When the auction is too popular: How Italy's FER CfDs are reshaping the PPA market

10 July, 2026

Multisectors Market Commentary Auction PPA Policy & Regulation

Heavy oversubscription in Italy’s FER-X and late FER-1 auctions has begun to reshape the power market around state-backed Contracts for Difference (CfDs), putting pressure on corporate PPAs. While the current pipeline remains relatively balanced, that equilibrium may not hold. A European Parliament study suggests the long-term trajectory is far more skewed, with CfDs projected to expand at roughly three times the pace of PPAs, raising questions about whether private long-term contracting can remain viable alongside subsidies.

On 8 June 2026, the European Commission approved a €23 billion Italian state aid scheme to support renewable electricity production, clearing the definitive FER-X framework under the Clean Industrial Deal State Aid Framework. The headline number is a contingent liability, not a subsidy. But the more consequential figure sits beneath it: the scheme is expected to add 37.15GW of capacity, roughly 48% of Italy's current renewable base, almost all of it channelled through 20-year two-way Contracts for Difference (CfD). With GSE (Gestore Servizi Energetici) preparing to auction 10GW of solar and 16GW of wind across 2026 and 2027, the state is about to become the dominant offtaker in one of Europe's largest power markets.

The first auction results for FER-X, published by GSE on 1 December 2025, confirmed the scale of the appetite. Roughly 7.7GW of solar and 940MW of onshore wind were awarded, making it by far the largest renewable auction ever run in Italy. Solar was oversubscribed by around 1.5GW. The weighted-average awarded price for solar came in at €56.82/MWh, a 37% discount to the ceiling. The first FER-X results had 870 registration requests for a total of around 12GW of power. There were 818 requests for 10,093MW of photovoltaic plants and 52 requests for 1,672MW of wind plants.

Oversubscription at low prices reflects more than intense developer competition. It indicates that the regulated route has become the default option, and that the adjacent merchant and corporate PPA market is being reshaped accordingly.

The steep gap between awarded prices and the ceiling reflects the weight of oversubscription, with excess demand for contracts forcing bidders to compete prices down. As Gresham House's Director - Energy Transition, Letizia Coradeschi notes, “The latest FER-X auctions were heavily oversubscribed and cleared around the mid-€50/MWh level, indicating strong developer appetite but also tighter economics.”

When a large volume of capacity bids into a 20-year, inflation-indexed, state-backed contract at mid-50s prices, it resets the reference price the rest of the market must compete against. That clearing level sits at or below the level at which solar corporate PPAs have been transacted, while the CfD offers double the tenor and a stronger counterparty.

CfDs and PPAs: Complementary or conflicting?

CfDs and PPAs are not mutually exclusive and can be structured to complement each other. However, given the high level of competition seen in FER-X auctions, initial CfD support could reduce developers' incentives to pursue further PPAs. If a developer can secure high price certainty through a CfD, PPAs become less attractive as an alternative.

Recent auction dynamics illustrate this effect. High ceiling prices in CfD auctions have pushed up PPA prices, as developers shift towards subsidised routes. Auction parameters also act as anchoring points in PPA negotiations. Coradeschi says: "Incentive schemes can be beneficial for financiers because they provide greater visibility on contracted cash flows. However, depending on the cleared floor price, they may also slow market development by capping project returns, making it more challenging for developers to generate attractive margins while relying on external funding."

Federico Macioci, Energy Senior Consultant at Key to Energy, says: "PPA reference prices will increasingly need to be anchored to the underlying cost structure of renewable generation. As a result, they are likely to progressively converge towards the price benchmarks established by CfD mechanisms."

With CfDs “crowding out” corporate PPAs and other market-based long-term contracts, the liquidity in wholesale forward markets begins to reduce, contributing to a thinner residual market and potentially a more pronounced two-tier structure between organised markets and long-term contracting. Coradeschi continues: "We are noticing a shortening in PPA tenors. Not every offtaker is willing to commit for 15, 20 or 25 years, as was more common in the early stages of the renewables market. Tenors are nowadays often shorter, around or below 10 years."

Wholesale price expectations retain large influence. Higher expected capture prices increase demand for PPAs and reduce reliance on CfDs. Conversely, lower price expectations weaken PPA demand and strengthen the case for public support. The crowding-out effect is therefore most pronounced in low-price environments, when demand for CfDs rises and private contracting declines.

Italy's own market was already primed for this. Through 2025, approximately 87% of Italian PPA contracts were structured with terms under 15 years, meaning the market was skewed towards short tenors before the CfD reset arrived and is therefore more exposed to the benchmark effect. Notably, even as most of Europe saw corporate PPA volumes decline, Italy still recorded a slight increase.

For investors focused on preserving value rather than maximising upside, the security of a FER CfD may therefore outweigh the potential gains available in the merchant market. That said, sponsors with a strong view on long-term electricity demand or rising power prices may still favour PPAs, particularly where they can secure attractive terms from energy-intensive corporates. Macioci says: “On the contrary, PPAs are often regarded as more flexible instruments, better suited to the specific needs of counterparties and less restrictive than regulated CfDs, particularly regarding operational obligations and participation in electricity and ancillary services markets.”

In practice, many developers are likely to pursue a blend of both, using the FER mechanism to anchor revenues while PPAs provide additional flexibility and exposure to upside beyond the scope of state support.

Next generation of PPA-CfD

Poorly designed two-way CfDs can weaken operational incentives by insulating generators from market price signals, increasing system costs. The policy challenge is therefore to retain market exposure while preserving investment certainty.

Several alternative models are emerging. An example imposed by the Dutch government is a four-way linking renewable generation projects and industrial projects through mirrored contracts with the government as intermediary. As a result, the government bridges the difference between producer and consumer strike prices, simultaneously giving generators investment certainty and industrial buyers stable access to green electricity. Corridor CfDs also offer another approach – intervening only when prices move outside a predefined range, rather than settling all deviations from the strike price. By limiting intervention, they preserve stronger market signals.

An intermittent-switching model allows developers to move between CfDs and PPAs over a project's lifetime. Belgium's Princess Elisabeth offshore wind framework, for example, permits limited partial withdrawal from the CfD to pursue PPAs, showing that CfDs and PPAs can be sequenced and combined rather than treated as mutually exclusive options. Macioci continues: “To ensure effective coexistence between the two instruments, a balanced approach is required—one that supports both public mechanisms and the private PPA market.”

Nonetheless, simply layering a PPA on top of an already CfD-backed project can create conflicts. If the investment case is already secured through a CfD, a subsequent PPA does not provide additionality but merely reallocates revenues. Dual contracting can also introduce financial and arbitrage risks, particularly where strike prices diverge.

Another solution to CfD saturation is Italy’s Decreto PPA (MASE Decree No. 152 of 20 June 2025), which positions the GSE as 'guarantor of last resort', a mechanism designed to de-risk offtake and draw in buyers who might otherwise be deterred by counterparty risk. When enacted, this legislation could tilt offtakers toward PPAs rather than CfDs, ensuring the instrument retains a durable role in the market. However, according to Macioci, "several elements could still limit its effectiveness: a significant access fee, guarantee coverage capped at 80% of the contractual exposure, and a maximum compensation threshold of 40 €/MWh."

As CfDs scale, PPAs may persist, but in a narrower and more constrained role. The outcome will depend on whether Italy can integrate both in a well-designed layered model, or whether the two continue to diverge, leaving private contracting with diminishing relevance in the energy transition.