that. So -- and we also think that the consent in the wind projects will be longer than solar. Our decision therefore in Italy was to focus on solar. And our pipeline in Italy is entirely solar. And in terms of greenfield development. Of course, we have other opportunities to look at wind -- I'm sorry, in terms of solar -- so pipeline is 100% solar in terms of organic development for wind. We look at alternatives, which might be M&A, joint development agreements. So other forms of getting into good projects but not starting from scratch. So we're a little bit indifferent essentially to what they do for the auctions in Italy. I don't think the mechanism doesn't work. I just think that the permitting is the issue. But it's not easy to simplify the meeting rules. Because these rules have been devolved to the region, it's a regional approach. And it's not easy to change it. But we do see certain regions to be more active and work faster than others. Generally speaking, I think that when we have proposed for consenting solar project, some regions had responded even slightly better than expectations. So the proof will be in the pudding, as they say, let's wait for, I think, in 12 to 18 months when we expect that maybe the first consent, let's see if we beget there on time or if we are delayed. By the way, we are proposing, I would say, the majority of our solar project within combination retail with storage, which is a little bit of a new scheme for some of the recent regions, so they learn very fast about that as well. For the U.K., the good news is that the government has announced, you can see that they are entertaining the idea of including onshore wind in 2021 for a Pot One, what is called a Pot One CfD auction. So we are learning the details but this is a positive news. It means that the U.K. government, even though they rely very much on offshore for the decarbonization in terms of wind, they are understanding that there is good supplier projects in U.K., it's probably about 3 gigawatts of consented projects that could be bid in auctions and so that is a good opportunity. And of course, that unlike Italy, that will become an opportunity for us as well because we do have some consented -- to a consented side that we are developing re-consenting for higher turbines. We also entered into the joint development agreement with REG. So there are some projects that might be big. Of course, my comments are assuming not only that there will be a first Pot One auction in 2021. But starting from there, that they were included on some sort of regular basis. So I'll give it back to you now for, I don't know if you had another question.

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Emanuele Oggioni, Banca Akros S.p.A., Research Division - Analyst [15]

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Thank you, very clear. My next question is on the pipeline, the prices impact? And so could you add more color on the authorized capacity or ready to build or Aliden and, et cetera. And is the 100 or 200 megawatts of price projects in Sicily, which are included in your business plan, which is the COD?

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Toni Volpe, Falck Renewables S.p.A. - CEO, GM & Director [16]

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So I think the best answer is we're looking again, together, Page 25, we have provided as best as we can, the most accurate picture of what we have. So what we say there is that we have about 2 gigawatt gross. So adding up all the projects and all the megawatt we don't put in the 2 gigawatt everything. So in order for us to qualify to be admitted to the gigawatt, we need a minimum standard of adding the [Sicilian plant procedure] of seamless interconnection applications or a minimum standard that qualified. If we had to include everything probably, we would have more than 2 gigawatts stuff, quite frankly, we don't yet count it in the top, we don't count that in the project unless they have a minimum standard. So reaching what we call the phase line, right? So we have land and grid secured or grid secured. Of course, Sicily and all the agreements, which have already been closed are included. So with reference to what we purchased from Canadian Solar. It is included in the pipeline. Looking at South Europe that's where we have, certainly, largest concentration and the most advanced is what we call the Phase 2, which is we have applied for the planning -- for the application, which is essentially the project. So we are now waiting for the authorities to go through the process. And again, we also added another concept, which we expect that megawatts by 2021, that we say, look, if we take the gross pipeline, the Phase 1, the Phase 2 and so on, and we try to estimate and we assume that the consenting process will take the time it should take, so it's not going to be delayed and so on, how much could we get in CfD by 2021, and that's the number that you see there for South Europe, which included EMEA and Spain, essentially, which is about 120 megawatt. And similarly for the other countries. So this is the project we have included in Phase 4. So under construction, which is more than ready to build. Of course, the Brattmyrliden project that we commented upon. Okla, for Okla, I just wanted to say that we added [25] turbines, and we're planning to start construction, of course, in 2020. So for that project, we need to see that pace in terms of future development of the project. The team think we have a chance to do it in '21, 2020, but, of course, should there be any delay there might be a project that could go online in 2021. It does not have very material impact because it's a smaller project and in our guidance towards megawatt because we are also assuming the current timeline. So we'll see.

So that is the sort of answer. Of course, we as partners as well, mainly our biggest partner is Eni in the United States. And so we are including on top of the megawatts, we need to reach our targets. And again, the target in terms of megawatt has not changed relative to what we're doing last year. I feel the same we also need to account for the project that will be owned 100% by the partners and not by us or not by us together with the partner. So that is the other number is in the slide, which refers to another couple hundred of megawatts.

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Operator [17]

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The next question is from Roberto Letizia of Equita.

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Roberto Letizia, Equita SIM S.p.A., Research Division - Analyst [18]

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Yes, I have some questions strategic and some quantitative questions. So the first 1 relates to the overall dimension of the plan. And I'm curious to understand is what you presented is somewhat limited by any financial bracket. I mean, have you -- do you see yourself limited on what you can do by the available equity research, for example, rather than the debt resources, which has so far has been now less in open market, and then we see what happens in the next month. But so far the debt certainly has not been an issue. Sorry, not -- I'm not sure if I'm clear, but it seems the market has so many opportunities, greenfield, but also M&A, that is something that is less addressed to -- into your plan. So I was wondering if the company would be able to have additional equity research that would allow you to have a more aggressive plan? Or do you feel you have currently exploring anything that you have in your hands so far. So you cannot do actually do more than that, but for M&A, for example, which also applies to the joint venture with Eni. So I would like to understand effectively the way you're currently envisage the split of the future assets has to do with your capability to then spend and acquire those assets with the equity available resources or not. So can you please address this point? The second one -- yes, the second one is linked a little bit to the first -- to the very first question about the potential change in the remuneration model in the long run, and I was asking if you believe that this is going to change in the future more towards something that is connected to the value of the invested capital rather than the [fuel free] market remuneration. Doesn't -- in contrast with the assumption of EUR 65 per megawatt hours that we see in the plan, which seems a bit high, and actually, it seems not coherent. It's something that is in the long run, will develop in line with invested capital, definitely, this leads to returns no more than 150 basis points, 100 basis points of cost of capital, which is something that is totally incoherent with the EUR 65 per megawatt hour that we see in the plan. And actually, if you can clarify that this is simply a market reference and not what actually you plead in terms of expected remuneration for your asset? Or that is actually what is basing your EBITDA generation in the future? Can you clarify this? Linked to this, can you actually tell us what is the sensitivity if the power crisis in '25 will be EUR 10 per megawatt lower then what you actually excluded in your forecast? And then last question, that is more for Paolo probably. Can you please tell us a little bit more on the dynamics that will affect the results below the EBITDA line if the plan assume any change in, for example, the depreciation policy? Or can you please detail a little bit more do you expect the evolution of the cost of capital throughout the plan, the cost of debt, sorry, throughout the term and the evolution of interest rates and tax rate?

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Toni Volpe, Falck Renewables S.p.A. - CEO, GM & Director [19]

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So let me start -- I would ask Paulo to think while I answer to question #1 and #2. You should think about #3 and #4 so that you're more efficient. So let me take number two. I mean, let's maybe go back over that concept and clarify it again. So -- because you said it might not look incoherent then that -- I mean, the prices that we are so -- let's start from -- by saying, again, very clearly, that when we look at the business plan, and we look at the long-term power curve, long-term leading up to 2025 that we will have generated, those are done absolutely in line with current market. So shift on marginal price nothing changes relative to other market functions today. And of course, we have an increase in price. That is the result of several components. This is the result of a -- of the fact that commodities will not be priced at the level of today, but they'll start to graph, there is an assumption. And of course, it's an estimate that we do market-by-market, by the] way, and we do it not only with internal sources but we look at external market providers. So we do a blend of internal assumption market providers and so on. So carbon price evolution, we, of course, take in to due consideration, the capture effect, which today, as we discussed, is penalizing renewables because -- especially for solar, it tends to generate all that -- all at the same time and so on. So that is how we formulate if you want the price captured by power plant backing from the overall market prices, so no changes. And we have clearly identified what are the prices that we assume and those other prices that, of course, are translated into the EBITDA generation. Then we have said I kind of tried to come up with another, if you want, alternative, which is, well, what if -- and again, that this would be in our view, much, much later, right? We said we called it 2040, what if the system was different or might be different in the sense that, first of all, that what if there will be 3 components, which are exactly similar to today. But dedicated more upon full cost recovery, one, relative to how much the cost to install a panel, then you put it this way, which is the first bar in the chart. And of course, that price is going to go down. So if the limelight cost of energy if anybody gets that by 2040, let's say, that instead of spending EUR 600,000, EUR 700,000 per megawatt for solar, you spend half of that. The other part is -- and that gives you let me pull it back just on, sorry I am on page 12. But that gives you an LCOE of between EUR 25 and EUR 30 just for the partner for the energy component. But we need to take into account that we are going to have to provide other services, and there might be other CapEx basically for storage to provide those services or other equipment so the CapEx is somehow will need to include also that. And we did a very simple estimation here of saying that, look, for every megawatt, let's assume that there would be 4-megawatt hour of storage associated, what would be the evolution of storage cost, of course, we think it's going to go down, let's say, 50% from what some current prices are. And so that is going to give you another add-up -- add-on to the final enterprise, and then there will be the indirect carbon. So somehow, bottom line, you would still see the formation if the market price was pricing correctly renewables, which is in the order of magnitude of 7 years, which is 2040, but we know that we've seen that from what we have in our long-term market estimate. And then with additional result, but what if you also took into some account some other benefits to decarbonization, would you have an operational leverage, whereby you could even make additional returns. And that's what the last column says. So I don't -- of course, it is inconsistent in the sense that it's a different way of looking at what the future prices might be. But I just wanted to clarify that, again, this is not the basis for our long term assumptions. The basis for our long-term assumptions are the usual ones, it's the marginal price, CO2 commodities, power generation portfolio and the things that are usually identified to estimate prices. However, from a strategic standpoint, what that tells me, and which is what is relevant for us in the short-term is that you can't only think about the plant as a sum of solar panel or sum of the impairments. You need about -- to think about a plant with sum of debt plus some storage capacity. And most importantly, plus the ability to manage all these fixed assets, fixed infrastructure to address the changes in the regulation that inevitably that will be on powered markets. Because, again, we are investing with a time horizon of 30 years. And it's difficult to predict. The only insurance, the only -- the best insurance policy is that we have the right pieces of iron, if you want, our equipment in place and we have the right people that are able to manage. So that's why it is the decision to say, well, let's think about developing obviously a storage, let's think about strengthening the team of energy management, because they will be the key. Keep in mind that, I mean, just to give you a -- or tell you about the importance of this component. It's not only about centralized large-scale power generation, but it also works for the downstream part.

Our Falck Next now Falck Renewables Next solution with the remaining people when they discuss with energy-intensive customers, they discuss about distributed generation, distributed storage, they discuss about introducing flexibility to their power plant, they discuss about grid supply. It's -- if you want the -- so asset, our assets and ability to manage the 2 components that go together. So -- but again, if I didn't address your point, we can go back on this question. From a first question, is that about equity -- first of all, let me be clear about our assumptions. From an equity standpoint, in our business plan, there are essentially built-in 2 assumptions of minority equity participation. One is relative to the fact that 400 megawatts of growth in the United States will be done together with the Eni according to the agreement that we have in place in 51% to 49 % of ownership, which allows us to consolidate. So for those 400 megawatt, we have that contribution. And the other assumption is that we continue to have the tax equity contribution to the investments in the United States. Except for that, however, there are no other assumptions of [actively] recycling at project level, which in our view, leaves us, of course, soon if we find the right opportunities because we do have other assets where we could have the same concept, either we partner in the same format as Eni or with Eni as they want or with others, but we have that possibility. Then, we have not assumed that whether, in order to sustain our plant and in our numbers, and yes, we're not assumed to, I don't know, you could think about -- well, why don't you get out of the biomass and waste-to-energy, for example. No, we are not assuming that actually, we are planning to -- even though we have not put that in our numbers. We are fully convinced that our waste-to-energy plant is launched -- finishes in 2023 in our business plan and the numbers I presented to you, that will be extended further. So we see that as an opportunity.

Then -- when we look at the sort of sensitivity we have provided in page one of the last ones, so inside Page 42, what we have said is, look, the right -- if the market has the right conditions we could grow more, if we have the right project, yes, we could grow more. And we have simulated in that page a growth purely based on that. But again, that could also come as a combination of other things. And it could come with instruments that don't necessarily need to be backed. I think what is important is that we have a lot of options on that number. We are -- we need to take out of these options, not tomorrow morning, but over the time of 5 years. And we have a very active and constant discussion with the board about evaluating whichever option makes more sense, whether it's debt, whether it's aggregate project level, whether it's anything else that could be included. So the plan, we don't feel that this plan is limited by the resources, we actually feel that the (inaudible).

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Roberto Letizia, Equita SIM S.p.A., Research Division - Analyst [20]

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If I can clarify that because I'm not sure I've got -- I got the information I was trying to ask for. So you have additional acceptable indebtedness level in the sense that if you look into market, you can easily find other renewable groups that have a much higher indebtedness sometimes in the case even 4, 5, 6x debt-to-EBITDA because they are trying to follow as much as possible all the opportunities they currently have in the hand. So I was asking, not sure if you have set internally, a debt-to-EBITDA level that you want to keep and then develop a strategic plan accordingly or you have captured all the opportunity that you currently have in your hands today? And this resulted in a 3.5 debt-to-EBITDA. So I was likely to understand if you have saturated so far your mid-term opportunity or actually, you simply limited yourself into a balanced situation that you currently find the best today in the capital allocation process. I don't know if I been a little bit more clear.

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Toni Volpe, Falck Renewables S.p.A. - CEO, GM & Director [21]

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Okay. Let me -- yes, the question is clear. Let me try to -- so the process that Falck follows is just trying to say we have a sustainable -- we target a certain sustainable level of debt that we want to have, and that's what you see in the plan, remaining below 4. And then, of course, we look at what is it that we can do, maintaining a sustainability of our balance sheet. But we're also saying that looking at DPS, for example, up to a few months ago that we could also set a different threshold and therefore, move up in the sustainability level to a higher net financial position to EBITDA if we only wanted to get, you know, that view and we could do more. Of course, they will need to be paired by opportunities. We think that as far as pipeline in the short term, 2020, 2021, we have put the stuff that we reasonably have, and we need to do additional work in order to get it. In the long run, we think that our pipeline, we'll have a lot more excess capacity than what we have in the plan. In fact, we identified that in 1 particular slide. And we said, obviously, we could do more. And of course, we have also, as you mentioned, other opportunities, which are the M&A route, which is -- here, we are, again, very confident in our plan, we never account for M&A, specifically in the plan. So we never set a target, assuming that we are going to have M&A. But if we do have the right opportunities, of course, we will see those opportunities. And maybe some of those opportunities will also push us so we think about what is the right debt or equity that we need to have depending on those. But this is the way we work. So we start from saying, okay, what is sustainable? What feels right? Then we look at the opportunities and we bandage on the (inaudible) but we have not exhausted everything that we think is possible certainly by 2025. This is why we also introduced that slide on Page 42 to say, look, there's probably more that could be done, especially when we are targeting the out-year of our plan. I don't know Roberto if this was was clear, I hope so.

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Roberto Letizia, Equita SIM S.p.A., Research Division - Analyst [22]

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Yes. Thanks, thanks.

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Toni Volpe, Falck Renewables S.p.A. - CEO, GM & Director [23]

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Then let's move to question 3 and 4. I will probably ask Paolo. I don't know, Paolo, if you had time to prepare?

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Paolo Rundeddu, Falck Renewables S.p.A. - Corporate Accounting Documents Officer & Compliance Officer [24]

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Yes. With reference to the value below the EBITDA. We envisage an increase, of course, on depreciation and amortization from the actual amount in 2019 by EUR 29 million. This is due both to the effect of the increased capacity and to the effect of IFRS. In this amount of amortization, we also had included debt which is reducing the amortization, the fact that we signed an extension of the concession of Buddusò-Alà dei Sardi the 138-megawatt plant wind farming in the Sicily, which is a benefit for the depreciation is reducing likely the depreciation, but we are increasing the depreciation for the plants that we are going to (inaudible). Second, with reference to the other drivers, we expect for the cost of the debt that sort of, let's say, in line with today debt with two points. One, is the fact that doing -- preparing and baseline, of course, you have to forecast interest rates and margin. As you can see in slide number 33, we have forecast for the Euribor on the horizons of the plan from 0% to 1% in 2025, while for the LIBOR, we have forecast from 0.9% to 1.4%, which are slightly higher than today. So in that case, we can be conservative. Also in the project financing on the corporate debt, we have taken some, let's say, some conservative approach. For the new project financing, we're expecting to add between 250 and 300 basis points. So there is a margin on these, and also in the corporate loan, we expect to have around 200 basis points. On the other side, we also had consider that during the period of the plan, we have some installments of the project financing that are going to elapse. This will benefit the cost of the debt because those financing has been put in place when the interest were very high in fact, as you know, we always said, at least 70% of our debt. So the installment that we are repaying during the period of the plans, will allow us to reduce partially the cost of debt. In a nutshell, the closing costs of all these new additional debt and the repayment with that will allow us to say that we are having a cost of debt which is in line with what we have today. With inference to the tax rate, in the tax rate, we have assumed to have around 25.4% of tax rate. This is a mix depending on different countries, depending on tax declaration which is very -- always very complicated depending on consolidated taxes and depending also on minorities. Please take in consideration that in 2019, you might see a tax rate, which is low, but you have to take out from the tax rate in 2019 around EUR 6.4 million, which are some benefits that we had with reference to the patent box, was around EUR 1.4 million, and we have referenced to, again, the agreement that we did with Buddusò-Alà dei Sardi, which allow us to record EUR 3.4 million of taxes, which, of course, is only on balance sheet of 2019. So that's why you can see that we are 25% in the business plan, while we have a lower accelerating 2019. Then we also have to add that in the plan that there'll be a benefit from the sales of the project of third parties in from the joint ventures that we envisage to have during this period of the plan, including, of course, the joint venture of Eni. Then, do I have any other question pending?

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Roberto Letizia, Equita SIM S.p.A., Research Division - Analyst [25]

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Yes, sorry, Paolo for this, very last one. So any capital gain that you're going to get from the sale of the projects from the JV will be seen at which level in the P&L? I think it...

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Paolo Rundeddu, Falck Renewables S.p.A. - Corporate Accounting Documents Officer & Compliance Officer [26]

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Well, it depends. Yes, yes. Well, it depends very much on how he's done the deal. Actually, we have posted it between the EBITDA items. And of course, as you may understand, this depends on how we will do the deal, which company will do it whether on the joint venture where they're on the (inaudible). So far, you see below the EBITDA.

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Roberto Letizia, Equita SIM S.p.A., Research Division - Analyst [27]

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Yes, and I got the 10 megawatts of sensitivity indication from 65.

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Paolo Rundeddu, Falck Renewables S.p.A. - Corporate Accounting Documents Officer & Compliance Officer [28]

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Sorry, sorry, sorry. Yes, sorry. Sorry, if you go to Page 34 of our business plan, we put a sensitivity we referenced to 2020 on the energy price. 10 million change in the energy price in Italy will impact in2020 EUR 6 million of revenues. And of course, this will allow in 2021 then to have an increase in the green certificate. GBP 10 million of reduction of prices per mega. So in total, will imply GBP 7 million reduction in the revenues in the U.K.

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Toni Volpe, Falck Renewables S.p.A. - CEO, GM & Director [29]

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Paolo meant GBP 10 and EUR 10 of reduction will means those (inaudible)

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Paolo Rundeddu, Falck Renewables S.p.A. - Corporate Accounting Documents Officer & Compliance Officer [30]

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Yes, sorry.

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Toni Volpe, Falck Renewables S.p.A. - CEO, GM & Director [31]

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And you were asking, I think, for 2025, what the sensitivity will be. I don't think we have aimed the debt component but I would say that's slightly higher, because we -- in 2020, we have part of the -- we described in that slide, the part of the energy has already been hedged for 2020, because we sold it forward last year. So if you look at the pure sensitivity in '25. So I think that number, but please, we have other colleagues being connected here, but I think it would be probably 20%, 30% higher in terms of sensitivity because your question was 2025 if I'm not wrong.

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Roberto Letizia, Equita SIM S.p.A., Research Division - Analyst [32]

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That's correct because you also have expired incentives in some cases. So you're just -- probably, it's going to be higher. But I think it's a fair indication.

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Toni Volpe, Falck Renewables S.p.A. - CEO, GM & Director [33]

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But Keep in mind, also another point with this, I wanted to highlight is that an important method for us is that we do have expired -- expiring incentives in 2025, and we provided the waterfall of EBITDA, the indication, but our growth is able to more than compensate for that, which, of course, is the very, if you want, nature of our intent our long-term business plan and sustainable growth of this company is to envisage a future, which is different over the company keeps doing well in a completely different scenario. So one of the reasons why we wanted to show you numbers for 2025, in addition, to show you what the potential of the company was over a longer period of time is also to show that this company while incentives are going to go out, but we have the opportunity with growth to absolutely more than compensate for that. And Page 36 shows that as well.

I don't know if there are other questions from the participants.

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Operator [34]

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Mr. Volpe, there are no more questions registered at this time.

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Toni Volpe, Falck Renewables S.p.A. - CEO, GM & Director [35]

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Okay. So I got some questions. I think also the other sources that people connected. So I wanted to review quickly before we disconnect whether there was something else that I have not addressed. I think there was a question relative to revamping and of solar. Right now, we revamped Spinasanta which is 1 of the 3 plants, part of the Actelios portfolio, we are looking at the other plant performance, but we have not determined yet that it makes sense to substitute the panels, like we did in Spinasanta. So for now, I would say, we haven't yet made any decision. But as you know, the performance of panels is something that needs to be adhered constantly. And so we are going to evaluate that over time. We also feel that the methodology we have identified to assess the performance and monitor the performance of our solar plants, which is also supported and helped by the fact that we have developed a very good asset management, digital platform that evaluates and it's capable of evaluating the performance of assets. So this methodology might represent a business opportunity for us to do it not only for our plant but also for other customers. And as a matter of fact, Falck Renewables Next solutions has a target of finding customers that might want to acquire our help, together with, of course, the technical support of like the renewables. But other than that, I think we don't have and other than the specific comment on Trezzo in our plan, there isn't anything that we think requires among the -- other than the ordinary maintenance specific, if you want to revamping. So the ROC evolution, somebody else was asking, of course, we have provided together with the price assumptions in Page 33, also the evolution of ROC over the plant, but that is fairly standard that it evolves pretty much by inflation. So that is one of those components that is very predictable. On the -- there was a question on tax release for these companies, we'll probably defer to Paolo is it too early to estimate a fiscal savings. I would defer to Paolo if he has any information about that and he wants to add more color.

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Paolo Rundeddu, Falck Renewables S.p.A. - Corporate Accounting Documents Officer & Compliance Officer [36]

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No, no, Toni, we do not have any additional information on it. Is that -- we're going to see whether there will be a tax relief.

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Toni Volpe, Falck Renewables S.p.A. - CEO, GM & Director [37]

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Okay. And then there was a question on the batteries margin, and we have provided very specific numbers, actually, Page 16, where we are estimating, for example, it's in the footnotes there, but we're estimating it for the battery components of the storage component, EUR 54,000 per megawatt per year, which comes from the auction, but then there is a derating factor that is applied to renewable power plant. Of course, if you spread it over the installed capacity of the solar plant associated that is less, it's about 1/3 of that, if I'm not wrong, but if I am, I would precisely (inaudible). I'm sure that my colleagues will clarify for me. It's about 1/3 of that. And then we have other estimates that come from our experience also in the U.S. in that slide. Again, it's a wide range. It's very much case by case by they -- but we see that as something that is growing all the time. Just in a few seconds because I'm paging to the questions. I would say short of something that I'm missing. I think I have covered also some other questions. I would like to ask only, again, if there's anybody else that has come out to talk about some other questions. Meanwhile, I was speaking. So let me give a last chance. Otherwise, I would thank everybody. So any other last questions?

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Operator [38]

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Mr. Volpe, there are no more questions at this time.

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Toni Volpe, Falck Renewables S.p.A. - CEO, GM & Director [39]

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Okay. So well, thank you very much for your time today. Again...

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Paolo Rundeddu, Falck Renewables S.p.A. - Corporate Accounting Documents Officer & Compliance Officer [40]

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Thank you very much.

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Toni Volpe, Falck Renewables S.p.A. - CEO, GM & Director [41]

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We have would have preferred to see everybody in person. But given the circumstances, the appropriate thing to do this is to use technology and do the audio conference. So I hope that technology was good enough to have a good conversation. I think that was the case. Thank you very much, and please refer to (inaudible), of course, for additional questions. Have a good day.

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Operator [42]

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Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones. Thank you.