Table of Contents
The following is the Report on Form 20-F of Ellomay Capital Ltd.,
or the Report. Unless the context in which such terms are used would require a different meaning, all references to “Ellomay,”
“us,” “we,” “our” or the “Company” refer to Ellomay Capital Ltd. and its consolidated
All references to “€,” “euro” or
“EUR” are to the legal currency of the European Union, or EU, all references to “NIS” or “New Israeli Shekel”
are to the legal currency of Israel and all references to “$,” “dollar,” “US$,” “USD”
or “U.S. dollar” are to the legal currency of the United States of America. Other than as specifically noted, all amounts
translated into a different currency were translated based on the relevant exchange rate as of December 31, 2022.
We prepare our consolidated financial statements in accordance
with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB.
All trademarks, service marks, trade names and registered marks
used in this Report are trademarks, trade names or registered marks of their respective owners.
Statements made in this Report concerning the contents of any agreement,
contract or other document are summaries of such agreements, contracts or documents and are not complete description of all of their terms.
If we filed any of these agreements, contracts or documents as exhibits to this report or to any previous filing with the Securities and
Exchange Commission, or SEC, you may read the document itself for a complete understanding of its terms.
In addition to historical information, this
report on Form 20-F contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or
the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. Some of the statements under
“Item 3.D: Risk Factors,” “Item 4: Information on Ellomay,” “Item 5: Operating and Financial Review and
Prospects” and elsewhere in this Report, constitute forward-looking statements. Forward-looking statements reflect our current view
about future plans, intentions or expectations. These statements relate to future events or other future financial performance, plans
strategies and prospects, and are identified by terminology such as “may,” “will,” “should,” “expect,”
“scheduled,” “plan,” “intend,” “anticipate,” “believe,” “estimate,”
“aim,” “potential,” or “continue” or the negative of those terms or other comparable terminology,
but the absence of these words does not mean that a statement is not forward-looking.
The forward-looking statements contained in
this Report are based on current expectations and beliefs concerning future developments and the potential effects on our business. There
can be no assurance that future developments actually affecting us will be those anticipated. These forward-looking statements involve
a number of risks, uncertainties or other assumptions that may cause actual results or performance to be materially different from those
expressed or implied by these forward-looking statements.
Assumptions included in this
Report involve judgment with respect to, among other things, future economic, competitive and market conditions, and future business decisions,
all of which are difficult or impossible to predict accurately and many of which are beyond our control. In light of the significant uncertainties
inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation
by us or any other person that our objectives or plans will be achieved. Factors that could cause actual results to differ from our expectations
or projections include the risks and uncertainties relating to our business described in this Report under “Item 3.D: Risk Factors,”
“Item 4: Information on Ellomay,” “Item 5: Operating and Financial Review and Prospects” and elsewhere in this
Report. In addition, new factors emerge from time to time, and it is not possible for management to predict all such factors, nor assess
the impact of any such factor on our business or the extent to which any factor, or combination of factors, may cause results to differ
materially from those contained in any forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking
statements, which reflect management’s analysis as of the date hereof. We undertake no obligation to publicly revise these forward-looking
statements to reflect events or circumstances that arise after the date hereof, except as required by applicable law. In addition to the
disclosure contained herein, readers should carefully review any disclosure of risks and uncertainties contained in other documents that
we file from time to time with the SEC.
To the extent that this Report contains forward-looking
statements (as distinct from historical information), we desire to take advantage of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995 and we are therefore including this statement for the express purpose of availing ourselves of the protections
of the safe harbor with respect to all forward-looking statements.
OF RISK FACTORS
Our business is subject to numerous risks and uncertainties, including
those described in Item 3.D “Risk Factors.” You should carefully consider these risks and uncertainties when investing in
our ordinary shares. Principal risks and uncertainties affecting our business include the following:
risks related to projects that are in the development stage, among other issues due to the inability to obtain or maintain licenses
or project finance;
regulatory changes and government interventions impacting electricity prices and other changes in electricity prices, including their
impact on the fair value of financial instruments and assets;
weather conditions and various meteorological and geographic factors;
our EPC contractors’ and our other contractors’ and service providers’ technical, professional and financial ability
to construct, install, test and commission a renewable energy plant and to provide us with the required services and support;
our contractors’ technical, professional and financial ability to deliver on and comply with their operation and maintenance,
or O&M, undertakings in connection with the operation of our renewable energy plants;
dependency on the availability of financial incentives and government subsidies and on governmental regulations for our operating
renewable energy projects and projects under development and the potential reduction or elimination, including retroactive amendments,
of the government subsidies and economic incentives applicable to, or amendments to regulations governing the, renewable energy markets
in which we operate or to which we may in the future enter;
defects in the components of the renewable energy plants we operate or theft of various components;
our ability to meet our obligations, undertakings and financial covenants under various financing agreements, including to our debenture
holders, our ability to raise additional equity, debt or other types of financing in the future and the limitations imposed on us in the
deeds of trust governing our debentures;
risks due to our current debt, which has increased in recent years, and in connection with debt incurred in the future;
our inability to generate a positive cashflow from our operations;
risks relating to operations in foreign countries, including cross currency movements, payment cycles and tax issues;
our inability to locate land suitable or sufficient for the needs of the projects that we develop and potential disagreements with
natural disasters, terrorist attacks, other catastrophic events, cyber attacks and information technology or telecommunication system
changes in the prices of the components or raw materials required for the production of renewable energy;
our dependency on revenues and cash flows from the Talasol PV Plant;
risks in connection with our Waste-to-Energy, or WtE, projects in the Netherlands, including shortages, insufficient quality or changes
in prices of raw materials, increase in delivery prices and environmental and other regulatory changes;
risks relating to our Israeli operations, including the centralized electricity market and exposure to damages due to hostile attacks;
the risks we are exposed to due to our holdings in U. Dori Energy Infrastructures Ltd., or Dori Energy, and Dorad Energy Ltd. ,or
Dorad, including risk factors generally applicable to electricity manufacturers and our joint control of Dori Energy and lack of control
of Dorad, restrictions on our right to transfer our holdings in Dori Energy, regulatory changes applicable to Dorad, shortages of gas,
exposure to changes in the Israeli consumer price index and exchange rates and involvement in legal proceedings;
the market, economic and political factors in the countries in which we operate;
our ability to maintain expertise in the energy market, and to track, monitor and manage the projects which we have undertaken;
competition and changes in the renewable energy markets;
future disagreements with our partners who own a portion of the renewable energy plants;
dependency on payments received from governmental entities;
fluctuations in the value of currency and interest rates;
risks related to our incorporation and location in Israel, including security risks and political risks;
risks related to economic uncertainty and exposure to the impact of the military conflict between Russia and Ukraine;
our plans with respect to the management of our financial and other assets and our ability to identify, evaluate and consummate additional
suitable business opportunities and strategic alternatives;
we are controlled by a small group of shareholders and, as a foreign private issuer, may rely on home country practices with respect
to certain matters;
the price, market liquidity and volatility of our ordinary shares, potential future dilutions and listing on two markets;
dependency on key management and personnel;
the effects of the Covid-19 pandemic on the development, construction and operation of projects, including in connection with actions
taken by governments and authorities, delays in construction due to quarantine and other measures, changes in regulation, changes in the
price of electricity and in the consumption of electricity;
our inability to maintain effective internal controls over financial reporting;
impact of provisions of Israeli law on our shareholders’ ability to enforce US judgements on us, on the ability to acquire
us or a controlling position in our company, on rights and obligations of shareholders;
exposure to legal and administrative proceedings and tax audits; and
we have not paid any cash dividends since 2016.
1: Identity of Directors, Senior Management and Advisers
2: Offer Statistics and Expected Timetable
3: Key Information
Capitalization and Indebtedness
Reasons for the Offer and Use of Proceeds
Investing in our securities involves significant
risk and uncertainty. You should carefully consider the risks and uncertainties described below as well as the other information contained
in this Report before making an investment decision with respect to our securities. If any of the following risks actually occurs, our
business, financial condition, prospects, results of operations and cash flows could be harmed and could therefore have a negative effect
on the trading price of our securities.
The risks described below are
the material risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial may
also materially adversely affect our business, financial condition, or results of operations in the future.
Risks Related to our Business
Risks Related to our Renewable Energy Operations
In recent years, we entered the
development and entrepreneurship renewable energy market. These operations are exposed to regulatory and other development risks that
may cause such projects not to enter the construction phase and other risks that may cause damages, delays and interruptions during the
construction phase, and thereby cause the total or partial loss of the project development funds invested in the project.
We are currently active in several projects in various development and construction stages, including the construction of a 156 Mega Watt,
or MW, pumped storage project in the Manara Cliff in Israel, or the Manara PSP, and the development of various PV projects in Italy, Spain,
Israel and the United States. Projects in the development stages are exposed to various risks, including the inability to obtain or maintain
regulatory permits and approvals and the inability to obtain project finance, upon terms economically beneficial or at all. Projects in
the construction stage are exposed to various risks, including delays in the construction, interferences from third parties such as adjacent
plot owners, residents living in the vicinity, governmental, municipal, environmental and other authorities, malfunctions in construction
equipment, shortage in equipment or personnel required for the construction and damage caused by weather conditions and other factors
that we cannot control. All projects in the development and construction stages are subject to additional risks, including changes to
existing regulation that could reduce the potential profitability of such projects, potential disagreements and conflicts with partners,
dependency on technical consultants and surveys, and risks associated with operations in foreign countries, as applicable. If any of these
risks materialize, the entire project may be delayed or cancelled altogether, causing the loss of all part of the funds invested in the
project development efforts and the impairment of some or all of the capitalized investments we made in connection with the project. Such
impairment would have an adverse impact on our financial position. Even if we succeed in selling our rights in a project to third parties,
the return of our project development expenses will likely be conditioned upon the continued development of the project by such third
Existing regulations, and changes
to such regulations, may present technical, regulatory and economic barriers and restrictions to the construction and operation of
renewable energy plants, which may adversely affect our operations. The installation and operation of renewable energy plants
is subject to oversight and regulation in accordance with international, European (to the extent applicable), national and local ordinances,
building codes, zoning (or permitting), environmental protection regulation, including waste disposal regulations, utility interconnection
requirements, security requirements and other rules and regulations. Any changes in applicable regulations that increase the burdens or
restrictions on the operation of our renewable energy plants could increase our costs of operation and, as a result, adversely affect
our results of operations. In addition, various governmental, municipal and other regulatory entities require the issuance and continued
effectiveness of relevant permits, licenses and authorizations for the construction and operation of renewable energy plants. If such
permits, licenses and authorizations are not timely issued, it could result in the interruption, cessation or abandonment of a newly constructed
renewable energy plant or may require significant changes to such renewable energy plant, any of which may cause severe losses. In addition,
if issued, these licenses and permits may be revoked by the authorities following their issuance in the event the authorities discover
irregularities or deviations from the scope of the license or permit. Any revocation of existing licenses may obligate us to cease constructing
or operating the relevant renewable energy plant for the period required to renew the relevant license or indefinitely and therefore will
adversely affect our business and results of operations.
Government interventions in response
to current high energy prices may negatively impact revenues or increase our tax burden. At both the European Union and member
country levels, European countries have responded to the increased energy prices experienced in recent years by adopting a number of measures
aimed at reducing or limiting the profits of renewable energy manufacturers through taxes or other regulatory arrangements. For example,
Spain introduced a reduction mechanism for excess remuneration resulting from the high price of natural gas during 2021, which is currently
in effect until December 31, 2023 and Italy introduced a set of laws aimed at reducing excess remuneration as well. This Spanish regulation
mainly impacted our operating profit from the 300 MW photovoltaic plant in the municipality of Talaván, Cáceres, Spain, which
was connected to the Spanish national grid in December 2020, or the Talasol PV Plant (with respect to the portion of revenues not subject
to the financial power swap executed in connection with the Talasol PV Plant, or the Talasol PPA), and from our Spanish 28 MW photovoltaic
plant, or the Ellomay Solar PV Plant. These measures may also include caps on energy prices, changes to price formulations and the proposal
of windfall taxes on energy companies, including companies that generate renewable energy. It is possible these measures may intensify
and be adopted by other countries in which we operate will operate in the future in which case it could materially affect our financial
A drop in the price of energy may
negatively impact our results of operations. The revenue from the sale of energy produced by renewable energy plants is based
on proceeds from the sale of electricity and gas produced in the electricity and gas market at market price and sometimes also includes
incentives in the form of governmental subsidies or fixed tariffs. Previous revisions to the governmental subsidies’ regime in several
countries, including Spain, Italy and Israel, which reduced or eliminated the scope of the incentives paid by governments, increased the
dependency of renewable energy plants on market prices or on tariffs determined in a public bid process. Many factors impact the prices
of electricity, including demand, the cost of alternative energy, such as natural gas and fuel, introduction of competing manufacturers
and technologies and regulatory changes imposing caps on prices or otherwise impacting the profitability of energy manufacturers. A decrease
in the price of electricity and gas, particularly in the countries in which we operate and in which some of our revenues are based on
the market price of electricity and gas, may negatively impact our profitability and our ability or interest to expand our renewable energy
The success of our renewable energy
plants, from their construction through their commissioning and ongoing commercial operation, depends to a large extent on the cooperation,
reliability, solvency, and proper performance of the contractors we engage for the construction, operation and maintenance of our renewable
energy plants, or the Contractors, and of the other third parties involved in the construction and operation of the plants, including
technical consultants, subcontractors, local advisors, financing entities, land owners, suppliers of feedstock, the energy grid regulator,
governmental agencies and potential purchasers of electricity. The construction and operation of a renewable energy plant
requires timely input, often of a highly specialized technical nature, and cooperation from several parties, including the suppliers of
the various system components (such as solar panels or CHP engine) and plant operators, other suppliers of relevant parts and materials
(including replacement parts), feedstock suppliers, land owners, subcontractors, electricity brokers, financing entities and governmental
and related agencies (as subsidizers and as regulators). If we fail to obtain such input or cooperation, or fail to locate suitable suppliers,
equipment, land or other components required in order to efficiently and timely construct or operation a renewable energy plant, the specific
project and our results of operations may be materially adversely affected. In addition, as we use Contractors to construct and thereafter
operate and maintain our renewable energy plants, we depend on the Contractors’ expertise and experience, representations, warranties
and undertakings regarding, inter alia: the construction quality, schedule of construction, operation,
maintenance and performance of each of the plants, the use of high-quality materials, strict compliance with applicable legal requirements
and the Contractors’ financial stability. If the Contractors’ representations, warranties or undertakings are inaccurate or
untrue, or if any of the Contractors or other entities fail to perform their obligations properly, this could result in the interruption
or cessation of construction or operations or abandonment of the relevant plant, or may require significant expenses to mitigate the damages
or repair them, any of which may cause us severe losses.
is affected by the availability of financial incentives and supporting regulation. The reduction or elimination of government subsidies
and economic incentives could reduce our profitability and our revenues. Many countries, such as
Spain, Italy, the Netherlands, Israel and the United States, previously introduced substantial incentives to offset the cost of renewable
energy production, including photovoltaic power systems and WtE technologies, in the form of Feed-in-Tariff, or FiT, green certificates,
tax credits or other incentives aimed at promoting the use of clean energy (including solar energy and biogas) and reducing dependence
on other forms of energy. In addition, several countries encourage manufacturers and farmers to choose waste management methods that are
more environmentally-friendly, either by establishing fines on non-environmentally friendly waste management methods or by payment of
incentives. Certain of these government incentives were reduced or eliminated in the past years (for example with respect to photovoltaic
installations in Italy and Spain) and the remaining incentives could potentially be reduced or eliminated in the future. If the governments
in the countries in which we operate elect to revise the existing incentive schemes to reduce incentives, it may adversely affect our
profitability from projects that enjoy incentives. Any retroactive or prospective changes in the incentive schemes may affect our business
plan and potential future projects we may be interested in developing or acquiring. In general, uncertainty about the introduction of,
reduction in, or elimination of, incentives or delays or interruptions in the implementation of favorable laws could affect our profitability.
The performance of our renewable
energy plants depends on the quality of the equipment installed in such plants and on the reliability of the suppliers of spare and replacement
parts. The performance of our renewable energy plants depends on the quality of the components of the plants and the equipment
installed in the plants. Any defects or deterioration in the quality of such components and equipment could harm our results of operations,
and if we will not be able to quickly locate quality replacement parts or perform repairs, our results of operations could be adversely
affected for a long period of time. For example, the performance of our photovoltaic plants, or the PV Plants, depends on the quality
of the solar panels installed. Degradation in the performance of the solar panels above a certain level is guaranteed by the panel suppliers
and we generally receive undertakings from the Contractors with respect to minimum performances. Therefore, a critical factor in the success
of our PV Plants is the existence of reliable solar panel suppliers, who guarantee the performance and quality of the solar panels supplied
and their ability to provide us with replacement and spare parts that are of sufficient quality. If the suppliers of solar panels do not
meet their undertakings under the guarantees and no replacement panels are available at a reasonable price, it could result in the interruption,
cessation or abandonment of the relevant PV Plant, or may require significant expenses to mitigate the damages or repair them, any of
which may cause us severe losses.
In the event we are unable to comply
with the obligations and undertakings, including with respect to financial covenants, which we undertook in connection with the project
financing of our renewable energy plants, our results of operations may be adversely affected. In connection with the financing
of our PV Plants, our WtE plants, and the Manara PSP, we entered into long-term agreements with various financing entities and may in
the future enter into additional project finance agreements in connection with our other projects, for example, the projects currently
under development in Italy. The agreements that govern the provision of financing include, and future project finance agreements are expected
to include, inter alia, undertakings and financial covenants, the majority of which are based
on the ongoing income derived from the relevant plant, which may be adversely affected by the various risks detailed herein. If we fail
to comply with any of these undertakings and covenants, we may be subject to penalties, future financing requirements, and the acceleration
of the repayment of debt. These occurrences would adversely affect our financial position and results of operations and our ability to
obtain outside financing for other projects.
As a substantial part of our business
is currently located in Europe, we are subject to additional risks that may negatively impact our operations. We currently
have substantial PV operations in Spain and WtE operations in the Netherlands, all of which are held by our wholly-owned Luxembourg subsidiary,
Ellomay Luxembourg Holdings S.àr.l, or Ellomay Luxembourg, and may make additional investments in projects located in Europe, such
as the development and construction of additional PV plants in Spain and Italy. Due to these existing operations and any additional future
investments, we are subject to special considerations or risks associated with companies operating in other jurisdictions, including rules
and regulations, cross currency movements, different payment cycles, tax issues, such as tax law changes and variations in tax laws as
compared to Israel, cultural and language differences, crime, strikes, riots, civil disturbances, terrorist attacks and wars and deterioration
of political and economic relations with Israel. Our European operations subject us to a number of these risks, as well as the requirement
to comply with the local laws, such as the Spanish, Dutch and EU laws.
On January 31, 2020, the United Kingdom due to the Brexit referendum
stopped being a member of the EU. Brexit has created significant uncertainty about the future relationship between the United Kingdom
and the EU, and given rise for the governments of other EU member states to consider withdrawal. Our regulatory risk could increase if
there were to be future divergence with the EU regime.
These developments, or the perception that any of them could occur,
could have a material adverse effect on global economic conditions and the stability of global financial markets, and could significantly
reduce global market liquidity and future growth. Asset valuations, currency exchange rates and credit ratings may be especially subject
to increased market volatility. We cannot assure you that we would be able to adequately address some or all of these additional risks.
If we were unable to do so, our operations might suffer.
We may not be able to source land
sufficient or suitable for the development of our projects. We do not own the land on which substantially all of the projects in our portfolio
are located. The successful development of a renewable energy project requires obtaining rights, whether ownership or lease rights,
to land suitable for the project, including among other features, its location, size, geological status and the ability to build, or proximity
to, interconnection facilities and transmissions systems. Such land may not always be available to us at all or under acceptable terms
and, if available, may require the execution of long-term leases or other long-term arrangements. The construction of our facilities requires
substantial investments and efforts and as the majority of our projects are located on land owned by third parties, we are subject to
risks in connection with such ownership, including disputes with landowners and with other third parties, such as creditors of the landowners.
Any loss of rights to the land on which our projects are located or constructed could have a material adverse effect on our business,
financial condition and results of operations.
Natural disasters, terrorist attacks,
or other catastrophic events could harm our operations. Our worldwide operations could be subject to natural disasters terrorist
attacks, public health events and other business disruptions, which could harm our future revenue and financial condition and increase
our costs and expenses. Among others, floods, storms, seismic turbulence and earth movements may damage our projects in operation or under
construction. The insurance coverage we have for a portion of such risks may not cover the damage in full because these circumstances
are sometimes deemed “acts of god.” In the event that an earthquake, fire, tsunami, typhoon, terrorist attack, or other natural,
manmade or technical catastrophe were to damage or destroy any part of our plants or those of manufacturers on which we rely, destroy
or disrupt vital infrastructure systems or interrupt our operations or services for any extended period of time, our business, financial
condition and results of operations would be materially and adversely affected.
An increase in the prices of components
of a renewable energy plant may adversely affect our projects under development, our future growth and our business. Installations
of renewable energy plants have substantially increased over the past few years. The increased demand led to fluctuations in the prices
of the components of the plants resulting from oversupply and undersupply. For example, the increased demand for solar panels resulted
in substantial investments in solar panels production facilities, creating oversupply and a sharp continuing decrease in the prices of
solar panels. However, the Covid-19 pandemic and its effects on global supply chains, since 2020, halted years of solar
panel price cost reductions. The Covid-19 pandemic has put pressure on global supply chains with factory closures, import tariffs, shortages
of raw materials and components, and shipping bottlenecks creating supply chain shortages and delays. It may take several years until
solar module prices stabilize and such conditions increase the costs of replacing components in our existing plants and the costs of constructing
new plants, could potentially delay the commencement or completion of construction of new projects and may impact the profitability of
constructing plants and our ability to expand our business. Also, shortage or delays to deliveries of vital components can result in construction
and installations delays.
The market for renewable energy
is intensely competitive and rapidly evolving. The market for renewable energy attracts many initiatives and therefore is intensely
competitive. The changes in the renewable energy field, such as the adoption of additional supporting legislation, combined with the impact
of shortage of natural gas and other sources of energy, raised additional awareness and interest in the filed by many market participants,
including private and public companies, investment funds, institutional investors and others. For example, in recent years the Israeli
Electricity Authority commenced issuing licenses to photovoltaic installations in tender processes resulting in a substantial decrease
in prices per KWh in the newly issued licenses and our competitors, who strive to construct new renewable energy plants and acquire existing
plants, may offer lower prices per KWh in future tender processes. Existing and future competition may also impact our ability to sell
the electricity produced by our facilities, to obtain project finance for our facilities or to enter into PPAs in connection with our
facilities. Our competitors may have established more prominent market positions, may have greater resources and may have more experience
in this field than us. Extensive competition may adversely affect our ability to continue to acquire and develop new plants.
Our success depends in part on
our senior management team and other key employees and our ability to attract, integrate and retain key personnel and qualified individuals.
We depend on the expertise of our senior management team and other key employees to help us meet our strategic objectives. The
inability to maintain our senior management team and other key employees or to attract highly skilled personnel, may materially adversely
affect the implementation of our development business plan and could ultimately adversely impact our business.
We do not wholly-own a few of our
operating projects and projects under development. Although we currently control these projects, disagreements with our partners could
cause delays in the construction or development of the projects or affect decisions made in connection with operating plants. We
wholly-own all of our operating PV plants and the Netherlands’ WtE plants, except the Talasol PV Plant, of which we hold 51%. We
also own 83.333% of the Manara PSP and may in the future enter into projects that we do not wholly-own or introduce additional partners
to the Manara PSP or other projects under development or to our operating plants. Although we control both the Talasol PV Plant and the
Manara PSP, any disagreements with our partners could delay the development or construction of the Manara PSP, affect decisions made in
connection with the Talasol PV Plant and require management resources and attention. Any delays or damages caused due to such disagreements
could adversely affect our business plans and results of operations.
We may be subject to disruptions
or failures in information technology, telecommunication systems and network infrastructures that could have a material adverse effect
on our business and financial condition. Our renewable energy business relies, among other things, on information technology and
on telecommunication services as we remotely monitor and control our assets and interface with regulatory agencies and wholesale power
markets. Disruptions or failures in such systems may result due to various causes, including internal malfunctions in our systems or in
the systems of third parties such as suppliers, governmental authorities, from employee error, theft or misuse, malfeasance, power disruptions,
natural disasters or accidents and may also result from cyber-attacks or other breaches of information technology security. Such disruptions
and failures could have an adverse effect on our business operations, financial reporting, financial condition and results of operations.
Fluctuations in energy prices and
the resulting changes in the fair value of financial instruments and assets may impact our financial results. Renewable energy
manufacturers, such as our company, may execute financial power swaps or other offtake arrangements that fix the price of the all or part
of the electricity manufactured by a facility. These instruments and the related assets or liabilities are recorded at fair value in our
financial statements. Increases in market prices of electricity generally cause a significant change in the fair value of assets or liabilities
recorded in connection with these instruments and result in decreases in our shareholders equity. For example, as of December 31, 2022,
we recorded current maturities of derivatives in the amount of approximately €33.2 million as a result of the increase in the fair
value of the liability resulting from the Talasol PPA and a similar reduction in our shareholders’ equity. Although these changes
do not impact our cash flow (as the revenues of Talasol Solar S.L.U, or Talasol, from the sale of electricity during the same period are
expected to exceed its liability and payments to the PPA provider), there is an impact on our balance sheet and on the other comprehensive
income (loss). These changes in value of the Talasol PPA were the basis for an amendment to the Deed of Trust governing our Series C Debentures
in June 2022, which also entailed an increase of 0.25% in the annual interest rate on such debentures. For more information see “Item
5.B: Liquidity and Capital Resources.” Future material fluctuations in the market price of electricity could have a material adverse
impact on our financial results and could further decrease our shareholders’ equity.
The continued global crisis resulting
from the current novel strain of coronavirus (Covid-19) and any other pandemic, epidemic or outbreak of an infectious disease may
adversely affect our operations. If a pandemic, epidemic or outbreak of an infectious disease occurs in Europe, Israel or elsewhere,
our business may be adversely affected. Following the outbreak of the Coronavirus (Covid-19) in December 2019, this virus and its variants
spread globally to over 180 countries, including European countries and Israel. The spread of Covid-19 has resulted in the World Health
Organization declaring the outbreak of Covid-19 as a “pandemic.” Due to the spread of Covid-19 and the measures taken
by governments in order to control the spread, there was a decrease in economic activity in many areas around the world, including Israel
and Europe since March 2020. The spread of the virus has led, inter alia, to a disruption in the supply chain, a decrease in global transportation,
restrictions on travel, mass gatherings, commerce and work that were announced by the State of Israel and other countries around the world
and a decrease in the value of financial assets and commodities on the markets in Israel and the world. Although our operations have not
thus far been materially adversely affected by the restrictions imposed by local governments and authorities in the countries in which
we operate and although many restrictions have been removed or eased, in the event the spread of the virus, its variants or another virus
occurs, resulting in new or continuing restrictions, our operations, including the projects under construction and development, may be
Also, as a result of the Covid-19 pandemic, the electricity prices
in the European markets were very volatile. Despite a decrease in the number and severity of Covid-19 cases in recent months compared
to the first year of the pandemic, the impact and implications of the pandemic, including the delays in supply chains and the shortage
of components, causing delays and increases in costs and expenses, are still impacting the markets and industries worldwide and may also
indirectly affect our operations, for example through changes in the prices of oil resulting in a decrease in the electricity prices,
and through reduction in demand for electricity, delays in construction of projects due to curtailment of work, limited availability of
components required in order to operate or construct new projects, regulatory changes by countries affected by the virus, including changes
in subsidies, collection delays, delays in obtaining permits, limited availability or changes in terms of financing for future projects,
limited availability or changes in terms of financing for future projects or corporate financing and lower returns on potential future
investments. As a result, our business and operating results could be negatively affected. The extent to which the Covid-19 pandemic or
any other widely-spread health crisis impacts our business will depend on future developments, which are highly uncertain and cannot be
predicted, including new information which may emerge concerning the severity of Covid-19, the resurgence of new variants or mutations
of the virus and the actions to contain Covid-19 or treat its impact, among others.
Risks Related to our PV Plants
Our ability to produce solar power
depends upon the magnitude and duration of sunlight as well as other meteorological and geographic factors. Solar power production
has a seasonal cycle and requires prolonged and strong exposure to sunlight in order to meet the maximum production capacity. Adverse
meteorological conditions, including sever weather conditions such as storms, extensive rain and winds, can damage our photovoltaic plants
or materially impact the output of photovoltaic plants and result in production of electricity below expected output, which in turn could
adversely affect our profitability. Lower electricity output due to changes in meteorological conditions and other geographic factors
may adversely affect our profitability. For example, the radiation in Spain during the fourth quarter of 2022 was relatively lower than
the radiation during the same period in 2021 negatively impacting the revenues from the Talasol PV Plant and the Ellomay Solar PV Plant.
The revenues derived from several
of our PV Plants mainly depend on payments received from governmental entities. Any future deterioration in the financial position of
the local governments or regulated entities, resulting in partial or no payment or in regulatory changes may adversely affect the results
of our operations. The revenues derived by several of our PV Plants are based mainly on payments received from governmental
or regulated entities. In Spain (except with respect to the Talasol and the Ellomay Solar PV Plants), our revenues are primarily based
on payments from governmental entities in accordance with a specific remuneration incentive scheme. In Israel, our income is based on
a fixed tariff from the Israel Electric Company, or the IEC, a governmental company that controls the Israeli electricity market. We cannot
assure you that there will not be changes to the governments’ photovoltaic energy incentive schemes or in the financial stability
of the governments or relevant governmental agencies or companies. Any changes in the financial stability of the governmental entities
paying all or a portion of our PV revenues and any resulting change in the regulation may directly or indirectly affect the payments we
receive and, therefore, our operations and revenues.
We are exposed to the possibility
of damages to, or theft of, the various components of our PV Plants. Such occurrences may cause disruptions in the production of electricity
and additional costs. Our PV Plants may suffer damages and disruption in the production of electricity due to theft of panels
and other components, or due to bad weather and land conditions. Although such damages are generally covered by the PV Plants’ insurance
policies, under certain circumstances such occurrences may not be covered or may only be partially covered by the insurance and, if covered,
utilization of the insurance may cause an increase in the premiums paid to our insurance companies, all of which may adversely affect
our results of operations and profitability.
Risks Related to our WtE (Biogas) Plants
In addition to the risks involved
in the construction and operation of, and the regulatory risks applicable to, renewable energy plants in general, WtE plants are exposed
to risks specific to this industry. In addition to the risks detailed above under “Risks Related to our Renewable Energy
Operations,” WtE plants are exposed to additional risks specific to this industry, including:
As the raw materials used to produce energy in the WtE market are not freely available (as is the case with wind and solar energies),
the success of a WtE plant depends, among other things, on the prices of feedstock required in order to maintain the optimal mix of feedstock
necessary to maximize performance of the plants and meet a certain of range of energy (gas, electricity or heat) production levels. In
order to ensure a continuous supply of raw materials, both in terms of the quantity and the quality and composition of the raw materials,
a WtE plant is required to enter into supply relationships with several feedstock suppliers, such as farmers, food manufacturers and other
specialized feedstock suppliers and to continuously monitor the proposed transactions to locate the most efficient and beneficial offers.
Any increase in the price of feedstock or shortage in the type or quality of feedstock required to produce the desired energy levels with
the technology used by the plant could slow down or halt operations, causing a material adverse effect on the results of operations. The
price and quality of the feedstock mix might also increase the plant’s operating costs, either due to the need to purchase a more
expensive feedstock mix to meet the desired energy production levels, or due to an increase in residues and the resulting increase of
surplus quantities that require removal. In addition to the impact of the quality of the feedstock on the production levels, maintaining
and monitoring the feedstock quality is crucial for preventing malfunctions in the process, for example due to high levels of certain
chemicals that might harm the CHP engines. Additionally, a wrong feedstock mix and/or low feedstock quality might create biology problems
such as lower bacteria population, which directly adversely impacts biogas production. Therefore, any shortage of quality feedstock and
changes in the feedstock mix available for use could have a material adverse effect on the results of operations of our WtE plants. As
a result of the Russia-Ukraine military conflict, our WtE plants experienced a shortage of raw materials and feedstock, which impacted
the composition of the materials used by the facilities and their production.
The operation of WtE facilities is highly complex and requires ongoing supervision and maintenance. Several factors may impact the
efficiency of the facilities, including the availability and cost of feedstock, the composition of feedstock, malfunctions and damages.
In addition, following a correction of malfunctions that disables the system, the facility does not generally return to maximum capacity
immediately and the startup is implemented gradually. Although we have insurance policies that cover damages and loss of revenue upon
certain events, these insurance policies may not cover all damages or be available to us in the future, on acceptable terms or at all.
The expense level and profitability of WtE plants depends on many factors, many of which are not within our control. For example,
the recent increase in fuel prices increased transportation costs and operating expenses of our WtE plants and the increase in electricity
prices increased the costs of operations of our Gelderland biogas plant, that did not produce electricity for self-use during 2022. Any
future increase in expenses could materially impact the results of operations and financial condition of our WtE plants.
The WtE industry is subject to many laws and regulations which govern the protection of the environment, quality control standards,
health and safety requirements, and the management, transportation and disposal of different types of waste. Environmental laws and regulations
may require removal or remediation of pollutants and may impose civil and criminal penalties for violations. The costs arising from compliance
with environmental laws and regulations may increase operating costs for our WtE plants and we may be exposed to penalties for failure
to comply with such laws and regulations. In addition, existing regulation governing waste management and waste disposal provide incentives
to feedstock suppliers to use waste management solutions such as the provision of feedstock to WtE plants. Any regulatory changes that
impose additional environmental restrictions on the WtE industry or that relieve feedstock suppliers from the stringent regulation concerning
waste management and disposal could increase our operating costs, limit or change the cost of the feedstock available to us, and adversely
affect our results of operations.
Risks Related to our Israeli Operations
The electricity sector in Israel
is highly regulated. Any changes in the tariffs, system charges or applicable regulations may adversely affect our operations and results
of operations. In addition, failure to obtain and maintain electricity production and supply licenses from the regulator could materially
adversely affect our operations and results of operations. The Israeli electricity sector is subject to various laws and regulations,
such as the tariffs charged and paid by Noga – Electricity System Management Ltd., which is a newly-formed Israeli government company
managing the national electricity system, or the System Manager, and the IEC, and the licensing requirement that apply to private manufacturers,
such as Dorad Energy Ltd., or Dorad, in which we indirectly hold 9.375%. The tariffs paid by Dorad in connection with the Dorad Power
Plant to the System Manager for system operation services provided to Dorad and the fees received by Dorad from the System Manager for
electricity sold to the IEC and for providing the IEC with energy availability, are all based on tariffs determined by the Israeli regulator.
The updates and changes to the regulation and tariffs required to be paid to the IEC and to the System Manager by Dorad, or from the System
Manager to Dorad, may not necessarily involve negotiations or consultations with Dorad and may be unilaterally imposed on it. Any changes
in the tariffs, system charges or applicable regulations may adversely affect our operations and results of operations. In addition, a
manufacturer of electricity in Israel, such as Dorad, the Manara PSP, the Talmei Yosef PV Plant and any other facility we may wish to
develop, promote, construct, operate or acquire, is required to hold permanent licenses for production and supply, issued by the Israeli
Electricity Authority, which include terms and conditions that could be revised in the future by the Israeli Electricity Authority, and
which could be revoked under certain circumstances. In the event any manufacturer does not meet its obligations set forth in the licenses
or in the event the Israeli Electricity Authority decides to impose additional restrictions or materially change the terms of the licenses,
then, subject to its right to a hearing, such manufacturer may lose one or all of its licenses (production and supply) or their terms
may be materially revised. Failure to maintain such licenses or a material revision to the terms of the licenses could adversely affect
our results of operations.
The electricity sector in Israel
is highly centralized. The IEC controls and operates the electricity system and all stages of the transmission of electricity. The
electricity sector in Israel is dominated by the IEC, which controls and operates the supply, distribution and transmission of electricity,
and also produces the majority of electricity in Israel. The System Manager, entered into an agreement with Dorad for the purchase of
availability and electricity The System Manager is also the only customer of the Talmei Yosef PV Plant and is subject to the requirement
to pay a fixed tariff for the electricity manufactured by such plant. Similarly, it is currently expected that the sole customer of the
Manara PSP will be the System Manager, who will be required to pay the Manara PSP for availability and electricity produced. The ability
of the System Manager to pay the renewable energy manufacturers could be affected by financial instability of the System Manager. The
inability of the System Manager to pay Dorad, Talmei Yosef, the Manara PSP or any energy project we may be involved in in Israel, may
adversely affect our plan of operations and could have a material adverse effect on our profitability.
The Talmei Yosef PV Plant and the
Dorad Power Plant are located in the southern part of Israel, in proximity to the Gaza Strip and within range of missile and mortar bombs
launched from the Gaza Strip. The Manara PSP is located the northern part of Israel, in proximity to the border with Lebanon. The
Talmei Yosef Project is located near the Gaza Strip border and the Dorad Power Plant is located in Ashkelon, a town in the southern part
of Israel, in proximity to the Gaza Strip. In recent years, there has been an escalation in violence and missile attacks from the Gaza
Strip to Southern and Central Israel. The Manara PSP is constructed in close proximity to Israel’s border with Lebanon, in an area
that has also been attacked by missiles in the past. Due to the location of the Dorad Power Plant, Dorad has implemented various security
measures in order to enable continued operations of the Dorad Power Plant during attacks on its premises. However, any such further attacks
to the area surrounding the Gaza Strip or the northern border of Israel or any direct damage to the location of the Dorad Power Plant
or the Manara PSP may damage it and disrupt their operations, and may cause losses and delays. In addition, any operations in Israel are
impacted by the general security and economic conditions in Israel, any deterioration in the security or economic condition in Israel,
including, but not limited to, due to war, terrorist attacks, recession or any other events that may cause a decrease in electricity consumption
or electricity prices, may damages facilities or the transmission of gas to the Dorad Power Plant or may adversely impact customers and
may cause losses or delays.
Risks Related to our Investment in Dori Energy
We have joint control in U. Dori
Energy Infrastructures Ltd., or Dori Energy, who, in turn, holds a minority stake in Dorad. Therefore, we do not control the operations
and actions of Dorad. We currently hold 50% of the equity of Dori Energy who, in turn, holds 18.75% of Dorad and accordingly our
indirect interest in Dorad is 9.375%. Although we entered into a shareholders’ agreement, or the Dori Energy Shareholders Agreement,
with Dori Energy and the other shareholder of Dori Energy, Amos Luzon Entrepreneurship and Energy Group Ltd. (f/k/a U. Dori Group Ltd.),
or the Luzon Group, providing us with joint control of Dori Energy, should differences of opinion as to the management, prospects and
operations of Dori Energy arise, such differences may limit our ability to direct the operations of Dori Energy. Moreover, Dori Energy
holds a minority stake in Dorad and as of the date hereof is entitled to nominate only one director in Dorad, which, according to the
Dori Energy Shareholders Agreement, we are entitled to nominate. As we have one representative on the Dorad board of directors, which
has a total of seven directors, we do not control Dorad’s operations. Therefore, as we have joint control over Dori Energy and limited
control over Dorad, we may be unable to prevent certain developments that may adversely affect their business and results of operations.
Since July 2015, several of Dorad’s direct and indirect shareholders, including Ellomay Clean Energy Limited Partnership, or Ellomay
Energy LP, a limited partnership directly and indirectly wholly-owned by us that holds Dori Energy’s shares, are involved in various
legal proceedings, all as more fully described in “Item 4.B: Business Overview” below. In addition, to the extent our interest
in Dori Energy is deemed an investment security, as defined in the Investment Company Act of 1940, or the Investment Company Act, we could
be deemed to be an investment company under the Investment Company Act, depending on the value of our other assets. Please see “We
may be deemed to be an “investment company” under the Investment Company Act of 1940, which could subject us to material adverse
The Dori Energy Shareholders Agreement
contains restrictions on our right to transfer our holdings in Dori Energy, which may make it difficult for us to terminate our involvement
with Dori Energy. The Dori Energy Shareholders Agreement contains several restrictions on our ability to transfer our holdings
in Dori Energy, including a right of first refusal. The aforesaid restrictions may make it difficult for us to terminate our involvement
with Dori Energy should we elect to do so and may adversely affect the return on our investment in Dori Energy.
Our holdings in Dori Energy are
pledged to the holders of our Series E Secured Debentures, which may limit our ability to sell such holdings or perform other actions
that may be beneficial to us. On February 1, 2023, we issued a new series of secured nonconvertible debentures due March 31, 2029,
or the Series E Secured Debentures. The Series E Debentures are secured by pledges on the shares of Dori Energy held by Ellomay Energy
LP and on Ellomay Energy LP’s rights and agreements in connection with shareholder’s loans provided by Ellomay Energy LP to
Dori Energy. The Deed of Trust governing the Series E Secured Debentures includes several limitations and requirements applicable to our
holdings in Dori Energy and additional provisions that may limit our ability to sell our holdings in Dori Energy or to revise arrangements
with Dori Energy. For further information concerning the Deed of Trust governing our Series E Secured Debentures, issued on February 1,
2023, see “Item 4.A: History and Development of Ellomay” under “Recent Developments” and “Item 10.C: Material
Dorad, which is the only substantial
asset held by Dori Energy, operates the Dorad Power Plant, whose successful operations and profitability depends on a variety of factors,
some of which are not within Dorad’s control. Dorad’s only substantial asset is the Dorad Power Plant, situated
on the premises of the Eilat-Ashkelon Pipeline Company, or EAPC, located south of Ashkelon, Israel. The Dorad Power Plant is subject to
various complex agreements with third parties (the IEC, the operations and maintenance contractor, suppliers, private customers, etc.)
and to regulatory restrictions and guidelines in connection with, among other issues, the tariffs to be paid by the IEC to Dorad for the
energy it produces. Various factors and events may materially adversely affect Dorad’s results of operations and profitability and,
in turn, have a material adverse effect on Dori Energy’s and on our results of operations and profitability. These factors and events
Electricity tariffs, which are determined and updated solely by the Israeli Electricity Authority, have a material impact on the
results of operations of Dorad.
The operation of the Dorad Power Plant is highly complex and depends upon the continued ability: (i) to operate the various turbines,
and (ii) to turn the turbines on and shut them down quickly based on demand. The profitability of Dorad also depends on the accuracy of
the proprietary forecasting system used by Dorad. Any defects or disruptions, or inaccuracies in forecasts, may result in an inability
to provide the amount of electricity required by Dorad’s customers or in over-production, both of which could have a material adverse
effect on Dorad’s operations and profitability.
Dorad’s operations depend upon the expertise and success of its operations and maintenance contractor, who is responsible for
the day-to-day operations of the Dorad Power Plant. If the services provided by such contractor will cause delays in the production of
energy or any other damage to the Dorad Power Plant or to Dorad’s customers, Dorad may be subject to claims for damages and to additional
expenses and losses and therefore Dorad’s profitability could be adversely affected. Dorad also depends on certain sole suppliers
for services, including the IEC, which distributes the electricity manufactured by Dorad to Dorad’s customers and Israel Natural
Gas Lines Ltd., who delivers the gas required for Dorad’s operations. Any disagreement or disruption of these services could adversely
impact Dorad’s operations.
Significant equipment failures may limit Dorad’s production of energy. Although damages from equipment failures generally covered
by insurance policies, any such failures may cause disruption in the production, may not all be covered by the insurance and the correction
of such failures may involve a considerable amount of resources and investment and could therefore adversely affect Dorad’s profitability.
Dorad’s operations depend on the availability and accurate function of its information technology, communications and data
retrieval and analysis systems. As such, Dorad is exposed to risks of cyber-attacks, either directed specifically at Dorad or at infrastructure
or Israeli sites in general. The occurrence of a cyber-attack may halt Dorad’s operations and result in damages to Dorad’s
financial results and reputation.
The construction of the Dorad Power Plant was mainly financed by a consortium of financing entities pursuant to a long-term credit
facility and such credit facility provides for pre-approval by the consortium of certain of Dorad’s actions and contracts with third
parties and further includes a list of events that may enable the lenders to demand immediate repayment of the credit facility. Changes
in the credit ratings of Dorad and its shareholders, non-compliance with financing and other covenants, delays in provision of required
pre-approvals or disagreements with the financial entities, material changes in Dorad’s licenses or a loss of license by Dorad and
additional factors may trigger certain rights granted to the lenders under the financing documents and may adversely affect Dorad’s
operations and profitability.
Dorad entered into a long-term natural gas supply agreement, or the Tamar Agreement, with the partners in the “Tamar”
license located in the Mediterranean Sea off the coast of Israel, or Tamar. This agreement includes a “take or pay” mechanism,
subject to certain restrictions and conditions that may result in Dorad paying for natural gas not actually required for its operations.
In addition, in November 2022, Dorad started purchasing natural gas from Energean Israel Ltd., or Energean. Dorad’s operations depend
on the timely, continuous and uninterrupted supply of natural gas from Tamar and Energean and on the existence of sufficient reserves
throughout the term of the agreements with Tamar and Energean. Any disruptions in the gas supply, could adversely impact Dorad’s
operations and results of operations. In addition, the price of natural gas under the supply agreements with Tamar and Energean is linked
to production tariffs determined by the Israeli Electricity Authority but cannot be lower than the “final floor price” included
in the agreements. In the event of future reductions in the production tariff, the price of gas may reach the “floor price”
and thereafter will not be further reduced. Any delays, disruptions, increases in the price of natural gas under the agreement, or shortages
in the gas supply from Tamar or Energean will adversely affect Dorad’s results of operations.
The Dorad power plant is subject to environmental regulations, aimed at increasing the protection of the environment and reducing
environmental hazards, including by way of imposing restrictions regarding noise, harmful emissions to the environment and handling of
hazardous materials. Currently the costs of compliance with the foregoing requirements are not material. Any breach or other noncompliance
with the applicable laws may cause Dorad to incur additional costs due to penalties and fines and expenses incurred in order to regain
compliance with the applicable laws, all of which may have an adverse effect on Dorad’s profitability and results of operations.
Due to the agreements with contractors of the Dorad Power Plant and the indexation included in the gas supply agreement, Dorad is
exposed to changes in the exchange rates of the U.S. dollar against the NIS. To minimize this exposure Dorad executed forward transactions
to purchase U.S. dollars against the NIS. In addition, due to the indexing to the Israeli consumer price index under Dorad’s credit
facility, Dorad is exposed to fluctuations in the Israeli CPI, which may adversely affect its results of operations and profitability.
For example, Dorad’s financing expenses increased during 2022 due to an increase in the Israeli CPI of approximately 5.3% during
the year. Dorad entered into hedging transaction in order to minimize the risk.
Dorad is involved in several arbitration and court proceedings initiated by Dorad’s shareholders, including Dori Energy. Disagreements
and disputes among shareholders may interfere with Dorad’s operations and specifically with Dorad’s business plan and potential
The electricity production sector in Israel has expanded and evolved during recent years, with the introduction of privately held
electricity production facilities. Dorad is subject to competition from existing or new electricity producers, who will attempt to sell
electricity directly to private customers, including Dorad’s customers or potential customers. The added competition may reduce
the rates received by Dorad and therefore decrease its revenues and profitability.
Dorad is required to make payments to various third parties, including the financing consortium, the gas suppliers, the O&M contractor
and the gas transmission service provider. In the event Dorad will not have sufficient liquidity to comply with its payment obligations,
its operations and financial results may be materially adversely impacted.
The Covid-19 crisis affected Dorad’s customers (which include hotels and other industrial customers), and therefore any decrease
in electricity consumption by Dorad’s customers and in Israel generally (affecting the amount of electricity purchased by the IEC
from Dorad), may affect Dorad’s financial results. Dorad is monitoring the re-spreading of the virus and continuously examines the
options for dealing with damage to its income.
Risks Related to the Manara PSP
The Manara PSP currently holds
a conditional license. Such conditional license may be revoked for various reasons, such as non-compliance with milestones stipulated
in the conditional license. The Manara PSP currently holds a conditional license for the construction of a 156 MW pumped storage
project, or the Manara PSP Conditional License, issued to it on June 17, 2020. Conditional licenses issued by the Israeli Electricity
Authority include several milestones, and deadlines for completing such milestones, including the completion of the construction works
of the pumped storage power plant. The Israeli Electricity Authority could revoke the Manara PSP Conditional License if Ellomay Pumped
Storage (2014) Ltd., the project company of the Manara PSP, or Ellomay PS, does not timely meet the milestones included in it. Any such
attempted revocation is subject to a written notice from the Israeli Electricity Authority, which is required to include the reasons for
the proposed revocation, and to a hearing of Ellomay PS before the Israeli Electricity Authority. If the Manara PSP Conditional License
will be revoked in the future, that could prevent the completion of the Manara PSP, resulting in a loss of some or all the funds invested
in the Manara PSP.
The construction of the Manara
PSP is a complex and unique engineering challenge. The construction process of the Manara PSP includes planning and conducting
of a comprehensive investigation to characterize the variety of soils and rocks at the construction sites. In accordance with the infrastructure
characteristics and the seismic risks that exist on site, stability calculations need to be performed on the basis of which instructions
are given for the planning and execution of the reservoirs. Any complications during the construction period of the Manara PSP could cause
delays in the construction and could expose the Manara PSP to non-compliance with the terms of the Manara PSP Conditional License issued
to it by the Israeli Electricity Authority and could otherwise materially adversely affect our results of operations in connection with
the Manara PSP.
Risks Related to our Operations and our Structure
We depend on the Talasol PV Plant
for a substantial portion of our revenues and cash flows. We depend on the Talasol PV Plant, and expect to continue to depend on
the Talasol PV Plant and other relatively large projects, for a substantial portion of our revenues and cash flows. The Talasol PV Plant
accounted for approximately 64% and 61.4% of our revenues for the years ended December 31, 2021 and 2022, respectively. As new projects
reach commercial operation, our dependency on the Talasol PV Plant is expected to reduce. However, this project, as well as other large
projects such as the Manara PSP, are still expected to account for a substantial portion of our revenues and cash flows in the future.
Consequently, any damage or loss in connection with the Talasol PV Plant could materially reduce our revenues and cash flows and, as a
result, have a material adverse effect on our business, financial condition and results of operations.
Our ability to leverage our operations
and increase our operations depends, inter alia,
on our ability to obtain attractive project and corporate financing from financial entities or to enter into other financing arrangements.
Our ability to obtain attractive financing and the terms of such financing, including interest rates, equity to debt ratio
requirement and timing of debt availability will significantly impact our ability to leverage our investments and enhance our operations
and to fulfill our development plans. Although we have financing agreements with respect to several of our PV Plants, WtE Plants and the
Manara PSP and although we raised significant funds in Israel through the issuance of debentures, there is no assurance we will be able
to procure additional project financing for projects under development or any operations we will acquire or projects we wish to advance
in the future, or to obtain additional corporate financing, on terms favorable to us or at all. During 2022 and until the date hereof,
the global markets as well as the market in Israel have experienced significant increases in interest rates, which impact the interest
rates applicable to public and private debt financings. In addition, adverse developments that affect financial institutions, such as
events involving liquidity that are rumored or actual, have in the past and may in the future lead to bank failures and market-wide liquidity
problems. For example, on March 10, 2023, Silicon Valley Bank (“SVB”) was closed by the California Department of Financial
Protection and Innovation, which appointed the Federal Deposit Insurance Corporation (“FDIC”) as receiver. Similarly, on March
12, 2023, Signature Bank and Silvergate Capital Corp. were each swept into receivership. The results of events or concerns that involve
one or more of these factors could include a variety of material and adverse impacts on our ability to obtain financing, and on our current
and projected business operations and our financial condition and results of operations. Any instability in the banking and financing
markets could limit the availability of funds for financing activities or result in less favorable commercial financing terms, including
higher interest rates or costs and tighter financial and operating covenants, or systemic limitations on access to credit and liquidity
sources, thereby making it more difficult for us to acquire financing on acceptable terms or at all. An increase in interest rates may
also adversely impact the profitability and return on projects we consider, and may cause us to decide not to pursue certain business
opportunities. In addition, we recently entered into the US solar PV market. We expect that our US PV projects will rely on third-party
tax equity funding, obtained through the sale of available tax incentives. No assurance can be given that tax equity investors will be
available or willing to provide financing on acceptable terms, that we will be able to sell the tax incentives through other markets or
that the tax incentives and benefits that are needed to make tax equity financing available will remain in place. Even if we locate a
tax equity partner, we may be required to provide them with certain rights with respect to the relevant project, which include rights
to a portion of the projects’ cash flows. Our inability to obtain additional financing, through financing entities, tax equity funding
or otherwise, on favorable terms, or at all, may adversely affect our ability to leverage our investments and to procure the equity required
in order to execute one or more projects or increase and further develop our operations and execute our business plan.
Our ability to freely operate our
business is limited due to certain restrictive covenants contained in the deeds of trust of our Debentures. The deeds of trust
governing our Series C Debentures, our Series D Convertible Debentures and our Series E Secured Debentures, or the Deeds of Trust and
the Debentures, respectively, contain restrictive covenants that limit our operating and financial flexibility. These covenants include,
among other things, a “negative pledge” with respect to a floating pledge on all of our assets. The Deeds of Trust also contain
covenants regarding maintaining certain levels of financial ratios and criteria, including as a condition to the distribution of dividends,
as a trigger for an obligation to pay additional interest and as a cause for immediate repayment, and other customary immediate repayment
conditions, including, under certain circumstances, in the event of a change of control, a default under the deed of trust of the other
debentures issued by us, a change in our field of operations or a disposition of a substantial amount of assets. Our ability to continue
to comply with these and other obligations depends in part on the future performance of our business. Such obligations may hinder our
ability to finance our future operations or the manner in which we operate our business. In particular, any non-compliance with performance-related
covenants and other undertakings of the Debentures could result in increased interest payments for some or all of the Debentures or a
demand for immediate repayment of the outstanding amount under the Debentures and restrict our ability to obtain additional funds, which
could have a material adverse effect on our business, financial condition or results of operations.
Our debt increases our exposure
to market risks, may limit our ability to incur additional debt that may be necessary to fund our operations and could adversely affect
our financial stability. As of December 31, 2022, our total indebtedness in connection with corporate and project financing (including
the Talasol PV Plant, of which we hold 51%) was approximately €390 million, including principal and interest expected repayments,
financing related swap transactions and excluding any related capitalized costs. The Deeds of Trust permit us to incur additional indebtedness,
including by issuing additional debentures of the existing series of Debentures and issuing additional series of debentures, subject to
maintaining certain financial ratios and covenants. Our debt, including the Debentures, and any additional debt we may incur, could adversely
affect our financial condition by, among other things:
increasing our vulnerability to adverse economic, industry or business conditions and cross currency movements and limiting our flexibility
in planning for, or reacting to, changes in our industry and the economy in general;
requiring us to dedicate a substantial portion of our cash flow from operations to service our debt, thus reducing the funds available
for operations and future business development; and
limiting our ability to obtain additional financing to operate, develop and expand our business.
We may incur significant additional
amounts of debt, which could further exacerbate the risks associated with our substantial indebtedness. We may be able to incur
substantial additional indebtedness, including additional issuances of debentures and secured indebtedness, in the future. Although the
Deeds of Trust governing our Debentures contain conditions that may affect our ability to incur additional debt, mainly through the issuance
of additional debentures of the existing series of the Debentures, these conditions are limited and we will be able to incur additional
debt and enter into leveraged transactions, so long as we do not breach the financial covenants and meet these conditions. If new debt
is added to our existing debt levels, the related risks that we face would intensify and we may not be able to meet all our debt obligations,
including the obligations in connection with repayment of the Debentures.
We cannot assure you that our business
will generate cash flow from operations or future borrowings from other sources in an amount sufficient to enable us to service our indebtedness,
including the Debentures, or to fund our other liquidity needs. To service our indebtedness, we require a significant amount of
cash. Our ability to make payments on, and to refinance our indebtedness, including the Debentures, to fund planned capital expenditures
and to maintain sufficient working capital depends on our ability to generate cash in the future. This, to a certain extent, is subject
to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. As such, we may not
be able to generate sufficient cash to service the Debentures or our other indebtedness, and may be forced to take other actions to satisfy
our obligations under our indebtedness, such as reduce or delay capital expenditures, sell assets, seek additional capital or restructure
or refinance all or a portion of our indebtedness, including the Debentures, on or before the maturity thereof, which may not be successful
and could have a material adverse effect on our operations. We cannot assure you that we will be able to refinance any of our indebtedness,
including the Debentures, on commercially reasonable terms or at all, or that the terms of that indebtedness will allow any of the above
alternative measures or that these measures would satisfy our scheduled debt service obligations. If we are unable to generate sufficient
cash flow to repay or refinance our debt on favorable terms, it could significantly adversely affect our financial condition, the value
of our outstanding debt, including the Debentures, and our ability to make any required cash payments under our indebtedness, including
the Debentures. Our ability to restructure or refinance our debt will depend on the condition of the capital markets and our financial
condition at that time. Any refinancing of our debt could be at higher interest rates and may require us to comply with more onerous covenants,
which could further restrict our business operations.
Our business results may be affected
by currency and interest rate fluctuations and the hedging transactions we enter into in order to manage currency and interest rate related
risks. We hold cash and cash equivalents, restricted cash and marketable securities mainly in euro and NIS. Our holdings
in our PV Plants located in Spain and in the WtE Plants located in the Netherlands are denominated in euro and our holdings in the Talmei
Yosef PV Plant and in Dori Energy are denominated in NIS. Our Debentures and the project finance obtained in connection with the Talmei
Yosef PV Plant and the Manara PSP are denominated in NIS and the interest and principal payments are to be made in NIS. The financing
for several of our PV Plants bears interest based on EURIBOR rate. Therefore, our repayment obligations and undertakings may be affected
by adverse movements in the exchange and interest rates. Although we attempt to manage these risks by executing various swap interest
and currency transactions as more fully explained in “Item 11: Quantitative and Qualitative Disclosures About Market Risk”
below, we cannot ensure we will succeed in eliminating these risks in their entirety. These swap transactions may also impact the
results of our operations due to fluctuations in their value based on changes in the relevant exchange or interest rate.
We are incorporated and headquartered in Israel,
and some of our operations and projects under development are located in Israel, and therefore we are subject to potential adverse impact
of political, economic and military instability in Israel and its region.
We are incorporated under the laws of the State of Israel, our
principal offices are located in central Israel and our headquarters and management, and most of our employees are located in Israel.
In addition, all of the funding raised by us through equity or debt issuances was raised in the Israeli market and from Israeli investors.
Accordingly, political, economic and military conditions in Israel and the surrounding region may directly affect our business and prospects.
Any armed conflicts, terrorist activities or political instability in the region would likely negatively affect business conditions and
could harm our results of operations.
In recent years, Israel has been engaged in sporadic armed conflicts
with Hamas, an Islamist terrorist group that controls the Gaza Strip, with Hezbollah, an Islamist terrorist group that controls large
portions of southern Lebanon, and with Iranian-backed military forces in Syria. In addition, Iran has threatened to attack Israel and
may be developing nuclear weapons. Some of these hostilities were accompanied by missiles being fired from the Gaza Strip, Lebanon and
Syria against civilian targets in various parts of Israel, including areas in which our headquarters and operations are located. Any hostilities
involving Israel, regional political instability or the interruption or curtailment of trade between Israel and its trading partners could
materially and adversely affect our business and results of operations.
The Israeli government is currently pursuing extensive changes
to Israel’s judicial system. In response to the foregoing developments, individuals, organizations and institutions, both within
and outside of Israel, have voiced concerns that the proposed judicial changes, if adopted, may negatively impact the business environment
in Israel, including due to reluctance of foreign investors to invest or conduct business in Israel, as well as to increased currency
fluctuations, downgrades in credit rating, increased interest rates, increased volatility in securities markets, and other changes in
macroeconomic conditions. In addition, since the announcement of the proposed changes, large protests have taken place and continue to
take place in many cities in Israel. The proposed judicial changes may also adversely affect the labor market in Israel or lead to political
instability or civil unrest. At this stage, where the proposed legislation has not become effective, and its scope is not fully determined,
we cannot assess the possible impacts of these changes and their likelihood, however, to the extent that any of these negative developments
do occur, they may have an adverse effect on our business, financial condition, results of operations and prospects and the market price
of our shares, as well as on our ability to raise additional capital.
We are currently operating in a
period of economic uncertainty and capital markets disruption, which has been significantly impacted by geopolitical instability due to
the ongoing military conflict between Russia and Ukraine. Our business, financial condition and results of operations may be materially
and adversely affected by any negative impact on the global economy and capital markets resulting from the conflict in Ukraine or any
other geopolitical tensions. U.S. and global markets are experiencing volatility and disruption following the escalation of geopolitical
tensions and the start of the military conflict between Russia and Ukraine. On February 24, 2022, a full-scale military invasion of Ukraine
by Russian troops was reported. This invasion led to global sanctions that have impacted the international economy, to a shortage and
ensuing increase in price of natural gas and other forms of energy and electricity, shortages in raw materials, including in the materials
comprising the feedstock used by our WtE plants, supply chain delays and an increase in the cost of transportation, impacting the cost
of operations of our WtE plants, which depend on transportation of feedstock and residues. We cannot anticipate the length and continued
impact of the ongoing military conflict, and this conflict in Ukraine could continue to impact the market in Europe and worldwide and
lead to additional market disruptions, including significant volatility in commodity prices, credit and capital markets, as well as supply
chain interruptions. We are continuing to monitor the situation in Ukraine and globally and assessing its potential impact on our business.
Additionally, Russia’s prior annexation of Crimea, recent
recognition of two separatist republics in the Donetsk and Luhansk regions of Ukraine and subsequent military interventions in Ukraine
have led to sanctions and other penalties being levied by the United States, European Union and other countries against Russia, Belarus,
the Crimea Region of Ukraine, the so-called Donetsk People’s Republic, and the so-called Luhansk People’s Republic, including
agreements to remove certain Russian financial institutions from the Society for Worldwide Interbank Financial Telecommunication payment
system. Additional potential sanctions and penalties have also been proposed and/or threatened. Russian military actions and the resulting
sanctions could adversely affect the global economy and financial markets and lead to instability and lack of liquidity in capital markets,
potentially making it more difficult for us to obtain additional funds.
The continued military conflict between Russian and the Ukraine
may adversely impact our operations in the future, including through the implementation of new regulation in the countries in which we
operate, changes in the financial markets and availability of funds in Europe, shortages in raw materials and continued increase in delivery
Our inability to effectively hedge
interest rate, currency and other market-related risks may adversely affect our profitability. We use hedging instruments in an
attempt to manage interest rate, currency and other market-related risks. If any of the variety of instruments we use to hedge our
exposure to these various types of risk is not effective, we may incur losses, which may have an adverse effect on our financial condition.
The majority of our derivative contracts are OTC derivatives, i.e., derivative contracts that are not transacted on an exchange. These
derivatives are entered into under ISDA Master Agreements. If a counterparty defaults on these contracts, the underlying exposure would
no longer be effectively hedged, which could result in losses. In addition, there can be no assurance that we will continue to be able
to hedge risks related to current or future assets or liabilities in an efficient manner or at all. Disruptions such as market crises
and economic recessions may put a strain on the availability and effectiveness of hedging instruments. For example, the expected transition
away from LIBOR and similar benchmark rates may have a different impact on the hedged item and the hedging instrument, which could cause
some of our hedge to become ineffective, resulting in potential losses.
If we do not conduct an adequate
due diligence investigation of a target project or if certain events beyond our control occur, we may be required to subsequently take
write-downs or write-offs, restructuring, and impairment or other charges that could have a significant negative effect on our financial
condition, results of operations and our stock price. We must conduct a due diligence investigation of target projects that we
intend to acquire or purchase an interest in. Intensive due diligence is time consuming and expensive due to the cost of the technical,
accounting, finance and legal professionals involved in the due diligence process. Even if we conduct extensive due diligence on a target
business, we cannot assure you that this due diligence will reveal all material issues that may affect a particular target project, or
that factors outside the control of the target project and outside of our control will not later arise. If our due diligence review fails
to identify issues specific to a target project, industry or the environment in which the target project operates, or if certain events
or circumstances occur that are beyond our control, we may be forced to later write-down or write-off assets, restructure our operations,
or incur impairment or other charges that could result in losses. Even though these charges may be non-cash items and may not have an
immediate impact on our liquidity, the fact that we report charges of this nature could contribute to negative market perceptions about
us or our ordinary shares.
Tax audits may result in an obligation
to make material payments to tax authorities at the conclusion of these audits. We conduct our business globally (currently
in Israel, Luxembourg, Italy, Spain and The Netherlands). Our domestic and international tax liabilities are subject to the allocation
of revenues and expenses in different jurisdictions and the timing of recognizing revenues and expenses. Additionally, the amount of income
taxes paid is subject to our interpretation of applicable laws in the jurisdictions in which we file. Not all of the tax returns of our
operations in other countries and in Israel are final and we may be subject to further audit and assessment by the applicable tax authorities.
For example, during 2018, following a tax inspection and a final settlement reached with the tax authorities, we reduced our carry forward
tax losses by approximately €20 million. Such audits often result in proposed assessments and any estimation of the potential outcome
of an uncertain tax issue is a matter for judgment, which can be subjective and highly complex. While we believe we comply with applicable
tax laws and that we provided adequately for any reasonably foreseeable outcomes related to the tax audit, there can be no assurance that
a governing tax authority will not have a different interpretation of the law and assess us with additional taxes, as a result of which
our future results may be adversely affected. Although we believe our estimates to be reasonable, the ultimate outcome of such audits,
and of any related litigation, could differ materially from our provisions for taxes, which may have a material adverse effect on our
consolidated financial statements.
Our failure to maintain effective
internal controls over financial reporting could materially adversely affect our reported financial information and the market price of
our ordinary shares. We are characterized as an “accelerated filer” under the US Securities Law. Among other things,
this characterization imposes a requirement that our registered public accounting firm issue an attestation report as to our internal
control over financial reporting in connection with the filing of the Annual Report on Form 20-F for each fiscal year. Our efforts to
comply with the requirements of Section 404 of the Sarbanes-Oxley Act of 2002 have resulted in increased general and administrative expenses
and a diversion of management time and attention, and we expect these efforts to require the continued commitment of resources. We cannot
predict the outcome of our testing in future periods. If we fail to maintain the adequacy of our internal controls, we may not be able
to ensure that we or our registered public accounting firm can conclude on an ongoing basis that we have effective internal controls over
financial reporting. Failure to maintain effective internal controls over financial reporting could result in investigation or sanctions
by regulatory authorities, and could have a material adverse effect on our operating results, investor confidence in our reported financial
information, and the market price of our ordinary shares.
We are subject to risks associated
with legal or administrative proceedings that could materially affect us. We are subject to risks and costs, including potential
negative publicity, associated with lawsuits, claims or administrative proceedings. The result and costs of defending any such proceedings
or claims, regardless of the merits and eventual outcome, may be material. Any such proceedings or claims could also materially delay
our ability to complete construction of a project in a timely manner or at all or could otherwise materially adversely affect a completed
project’s operations. Further, we have little control over whether third-party claims will be brought by one or more third parties,
including public and private landowners, purchasers of electricity or green certificates, equipment suppliers, construction firms, labor
unions, and O&M and other service providers or their employees or contractors. Defending litigation, delays caused by litigation,
and the costs of settling or other unfavorable outcomes, including judgments for monetary damages, injunctions, or denial or revocation
of permits, could have a material adverse effect on our business, financial condition and results of operations.
We may be deemed to be an “investment
company” under the Investment Company Act of 1940, which could subject us to material adverse consequences. We could
be deemed to be an “investment company” under the Investment Company Act if we invest more than 40% of our assets in “investment
securities,” as defined in the Investment Company Act. Investments in securities of majority owned subsidiaries (defined for these
purposes as companies in which we control 50% or more of the voting securities) are not “investment securities” for purposes
of this definition. As our interest in Dori Energy is not considered an investment in majority owned securities, unless we maintain the
required portion of our assets under our control, limit the nature of the requisite portion of our investments of our cash assets to cash
and cash equivalents (which are generally not “investment securities”), succeed in making additional strategic “controlling”
investments and continue to monitor our investment in Dori Energy, we may be deemed to be an “investment company.” We do not
believe that our holdings in the Spanish PV Plants or the WtE Plants would be considered “investment securities,” as we control
the PV Plants (other than the Talasol PV Plant) and the WtE Plants via wholly-owned subsidiaries. In addition, despite minority holder
protective rights granted to the minority shareholders of the Talasol PV Plant and the Manara PSP, including several rights which effectively
require the unanimous consent of all shareholders, we believe that our interests in the Talasol PV Plant and the Manara PSP do not constitute
“investment securities” given, among other things, our majority shareholder and board membership status in the project companies.
We do not believe that the current fair value of our holdings in Dori Energy (all as more fully set forth under “Business”
below) and other relevant assets, all of which may be deemed to be “investment securities,” would result in our being deemed
to be an “investment company.” If we were deemed to be an “investment company,” we would not be permitted to register
under the Investment Company Act without an order from the SEC permitting us to register because we are incorporated outside of the United
States and, prior to being permitted to register, we would not be permitted to publicly offer or promote our securities in the United
States. Even if we were permitted to register, it would subject us to additional commitments and regulatory compliance. Investments in
cash and cash equivalents might not be as favorable to us as other investments we might make if we were not potentially subject to regulation
under the Investment Company Act. We seek to conduct our operations, including by way of investing our cash and cash equivalents, to the
extent possible, so as not to become subject to regulation under the Investment Company Act. In addition, because we are actively engaged
in exploring and considering strategic investments and business opportunities, and in fact the majority of our investments to date (mainly
in the Italian, Spanish and Israeli photovoltaic power plants markets and in the Netherlands’ WtE market) were made through a controlling
investment, we do not believe that we are currently engaged in “investment company” activities or business. These strategies
may force us to pursue less than optimal business strategies or forego business arrangements and to forgo certain cash management strategies
that could have been financially advantageous to us and to our financial situation and business prospect.
We may be characterized as a passive
foreign investment company. Our U.S. Holders may suffer adverse tax consequences. Under the passive foreign investment company
or “PFIC” rules, for any taxable year that our passive income or our assets that produce passive income exceeds specified
levels, we will be characterized as a PFIC for U.S. federal income tax purposes. This characterization could result in adverse U.S. tax
consequences for our U.S. Holders (as defined below), which may include having certain distributions on our ordinary shares and gains
realized on the sale of our ordinary shares treated as ordinary income, rather than as capital gains income, and having potentially punitive
interest charges apply to the proceeds of sales of our ordinary shares and certain distributions.
Certain elections may be made to reduce or eliminate the adverse
impact of the PFIC rules for our U.S. Holders, but these elections may be detrimental to such U.S. Holders under certain circumstances.
The PFIC rules are extremely complex and U.S. Holders are urged to consult independent tax advisers regarding the potential consequences
to them of our classification as a PFIC.
Based on our income and/or assets, we believe that we were a PFIC
with respect to any U.S. Holder that held our shares in 2008 through 2012. We also believe, based on our income and assets, that it is
likely that we were not a PFIC with respect to U.S. Holders that initially acquired our ordinary shares in 2013-2022. However, the Internal
Revenue Service may disagree with our determinations regarding our prior or present PFIC status and, depending on future events, we could
become a PFIC in future years.
For a more detailed discussion of the consequences of our being
classified as a PFIC, see “Item 10.E: Taxation” below under the caption “U.S. Tax Considerations Regarding Ordinary
Risks Relating to our Ordinary Shares and Ownership
We are controlled by a small number
of shareholders, who may make decisions with which you may disagree and which may also prevent a change of control via purchases in the
market. Currently, a group of investors comprised of Kanir Joint Investments (2005) Limited Partnership, or Kanir, and S.
Nechama Investments (2008) Ltd., or Nechama Investments, hold an aggregate of 44.6% of our outstanding ordinary shares. Shlomo Nehama,
our Chairman of the Board who controls Nechama Investments holds directly an additional 3.6% of our outstanding ordinary shares and the
estate of Mr. Hemi Raphael, which holds a majority of the outstanding shares of Kanir Investments Ltd., or Kanir Ltd., the general partner
of Kanir, holds an additional 2% of our outstanding ordinary shares. Therefore, acting together, these shareholders could exercise significant
influence over our business, including with respect to the election of our directors and the approval of a change in control and other
material transactions. This concentration of control may have the effect of delaying or preventing changes in control or changes in management,
or limiting the ability of our other shareholders to approve transactions that they may deem to be in their best interest. In addition,
due to this concentration of control, we are deemed a “controlled company” for purposes of NYSE American LLC rules and as
such we are not subject to certain NYSE American LLC corporate governance rules. Moreover, our Second Amended and Restated Articles includes
the casting vote provided to our Chairman of the Board under certain circumstances and the ability of members of our Board to demand that
certain issues be approved by our shareholders, requiring a special majority, all as more fully described in “Memorandum of Association
and Second Amended and Restated Articles” below may have the effect of delaying or preventing certain changes and corporate actions
that would otherwise benefit our shareholders.
You may have difficulty enforcing
U.S. judgments against us in Israel. We are organized under the laws of Israel and our headquarters are in Israel. All of
our officers and directors reside outside of the United States. Therefore, it may be difficult to effect service of process upon us or
any of these persons within the United States. In addition, you may not be able to enforce any judgment obtained in the U.S. against us
or any of such persons in Israel and in any event will be required to file a request with an Israeli court for recognition or enforcement
of any non-Israeli judgment. Subject to certain time limitations, executory judgments of a United States court for liquidated damages
in civil matters may be enforced by an Israeli court, provided that: (i) the judgment was obtained after due process before a court of
competent jurisdiction, that recognizes and enforces similar judgments of Israeli courts and according to the rules of private international
law currently prevailing in Israel, (ii) adequate service of process was effected and the defendant had a reasonable opportunity to be
heard, (iii) the judgment and its enforcement are not contrary to the law, public policy, security or sovereignty of the State of Israel,
(iv) the judgment was not obtained by fraud and does not conflict with any other valid judgment in the same matter between the same parties,
(v) the judgment is no longer appealable, and (vi) an action between the same parties in the same matter is not pending in any Israeli
court at the time the lawsuit is instituted in the foreign court. If a foreign judgment is enforced by an Israeli court, it will be payable
in Israeli currency. You may not be able to enforce civil actions under U.S. securities laws if you file a lawsuit in Israel.
We may rely on certain Israeli
“home country” corporate governance practices which may not afford shareholders the same protection afforded to stockholders
of U.S. companies. As a foreign private issuer for purposes of U.S. securities laws, NYSE American LLC rules allow us to follow
certain Israeli “home country” corporate governance practices in lieu of the corresponding NYSE American LLC corporate governance
rules. Such home country practices may not afford shareholders the same level of rights or protections in certain matters as those of
stockholders of U.S. domestic companies. To the extent we are entitled to elect to follow Israeli law and practice rather than corresponding
U.S. law or practice, such as with regard to the requirement for shareholder approval of changes to option plans, our shareholders may
not be afforded the same level of rights they would have under U.S. practice.
The rights and responsibilities
of our shareholders are governed by Israeli law and differ in some respects from the rights and responsibilities of shareholders under
U.S. law. We are incorporated under Israeli law. The rights and responsibilities of holders of our ordinary shares are governed
by our memorandum and articles of association and Israeli law. These rights and responsibilities differ in some respects from the rights
and responsibilities of shareholders in typical U.S. corporations. In particular, each shareholder of an Israeli company has a duty to
act in good faith in exercising his or her rights and fulfilling his or her obligations toward the company and other shareholders and
to refrain from abusing his power in the company, including, among other things, in voting at the general meeting of shareholders on certain
matters. Israeli law provides that these duties are applicable in shareholder votes on, among other things, amendments to a company’s
articles of association, increases in a company’s authorized share capital, mergers and interested party transactions requiring
shareholder approval. In addition, a controlling shareholder of an Israeli company or a shareholder who knows that it possesses the power
to determine the outcome of a shareholder vote or who has the power to appoint or prevent the appointment of a director or officer in
the company has a duty of fairness toward the company. However, Israeli law does not define the substance of this duty of fairness. Because
Israeli corporate law has undergone extensive revisions in recent years, there is little case law available to assist in understanding
the implications of these provisions that govern shareholder behavior.
You may be diluted by the future
issuance of additional ordinary shares, among other reasons, for purposes of carrying out future acquisitions, financing needs, and also
as a result of our incentive and compensation plans. During 2019-2021 we issued 2,143,750 ordinary shares in private placements
including through exercise of warrants. In addition, on October 26, 2020, we issued a new series of options (the Series 1 Options), tradable
on the Tel Aviv Stock Exchange, to purchase an aggregate of 385,000 ordinary shares at an exercise price per share of NIS 150 (subject
to adjustments upon customary terms) and on February 23, 2021 we issued our Series D Convertible Debentures, which are convertible into
an aggregate of 375,757 ordinary shares at a conversion price per share of NIS 165 (subject to adjustments upon customary terms). In the
event some or all of our Series 1 Options are exercised, or some or all of our Series D Convertible Debentures are converted, you may
experience dilution of your percentage of holdings in our ordinary shares. We may also choose to raise additional equity capital in the
future for various reasons and purposes. The issuance of any additional ordinary shares in the future, or any securities that are exercisable
for or convertible into our ordinary shares, will have a dilutive effect on our shareholders as a consequence of the reduction in percentage
Our ordinary shares are listed
in two markets, and this may result in price variations that could affect the trading price of our ordinary shares. Our ordinary
shares are listed on the NYSE American LLC and on the Tel Aviv Stock Exchange, or TASE, both under the symbol “ELLO.” Trading
in our ordinary shares on these markets is made in different currencies (U.S. dollars on the NYSE American LLC and New Israeli Shekels
on the TASE), and at different times (due to the different time zones, different trading days and different public holidays in the United
States and Israel). The trading prices of our ordinary shares on these two markets may differ due to these and other factors. Any decrease
in the trading price of our ordinary shares on one of these markets could cause a decrease in the trading price of our ordinary shares
on the other market.
We have not paid a cash dividend
or executed a buyback of a substantial number of shares since 2016 and there is no assurance we will do so in the future. We
have not paid any cash dividends or announced a share buyback plan since 2016. Future dividends or future share buyback plans will depend
on our earnings, if any, capital requirements, general financial condition and applicable legal and contractual constraints in connection
with distribution of profits, and will be within the discretion of our then-board of directors. There can be no assurance that any additional
dividends will be paid or share buyback programs adopted, as to the timing or the amount of the dividends or share buyback programs, or
as to whether our Board of Directors will elect to distribute our profits by means of share repurchases or a distribution of a cash or
other dividend. In addition, the terms of the deeds of trust governing our Debentures restrict our ability to made “distributions”
(as such term is defined in the Israeli Companies Law, 1999, as amended, or the Companies Law, which includes cash dividends and repurchase
of shares). For more information see “Item 5.B: Liquidity and Capital Resources” and “Item 8.A: Financial Information;
Consolidated Statements and Other Financial Information; Dividends” below.
Our stock price has been very volatile
in the past and may in the future be volatile, which could adversely affect the market liquidity
of our ordinary shares and our ability to raise additional funds. The market liquidity and
analyst coverage of our ordinary shares is limited. Our ordinary shares have experienced substantial price volatility in the past,
particularly during periods of very limited volume of trading in our ordinary shares resulting in every transaction performed significantly
influencing the market price. Although our ordinary shares are listed both on the NYSE American LLC and on the TASE, there is still limited
liquidity, and combined with the general economic and political conditions, these circumstances cause the market price for our ordinary
shares to continue to be volatile. The continuance of such factors and other factors relating to our business may materially adversely
affect the market price of our ordinary shares in the future and could result in lower prices for our ordinary shares than might otherwise
prevail and in larger spreads between the bid and asked prices for our ordinary shares. These issues could materially impair our ability
to raise funds through the issuance of our ordinary shares in the securities markets.
Provisions of Israeli law may delay,
prevent or make difficult an acquisition of Ellomay or a controlling position in Ellomay, which could prevent a change of control and,
therefore, depress the price of our shares. Israeli corporate law regulates mergers, requires tender offers for acquisitions
of shares above specified thresholds, requires special approvals for transactions involving directors, officers or significant shareholders
and regulates other matters that may be relevant to these types of transactions. Furthermore, Israeli tax considerations may make potential
transactions unappealing to us or to some of our shareholders. These provisions of Israeli law may delay, prevent or make difficult an
acquisition of Ellomay, which could prevent a change of control and therefore depress the price of our shares.
4: Information on Ellomay
History and Development of Ellomay
Our legal and commercial name is Ellomay Capital Ltd. Our office
is located at 18 Rothschild Boulevard, 1st floor, Tel-Aviv
6688121, Israel, and our telephone number is +972-3-7971111. Our registered agent in the United States is CT Corporation System, 111 Eight
Avenue, New York, New York 10011.
We were incorporated as an Israeli corporation under the name Nur
Advertisement Industries 1987 Ltd. on July 29, 1987. On August 1, 1993, we changed our name to NUR Advanced Technologies Ltd., on November
16, 1997 we again changed our name to NUR Macroprinters Ltd. and on April 7, 2008, in connection with the closing of the sale of our business
to HP, we again changed our name to Ellomay Capital Ltd. Our corporate governance is controlled by the Companies Law.
Our ordinary shares are currently listed on the NYSE American LLC
and are also listed on the Tel Aviv Stock Exchange under the trading symbol “ELLO” pursuant to the Israeli regulatory “dual
listing” regime that provides companies whose securities are listed both in the NYSE American LLC and the TASE certain reporting
In June 2022, the photovoltaic plant held by our indirectly wholly-owned
subsidiary, Ellomay Solar S.L.U., or Ellomay Solar, located on a plot adjacent to the land on which the Talasol PV Plant is located, with
a peak capacity of 28 MW, or the Ellomay Solar PV Plant, was connected to the electricity grid and commenced production of electricity.
Projects in the Netherlands
In connection with the military conflict in Ukraine and the stoppage
of Russian gas supply to Europe, there are substantial changes in the field of biogas in the Netherlands and Europe. Europe in general
and the Netherlands specifically have set ambitious goals for increasing gas production from waste. Various incentives are being considered,
the main one is increasing the price of the green certificates and as of today the market price of these certificates has increased from
an average of 13–15 euro cents per cubic meter to around 30-45 euro cents per cubic meter and future increases are currently projected.
The gas price for 2023, which is determined based
on the 2022 average, was set at €1.13 per cubic meter, a price that is higher than the cap of the subsidy granted to the Company’s
Dutch subsidiaries (approximately €0.75 per cubic meter). Therefore, in 2023 the Dutch subsidiaries will temporarily exit the subsidy
regime. Not using the subsidy during 2023 will enable the Dutch subsidiaries to postpone the termination of the subsidy period (originally
12 years) by one year.
Due to the military conflict in Ukraine, during 2022 there was
an increase in the price of feedstock, which is based on agricultural residues, in the cost of transportation and the price of electricity
(which increased tenfold). These circumstances caused an increase in expenses. As of the beginning of 2023, the feedstock prices and transportation
costs are in decline and there is no shortage of raw material of any kind.
The increase in electricity prices in the Netherlands did not substantially
impact two of the three biogas facilities owned by the Company, which mostly produce electricity and heat for self-consumption. However,
the Gelderland project, which was acquired in December 2020, was not equipped with the means to self-generate electricity and heat during
2022 and was required to pay expensive prices for the electricity it consumes and to purchase expensive gas for heating, which caused
an increase in expenses of approximately €1 million compared to forecasts. In May 2022, Gelderland received notification of approval
for a subsidy for generation of electricity and heat in its facility, in August 2022 a generator (CHP) was ordered, which is being installed
and expected to commence operating during the coming days.
Projects under Development or Construction
The Manara PSP
The construction of the Manara PSP commenced in April 2021 and
is advancing in accordance with the construction plans and schedule. The Manara PSP is expected to reach commercial operation during 2026
and we and the Manara PSP other shareholder invested the equity required for the Manara PSP, with the remainder of the funding received
from a consortium of lenders led by Mizrahi Tefahot Bank Ltd., at a scope of approximately NIS 1.27 billion. This aggregate amount is
linked to a synthetic composite index comprising a weighted average of the indices and currencies applicable to the Manara PSP’s
For more information, see “Item 4.B: Business Overview”
under the heading “Pumped Storage Project in the Manara Cliff in Israel.”
The construction of the Manara PSP and the
connection of this project to the grid are subject to risks and uncertainties. For more information concerning these and other risks see
under “Item 3.D: Risk Factors - Risks Related to our Business.”
PV Projects under Development
Italian PV Portfolio
We are currently planning to commence construction of photovoltaic
facilities in Italy during 2023 in an aggregate capacity of approximately 150-200 MW, or the Italian PV Portfolio. The Italian PV Portfolio
received building permits and is in “Ready to Build” status. The bid process for the contractors who will build the Italian
PV Portfolio is underway and the winning contractor(s) will be determined in the coming days. The cost of construction of the Italian
PV Portfolio, including related expenses, is currently estimated at €150 million - €200 million and the expected average construction
period of each facility is approximately 18 months.
We are in advanced stages of negotiating a framework agreement
for the financing of the Italian PV Portfolio with a European bank for a period of twelve years and for the financing of additional approximately
400 MW PV in Italy. The scope of financing will be determined based on the ratio of the debt to the cost of construction and the financing
is expected to cover 80% of the construction costs, including related expenses, if a financial power swap (PPA) will be executed in connection
with the relevant facility and 60% of such costs if a PPA will not be executed. We currently do not plan to execute PPAs in connection
with these facilities. Therefore, the financing for the Italian PV Portfolio is expected to be approximately €90-120 million and
the equity required from us is approximately €60-80 million.
The Italian PV Portfolio includes our wholly-owned Italian subsidiaries,
Ellomay Solar Italy One SRL and Ellomay Solar Italy Two SRL, which are constructing photovoltaic plants with installed capacity of 14.8
MW and 4.95 MW, respectively, in the Lazio Region, Italy, and our wholly-owned subsidiaries, Ellomay Solar Italy Four SRL, Ellomay Solar
Italy Five SRL and Ellomay Solar Italy Ten SRL, which are developing photovoltaic plants with installed capacity of 15.06 MW, 87.2 MW
and 18 MW, respectively, in the Lazio Region, Italy that have reached Ready to Build status.
Additional PV Projects under Development
In addition to the Italian PV Portfolio, we have photovoltaic projects
under various development stages as follows: (i) under advanced development stages – 306 MW in Italy and 40 MW plus storage in Israel;
and (ii) in early development stages – 800 MW in Italy, Spain and Israel.
We are negotiating a financing agreement for the financing of 600
MW PV projects (including the Italian PV Portfolio) that are under advanced development in Italy with a leading European bank in the field.
In addition, of the aforementioned portfolio of
projects under early development stages, the Company is advancing the following projects in Israel: (i) the Komemiyut project, intended
for 21 MW PV and 47 MW / hour batteries. The project obtained an approval for connection to the grid and is in the process of receiving
a building permit. Construction is planned to commence in the third quarter of 2023, (ii) the Qelahim project, intended for 15 MW PV and
33 MW / hour batteries. The project obtained an approval for connection to the grid, and is in the final stages of the zoning approval,
(iii) the Talmei Yosef project, an expansion of the existing project (as of today 9 MW PV) to 104 dunams, intended for 10 MW PV and 22
MW / hour batteries. The request for zoning approval has been filed and approval is expected to be received in the second quarter of 2023,
(iv) the Talmei Yosef storage project in batteries, which obtained zoning approval for 30 dunam, intended for approximately 400 MW / hour.
The project is designed for the regulation of the high voltage storage, and (v) the Sharsheret project, intended for 20 MW PV and 44 MW
/ hour batteries. The zoning request was submitted. There are additional 250 dunams that are under advanced planning stages.
The Komemiyut and Qelahim projects are based on a tender we previously
won for PV plus storage.
The advancement and development of these and
other projects is subject to the projects reaching several milestones, including receipt of regulatory approvals and authorizations, procurement
of land rights, obtaining financing, commencement and completion of construction and connection to the grid, and to various risks and
uncertainties applicable to projects under development and construction as more fully set forth under “Item 3.D: Risk Factors”
above. There can be no assurance as to how many projects, if any, will reach the final stage of connection to the grid and operational
status and, even if projects reach certain milestones, there is no assurance that we will decide to advance the projects. We may advance
some or all of the projects with partners and therefore we may not wholly-own such projects in the future.
Series E Secured Debentures Offering in Israel
On February 1, 2023, we issued NIS 220 million (approximately
€58.5 million, as of the issuance date) of the Series E Secured Debentures, due March 31, 2029, through a public offering in Israel.
The net proceeds of the offering, net of related expenses such as consultancy fee and commissions, were approximately NIS 218 million
(approximately €56 million as of the issuance date). The Series E Secured Debentures are secured by the following pledges:
a fixed pledge first degree on shares of Dori Energy held by Ellomay Energy LP, representing a 50% ownership of Dori Energy, which
holds 18.75% of Dorad;
a floating first degree pledge and an assignment by way of a pledge of, and with respect to, Ellomay Energy LP’s rights and
agreements in connection with shareholder’s loans provided by Ellomay Energy LP to Dori Energy; and
a fixed first degree pledge on our rights and the rights of Ellomay Energy LP in and to a trust bank account in the name of the trustee
of the Series E Secured Debentures.
The Series E Secured Debentures are traded on the TASE.
The principal amount of Series E Secured Debentures is repayable
four equal installment on March 31 from 2026 through 2029 (inclusive). The Series E Secured Debentures bear a fixed interest at the rate
of 6.05% per year (that is not linked to the Israeli CPI or otherwise), payable semi-annually on March 31 and September 30, commencing
March 31, 2023 through March 31, 2029 (inclusive).
The Series E Deed of Trust includes customary provisions, including
(i) a negative pledge such that we may not place a floating charge on all of our assets, subject to certain exceptions and (ii) an obligation
to pay additional interest for failure to maintain certain financial covenants, with an increase of 0.25% in the annual interest rate
for the period in which we do not meet each standard and up to an increase of 0.75% in the annual interest rate. The Series E Deed of
Trust does not restrict our ability to issue any new series of debt instruments, other than in certain specific circumstances, and enables
us to expand the Series E Secured Debentures up to an aggregate par value of NIS 220 million subject to certain conditions.
The Series E Deed of Trust includes a number of customary causes
for immediate repayment, including a default with certain financial covenants for the applicable period, and as noted above a mechanism
for the update of the annual interest rate in the event we do not meet certain financial covenants. The financial covenants are as follows:
Our Adjusted Balance Sheet Equity (as such term is defined in the Series E Deed of Trust, which, among other exclusions, excludes
changes in the fair value of hedging transactions of electricity prices, such as the PPA executed in connection with the Talasol PV Plant),
on a consolidated basis, shall not be less than €75 million for two consecutive quarters for purposes of the immediate repayment
provision and shall not be less than €80 for purposes of the update of the annual interest provision;
The ratio of (a) the short-term and long-term debt from banks, in addition to the debt to holders of debentures issued by us and
any other interest-bearing financial obligations provided by entities who are in the business of lending money (excluding financing of
projects and other exclusions as set forth in the Series E Deed of Trust), net of cash and cash equivalents, short-term investments, deposits,
financial funds and negotiable securities, to the extent that these are not restricted (with the exception of a restriction for the purpose
of securing any financial debt according to this definition), or, together, the Series E Net Financial Debt, to (b) our Adjusted Balance
Sheet Equity, on a consolidated basis, plus the Series E Net Financial Debt, or our Series E CAP, Net, to which we refer herein as the
Series E Ratio of Net Financial Debt to Series E CAP, Net, shall not exceed the rate of 65% for three consecutive quarters for purposes
of the immediate repayment provision and shall not exceed a rate of 60% for purposes of the update of the annual interest provision; and
The ratio of (a) our Series E Net Financial Debt, to (b) our earnings before financial expenses, net, taxes, depreciation and amortization,
where the revenues from our operations, such as the Talmei Yosef project, are calculated based on the fixed asset model and not based
on the financial asset model (IFRIC 12), and before share-based payments, when the data of assets or projects whose Commercial Operation
Date occurred in the four quarters that preceded the test date will be calculated based on Annual Gross Up (as such terms are defined
in the Series E Deed of Trust), based on the aggregate four preceding quarters, or our Series E Adjusted EBITDA, to which we refer to
herein as the Series E Ratio of Net Financial Debt to Series E Adjusted EBITDA, shall not be higher than 12 for three consecutive quarters
for purposes of the immediate repayment provision and shall not be higher than 11 for purposes of the update of the annual interest provision.
The Series E Deed of Trust further provides that we may make distributions
(as such term is defined in the Companies Law, e.g. dividends), to our shareholders, provided that: (a) we will not distribute more than
60% of the distributable profit, (b) we will not distribute dividends based on profit due to revaluation (for the removal of doubt, negative
goodwill will not be considered a revaluation profit), (c) we are in compliance with all of our material undertakings to the holders of
the Series E Secured Debentures, (d) on the date of distribution and after the distribution no cause for immediate repayment exists and
(e) we will not make a distribution for as long as a “warning sign” (as such term is defined in the Israeli Securities Regulations)
exists. We are also required to maintain the following financial ratios (which are calculated based on the same definitions applicable
to the financial covenants set forth above) after the distribution: (i) Adjusted Balance Sheet Equity not lower than €90 million,
(ii) Series E Ratio of Net Financial Debt to Series E CAP, Net not to exceed 60%, and (iii) Series E Ratio of Net Financial Debt to Series
E Adjusted EBITDA, shall not be higher than 9, and not to make distributions if we do not meet all of our material obligations to the
holders of the Series E Convertible Debentures and if on the date of distribution and after the distribution a cause for immediate repayment
exists. The Series E Deed of Trust includes several limitations and requirements applicable to our holdings in Dori Energy and additional
provisions that may limit our ability to sell our holdings in Dori Energy or to revise arrangements with Dori Energy.
For further information concerning the Series E Deed of Trust,
see “Item 10.C: Material Contracts” and the Series E Deed of Trust included as Exhibit 4.20 under “Item 19: Exhibits.”
Entry into US Solar PV Market
On March 14, 2023, we entered into a Joint Development Agreement,
or the JDA, for the development of solar photovoltaic projects in the State of Texas. The JDA was executed with a project development
company experienced in the development of energy projects, site acquisition, capital markets and commercial management. The JDA provides
for the initial development, design, construction and finance of two solar PV projects with aggregate projected DC capacity of 23 MW,
or the First US Projects. The First US Projects are in advanced stages of development and the estimated capital costs of the First US
Projects are in the range of $25-$27 million. Our share of the capital costs of the First US Projects is estimated at approximately $18-$20
million and the balance is intended to be provided by tax equity sources with whom we are currently in discussions. The sites for the
First US Projects will be leased under long-term leases from special purpose companies (Landcos) controlled by the development team. One
of the First US Projects, with a DC capacity of approximately 13 MW, is expected to achieve Ready to Build status within six months. The
JDA also provides for the development of three additional solar PV projects up to Ready to Build status with aggregate DC capacity of
approximately 30 MW.
The projects to be developed under the JDA will be subject to the
ERCOT Distributed Generation, or DG, Scheme for projects of up to 10 MW AC capacity and the applicable electricity market is the “ERCOT
North” zone market. Under the DG Scheme, ERCOT (the electricity regulator of the State of Texas), allows owners of generation assets
to sell electricity to Qualified Service Entities (QSE’s) at market rates under Real Time or Day Ahead prices at the local nodes
where the projects are located and/or to designated “Behind the Meter” clients under Power Purchase Agreements.
Principal Capital Expenditures and Divestitures
From 2017 through March 15, 2023, we made aggregate capital expenditures
of approximately €257 million in connection with our operating Spanish PV Plants. Our aggregate capital expenditures in connection
with the acquisition of the Talmei Yosef PV Plant was approximately €11.9 million. Our aggregate capital expenditures in connection
with PV Plants under development in Europe and Israel was approximately 22.9 million. The aggregate capital expenditures in connection
with the Manara PSP through March 15, 2023, including amounts recorded in the general and administrative expense, were approximately 120
million. From 2017 through March 15, 2023, capital expenditures incurred by the project companies in connection with the Waste-to-Energy
Projects in the Netherlands were approximately €36 million.
For further information on our financing activities please refer
to “Item 4.B: Business Overview” and “Item 5: Operating and Financial Review and Prospects.”
The SEC maintains an Internet site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding registrants that we file electronically with the SEC. These
SEC filings are also available to the public from commercial document retrieval services. Our website is http://www.ellomay.com.
The information on our website is not incorporated by reference into this annual report.
We are involved in the production of renewable
and clean energy. We own seven PV Plants that are operating and connected to their respective national grids as follows: (i) five photovoltaic
plants in Spain with an aggregate installed capacity of approximately 35.9 MW, (ii) 51% of Talasol, which owns a photovoltaic plant with
installed capacity of 300 MW in the municipality of Talaván, Cáceres, Spain that was connected to the Spanish electricity grid
in the end of December 2020, and (iii) one photovoltaic plant in Israel with an installed capacity of approximately 9 MW. In addition,
we indirectly own: (i) 9.375% of Dorad, which owns an approximate 860 MWp dual-fuel operated power plant in the vicinity of Ashkelon,
Israel, (ii) Ellomay Solar Italy One SRL and Ellomay Solar Italy Two SRL that are constructing photovoltaic plants with installed capacity
of 14.8 MW and 4.95 MW, respectively, in the Lazio Region, Italy, (iii) Ellomay Solar Italy Four SRL, Ellomay Solar Italy Five SRL
and Ellomay Solar Italy Ten SRL that are developing photovoltaic plants with installed capacity of 15.06 MW, 87.2 MW and 18 MW, respectively,
in the Lazio Region, Italy, (iv) Groen Gas Goor B.V., Groen Gas Oude-Tonge B.V. and Groen Gas Gelderland B.V., project companies operating
anaerobic digestion plants in the Netherlands, with a green gas production capacity of approximately 3 million, 3.8 million and 9.5 million
Normal Cubic Meter, or Nm3, per year, respectively and (v) 83.333% of Ellomay PS, which is constructing the Manara PSP. We also develop
PV projects in Italy, Spain and Israel.
Photovoltaic Industry Background
Clean electricity generation accounts for a growing share of electric
power. While a majority of the world’s current electricity supply is still generated from fossil fuels such as coal, oil and natural
gas, these traditional energy sources face a number of challenges including fluctuating prices, security concerns over dependence on imports
from a limited number of countries, and growing environmental concerns over the climate change risks associated with power generation
using fossil fuels. As a result of these and other challenges facing traditional energy sources, governments, businesses and consumers
are increasingly supporting the development of alternative energy sources, including solar energy, the fastest-growing source of renewable
By extracting energy directly from the sun and converting it into
an immediately usable form, either as heat or electricity, intermediate steps are eliminated.
Trends in the Industry
Overcoming severe supply chain bottlenecks and Covid-19 related
restrictions, 41.4 GW of new solar PV capacity was connected to the grid in 2022 throughout EU Member States, a 47% increase compared
to 2021. This follows the substantial addition of 41% in 2021. The total solar capacity of EU Member States reached 208.9 GW in 2022,
an increase of 25% from 2021. According to “SolarPower Europe’s” base case scenario, additional annual PV installations
between 2023-2026 are forecasted to be 54 GW, 62 GW, 74 GW and 85 GW, respectively. Furthermore, “SolarPower Europe” expects
the total solar capacity of the EU to reach 920 GW by 2030 in their base case scenario, surpassing the 750 GW target set by the REPowerEU
In 2022, the European Commission presented the REPowerEU Plan,
which is “in response to the hardships and global energy market disruption caused by Russia's invasion of Ukraine”. As part
of the REPowerEU Plan, the EU aims to connect over 400 GW of solar photovoltaic facilities by 2025 and approximately 750 GW by 2030. Furthermore,
the European Commission proposed to increase the EU’s 2030 target for renewable energy to 45% from 40%.
In October 2020, the Israeli government approved a plan to increase
its solar capacity by 15 GW and raise its target proportion of national electricity drawn from renewables from 17% to 30% by 2030. The
2025 target was set at 20%. According to the Israeli Electricity Authority’s 2023 Annual Conference, the total installed renewable
energy capacity is expected to be 9.6 GW by the end of 2025, of which 4.5 GW will be in dual-use photovoltaic systems and 2.6 GW will
be from land photovoltaic systems. This is expected to constitute 35% of the total capacity expected in Israel at that time. Furthermore,
the Israeli Electricity Authority forecasts that the total installed renewable energy capacity will be 16 GW by the end of 2030.
According to the 2022 Annual Renewable Energy Report of the Israeli
Electricity Authority, Israel’s total installed renewable energy capacity reached approximately 4.8 GW by the end of 2022, representing
21% of the total capacity in the Israeli electricity market and reflecting an average increase of 37% per annum during the years 2018-20.
The report shows that solar energy contributed 3.3 GW out of the total 4.8 GW, with 2 GW from dual-use photovoltaic systems and 1.3 GW
from land photovoltaic systems. This report also reveals an increase in the installations during recent years with a monthly average of
43 MW, 78 MW and 96 MW during 2020, 2021 and 2022, respectively. In addition, the report highlights that the actual consumption rate of
renewable energy in Israel crossed the 10% threshold for the first time in 2022, with renewable energy representing 10.1% of the actual
electricity consumed during the year.
Anatomy of a Solar Power Plant
Solar power systems convert
the energy in sunlight directly into electrical energy within solar cells based on the photovoltaic effect. Multiple solar cells, which
produce DC power, are electrically interconnected into solar panels. A typical solar panel may have several dozens of individual solar
cells. Multiple solar panels are electrically wired together and are electrically wired to an inverter, which converts the power from
DC to AC and interconnects with the utility grid.
Solar electric cells convert
light energy into electricity at the atomic level. The conversion efficiency of a solar electric cell is defined as the ratio of the sunlight
energy that hits the cell divided by the electrical energy that is produced by the cell. In recent years, effort in the industry has been
directed towards the development of solar cell technology that reduces per watt costs and increases conversion efficiency. Solar electric
cells today are getting better at converting sunlight to electricity, but commercial panels still harvest only part of the radiation they
are exposed to. Scientists are working to improve solar panels’ efficiency using various methods.
Solar electric panels are
composed of multiple solar cells, along with the necessary internal wiring, aluminum and glass framework, and external electrical connections.
Inverters convert the DC
power from solar panels to the AC power distributed by the electricity grid. Grid-tie inverters synchronize to utility voltage and frequency
and only operate when utility power is stable (in the case of a power failure these grid-tie inverters shut down to safeguard utility
personnel from possible harm during repairs). Inverters also operate to maximize the power extracted from the solar panels, regulating
the voltage and current output of the solar array based on sun intensity.
Monitoring. There are two
basic approaches to access information on the performance of a solar power system. The most accurate and reliable approach is to collect
the solar power performance data locally from the counters and the inverter with a hard-wired connection and then transmit that data via
the internet to a centralized database. Data on the performance of a system can then be accessed from any device with a web browser, including
personal computers and cell phones. As an alternative to web-based remote monitoring, most commercial inverters have a digital display
on the inverter itself that shows performance data and can also display this data on a nearby personal computer with a hard-wired or wireless
Tracker Technology vs. Fixed Technology
Some of our PV Plants use fixed solar panels while others use panels
equipped with single or dual axis tracking technology. Tracking technology is used to minimize the angle of incidence between the incoming
light and a photovoltaic panel. As photovoltaic panels accept direct and diffuse light energy and panels using tracking technology always
gather the available direct light, the amount of energy produced by such panels, compared to panels with a fixed amount of installed power
generating capacity, is higher. As the double axis trackers allow the photovoltaic production to stay closer to maximum capacity for many
additional hours, an increase of approximately 20% (single) - 30% (dual) of the photovoltaic modules plane irradiation can be estimated.
On the other hand, tracker technology requires more complex and expensive operations and maintenance and, as this is a more sophisticated
technology, it is exposed to more defects.
Energy Storage Solutions
According to a new study published by the European Commission,
innovative energy storage solutions will play an important role in ensuring the integration of renewable energy sources into the grid
in the EU at the lowest cost. This will help the EU reach its 2050 de-carbonization objectives under the European Green Deal while ensuring
Europe’s security of energy supply. This independent study, titled “Energy Storage Study - Contribution to the security of
electricity supply in Europe”, analyzes the different flexibility energy storage options that will be needed to reap the full potential
of the large share of variable energy sources in the power system. This study notes that the main energy storage reservoir in the EU at
the moment is pumped hydro storage. However, as prices fall, new battery technology projects are emerging - such as lithium-ion batteries
and behind-the-meter storage.
Solar Power Benefits
The direct conversion of light into energy offers the following
benefits compared to conventional energy sources:
Reliability - Solar energy production does not require fossil fuels and is therefore less dependent on this limited natural resource
with volatile prices. Although there is variability in the amount and timing of sunlight over the day, season and year, a properly
sized and configured system can be designed to be highly reliable while providing long-term, fixed price electricity supply.
Convenience - Solar power systems can be installed on a wide range of sites, including small residential roofs, the ground, covered
parking structures and large industrial buildings. Most solar power systems also have few, if any, moving parts and are generally guaranteed
to operate for 20-25 years, resulting in low maintenance and operating costs and reliability compared to other forms of power generation.
Cost-effectiveness - While solar power has historically been more expensive than fossil fuels, there are continual advancements in
solar panel technology which increase the efficiency and lower the cost of production, thus making the production of solar energy even
more cost effective.
Environmental - Solar power is one of the cleanest electric generation sources, capable of generating electricity without air or
water emissions, noise, vibration, habitat impact or waste generation. In particular, solar power does not generate greenhouse gases that
contribute to global climate change or other air pollutants, as power generation based on fossil fuel combustion does, and does not generate
radioactive or other wastes as nuclear power and coal combustion do. It is anticipated that environmental protection agencies will limit
the use of fossil fuel based electric generation and increase the attractiveness of solar power as a renewable electricity source.
Security - Producing solar power improves energy security both on an international level (by reducing fossil energy purchases from
hostile countries) and a local level (by reducing power strains on local electrical transmission and distribution systems).
These benefits impacted our decision to enter into the solar photovoltaic
market. We believe the fluctuations in fuel costs, environmental concerns and energy security make it likely that the demand for solar
power production will continue to grow. Many countries, including Italy and Spain, have put incentive programs in place to spur the installation
of grid-tied solar power systems. For further information please see “Material Effects of Government Regulations on the PV Plants.”
Measuring the Performance of Solar Power Plants
One of the main factors for measuring the efficiency and quality
of a power plant is the performance ratio (PR). The performance ratio is stated as percent and describes the relationship between the
actual and theoretical energy outputs of the PV plant. This calculation provides the proportion of the energy that is actually available
for export to the electricity grid after deduction of any energy losses and of energy consumption for the operation of the PV plant. The
performance ratio can be used to compare PV plants at different locations as the calculation is independent of the location of a PV plant.
The closer the performance ratio is to 100%, the more efficient the relevant PV plant is operating, however a PV plant cannot reach a
performance ratio of 100% as there are inevitable losses and use of energy of the PV plant. High-performance PV plants can however reach
a performance ratio higher than 80%.
There are several risk factors associated with the photovoltaic
market. See “Item 3.D: Risk Factors - Risks Related to our Business.”
Our Operating Photovoltaic Plants
The following table includes information concerning our operating
Installed Production / Capacity1
Revenue in the year ended December 31, 2021 (in thousands)2
Revenue in the year ended December 31, 2022 (in thousands)2
Municipality of Córdoba, Andalusia, Spain
PV – Fixed Panels
Province of Murcia, Spain
PV – Fixed Panels
Province of Murcia, Spain
PV – Fixed Panels
Province of Murcia, Spain
PV – Fixed Panels
Talmei Yosef, Israel
PV – Fixed Panels
Talaván, Cáceres, Spain
PV – Fixed Panels
Talaván, Cáceres, Spain
PV – Fixed Panels
The actual capacity of a photovoltaic plant is generally subject to a degradation of approximately 0.5% per year, depending on climate
conditions and quality of the solar panels.
These results are not indicative of future results due to various factors, including changes in the regulation and in the climate
and the degradation of the solar panels.
The initial tariff of NIS 0.9631/kWh was fixed for a period of 20 years and is updated once a year based on changes to the Israeli
CPI of October 2011. The tariff was NIS 0.9946/kWh in 2021 and increased to NIS 1.0185/kWh in 2022.
As a result of the accounting treatment of the Talmei Yosef PV Plant as a financial asset, out of total proceeds from the sale of
electricity of approximately €4.3 million and €4.5 million for the years ended December 31, 2021 and 2022, respectively, only
revenues related to the ongoing operation of the plant in the amount of approximately €1 million and €1.1 million for the
years ended December 31, 2021 and 2022, respectively.
The Talasol PV Plant is 51% owned by us and the revenues included in the table reflect 100% ownership.
As the Ellomay Solar PV Plant was connected to the Spanish national grid during June 2022, no revenues were recorded in connection
with this PV Plant for the year ended December 31, 2021 and during the year ended December 31, 2022 until connection to the national grid.
The construction and operation of photovoltaic plants entail the
engagement of Contractors, in order to build, assemble, install, test, commission, operate and maintain the photovoltaic power plants,
for the benefit of our wholly-owned subsidiaries.
Each of the PV Plants is constructed and operates on the basis of the following main
Development Agreement with a local experienced developer for the provision of development services with respect to photovoltaic greenfield
projects from initial processing, obtaining of approvals and clearances with the aim of reaching “ready to build” status;
an Engineering, Procurement & Construction projects Contract, or an EPC Contract, which governs the installation, testing and
commissioning of a photovoltaic plant by the respective Contractor;
an Operation and Maintenance (O&M) Agreement, which governs the operation and maintenance of the photovoltaic plant by the respective
a number of ancillary agreements, including:
one or more “surface rights agreements” or “lease agreements” with the land owners, which provide the terms
and conditions for the lease of land on which the photovoltaic plants are constructed and operated;
optionally, one or more “project financing agreements” with financing entities, as were already executed with respect
to several of the PV Plants and as more fully described below, and as may be executed in the future with respect to one or more of the
remaining PV Plants; and
a stock purchase agreement in the event we acquire an existing company that owns a photovoltaic plant that is under construction
or is already constructed.
With respect to our Spanish PV Plants –
Standard “power distribution agreements” with the applicable Spanish power distribution grid company such as Endesa Distribución
Eléctrica, S.L.U., or Endesa, or Iberdrola Distribución Eléctrica, S.A.U., or Iberdrola, regarding the rights and obligations
of each party, concerning, inter alia, the evacuation of the power generated in the plant to the grid;
Standard “representation agreements” with an entity that will act as the energy sales agent of the PV Plant in the energy
market, in accordance with Spanish Royal Decree 436/2004; and
Assignment Contract (“contrato de encargo de proyecto”) and the Technical Access Contract (“Contracto técnico
de acceso a la red de transporte”) with Red Eléctrica de España (the Spanish grid operator, or REE).
With respect to our Israeli PV Plant:
A power purchase agreement with the IEC for the purchase of electricity by the IEC with a term of 20 years commencing on the date
of connection to the grid.
With respect to Italian PV Plants to be developed or held in the future –
one or more “power purchase agreements” with GSE, specifying the power output to be purchased by GSE for resale and the
consideration in respect thereof or, alternatively, a “power purchase agreements” with a private energy broker, specifying
the power output to be purchased for resale and the consideration in respect thereof;
one or more “interconnection agreements” with the Enel Distribuzione S.p.A, or ENEL, the Italian national electricity
grid operator, which provide the terms and conditions for the connection to the Italian national grid; and
to the extent the FiT or any other incentive will be applicable – standard “incentive agreements” with GSE, Italy’s
energy regulation agency responsible, inter alia, for incentivizing and developing renewable energy sources in Italy and purchasing energy
and re-selling it on the electricity market. Under such agreements, it is anticipated that GSE will grant the applicable FiT governing
the purchase of electricity (FiTs are further detailed in “Material Effects of Government Regulations on the Italian PV Plants”).
The summaries below describe the material terms of the O&M
Agreements executed in connection with our operating PV Plants.
Operation and Maintenance Agreements
As mentioned above, each of the PV Plants is operated and maintained
by a local contractor pursuant to an O&M Agreement executed between such Contractor and our subsidiary that owns the PV Plant, or
the PV Principal. Each O&M Agreement sets out the terms under which each of the Contractors is to operate and maintain the PV Plant.
In our Talmei Yosef PV Plant and Talasol PV Plant, a technical
adviser, or the Technical Advisor, was appointed by the Financing Entity, to monitor the performance of the services. Our current Technical
Advisers in Spain and Israel is a leading technical firm which appears in the banks’ whitelist.
We expect that, if required, we could replace some or all of our
current O&M Contractors with other contractors and service providers. However, we cannot ensure that if such replacement shall take
place we will receive the same terms and warranties from the new contractor. In addition, to the extent the relevant PV Plant received
financing from a bank or other financing institution, the applicable financing agreement generally requires that we obtain the financing
institution’s approval for the replacement of an O&M contractor.
Each O&M Agreement governs the provision of the following services:
(i) Subscription Services, which include Preventive Maintenance Services (maintenance services such as cleaning of panels and taking care
of vegetation, surveillance, remote supervision of operation and full operational status of the PV Plant) and Corrective Maintenance Services
(services to correct incidents arising at the PV Plant or to remedy any anomaly in the operation of the PV Plant), and (ii) Non-Subscription
Services, which are all services outside the scope of the Subscription Services. In some cases, certain engagement agreements are executed
by us directly with service providers (such as internet, security services, etc.).
Based on the range of services offered by the Contractor, the annual
consideration for the Subscription Services in our operating PV Plants in Spain, other than Ellomay Solar and Talasol, varies from €12,800
to €20,700 per MWp (linked to the local Consumer Price Index) for each of the PV Plants, paid on a quarterly basis. The annual consideration
for the Talasol O&M services amounts to approximately €2 million, paid on a monthly basis. The annual consideration for the
Ellomay Solar O&M services amounts to approximately €0.19 million, paid on a monthly basis. The annual consideration for the
Talmei Yosef O&M services amounts to approximately NIS 0.6 million (approximately €0.18 million based on the average exchange
rate for converting the NIS to euro during the year ended December 31, 2022), paid on a quarterly basis. The Subscription Services fee
is fixed, and the Contractor is not entitled to request an increase in the price due to the occurrence of unforeseen circumstances. This
annual consideration does not include the price of the insurance policies to be obtained by the PV Principal, including all risk insurance
O&M Contractor’s Obligations, Representations and Warranties
The Contractor’s obligations under the O&M Agreement
include, inter alia, the duty to diligently perform the operation and maintenance services in
compliance with the applicable law and permits in a workmanlike manner and using the most advanced technologies, to manage the spare parts
and replenish the inventory as needed, and to assist the PV Principal and the Financing Entity in dealing with the authorities by providing
the necessary information required by such authorities. The Contractor represents and warrants, inter
alia, that it holds the necessary permits and authorizations, and that it has the necessary skills and experience to perform the
services contemplated by the O&M Agreement.
Each party may terminate the O&M Agreement (to the extent applicable,
after obtaining the approval of the financing entity) if the other is in breach of any of its obligations that remain uncured for 30 days
following written notice thereof.
The O&M Agreement is terminated if the Contractor is liquidated
or becomes bankrupt or insolvent, and on other similar grounds, unless the PV Principal is willing to continue the O&M Agreement.
The O&M Agreement also provides the parties the option to withdraw
from the agreement other than in the event of a breach by the other party, subject to certain circumstances and advance notice requirements.
The Talasol PV Plant
In June 2018, Talasol executed the Talasol PPA in respect of approximately
80% (75% based on P-50) of the output of a prospective photovoltaic plant for a period of 10 years. The Talasol PPA was executed with
a leading international energy company with a solid investment grade credit rating and a pan-European asset base, which is active in more
than forty countries and has a proven track record in financial hedges. The power produced by the Talasol PV Plant is sold in the open
market for the then current market power price. The Talasol PPA is expected to hedge the risks associated with fluctuating electricity
market prices by allowing Talasol to secure a certain level of income for the power production included under the Talasol PPA. The hedging
provides that if the market price goes below a price underpinned by the Talasol PPA, the Hedging Provider will pay Talasol the difference
between the market price and the underpinned price, and if the market price is above the underpinned price, Talasol will pay the Hedging
Provider the difference between the market price and the underpinned price. The hedge transaction became effective in March 2019.
In April 2019, the Talasol PV Plant reached financial closing and
we sold 49% of our holdings in Talasol to two entities and therefore our current ownership interest in the Talasol PV Plant is 51%.
As noted above, the Talasol PV Plant reached mechanical completion
in September 2020 and was connected to the electricity grid and electricity production commenced at the end of December 2020. In parallel
to the connection to the grid, hot commissioning tests have been initiated by the EPC contractor. PAC was achieved on January 27, 2021.
Agreements with Partners in Talasol
On April 17, 2019, Ellomay Luxembourg executed a Credit Facilities
Assignment and Sale and Purchase of Shares Agreement, or the Talasol SPA, with GSE 3 UK Limited and Fond-ICO Infraestructuras II, FICC,
or, together, the Talasol Partners, pursuant to which it agreed to sell to each of the Talasol Partners 24.5% of its holdings in Talasol.
The Talasol SPA further provided that Ellomay Luxembourg would
assign to the Talasol Partners, in equal parts, 49% of its rights and obligations under the agreements executed in connection with the
project finance obtained for the Talasol PV Plant. The Talasol SPA provided that the legal risks will be transferred to the Talasol Partners
on the closing date and the economic yields and results of operations of Talasol’s business will be transferred to the Talasol Partners
as from December 31, 2018.
The Talasol SPA included customary representations and warranties
of Ellomay Luxembourg and the Talasol Partners and a mutual indemnification mechanism for breaches of representations and warranties or
of undertakings, subject to time, minimum claims, minimum aggregate claims and maximum liability limitations, as a sole remedy, subject
to customary exceptions. The consummation of the transactions contemplated by the Talasol SPA was subject to the fulfillment or waiver
of several customary conditions precedent by June 30, 2019, including the fulfillment of all conditions precedent under the Talasol PV
Plant’s project finance and the entry by the Talasol Partners into an equity support agreement.
The transactions contemplated under the Talasol SPA were consummated
in April 2019. The aggregate purchase price paid by the Talasol Partners, in the amount of approximately €16.1 million, represented
49% of the amounts withdrawn and interests accrued from and by Talasol under its shareholder development costs credit facility in connection
with the Talasol PV Plant’s financing as of the closing date of the Talasol SPA (approximately €4.9 million), plus a payment
for 49% of Talasol’s shares (approximately €4.9 million) plus a premium of approximately €6.1 million. Of such aggregate
purchase price, the payment of €1.4 million was deferred until the achievement of a preliminary acceptance certificate, or PAC,
under the EPC agreement of the Talasol PV Plant. Following the achievement of PAC on January 27, 2021, the deferred payment amount of
€1.4 million was received by Ellomay Luxembourg.
On the closing date of the Talasol SPA, Ellomay Luxembourg and
the Talasol Partners entered into a Partners’ Agreement, or the Talasol PA, setting forth the relationship between the prospective
shareholders of Talasol, the governance and management of Talasol, the funding and financing of Talasol and the mechanism for future transfers
of Talasol’s shares. The Talasol PA provides that all matters brought for a vote at a partners’ meeting, other than specific
reserved matters, will be adopted by the majorities set forth in the Spanish Companies Act. The Talasol PA includes minority rights for
the Talasol Partners and provides that we will appoint the majority of the board members and that all matters brought for a vote at a
board of directors meeting will be adopted by a simple majority of the directors, other than specific matters.
The Talasol PA further provides that Ellomay Luxembourg will be
entitled to receive a management fee from Talasol in consideration for the administrative, support and management services to be provided
to Talasol by Ellomay Luxembourg. The Talasol PA includes restrictions on transfer of the shares of Talasol by Ellomay Luxembourg and
any of the Talasol Partners, which is prohibited for a certain period (other than in connection with certain customary permitted transfers)
and thereafter is subject to a right of first offer, tag along rights granted to the Talasol Partners on sales by Ellomay Luxembourg and
a drag along right granted to Ellomay Luxembourg.
The Talasol PV Plant has entered into its operational
stage, which entails several risks and uncertainties. For more information concerning these and other risks see under “Risk Factors
– Risks Related to our Business.” The projected production, revenues and other future results and outcomes included herein
are based on the current expectations and assumptions of the Company and its advisors and are subject to various conditions and circumstances.
Talasol PV Plant Project Finance
The Talasol PV Plant obtained project financing in connection with
the commencement of its construction. During January 2022, Talasol refinanced its previous financing. For more information concerning
the refinancing and the new financing of Talasol, see “Item 5.B: Liquidity and Capital Resources.”
On February 26, 2021, Ellomay Solar entered into an engineering,
procurement & construction agreement in connection with the Ellomay Solar PV Plant with METKA EGN Spain S.L.U., a 100% indirect subsidiary
of MYTILINEOS S.A., under the Renewables & Storage Development Business Unit.
The Ellomay Solar EPC Agreement provides a fixed and lump-sum amount
of €15.82 million for the complete execution and performance of the works defined in the EPC Agreement. The works include the engineering,
procurement and construction of the Ellomay Solar Project and the ancillary facilities for injecting power into the grid and performance
of two years of O&M services. The EPC Agreement contains additional standard provisions, including liquidated damages in connection
with delays and performance, performance guarantees, suspension and termination.
In June 2022, the Ellomay Solar PV Plant was connected to the electricity
grid and commenced production of electricity.
Israeli Tender Process for PV plus Storage
On July 19, 2020, we were notified that we are one of the winners
of a first-in-kind quota tender process published by the Israeli Electricity Authority for combined photovoltaic and electricity storage
facilities in Israel. The tariff per kWh determined in the tender process is NIS 0.199 for a quota of 20 MW. This tariff is linked to
the Israeli CPI and is valid for a period of 23 years commencing on the commercial operation of each relevant facility.
As noted, the tender process was for a quota and we are currently
examining and expect to further examine potential sites for the construction of the facilities. With respect to each project we will be
required to obtain approvals, if applicable, from the Israel Land Authority, or ILA, in connection with the site for such project, and
to take all other actions necessary for the promotion of such project. Pursuant to the terms of the tender, we are further required to
receive approvals for connection to the electricity grid and a grid synchronization approval from the Israeli Electric Company within
up to 37 months. Following the receipt of the notice from the Israeli Electricity Authority, we submitted a performance guarantee in an
aggregate amount of NIS 12 million (approximately €3 million based on the euro/NIS exchange rate at that time). During 2022, we
started developing the projects under this tender, the Komemiyut project, intended for 21 MW PV and 47 MW / hour batteries that obtained
an approval for connection to the grid and is in the process of receiving a building permit and construction is planned to commence in
the third quarter of 2023, and the Qelahim project, intended for 15 MW PV and 33 MW / hour batteries that obtained an approval for connection
to the grid, and is in the final stages of the zoning approval.
The continued development and construction
of the facilities depends upon various factors, including, but not limited to, the Company’s ability to locate sites for construction,
enter into EPC agreements and obtain project finance and all other required approvals, all upon terms acceptable to us. Therefore, there
is no assurance as to whether and when such process will be completed.
Framework Agreements for the Development of
PV Projects in Italy
First Framework Agreement
In November 2019, Ellomay Luxembourg executed a Framework Agreement,
or the First Framework Agreement, with an established and experienced European developer and contractor. Pursuant to the First Framework
Agreement, the developer will scout and develop photovoltaic greenfield projects in Italy with the aim of reaching an aggregate authorized
capacity of at least 250 MW over a three-year period.
The First Framework Agreement provides that each project will be
presented to Ellomay Luxembourg when it becomes “ready to build”. Thereafter, if Ellomay Luxembourg accepts the project, the
developer is obligated to transfer to Ellomay Luxembourg 100% of the share capital of the entity that holds the rights to the project.
With respect to each project, subject to the conditions set forth in the First Framework Agreement, Ellomay Luxembourg will enter into
engineering, procurement and construction, or EPC, and O&M contracts with the developer to construct and operate the projects.
The First Framework Agreement provides that when the first project
under the First Framework Agreement achieves the positive environmental impact assessment, the parties will negotiate the terms of a model
lump-sum, turnkey EPC contract and O&M contract that will be executed with the developer in connection with all projects acquired
under the First Framework Agreement.
In connection with the execution of the First Framework Agreement,
Ellomay Luxembourg paid the developer an advance payment of approximately €1.6 million, based on the target aggregate project capacity
of 250 MW, and undertook to pay an additional advance payment per each project when the project submits its environmental impact assessment
application. In the event the target aggregate capacity is not achieved within a three-year period or in the event a project does not
reach “ready to build” status, the advance payment will be proportionately refunded.
Second Framework Agreement
In December 2019, Ellomay Luxembourg executed an additional Framework
Agreement, or the Second Framework Agreement, with an established and experienced European developer. Pursuant to the Second Framework
Agreement, the developer will provide Ellomay Luxembourg with development services with respect to photovoltaic greenfield projects in
Italy in the scope of 350 MW with the aim of reaching an aggregate “ready to build” authorized capacity of at least 265 MW
over a period of forty-one months.
The Second Framework Agreement provides that the developer will
offer all projects identified during the term of the Second Framework Agreement exclusively to Ellomay Luxembourg and that, with respect
to each project acquired by Ellomay Luxembourg, the developer will be entitled to provide development services until it reaches the “ready
to build” status. The parties agreed on a development budget including a monthly development service consideration, to be paid to
the developer and all other payments for the tasks required to bring the projects to a ready to build. In addition, Ellomay Luxembourg
undertook to pay a success fee to the developer with respect to each project that achieves a “ready to build” status. Currently
development is progressing as planned.
In April 2021, the Second Framework Agreement was amended and the
target of reaching an aggregate “ready to build” authorized capacity of at least 265 MW was increased to 365 MW.
Our wholly-owned Italian subsidiaries, Ellomay Solar Italy
One SRL and Ellomay Solar Italy Two SRL, are constructing photovoltaic plants with installed capacity of 14.8 MW and 4.95 MW, respectively,
in the Lazio Region, Italy and our wholly-owned subsidiaries, Ellomay Solar Italy Four SRL, Ellomay Solar Italy Five SRL and Ellomay Solar
Italy Ten SRL are developing photovoltaic plants with installed capacity of 15.06 MW, 87.2 MW and 18 MW, respectively, in the Lazio Region,
Italy that have reached Ready to Build status, all under the Second Framework Agreement.
The advancement and development of projects
that will become part of the First Framework Agreement and the Second Framework Agreement is subject to various conditions, including
receipt of regulatory approvals and authorizations and procurement of land rights. There can be no assurance as to the aggregate capacity
of projects that will by identified by the developer and that will thereafter reach the “ready to build” status, and as to
our decision and success in completing construction of any of such projects. Any future decision of the Company with respect to the continued
development of projects will be subject to the relevant circumstances existing at the time such decision will be made. In addition, projects
in the construction stage are exposed to several risks, including delays in supply of equipment and defaults by contractors as noted under
“Item 3.D: Risk Factors” above.
Our competitors are mostly other entities that seek land and contractors
to construct new power plants on their behalf or seek to purchase existing photovoltaic power plants. The competition in the Israeli photovoltaic
sector concentrates on the ability to receive licenses from the Israeli Electricity Authority for the construction of new photovoltaic
plants, which is subject to a quota as more fully described below and the ability to acquire existing plants that were already granted
an electricity production license. The market for solar energy is intensely competitive and rapidly evolving, and many of our competitors
who strive to construct new solar power plants have established more prominent market positions and are more experienced in this field.
Our competitors in this market include Etrion Corporation (TSX, TO:ETX), Sunflower Sustainable Investments Ltd. (TASE:SNFL), Nofar Energy
Ltd, (TASE:NOFR), Doral Group Renewable Energy Resurcs Ltd. (TASE:DORL), Meshek Energy-Renewable Energies Ltd. (TASE:MSKE), Shikun &
Binui Energy Ltd. (TASE:SBEN), Enlight Renewable Energy Ltd. (TASE:ENLT), Energixs Renewable Energies Ltd. (TASE:ENRG), Allerion Clean
Power S.p.A. (ARN.MI), NextEra Energy Partners (NYSE:NEP), NRG Yield (NASD:NYLD), TransAlta Renewables (TSX:RNW), Pattern Energy Group
(NASD:PEGI), Abengoa Yield PLC (NASD:ABY), NextEnergy Solar Fund Limited (LSE:NESF), Bluefield Solar Income Fund Limited (LSE:BSIF), Infinis
Energy PLC (LSE:INFI), The Renewables Infrastructure Group Limited (LSE:TRIG) and TerraForm Power, Inc. (NASD:TERP). If we fail to attract
and retain ongoing relationships with solar plants developers, we will be unable to reach additional agreements for the development and
operation of additional solar plants, should we wish to do so.
The customers of our PV Plants are generally the local operators
of the national grid and our PV Plants do not provide electricity or enter into power purchase agreements with private customers. The
agreements with the customers include customary termination provisions, including in connection with breaches of the electricity producer
and in the event the plant causes disruptions with the grid.
Solar power production has a seasonal cycle due to its dependency
on the direct and indirect sunlight and the effect the amount of sunlight has on the output of energy produced. We produce a substantial
amount of our PV Plants’ energy during the summer months when sunlight conditions tend to be most favorable. Although we received
the technical calculation of the average production recorded in the area of each of our PV Plants from our technical advisors and incorporated
such data into our financial models, adverse meteorological conditions, including climate change and extreme weather conditions, can have
a material impact on the PV Plants’ output and could result in production of electricity below expected output. For example, the
radiation in Spain during the fourth quarter of 2022 was relatively lower than the radiation during the same period in 2021, negatively
impacting the revenues from the Talasol PV Plant and the Ellomay Solar PV Plant.
Sources and Availability of Components of the
Solar Power Plant
As noted above, the construction of our PV Plants entails the assembly
of solar panels and inverters purchased from third party suppliers. A critical factor in the success of our PV Plants is the existence
of reliable panel suppliers, who guaranty the performance and quality of the panels supplied. Degradation in such performance above a
certain minimum level, generally 90% during the initial ten-year period and 80% during the following ten-fifteen years period, is guaranteed
by the panel suppliers. However, if any supplier is unreliable or becomes insolvent, it may default on warranty obligations.
There are currently sufficient numbers of solar panel manufacturers
at sufficient quality and we are not currently dependent on one or more specific suppliers. Silicon is a dominant component of the solar
panels and inverters are also a material component of the photovoltaic systems, and although manufacturing abilities of silicon have increased
over-time, any shortage of silicon, or any other material component necessary for the manufacture of the solar panels, or any shortage
of other components, including inverters, may adversely affect our business. Shortages in materials may also impact the ability to construct
batteries designated for energy storage.
The Covid-19 pandemic has put pressure on global supply chains
with factory closures, import tariffs, shortages of raw materials, and shipping bottlenecks creating supply chain shortages and delays.
Although the shortage in silicon is currently less material, the inverters continue to be in short supply due to the global shortage in
semiconductor chips that started in 2020. It may take several years until solar module prices stabilize.
Material Effects of Government Regulations
on the PV Plants
The development, construction and operation of a photovoltaic plant
is subject to complex legislation covering, inter alia, building permits, licenses, the governmental
long-term incentive scheme and security considerations. The following is a brief summary of the regulations applicable to our PV Plants.
In June 2021 the EU established the European Climate Law, in which
the previously adopted CO2 reduction goals are made legally binding for the EU member states. The European Climate Law includes the obligation
for Europe’s economy and society to become climate-neutral by 2050 and also provides the intermediate target for a 55% cut in greenhouse
gas emissions in 2030 compared to 1990 levels. In order to become climate-neutral in 2050, the EU has furthermore set out intermediate
targets for 2030, for example the target that 32% of the energy production in the EU must come from renewable sources. The latter follows
from the European Renewable Energy Directive. The EU is currently negotiating this Directive to increase the intermediate target to at
least 40%. In addition, as noted above in May 2022 the European Commission proposed, as part of the REPowerEU program, to increase the
target to 45% by 2030, to be implemented through RED III. This program furthermore focuses on saving energy, producing clean energy and
diversifying the EU’s energy supplies.
Material Effects of Government Regulations on the Italian PV Plants
The regulatory framework surrounding photovoltaic plants located
in Italy consists of legislation at the Italian national and local level. Relevant European legislation has been incorporated into Italian
legislation, as described below.
Environmental Impact Assessment
(Valutazione di Impatto Ambientale – VIA)
According to Legislative Decree no. 152 of 3 April 2006, or Legislative
Decree no. 152/2006, regulating environmental matters:
PV projects with an overall power capacity exceeding 1 MW are subject to the Environmental Impact Assessment screening procedure,
or EIA Screening, performed by the relevant region. At the end of the EIA Screening procedure, the competent authority determines whether
or not the PV project should be subject to the ordinary Environmental Impact Assessment procedure, or EIA; and
PV projects with an overall power capacity exceeding 10 MW are subject to the EIA performed by the state.
The authorization procedure follows different procedures depending
on whether the project falls under the EIA procedure of the state or of the relevant region, namely:
PV projects falling within EIA procedure of the regions (i.e.,
PV projects with a power capacity between 1 MW and 10 MW) are authorized by means of Provvedimento
Autorizzatorio Unico Regionale, or PAUR, pursuant to Article 27-bis of the Legislative
Decree no. 152/2006, which includes the EIA and the Autorizzazione Unica (“Single
Authorization”), or AU, pursuant to Article 12 of Legislative Decree no. 387 of December 29, 2003, or Legislative Decree no. 387/2003,
and all other permits / nihil obstat / opinions necessary for the implementation of the PV project; and
PV projects falling within EIA procedure of the state (i.e.,
PV projects with a power capacity exceeding 10 MW) are authorized by means of the AU which includes the EIA decree.
Authorizations for the
construction and operation of PV Plants
Authorization for the construction and operation of PV Plants (Autorizzazione Unica)
The construction and operation of a PV plant is subject to receipt
of the AU pursuant to Article 12 of Legislative Decree no. 387/2003.
The AU is an authorization issued by the relevant region (or, as
the case may be, the province delegated by the region) which contains all permits, authorizations and opinions that would otherwise be
necessary to start the construction works (such as, building licenses, landscape authorizations, permits for the interconnection facilities,
The AU is issued following a procedure called Conferenza
di Servizi (“Steering Committee”) in which all relevant entities and authorities participate.
According to Article 27-bis
of Legislative Decree no. 152/2006, in case of PV projects falling within EIA procedure of the region, the interested party shall submit
to the region (or, as the case may be, the province delegated by the region) the PAUR application.
Under the PAUR procedure, all authorizations, understandings,
concessions, licenses, opinions, concerts, nihil obstat and consents, however denominated, necessary
for the implementation and operation of the same project are issued, including the EIA and AU.
Article 6 of Legislative Decree no. 28 of March 3, 2011, or Legislative
Decree no. 28/2011, introduced a simplified authorization procedure, or PAS, and aimed at authorizing certain typologies of renewable
energy power plants. According to the PAS procedure, an applicant can start the construction works of the PV project after 30 days of
the filing of the application with the competent municipality provided that the latter has in that time not raised objections and/or requested
According to Article 9-bis
of Legislative Decree no. 28/2011, the PAS procedure also applies to:
the construction of PV plants of up to 10 MW located in so called “suitable areas” (aree
idonee) (which are to be identified on the basis of the criteria set out in Legislative Decree no. 199 of November 8, 2021, as
detailed below); and
agri-photovoltaic plants located less than 3 km away from industrial, productive or commercial areas (with no power limitation).
Under the circumstances described in (i) and (ii) above, the
threshold for the subjection of in the applicable guidelines, including, for example, areas of significant cultural interest or protected
areas pursuant to applicable legislation, certain agricultural areas, areas of tourist attraction and areas that perform functions for
the conservation of biodiversity.
Furthermore, in relation to PV plants, non-substantial modifications
can be authorized through the so called Dichiarazione di Inizio Lavori Asseverata, or DILA,
i.e., a self-declaration confirmed by a qualified surveyor based on which the relevant works can start immediately. Specifically,
pursuant to Article 6-bis of Legislative Decree no. 28/2011, interventions on existing plants
and changes to authorized projects that do not entail an increase in the surface area occupied by the plants and the related connection
works, and regardless of the resulting electric power following the intervention, may be carried out with DILA without the need to submit
such changes to environmental and landscape assessments or to obtain any act of consent from the competent administrations.
In particular, works on ground-mounted PV plants may be carried
out with DILA if, also as a result of the modification of the technological solution used, through the replacement of modules and other
components and the modification of the layout of the system, they entail a variation of the maximum height from the ground not exceeding
Free building activity (Attività di edilizia libera)
According to Law Decree no. 13/2023 (still to be converted into
law) the construction and operation of PV plants:
in areas for industrial, productive or commercial use;
in closed and restored landfills or landfill lots; or
in quarries or lots of quarries that cannot be exploited further, for which the competent authority for the issue of the authorization
has certified the completion of the recovery and environmental restoration activities envisaged in the authorization title in compliance
with the regional regulations in force;
is considered an ordinary maintenance activity and is not subject to
the acquisition of permits, authorizations or acts of consent, however denominated.
Furthermore, the installation of PV plants on buildings is qualified
as ordinary maintenance and is not subject to any permit or authorizations (edilizia libera),
with the exception of buildings considered of public interest.
On November 8, 2021, Legislative Decree no. 199, or Legislative
Decree no. 199/2021 or Red II Decree, has been issued, implementing the EU RED II (Renewable Energy Directive, no. 2018/2001) on the promotion
of the use of energy from renewable sources.
Article 20 of the Legislative Decree no. 199/2021 provides for
the regulations for the identification of surfaces and areas suitable for the installation of renewable energy plants. In particular,
the aforementioned provision provided that ministerial decrees to be adopted by Ministry of the Environment and Energy Safety, or the
MASE, in consultation with the Ministry of Culture, or MC, and after agreement in the Unified Conference must establish uniform principles
and criteria for the identification of areas suitable and unsuitable for the installation of renewable source plants having a total capacity
at least equal to that identified as necessary by the National Integrated Energy and Climate Plan, or the PNIEC.
Subsequently, each region (within a further 180 days of the adoption
of the ministerial decrees) has to identify by specific regional laws the suitable areas, in compliance with the principles and criteria
established in the ministerial decrees. The decrees have not yet been issued, however, Legislative Decree no. 199/2021:
provided that pending the identification of suitable areas by the regions no moratoria or suspensions of the terms of authorization
procedures may be ordered; and
identified some suitable areas.
Pursuant to Article 20 of the Legislative Decree no. 199/2021,
as recently modified and supplemented, the following areas are to be considered as suitable areas:
the sites where plants of the same source are already installed and where non-substantial modification works are carried out, as
well as, for PV plants only, the sites where, on the date of entry into force of the provision, there are photovoltaic plants on which,
without change in the occupied area or otherwise with changes in the occupied area within the limits referred to in (vi)(a) below, substantial
modification work is carried out for refurbishment, repowering or complete reconstruction, including with the addition of storage systems
with a capacity not exceeding 8 MWh for each MW of power of the photovoltaic plant;
the areas of sites undergoing reclamation;
quarries and mines that have ceased, not reclaimed or abandoned or are in an environmentally degraded condition;
sites and facilities at the disposal of Italian State Railways Group companies and rail infrastructure managers as well as highway
sites and facilities in the availability of the airport management companies within the perimeter of relevance of the airports of
the smaller islands subject to the necessary technical verifications by the National Civil Aviation Authority;
exclusively for photovoltaic plants, including those with ground-mounted modules, in the absence of constraints under Part Two of
the Legislative Decree no. 42 of January 22, 2004, or the Cultural Heritage and Landscape Code:
areas classified as agricultural, enclosed within a perimeter whose points are not more than 500 meters from areas of industrial,
artisanal and commercial use, including sites of national interest, as well as quarries and mines;
areas within industrial plants and establishments, as defined in Legislative Decree no. 152/2006, as well as classified agricultural
areas enclosed within a perimeter whose points are no more than 500 meters from the same plant or establishment;
the areas adjacent to the highway network within a distance not exceeding 300 meters; and
without prejudice to the provisions of points above, areas that are not included in the perimeter of property subject to protection
under the Cultural Heritage and Landscape Code, nor fall within the buffer zone of property subject to protection under Part Two or Article
136 of the same Legislative Decree. The buffer strip shall be determined by considering a distance from the perimeter of protected property
of 500 metres for photovoltaic plants.
In order to further facilitate authorization procedures in suitable
areas, Article 22 of the Legislative Decree no. 199/2021 provided that:
in procedures for the authorization of power production facilities powered by renewable sources on suitable areas, including those
for the adoption of the environmental impact assessment resolution, the competent authority for landscape matters shall express a mandatory
non-binding opinion. After the time limit for the expression of the non-binding opinion has expired, the competent authority shall in
any case take action on the permit application; and
the time limits for permit procedures for plants in suitable areas shall be reduced by one-third.
Such rules shall also apply, where they fall on suitable areas,
to the electrical infrastructure for the connection of plants for the production of energy from renewable sources and those necessary
for the development of the national electricity transmission grid, if strictly functional to the increase of energy that can be produced
from renewable sources.
Connection to the National Grid
The procedures for the connection to the national grid are provided
by the Regulatory Authority for Energy, Networks and Environment (Autorità di Regolazione per Energia
Reti e Ambiente, or ARERA. Currently, the procedure to be followed for the connection is
regulated by ARERA Resolution no. 99 of 2008 (Testo Integrato delle Connessioni Attive, or TICA),
as subsequently integrated and amended.
According to TICA, an application for connection must be filed,
depending on the power capacity of the PV plant, with the competent local / national grid operator, after which the latter issues in favor
of the applicant the connection estimate for the connection costs of the PV project, including the Soluzione
Tecnica Minima Generale, or STMG. Depending on the grid operator, the STMG shall be accepted within 45 or 120 days of its issuance.
However, for the authorization to the connection to become definitive, all relevant authorization procedures (such as easements, ministerial
nulla osta, etc.) must be successfully completed.
There are three alternative modalities to sell electricity:
by way of sale on the electricity market (Italian Power Exchange - IPEX), the so called “Borsa Elettrica”;
through bilateral contracts with wholesale dealers; and
via the so-called “Dedicated Withdrawal” introduced by ARERA Resolution no. 280/07 and subsequent amendments. This is
the most common way of selling electricity, as it affords direct and quick negotiations with the national energy handler (GSE), which
will in turn deal with energy buyers on the market.
The Incentive Tariff System for PV Plants
The Italian government promotes renewable energies by providing
certain incentives. In the past, these incentives were provided mainly through granting of a fixed Feed-in Tariff, or FiT, for a period
of 20 years from the entry into operation of a PV plant. The FiT was determined with reference to the nominal power of the PV plant, the
characteristics of the plant (plants were divided into non-integrated, partially integrated and architecturally integrated) and the year
on which the plant has been connected to the grid.
On July 4, 2019, the Italian Ministry for Economic Development
issued a decree setting out a new incentive scheme for renewable energy plants including PV plants (Decree 4 July 2019, or the FER1 Decree).
With reference to PV plants, the FER1 Decree divides the PV plants eligible for incentives into two groups according to type, renewable
energy source and category of intervention:
Includes PV plants of new construction.
includes PV plants of new construction whose modules are installed to replace roofs
of buildings and farm buildings on which asbestos or fibre cement is completely removed.
With respect to PV plants, the FER1 Decree provides incentives
that are determined mainly based on the PV plant capacity. Additional bonuses are granted to plants below 1 MWp installed as replacement
of asbestos rooftops (included in group called “A-2” as set forth above) and to plants
with power below 100 kW installed on buildings provided that the amount of self-consumed energy is equal at least to 40% of the total
net production (€10/MWh). Below is a table summarizing the amount of the applicable reference tariff:
Power level (kW)
A-2 plants Bonus (€/MWh)
Bonus for self-consumption (€/MWh)
20 <P ≤100
100 <P ≤1000
20 <P ≤100
100 <P ≤1000
There are two different ways of accessing the incentives depending
on the power of the PV plant and the group to which it belongs:
Enrolment in Registers – PV plants with a power capacity of more than 20 kW and less than 1 MW that belong to Groups A and
A-2 must be enrolled in the Registers, through which the available power quota is allocated on the basis of specific priority criteria.
With respect to plants below 1 MW, the first criterion is the installation of the plant in areas such as closed dumps or mines, or (for
A-2 plants) on public buildings such as schools or hospitals. This is aimed at giving preference to environment-friendly plants and therefore,
for the avoidance of doubt, such plants will be preferred to other plants even if the tariff reduction set out in the application is lower.
Participation to Auction Procedures – PV plants with a power capacity greater than or equal to 1 MW that belong to Groups A
must participate in the Auction Procedures, through which the available power quota is allocated, according to the highest discount offered
on the incentive level and, at equal discount, applying further priority criteria. Incentives are awarded for a period of 20 years at
the outcome of seven tenders held between September 2019 and September 2021, whereby the effective granted tariff will be equal to the
reference tariff as reduced by the percentage reduction offered by the applicant. With respect to plants above 1 MW, the first criterion
is instead the tariff percentage reduction.
There are two different incentive mechanisms, depending on the
power of the plant:
the All-in Tariff (Tariffa Onnicomprensiva, or TO) consisting of a single tariff, corresponding
to the incumbent tariff, which also remunerates the electricity withdrawn by the GSE; and
an incentive calculated as the difference between the incumbent tariff and the hourly zonal energy price, since the energy produced
remains at the operator’s disposal.
For plants above 250 KW, the incentive is paid by GSE as positive
balance between the tariff and the energy price (i.e. the zonal hourly price); if the balance
is negative, GSE is entitled to receive the relevant amount from the producer. For plants below 250KW, the producer can also request that
GSE pay the incentive as All-in Tariff (Tariffa Onnicomprensiva). The incentives provided by the
FER1 Decree cannot be cumulated with the ones provided under the various Conto Energia (the laws
governing the previous incentive regime in Italy) and are in any case subject to achievement of an overall cap equal to an annual medium
cost for incentives of €5.8 billion per year.
Red II Decree Incentives
The Red II Decree has set-up the framework for new incentives
in the PV industry that will have to be implemented through detailed legislation, which is still to be adopted. In particular, it has
been provided that different incentives will be granted depending on the type of plant, and the main distinction is implemented between
“small plants” (with capacity up to 1 MW) and “big plants” (with capacity higher than 1MW):
as to small plants with a power capacity equal to or less than 1 MW, incentives will be awarded:
as to plants with market competitive generation costs and plants belonging to energy communities or self-consumption configuration,
through direct access to incentives; and
as to innovative plants and plants with higher generation costs, through tender procedures.
as to big plants, with power capacity above a threshold of at least 1 MW, incentives will be awarded through downward auction procedures.
According to the RED II Decree, procedural simplifications and
priority for the access to incentives are contemplated for PV plants, including inter alia:
the combination of renewables with storage systems is promoted, so as to enable greater programmability of sources, also in coordination
with mechanisms for the development of centralized storage capacity;
priority access is established for PV plants to be built on suitable areas (aree idonee),
with the same economic offers; and
participation in incentives is facilitated for those who install PV plants following asbestos removal, with bonus facilities and
the widest possible participation modalities.
The amount of the incentives, as well as the financial commitment
allocated thereto, shall be defined by future implementing decrees.
The Red II Decree has also set up an ad
hoc definition of long-term power purchase agreements, defined as the contract by which a person or entity undertakes to purchase
renewable sources electricity directly from an electricity producer. In that respect, the aim of the Red II Decree is to promote the utilization
of power purchase agreements, and in this respect, within 180 days of entry into force thereof, the following actions have been planned:
the creation of an online information board with the aim to facilitate the alignment of demand and offer;
the setting-up of a platform for the conclusion of power purchase agreements (as already provided in previous legislation);
the definition of tender schemes for the supply of renewable source energy to public administration through power purchase agreements;
issuance of an ad hoc regulation in order to inform final customers as to power purchase
agreements, also in order to facilitate use thereof by consumers in aggregate shape.
Retention from Incentives for Panel Disposal
As part of the implementation of legislative decree 49/2014, in
December 2015, GSE published the guidelines regarding disposal of PV panels that benefit from incentives. In particular, the decree had
established that GSE was entitled to retain a certain amount from payment of incentives as a guarantee for the cost of disposal of the
panels installed on PV plants and GSE set out the determination of such retention.
The guidelines provide that the retention shall start from the
11th year of incentive and shall be calculated, for plants
with nominal capacity higher than 10 kWp, on the basis of the following formula:
[2 * (n – i + 1) / n * (n + 1)] * total quota
where “n” is equal to 10, “i”
is the year in which the retention is applied, and “total quota” is n*number of panels
(GSE has however reserved to amend the value of “n” after further assessment of disposal costs).
For example, for a plant with 100 panels, based on the above formula
the retention is equal to €181.82 for the first year and an aggregate amount of €1,000 for a ten-year period (assuming a duration
of the incentive of 20 years).
The retention will be held by GSE in an interest-bearing escrow
account and is to be returned to producers after evidence is provided to GSE that the panels have been disposed correctly. If such evidence
is not provided, GSE will proceed by itself to the disposal of the panels and not return the retention to the producer.
The guidelines clarify that the retention shall apply also in the
case that the incentive-related receivables have been the object of assignment (as is applicable to our financed projects). PV pkants
subject to the Fourth and Fifth Conto Energia (except for certain specific type of plants) are exempt from the retention provided that
the relevant panel producers are enrolled with consortia/institutions listed in an ad hoc register held by GSE.
Furthermore, in 2021 GSE provided that as an alternative to the
retention, PV plant owners can provide a financial guarantee for the dismantling by joining an ad hoc
set-up collective system. In this respect, with Decree n. 54/2022 the Ministry of Ecological Transition (now, MASE) has approved new operating
instructions defined by GSE. The new guidelines provide clarifications on operational issues and set out the timeframe (within ten years
of commencement of operations) to join collective systems as an alternative to retention.
New provisions regarding determination of cadastral
value and so called “super-depreciation”
Art. 21 of Law 208/2015 (2016 Italian Budget Law) set out new criteria
concerning the determination of the cadastral value of immovable assets with so called special and particular destination (i.e., those
belonging to cadastral categories “D” and “E”). PV plants fall within the scope of such provision. Following issuance
of the law, on February 1, 2016, the Italian Tax Office (Agenzia delle Entrate) published official
clarifications to the scope of said provision. In connection with ground PV plants, the Italian Tax Office pointed out that, on the basis
of the new provision, modules and inverters shall not be accounted in the determination of the associated cadastral value, which should
entail a significant reduction in the calculation of the related tax burden.
With circular dated March 30, 2017, the Italian Tax Office further
clarified that PV plants can be characterized as movable assets and particularly, as a result, will be subject to the so called “super-depreciation”,
which allows them to increase the actual cost of the investment in PV plants by 40%, with associated significant fiscal benefits. During
subsequent years such fiscal benefit has been partially amended; for 2022 a tax credit equal to 6% of the capital expenditure (up to a
maximum of 2 million euros) has been provided.
Renewables energy cap
Measure (Law No. 25 of 28 March 2022)
By means of Article 15-bis, Law Decree no. 4 of January 27, 2022,
or Law Decree no. 4/2022 (converted into Law no. 25/2022 “Extra-profits Measure”), the Italian Government introduced a two-ways
offset mechanism aimed at annulling the extra revenues that incentivized PV plants and in general plants for the production of energy
from renewable sources, to deal with the ongoing increase in energy prices.
From February 1, 2022 and originally until December 31, 2022,
a rebalancing mechanism in the form of a “cap” was applied by the GSE on the price of electricity injected into the grid by:
PV plants with an output exceeding 20 kW that benefit from fixed feed-in tariffs under the Conto Energia scheme, which do not dependent
on market prices (i.e., First, Second, Third and Fourth Conto Energia); and
plants powered by solar, hydroelectric, geothermal and wind power sources with an output exceeding 20 kW that do not benefit from
incentive mechanisms, entered into operation before January 1, 2010 (any grid parity plant commissioned before December 31 , 2009).
In particular, GSE shall calculate the difference between: (a)
a benchmark price (“Benchmark Price” or “Cap”) indicated under Chart 1 of the Decree with reference to each market
zone (Center-North: Eur 58/MWh; Center-South: Eur 57/MWh; North: Eur 58/MWh; Sardinia: Eur 61/MWh; Sicila: Eur 75/MWh; Eur 56/MWh) and
(b) a market price equal to: for plants mentioned above under point (i) and for plants mentioned above under point (ii) from solar, wind,
geothermal and hydro sources, the hourly zonal market price of electricity or, with regard to fixed price power purchase agreements entered
into before January 27, 2022, the price indicated in such power purchase agreements, or,
for plants mentioned under point (ii) above, different from those indicated under point (i) above, the monthly arithmetic average of the
hourly zonal electricity market prices or, with regard to fixed price power purchase agreements entered into before January 27, 2022,
the price indicated in such power purchase agreements.
If the difference is positive, GSE shall pay the relevant amount
to the producers. Conversely, should the difference be negative, the GSE shall set-off, or request payment of the corresponding amount
from the producer.
The above does not apply to electricity sold under power purchase
agreements executed before January 27, 2022, unless they are linked to the price resulting from the electricity spot markets and do not
provide an average price exceeding 10% of the hourly zonal Benchmark Price. ARERA, by means of Resolution. 266/2022/R/EEL dated June 21,
2022 has issued implementing provisions.
Article 11 of law decree no. 115/2022 extended this mechanism to
June 30, 2023, in relation to power purchase agreements executed before August 5, 2022.
Several energy operators have challenged the Extra-profits Measure
before the Regional Administrative Court of Milan requesting the Court to raise (i) before the Constitutional Court a question of compatibility
of this law with the Italian Constitution and/or (ii) before the EU Court of Justice a question of compatibility with the EU laws. The
Regional Administrative Court of Lombardia – Milan, after the hearing of November 23, 2022, annulled the ARERA resolution implementing
the Extra-profits Measure. Based on the ruling of the Court, dated February 9, 2023, the ARERA Resolution is flawed on the preparatory
and motivational level, because it has unreasonably failed to identify on the technical level and to enhance on the regulatory level all
the factors that lead to the definition of the economic matches functional to the emergence of the inframarginal profit actually realized
by the operators affected by the measure. The Court pointed out that it is up to ARERA to identify the relevant economic items for the
purpose of surfacing the actual inframarginal profit received by the relevant producers. Thus, a complex set of elements affecting the
accrual of actual profit was submitted to ARERA, starting with costs that are necessarily incurred by producers, such as environmental
compensation measures, concession fees, imbalance fees, energy purchase costs for auxiliary plants, regional water derivation fees, and
any tax levies that already affect the inframarginal profit earned. In addition, it was pointed out that it is necessary to consider the
different sizes, spatial locations, and operating times of plants of the same type, which, because of these differences, are called upon
to incur different operating costs. However, the Court has not raised questions before the Constitutional Court / EU Court of Justice.
ARERA filed appeals against such ruling, which are still pending.
New price cap (Italian
Budget Law of December 29, 2022, no. 197)
The Italian Budget Law of December 29, 2022, no. 197, also taking
into account the Council Regulation (EU) 2022/1854 of October 6, 2022, provided that as of December 1, 2022 and until June 30, 2023, a
cap is applied on market revenues obtained from the production of electricity, through a one-way compensation mechanism, with reference
to electricity fed into the grid by:
renewable source plants not covered by Article 15-bis of Decree-Law No. 4 of January 27, 2022, converted, with amendments, by Law
No. 25 of March 28, 2022 (i.e., renewable source plants not subject to the “Extra-profits” Measure discussed above);
plants powered by non-renewable sources.
The cap on revenues shall apply to any market revenues of producers
of electricity generated by the above-mentioned plants and, if any, of intermediaries participating in wholesale electricity markets on
behalf of such producers, regardless of the time horizon of the market in which the transaction generating the revenue takes place and
whether the electricity is traded bilaterally or in a centralized market.
For this purpose, the GSE calculates the difference between the
a reference price equal to 180 euros per MWh or, for sources with generation costs higher than the aforementioned price, to a value
per technology established in accordance with criteria defined by ARERA, taking into account investment and operating costs and a fair
return on investment. To this end, in the case of plants incentivized with one-way mechanisms other than those substituting green certificates,
the reference price is equal to the maximum value between the amount of 180 euros per MWh and the tariff payable;
a market price equal to the monthly average of the hourly zonal market price, calculated as a weighted average for non-programmable
plants, based on the production profile of the individual plant, and as an arithmetic average for programmable plants, or, for supply
contracts entered into before the date of this law that do not fall in the exclusion cases, at the price indicated in the contracts themselves.
If this difference is negative, the GSE shall equalize or request
from the producer the corresponding amount. The producers concerned, upon request by the GSE, shall transmit to the GSE, within thirty
days of such request, a statement attesting to the information necessary for the calculation. ARERA shall regulate the implementation
modalities of the aforementioned provisions also in continuity with the operational modalities defined in relation to the Extra-profits
Measures. ARERA has not issued the implementing regulations yet.
Thus price cap does not apply:
to plants with a capacity of up to 20 kW;
to electricity falling under the scope of Article 5-bis of Decree-Law No. 14 of February 25, 2022 (i.e., coal- and oil-fired thermoelectric
to energy subject to supply contracts concluded before December 1, 2022, provided that they are not linked to the price trend of
the energy spot markets and that, in any case, they are not entered into at an average price higher than the value as calculated according
to the calculation method described above, limited to the period of duration of such contracts;
to electricity subject to withdrawal contracts concluded by the GSE pursuant to Article 16-bis of Decree-Law No. 17 of March 1, 2022,
and that, in any case, are not stipulated at an average price higher than the value as calculated according to the calculation method
described above, limited to the period of duration of the aforesaid contracts; and
to renewable source plants with active incentive contracts that are regulated with a two-way mechanism, renewable source plants with
contracts that provide for the withdrawal at an all-inclusive fixed tariff of electricity by the GSE as well as electricity shared within
energy communities and self-consumption configurations.
No similar provisions
have been introduced so far for the period beyond June 30, 2023.
At the beginning of February 2018, the EU Commission approved the
scheme presented by the Italian government for the setting up of the so-called “capacity market”. This has been approved for
a period of ten years and will allow producers of electric energy (including from PV sources) to participate in auctions whereby they
will obtain additional remuneration for providing availability to produce electric energy.
After consultation with the EU institutions and green light by
the latter, the capacity market has been implemented through Decree issued by the Ministry of Economic Development on June 28, 2019. However,
the remuneration provided therein is not compatible with GSE incentives. Therefore, if a photovoltaic plant benefits from GSE incentives
it cannot also benefit from incentives under the capacity market remuneration.
On September 3, 2019, ARERA by means of Resolution 363/2019/R/EEL,
set the technical and economic parameters for the capacity auctions:
price cap for new capacity at €75k/MW;
price cap for existing capacity at €33k/MW;
formula for the calculation of the strike price to be applied to the de-rated capacity production in the Ancillary Services Markets,
On September 6, 2019, Terna announced the procedure
and the requirements of the tenders for 2022 and 2023. Subsequently, with Decree issued by the Ministry of Ecologic Transition of October
28, 2021, the regulatory framework of the Capacity Market formulated by Terna for the delivery year 2024 (according to ARERA guidelines)
has been approved. Thereafter, Terna formally issued the approved regulatory framework. ARERA, by means of Resolution no. 498/2021/R/eel
of November 16, 2021, approved the Capacity Market procedure and technical rules proposed by Terna.
On November 23, 2021, Terna announced the procedure
and requirements of the tenders for the 2024 auction and on February 21, 2022 Terna published the results of the 2024 auction. On September
7, 2022, the EU Court of Justice confirmed the compliance of the Capacity Market scheme with the EU state aid rules.
Material Effects of Government Regulations
on the Spanish PV Plants
The Spanish general legal framework applicable to renewable energies
Law 24/2013, of December 27, 2013, of the Power
The Spanish general legal framework applicable to renewable energies
is contained in Law 24/2013, of December 27, 2013, of the Power Sector, or Law 24/2013, which sets forth the regulatory framework of the
power sector with the objective of guaranteeing the electricity supply with an adequate level of quality, at the least possible cost,
while ensuring the economic and financial sustainability of the system and pursuing effective competition in the power sector. At the
same time, the principle of environmental sustainability is considered.
The economic and financial sustainability is the guiding principle
for both the Spanish Public Administration and the agents acting under the scope of Law 24/2013, with a view to avoid the accumulation
of new tariff deficits. According to Law 24/2013, incomes must be enough to cover expenses and, on the other hand, tariffs and charges
must be automatically reviewed in case of overcoming certain established thresholds.
In accordance with Royal Decree-law 9/2013, dated July 12, 2013,
which adopts several urgent measures in order to ensure the financial stability of the power system, or RDL 9/3013, Law 24/2013 regulates
the new remuneration scheme of those renewable energy installations entitled to a regulated income, or the so called “Specific Remuneration,”
in addition to the market price. Law 24/2013 sets forth the principle of reasonable profit for the sake of which the parameters to determine
the regulated income are reviewed every six years.
In addition, Law 24/2013 establishes the priority access and dispatching
of RES and high efficiency Combined Heat and Power in line with the EU Directives, and further develops the general criteria for access
and dispatching by reinforcing the principles of objectivity and non- discrimination. Thereby, the reasons to refuse access are based
on technical criteria exclusively.
Moreover, Law 24/2013 develops a specific regulatory
framework for self-consumption. Law 24/2013 defines three different categories of self-consumption and obliges those installations connected
to the grid to contribute to the costs and services of the system under the same conditions as the rest of the customers. It also defines
the activity of “recharging managers” (for electric vehicles).
Royal Decree Law 15/2018
The Spanish general legal framework applicable to renewable energies
includes Royal Decree Law 15/2018, of October 5, 2018, or RDL 15/2018, of urgent measures for energy transition and consumer protection.
RDL 15/2018 includes, among others, the following:
It introduces three principles in the activity of self-consumption: (i) the right to self-consume electricity without charges; (ii)
the right to shared self-consumption by one or more consumers to take advantage of economies of scale; and (iii) administrative and technical
Any consumer – whether or not a direct consumer of the market – may acquire energy through bilateral contracting with
Regarding access and connection permits: (i) the validity of the access and connection permissions granted prior to the entry into
force of Law 24/2013 is extended and the aforementioned permits will expire if they have not obtained the authorization of exploitation,
on the later of: (a) before March 31, 2020, or (b) five years from the obtaining of the right of access and connection; (ii) the guarantees
to be placed for the access and connection permits are increased from €10/kW to €40/kW; (iii) with regards to the actions
carried out in the transport or distribution networks by the owners of the access and connection permits which must be developed by the
grid operator or distributor, the promoter must advance 10% of the total investment value to be undertaken within a period not exceeding
12 months. Once the aforementioned amount has been paid and the administrative authorization for the generation facility has been obtained,
its holder shall, within four months, enter into an Assignment Contract with the transportation grid operator or distributor, otherwise,
the validity of the access and connection permits will expire.
Royal Decree-law 17/2019
On November 24, 2019, Royal Decree-law 17/2019, of November 22,
or RDL 17/2019, enacted urgent measures for the necessary adaptation of remuneration parameters affecting the electricity system and responding
to the process of cessation of activity of thermal generation plants. Among others, this new regulation updates the remuneration parameters
of generation plants entitled to a specific remuneration for the regulatory period starting January 1, 2020, as further explained below.
New legislation applicable to renewable energies:
On June 25, 2020, Royal Decree-Law 23/2020 of June 23, 2020, or
RD-law 23/2020, came into force, approving measures in the energy sector and other sectors for the reactivation of the economy and introducing
a series of new provisions focused on overcoming the obstacles identified in the energy transition process and established an attractive
framework for renewable energy investments in Spain.
As a novelty, and in connection with the expiry of access and connection
to the grid permits, RD-law 23/2020 established certain permitting milestones to be achieved by the promoters. Failure to do so, will
result in expiration of the permits (except when the environmental permit was not granted for reasons not attributable to the promoter).
The milestones set up in RD-law 23/2020 were modified by Royal Decree-Law 29/2021, of December 21, 2021, or RD-law 29/2021, as further
On December 23, 2021, RD-law 29/2021 came into force, approving
urgent measures in the energy field for the promotion of electric mobility, self-consumption, and the deployment of renewable energies.
As a novelty, and in connection with self-consumption, RD-law
29/2021 establishes that installations associated with a self-consumption modality with a surplus installed power not exceeding 100 kW
are exempt from presenting the guarantee unless they are part of a group whose power exceeds 1 MW. Likewise, RD-Law 29/2021 adopts measures
to facilitate collective or shared self-consumption–- in which several self-consumers benefit from a single installation–-
and extends this possibility to high voltage.
Finally, the RD-law 29/2021 modifies the milestones established
in RD-law 23/2021. In this sense, the dates foreseen in RDL 23/2020 for the intermediate milestones related to the Environmental Impact
Statement (EIS), the prior administrative authorization (PAA) and the construction authorization (CAA) have been extended for an additional
nine months. All this, without extending the total period of five years for the final milestone of obtaining the administrative exploitation
on the Talasol PV Plant
The exploitation authorization is required to be granted within
five years from the entry into force of RD-law 23/2020 (i.e., by June 25, 2025) as modified by RD-law 29/2021 and was already granted.
on the Ellomay Solar 28 MW Project
The exploitation authorization is required to be granted within
five years from the entry into force of RD-law 23/2020 (i.e., by June 25, 2025) as modified by RD-law 29/2021 and was granted on January
on future PV projects in Spain
Once the access permit is granted to a project, the below milestones
will apply (the starting date is the date the permit access was granted):
Request of connection permit required in 6 months.
Valid request of Prior Administrative Authorization required in 6 months.
Obtention of environmental permit required in 31 months.
Obtention of Prior Administrative Authorization required in 34 months.
Obtention of Construction Administrative Authorization required in 37 months.
Obtention of Exploitation Authorization required in 5 years.
Impact on operating facilities
The above regulation does not affect our existing and operating
Royal Decree-law 1183/2020, or RD 1183/2020, was approved on December
30, 2020 and entered into force on December 31, 2020. RD 1183/2020 regulates in detail the
procedure for obtaining access and connection permits. RDL 23/2020 established a moratorium by virtue of which it was not possible to
request new access and connection permits until the regulation establishing the procedure for obtaining these was approved, and was then
further extended until the available capacities in accordance with the new criteria established by the Spanish National Commission on
Markets and Competition (CNMC) in Circular 1/2021 (as defined below) are published. The moratorium was released on July 1, 2022. In addition,
the approval of RD 1183/2020 determines the entry into force of art. 33.8 of Law 24/2013, which sets a validity of five (5) years of the
access and connection permits.
RD 1183/2020 also regulates the access capacity tenders in certain
nodes of the transmission grid for the integration of renewable energies.
The CNMC Circular 1/2021, or Circular 1/2021, establishing the
methodology and conditions for access and connection to the electricity transmission and distribution networks, was published on January
22, 2021. Circular 1/2021 completes the regulation process related to access and connection to the electricity transmission and distribution
networks. The regulation has been developed through the Resolution of May 20, 2021, explained further below.
Resolution of May 20, 2021, of the CNMC, which establishes the detailed specifications for the determination
of the generation access capacity to the transmission network and distribution networks
Resolution of May 20, 2021, contains the detailed specifications
for the determination of the access capacity of generation to the transmission grid and distribution networks.
The purpose of the detailed specifications for the determination
of the access capacity to the transmission grid for generation is to establish the particular aspects of criteria and methodology for
the calculation of the access capacity to the transmission grid for generation or storage facilities, new or existing, which change their
declared conditions, with direct connection to the transmission grid or with connection in distribution with influence on the transmission
The detailed specifications for the determination of the generation
access capacity to the distribution networks determine the criteria and methodology for the calculation of the access capacity to the
distribution networks, the calculation of the access capacity to the distribution network in the processing of requests for access of
generation or transmission requests for access of generation or storage facilities, whether new or existing that change their technical
characteristics or existing facilities that change their significant technical characteristics.
Law 7/2021 of climate change and energy transition
Law 7/2021 of May 20, 2021 on climate change and energy transition,
or Law 7/2021, establishes objectives for 2030 which include the reduction of greenhouse gas emissions of the Spanish economy by at least
23% compared to 1990; the penetration of renewable energies in final energy consumption of at least 42%; achieving an electricity system
with at least 74% of generation from renewable energies and reduction of primary energy consumption by at least 39.5%. It also establishes
that Spain must achieve climate neutrality by 2050 at the latest. The energy transition promoted by Law 7/2021 enables the mobilization
of more than 200 billion euros of investment over the decade 2021-2030.
Royal Decree-Law 17/2021, of September 14
Royal Decree-Law 17/2021, of September 14, or RDL 17/2021, entered
into force on September 16, 2021. From the entry into force of RDL 17/2021, a temporary adjustment in the remuneration of certain generation
facilities is foreseen, in proportion to the higher income obtained by such facilities due to the internalization in the price of electricity
in the wholesale market of the increase in the price of natural gas in international markets by the marginal emitting technologies. Such
adjustment was initially foreseen until March 31, 2022, but has been amended and extended several times, the last one until December 31,
2023, by Royal Decree-law 18/2022, dated October 18, 2022.
However, the following production facilities are excluded from
the scope of application of RDL 17/2021: (i) production facilities in the electricity systems of the non-peninsular territories, (ii)
production facilities that have a recognized remunerative framework (installations under the specific remuneration regime and the economic
regime for renewable from auctions) and (iii) production facilities with net power equal to or less than 10 MW, regardless of the date
In addition, the remuneration reduction mechanism will not apply
to the part of the energy produced by generation facilities which is subject to a fixed price (physical or financial) PPA either: (i)
entered before September 16, 2021 or (ii) entered into on or after September 16, 2021 if the PPA term is more than one year and the fixed
price is equal to or less than 67 €/MWh.
Producers likely to be affected by the reduction will have to
submit to REE a responsible statement and supporting documentation on the energy covered by contracting instruments. The Talasol PV Plant
is affected by this measure with respect to the portion of its revenues that is not covered by the PPA and has submitted the required
statement and documentation every month since the entry into force of RDL 17/2021.
Royal Decree-law 6/2022
Royal Decree-law 6/2022, of March 29, 2022, or RDL 6/2022, establishes
a range of urgent measures within the framework of the National Plan for Response to the Economic and Social Consequences of the War in
Ukraine. In particular, in the renewable energy field it adopts several measures, among others: (i) the mechanism for reducing excess
electricity market remuneration due to the high quotation price of natural gas in international markets, which was introduced under RDL
17/2021 until June 30, 2022 (and introduces amendments to the mechanism); (ii) it foresees the exceptional update of the specific remuneration
parameters for 2022, as will be further detailed below; (iii) it establishes certain particularities in the environmental assessment to
accelerate the permitting process; and (iv) it extends the suspension of the generation tax until June 30, 2022.
Royal Decree-law 11/2022
Royal Decree-law 11/2022, dated June 25, 2022, adopts certain
measures to respond to the economic and social consequences of the military conflict in Ukraine and to address situations of social and
economic vulnerability. In particular, it extends the mechanism for reducing excess electricity market remuneration due to the high quotation
price of natural gas in international markets, until December 31, 2022.
Royal Decree-law 17/2022
Royal Decree-law 17/2022, dated September 22, 2022, modifies
Article 115 of the Royal Decree 1955/2000 and adopts measures to allow cogeneration installations to recover their operating costs - due
to the price situation in the energy markets - through a new type of voluntary waiver of the specific remuneration scheme so that they
can apply for inclusion in the adjustment mechanism. It also introduces measures to promote the processing, commissioning and evacuation
of renewable energy. Firstly, one of the requirements to obtain administrative authorization for construction, or AAC, without the need
for a new prior administrative authorization, or AAP, in case of modifications to generation facilities that have already obtained AAP,
is modified. Therefore, the requirement that the installed power, after the modifications, does not exceed by more than 10% the power
defined in the original project, is amended so that the resulting installed power does not exceed the original one by more than 15%. This
is without prejudice to the implications that this excess power may have for the purposes of access and connection permits. One of the
requirements established regarding the consideration of non-substantial modifications is also revised to provide that a substantial modification
in basic technical characteristics will be measured at more than 10% of the capacity and not 5%. Deadlines for the approval of the execution
project are also reduced under certain circumstances.
Royal Decree-law 18/2022
Royal Decree-Law 18/2022, of October 18, 2022, or RDL 18/2022,
establishes a wide range of measures aimed at: (i) the protection of gas and electricity consumers, (ii) the promotion of renewable gases
and digitalization, (iii) the promotion of self-consumption, (iv) the rapid injection of energy into the network, and (v) administrative
simplification for electricity production facilities, among others. This RDL 18/2022 further extends the mechanism for reducing excess
electricity market remuneration due to the high quotation price of natural gas in international markets, until December 31, 2023.
In addition, regarding the procedure for holding capacity tenders,
the nodes reserved for contest by Resolution of the Secretary of State for Energy will remain reserved regardless of whether the capacity
reserved for competition has been reduced below the limit of 100 MW for nodes of the peninsular electricity system or 50 MW for those
located in non-peninsular territory, and that the conditions contained in Article 18.2 of Royal Decree 1183/2020, of December 29, 2020
are no longer met after the resolution.
Royal Decree-law 20/2022
This Royal Decree-law introduces several measures in the energy
field, among others, (i) an exceptional and transitory procedure for the determination of the environmental affection of generation projects
from renewable energy sources and the specific authorization procedures for those projects that have obtained a favorable opinion; and
(ii) with regard to grid capacity, the suspension of certain permitting procedures related to knots in which there is capacity that has
been reserved for grid capacity tenders (in any case, this does not affect those projects for which access and connection has already
Remuneration of Renewable Energy Plants
The remuneration of electricity generation activity includes the
following concepts: (i) the electric energy negotiated through the daily and intraday markets, remunerated on the basis of the price resulting
from the balance between the supply and the demand of electric energy offered in them (i.e., spot price), (ii) adjustment services, including
non-frequency services and system balance services, necessary to ensure adequate supply to the consumer, (iii) where appropriate, the
remuneration for capacity mechanism, (iv) where appropriate, the additional remuneration for the production of electric energy in the
electrical systems of non-peninsular territories, which the government may apply to cover the difference between the investment and operational
costs and the incomes of these plants, and (v) where appropriate, the specific remuneration for the production of electric energy from
renewable energy sources, high efficiency cogeneration and waste.
The legal and regulatory framework applicable to the production
of electricity from renewable energy sources in Spain was modified by RDL 9/2013, due to the adoption of several urgent measures in order
to ensure the financial stability of the power system, eliminating the former “Special Regime” and feed-in-tariff established
by Royal Decree 661/2007 and Royal Decree 1578/2008 and establishing the basis of the current remuneration scheme applicable to renewable
energies called the “Specific Remuneration” regime.
Specific Remuneration includes two components to be paid in addition
to the electricity market price: (i) an “investment retribution” sufficient to cover
the investment costs of a so-called “standard facility” – provided that such costs are not fully recoverable through
the sale of energy in the market, and (ii) an “operational retribution” sufficient
to cover the difference, if any, between the operational income and costs of a standard plant that participates in the market.
The Specific Remuneration provides that commencing July 13, 2013
all PV plants currently in operation, including our Spanish PV Plants, were no longer entitled to receive the applicable feed-in-tariff
for renewable installations but rather became entitled to receive the Specific Remuneration.
The basic concept of the Specific Remuneration contained in RDL
9/2013 was confirmed by the current Power Act (Law 24/2013) and further developed by the following regulations:
Royal Decree 413/2014 which regulates electricity generation activity using renewable energy sources, cogeneration and waste, or
Order IET/1045/2014 approving the retribution parameters for certain types of generation facilities of electricity from renewable
energy sources, cogeneration and waste facilities, or Order 1045/2014.
Order ETU/130/2017 updating the retribution parameters for certain types of generation facilities of electricity from renewable energy
sources, cogeneration and waste facilities, for the purposes of their application to the Regulatory Semi-period beginning on January 1,
2017 and ending on December 31, 2019, or Order 130/2017.
RDL 17/2019, adopting urgent measures for the necessary adaptation of remuneration parameters affecting the electricity system and
responding to the process of cessation of activity of thermal generation plants.
Order TED/171/2020, updating the retribution parameters for certain types of generation facilities of electricity from renewable
energy sources, cogeneration and waste facilities, for the purposes of their application to the Regulatory Period beginning on January
1, 2020, or Order 171/2020.
Royal Decree-Law 6/2022, of March 29, 2022, adopting urgent measures within the framework of the National Plan for the response to
the economic and social consequences of the war in Ukraine.
Order TED/1232/2022, of December 2, 2022, which updates the remuneration parameters for its application to the year 2022.
Pursuant to the above regulations, the calculation of the Specific
Remuneration is performed as follows:
The Specific Remuneration is calculated by reference to a “standard facility”
during its “useful regulatory life”. Order 1045/2014 characterized the existing renewable
installations into different categories (referred to as IT-category). These categories were created taking into account the type of technology,
the date of the operating license and the geographical location of renewable installations.
The Specific Remuneration is not calculated
independently for each power installation. It is calculated based on the inclusion of each existing installations in one of the formulated
IT-categories and, as a result of such inclusion, is based on the retribution parameters assigned to that particular IT-category.
According to RD 413/2014, the calculation of the Specific Remuneration of each IT-category shall be performed taking into account
the following parameters:
the standard revenues for the sale of energy production, valued at the production market prices (currently set at €54.42/MWh,
€52.12/MWh and €48.82/MWh for 2020, 2021 and 2022, respectively);
the standard exploitation costs; and
the standard value of the initial investment. For this calculation, only those costs and investments that correspond exclusively
to the electricity production activity will be taken into account. Furthermore, costs or investments determined by administrative rules
or acts that do not apply throughout Spanish territory will not be taken into account.
Order 1045/2014 established the relevant parameters applicable to each IT-category. Therefore, to ascertain the total amount of the
Specific Remuneration applicable to a particular installation it is necessary to (i) identify the applicable IT-category and (ii) integrate
in the Specific Remuneration formula set forth in RD 413/2014 the economic parameters established by Order 1045/2014 for the relevant
IT-category and the relevant update regulation (i.e., Order 171/2020).
The Specific Remuneration is calculated for regulatory periods of six years, each divided into two regulatory semi-periods of three
years. The first Regulatory Period commenced July 14, 2013 and terminated on December 31, 2019. The second Regulatory Period commenced
January 1, 2020 and terminates December 31, 2025 (the corresponding first Regulatory Semi-Period ends December 31, 2022).
The Specific Remuneration is designed to ensure a “reasonable rate of return” or profitability that during the first
regulatory period (i.e., until December 2019) shall be equivalent to a Spanish 10-year sovereign bond calculated as the average of stock
price in the stock markets during the months of April, May and June 2013, increased by 300 basis points (7.398% for plants prior to RDL
9/2013). RDL 17/2019 has fixed the reasonable rate of return for the second Regulatory Period at 7.09%. However, for plants prior to RDL
the reasonable rate of return will remain at 7.398% if the conditions set forth in RDL 17/2019 are met (mainly to withdraw from any arbitration
procedure, or to renounce any compensation, in connection with the regulatory changes in Spain that modified the remuneration regime).
Pursuant to RD 413/2014, the revenues from the Specific Remuneration are set based on the number of operating hours reached by the
installation in a given year and adjusted to electricity market price deviations. Furthermore, the economic parameters of the Specific
Remuneration might be reviewed by the Spanish government at the end of a regulatory period or semi-period, however the standard value
of the initial investment and the useful regulatory life will remain unchanged for the entire Regulatory Useful Life of the installation,
as determined by Order 1045/2014.
The update of the Specific Remuneration is carried out by reference
to the IT-categories with the sole exception of the adjustment of annual revenues from the Specific Remuneration as a result of the number
of Equivalent Operating Hours. This update is made installation by installation by the National Markets and Competition Commission.
The Talasol PV Plant is a “merchant” facility, i.e.,
will not be entitled to feed-in-tariff, “specific remuneration” or other similar regulatory incentives.
Special considerations for 2022 regarding Remuneration
of Renewable Energy Plants for 2020-2025
Due to the current situation of the increase in electricity prices,
RDL 6/2022 modified, in an extraordinary way, Order 171/2020 (which regulated the updating of the remuneration parameters for the regulatory
period from January 1, 2020 to December 31, 2025). Therefore, in addition to the review that will take place in 2023 (when the semi-period
ends), the Remuneration Regime was reviewed in 2022 (an extraordinary event in accordance with RD 413/2014, which only foresees such reviews
at the end of each period or semi-period).
In this sense, RDL 6/2022 establishes, on an extraordinary basis,
for the year 2022 the approval of a new order that updates the retributive parameters of the specific remuneration regime established
in Order 171/2020 affecting all type plants. This update is carried out without prejudice to the update foreseen for the regulatory semi-period
between January 1, 2023, and December 31, 2025.
For the application of the methodology for updating the remuneration
parameters, the regulatory half-period between January 1, 2020, and December 31, 2022 is divided into two regulatory half-periods: the
first one, from January 1, 2020, until December 31, 2021, and the second one, from January 1, 2022 until December 31, 2022.
The abovementioned parameters were approved by Order 1232/2022,
which updates the remuneration parameters for its application to the year 2022. This update of the remuneration parameters has been carried
out following the methodology established in Royal Decree 413/2014, of June 6, 2014, in a similar way to the ordinary update foreseen
at the end of each regulatory half-period but with certain particularities foreseen in the Order.
As a result of the application of this update with effect from
January 1, 2022 until December 31, 2022, the CNMC shall make the adjustments corresponding to the difference between the updated remuneration
values and the amounts already settled and shall incorporate them into the settlements following the entry into force of the Order 1232/2022.
The above regulatory changes apply to Rodríguez I, Rodríguez
II, Seguisolar and Rinconada facilities and the Order 1232/2022 provides the updated parameters for these PV plants.
As the update of the Remuneration Regime for 2022 has been exceptional
and will not be maintained for the half-year periods during 2023 to 2025, the Ministry is preparing a new order that will apply to the
half-year periods during 2023 to 2025. In this regard, the proposed order updating the remuneration parameters for the semi-periods during
2023-2025 has been published in order for interested parties to submit comments and the definitive order has not yet been published. After
the semi-periods during 2023-2025 and in accordance with RD 413/2014, a new order will be published for the following period (2025-2030)
and so on consecutively.
The obligation to finance the tariff deficit
Pursuant to Law 24/2013, renewable installations are required to
finance future tariff deficits whereas pursuant to the former Power Act, the tariff deficit was only financed by five vertically integrated
companies (Iberdrola, Endesa, E.On, Gas Natural Fenosa and Hidrocantábrico). Therefore, in the event there is a temporary deviation
between revenues and costs of the electricity system on any given monthly settlement, this deviation shall be borne by all the companies
participating in the settlement system (including renewable facilities).
Taxation of the income from generation of electricity
In December 2012, the Spanish Parliament enacted the 15/2012 on
fiscal measures for the sustainability of the energy sector, which entered into force on January 1, 2013. Law 15/2012 sets forth a tax
on energy generation of 7% from the total amount received for the production of electricity. RDL 15/2018 suspended this tax with respect
to the electricity produced and injected to the grid during a period of six months commencing October 6, 2018 through March 31, 2019.
The suspension has been extended several times, the last one by Royal Decree-law 20/2022, dated December 27, 2022, until December 31,
Removal of the Generation Access Toll
The CNMC approved Circular 3/2020, which was published in the Official
State Gazette on January 24, 2020, by which the electricity generators are exempted from paying the toll to access the grid. This means
the removal of the €0.5/MWh access toll that was established for electricity generators under Royal Decree – Law 14/2010 of
December 23, 2010.
Material Effects of Government Regulations on the Israeli PV Plant
The Israeli Electricity Market
The Israeli electricity market is dominated by the IEC, which manufactures
and sells most of the electricity consumed in Israel and by the Palestinian Authority and had an installed capacity of approximately 11.6
GW as of the end of 2021 (based on the Israeli Electricity Sector Annual Report for 2021, published by the Israeli Electricity Authority
in July 2022). According to such report, in 2021 the installed capacity of the IEC represented 54% of the total installed capacity in
the Israeli market, the actual electricity production of the IEC represented 52% of the actual electricity production in the Israeli market
and the IEC’s market share in the supply segment represented 70% of the supply segment of the Israeli market, with the remainder
represented by the independent power producers. The IEC controls both the transmission network (for long-distance transmittal of electricity)
and the distribution network (for transmittal of electricity to the end users).
The regulatory framework applicable to the production of electricity
by the private sector in Israel is provided under the Israeli Electricity Law, and the regulations promulgated thereunder, including the
Electricity Market Regulations (Terms and procedures for the granting of a license and the duties of the Licensee), 1997, the Electricity
Market Principles (Transactions with the supplier of an essential service), 2000, and the Electricity Market Regulations (Conventional
Private Electricity Manufacturer), 2005, or the Electricity Market Regulations. In addition, standards, guidelines and other instructions
published by the Israeli Electricity Authority (established pursuant to Section 21 of the Electricity Law) and\or by the Israeli Electric
Company also apply to the production of electricity by the private sector in Israel. The operations of photovoltaic plants in Israel are
also subject to various licensing, permitting and other regulations and requirements, issued and supervised by the relevant municipality,
the Israeli Land Authority and various governmental entities including the Ministry of Energy, the Ministry of Agriculture, the Ministry
of Interior and the Ministry of Defense.
In June 2018, the Israeli Government issued resolution no. 3859
for the reform of the electricity market and a structural change in the IEC. In July 2018, Amendment No. 16 to the Electricity Law was
adopted. This amendment implements the reform of the Israeli electricity market and the reduction of the IEC’s monopolistic power
by providing arrangements for the removal of the system management authorities from the IEC, maintaining the transmission and part of
the distribution facilities with the IEC, increasing the competition in the production segment by forcing the IEC to sell some of the
power plants it owns and opening up the supply segment to competition.
The Israeli Electricity Authority operates
in accordance with the Israeli Electricity Law and the policies of the Israeli government and the Minister of Energy, or the Minister.
As part of its authorities, the Israeli Electricity Authority, among other roles, grants licenses and supervises the compliance with the
provisions of the Israeli Electricity Law and the licenses issued thereunder, sets the tariffs and the methods for updating them and determining
standards for the quality, nature and level of the services provided by the holders of essential service supplier licenses in relation
to their customers and other electricity manufacturers, including in connection with electricity consumption, grid connections, supply
reliability, infrastructure services and the purchase of electricity from licensees.
As part of the 2018 reform referred to above,
the Israeli government separated the system management unit from the IEC and transitioned it to a separate government company (the System
Manager). The System Manager is responsible for planning and development of the electricity market and maintaining the balance between
the supply and demand for electricity and ensuring survivability of the electricity production and transmission systems, managing the
transmission of the energy from the power plants through the grid to substations with the requisite reliability and quality, timing of
maintenance works in the production units and transmission system, managing the trade in electricity under competitive, equal and beneficial
terms, including entering into agreements to purchase energy availability from manufacturers and the design of development of the transmission
and transformation system.
During 2020, the Minister instructed
that the coal-based production units of the IEC gradually transition to manufacturing electricity using natural gas, commencing in 2022
and through 2025. On the basis of this decision, in 2019 the IEC sold its production units in Alon Tavor, in 2020 its production units
in Ramat Hovav, and in 2022 its production units in Hagit Mizrach (effective June 2022). In addition, the IEC published a procedure (PQ)
for the sale of its production units in Eshkol in order to sell them to private parties in 2023. Upon completion of the sale of said production
units, the IEC’s market share in the electricity production segment in Israel will be below 50%.
As part of the implementation of the reform in the electricity
sector as described above, the System Manager was established. The System Manager began operating at the end of 2020 and the planning,
development and technology unit, as well as the statistics unit, were transferred to it. In November 2021, the system management unit
was also transferred to the System Manager as described above, and it began to operate fully. Commencing its full operation, the System
Manager manages the planning and development of the electricity system and the operation of the electricity production units in Israel.
As of the end of 2021, the IEC owned approximately 54% of the production capacity and the remainder is owned by the private electricity
producers. In addition, the System Manager is responsible for managing the electricity market in Israel.
Renewable Energy in Israel
On August 6, 1998, the Israeli government approved the resolution
of the Committee of Ministers for Environment and Hazardous Materials “to act to advance the development of technologies for efficient
use of renewable energies in order to reduce the dependency on imported fuel and reduce the contamination of the environment.” Commencing
in 2009, the Israeli government adopted a number of decisions intended to achieve the integration of renewable energies into the local
electricity market, including the adoption of a roadmap for the market in July 2011 and setting targets for renewable energy manufacturing.
The current targets for manufacturing electricity from renewable
sources were set by the Israeli government in September 2015, as follows: 10% in 2020, 13% in 2025 and 30% in 2030. These targets were
set as part of the Israeli government’s efforts to reduce greenhouse gas emissions in Israel.
In August 2017, Amendment no. 14 to the Electricity Sector Law,
or Amendment no. 14, was published. Amendment no. 14 is in effect until December 31, 2030. Amendment no. 14 requires that the Israeli
Minister of Energy formulate a perennial work plan in connection with production of electricity from renewable energy, which will include
action items per year in order to meet the targets for renewable energy manufacturing determined by the Israeli government. Amendment
no. 14 further provides that an inter-ministerial committee will be established, which will be required to submit its recommendations
to the Minister of Energy regarding the advancement of electricity manufacturing from renewable energy, including recommendation with
respect to: (i) methods for minimizing or eliminating obstructions for manufacturing of electricity from renewable energy, including in
connection with planning and financing and (ii) methods for minimizing or eliminating obstructions for the construction of facilities
for manufacturing electricity from renewable energy. Amendment no. 14 also requires the general manager of the Ministry of Energy to provide
an annual report to the Economic Committee of the Israeli parliament on meeting the targets for manufacturing electricity from renewable
energy and with respect to the implementation of Amendment no. 14 and the perennial work plan.
The Israeli Electricity Authority determines the quotas for
various traditional and renewable energy manufacturers in Israel. In the past, the Israeli Electricity Authority determined quotas for
photovoltaic installations. The previous quota of 300 MWp for medium installations, connected to the distribution grid, and 200 MWp for
large installations, connected to the transmission grid, have been fully utilized.
Israeli government resolution no. 2117, approved in October
2014, provides for a shift of thermo-solar, wind and bio-gas quotas in aggregate of 340 megawatt to solar quotas to be equally divided
between plants connected to the transmission network and plants connected to the distribution network and further providing that the total
quotas will not exceed 114 megawatt per year.
On October 10, 2016, The Israeli Electricity Authority published
a hearing concerning the development of new photovoltaic plants with a total capacity ranging between 800-1700 megawatts as will be determined
by the Israeli Electricity Authority, or the Publication. According to the Publication, the licenses to construct new photovoltaic plants
under the new quotas shall be granted on the basis of a competitive bidding process, in which the bidders shall propose the applicable
tariffs they expect to be paid for each KW/h supplied to the electric grid. The Publication provides that bidders who submit the lowest
proposals that collectively fall within the quota limits will be entitled to develop a photovoltaic plant and sell electricity to the
grid at a price equal to the lowest tariff proposal amongst the unsuccessful bids. Consequently, all successful bidders shall eventually
sell electricity at the same tariff.
The final tariff will be valid for a period of 23 years for
plants connected to the distribution grid, and 22 years for plants connected to the transmission grid, starting from the date of commercial
operation or upon receiving a permanent license to produce electricity and the commencement of commercial operation, as shall be determined
in accordance with the then applicable licensing regulation.
In November 2017, the Minister approved an additional quota
of 1,600 MWp for photovoltaic installations that will be allocated between small rooftop installations and medium installations.
During the years 2017-2019, several tenders were conducted.
The results of the fourth tender related to land-mounted medium installations that were published in November 2019, set a price per KWh
of NIS 0.1798 for an aggregate production capacity of 236 MWp to be constructed by the end of 2020. The results of the second tender related
to rooftop and water reservoir mounted installations, also published in November 2019, set a price per KWh of NIS 0.2307 for an aggregate
production capacity of 68 MWp. During 2020, the Israel Electricity Authority conducted additional tenders and on December 28, 2020
the results of the most recent tender were published, with an aggregate installed capacity allocated of 609 MW and price per KWh set at
NIS 0.1745, which is 12% lower than the price set in the previous tender. In a tender held at the end of 2021 in connection with a 300
MW facility in Dimona, Israel, with 210 MW storage, the price determined was 0.0857 per KWh.
In addition, the Israeli Electricity Authority approved a quota
of 200 MWp for tenders to be published in conjunction with the Israel Land Authority for the construction of photovoltaic installations,
of which winners were announced in connection with 136 MWp.
The Israeli Electricity Authority regulated the establishment
of photovoltaic plants, in several categories as noted above. Medium photovoltaic plants, such as the Israeli PV Plant, are governed by
the Israeli Electricity Authority’s decision no. 284, or Decision 284. Decision 284 provides that it will apply until the earlier
of reaching a quota of 300 megawatt in Israel or until the end of 2017.
An entity wishing to construct and operate a photovoltaic plant
in Israel is required to obtain a conditional license, subject to the fulfillment of several threshold conditions set forth in Decision
284. A conditional license is generally valid for 42 months and the licensee, after meeting the milestones included in the conditional
license, may be granted a conditional tariff approval based on the prevailing tariff, which is valid until the earlier of: (i) 90 days
following its issuance and (ii) receipt of financing for the construction of the photovoltaic plant. In the event the licensee obtains
financing during the 90 day period, it is issued the conditional tariff becomes permanent and is linked to the Israeli Consumer Price
Index for a period of 20 years commencing upon commercial operation of the plant. Thereafter, subject to fulfilment of certain conditions,
a permanent production license is granted.
National Outline Plan and Permits
In December 2010, the Israeli National Committee for Planning
and Construction approved National Outline Plan 10/d/10, or the Outline Plan, for regulating photovoltaic plants from small rooftop mounted
installations through photovoltaic plants on land plots up to a size of 0.29 square miles. The Outline Plan provides for the construction
of photovoltaic plants in two routes: permit and plan. Permits are available for rooftop mounted installations and for land installations
on specific lands, depending on their designation in the National Outline Plan and a plan route requires the licensee to file a plan with
the relevant planning authority and such a plan cannot be filed with respect to certain lands that are designated as forests, national
parks or reservations. The Outline Plan provides that preference will be given to the construction of photovoltaic plants in areas designated
for construction and development. The Outline Plan permits planning authorities to approve the construction of photovoltaic plants in
certain areas in northern and southern Israel in larger scopes than other areas.
Transfer of Rights in a Photovoltaic Plant
Any change of control in a photovoltaic plant that received
a production license from the Israeli Electricity Authority requires amending the license and the approval of the Israeli Electricity
Authority. Therefore, in the event we execute an agreement to acquire or sell and Israeli PV plant, such acquisition or sale, among other
things, will be conditioned upon receipt of these approvals and the amendment of the relevant license.
Dori Energy and the Dorad Power Plant
Dori Energy is an Israeli private company in which we currently
hold 50%. The remaining 50% is currently held by the Luzon Group (f/k/a the Dori Group). The Luzon Group is an Israeli publicly traded
company, whose shares and debentures are traded on the Tel Aviv Stock Exchange. Dori Energy’s main asset is its holdings of 18.75%
On November 25, 2010, Ellomay Energy Ltd., our wholly-owned subsidiary,
entered into an Investment Agreement, or the Dori Investment Agreement, with the Dori Group and Dori Energy, with respect to an investment
by Ellomay Energy Ltd. in Dori Energy. Pursuant to the terms of the Dori Investment Agreement, Ellomay Energy Ltd. invested a total amount
of NIS 50 million (approximately €10 million) in Dori Energy, and received a 40% stake in Dori Energy’s share capital. The
transaction contemplated by the Dori Investment Agreement, or the Dori Investment, was consummated in January 2011, or the Dori Closing
Ellomay Energy Ltd. was also granted an option to acquire additional
shares of Dori Energy, or the Dori Option, which, if exercised, will increase Ellomay Energy Ltd.’s percentage holding in Dori Energy
to 49% and, subject to the obtainment of certain regulatory approvals – to 50%. The exercise price of the options was NIS 2.4 million
for each 1% of Dori Energy’s issued and outstanding share capital (on a fully diluted basis). In May 2015, we exercised the first
option and in May 2016, we exercised the second option, accordingly, we currently hold 50% of Dori Energy and our indirect ownership of
Dorad is 9.375%. The aggregate amount paid in connection with the exercise of such options amounted to approximately NIS 2.8 million (approximately
€0.7 million), including approximately NIS 0.4 million (approximately €0.1 million) required in order to realign the shareholders
loans provided to Dori Energy by its shareholders with the new ownership structure.
Concurrently with the execution of the Dori Investment Agreement,
Ellomay Energy Ltd., Dori Energy and Dori Group also entered into the Dori Energy Shareholders Agreement that became effective upon the
Dori Closing Date. The Dori Energy Shareholders Agreement provides that each of Dori Group and Ellomay Energy Ltd. is entitled to nominate
two directors (out of a total of four directors) in Dori Energy for as long as the ratio of holdings between the two shareholders is in
the range of 1:1 to 1:1.5 and thereafter such number of directors based on the ratio of holdings of the parties. The Dori Energy Shareholders
Agreement also grants each of Dori Group and Ellomay Energy Ltd. with equal rights to nominate directors in Dorad, provided that in the
event Dori Energy is entitled to nominate only one director in Dorad, such director shall be nominated by Ellomay Energy Ltd. for so long
as Ellomay Energy Ltd. holds at least 30% of Dori Energy. The Dori Energy Shareholders Agreement further includes customary provisions
with respect to restrictions on transfer of shares, a reciprocal right of first refusal, tag along, limitations on pledging of Dori Energy’s
shares, principles for the implementation of a BMBY separation mechanism, special majority rights, etc.
Following the Dori Closing Date, the holdings of Ellomay Energy
Ltd. in Dori Energy were transferred to Ellomay Energy LP, an Israeli limited partnership whose general partner is Ellomay Energy Ltd.
and whose sole limited partner is us. Ellomay Energy LP replaced Ellomay Energy Ltd. with respect to the Dori Investment Agreement and
the Dori Energy Shareholders Agreement.
Dori Energy’s representative on Dorad’s board of directors
is currently Mr. Ran Fridrich, who is also our CEO and a member of our Board of Directors.
As of December 31, 2022, the outstanding shareholders’ loans
provided to Dori Energy by us and the Luzon Group amount to approximately NIS 66.9 million (the Company’s portion is approximately
NIS 33.5 million). Ellomay Energy LP and Dori Energy entered into a loan agreement and capital notes agreements, effective December 31,
2022, which provide for the conversion of approximately NIS 23.5 million of the shareholder’s loans to capital notes, payable not
less than 60 months after the date of their execution, at the sole discretion of Dori Energy, with the remaining balance of shareholder’s
loans (NIS 10 million), linked to the Israeli CPI and bearing an annual interest equal to the interest payable on Dorad’s senior
debt plus 3%, with a repayment date of December 31, 2023. The shareholder loan agreement provides that early repayment is permitted, without
a penalty. The Luzon Group entered into a similar loan agreement and capital notes with respect to its portion of the shareholders’
To the best of our knowledge, since February 2018, the holdings
and rights of the Luzon Group in Dori Energy (including the shares of Dori Energy held by the Luzon Group and the shareholders’
loans provided by the Luzon Group to Dori Energy) are pledged to the holders of debentures issued by the Luzon Group to the public in
Israel. We provided pledges on our holdings in Dori Energy and the shareholder’s loans provided to Dori Energy in connection with
the issuance of our Series E Secured Debentures. For more information see Item 4.A: History and Development of Ellomay” under “Recent
Developments” and “Item 10.C: Material Contracts.”
The Dorad Power Plant
Other than information relating to Dori Energy,
the disclosures contained herein concerning the Dorad Power Plant are based on information received from Dorad and other publicly available
Dorad currently operates a combined cycle power plant based on
natural gas, with a license to produce approximately 860 MW, located south of Ashkelon, or the Dorad Power Plant. The Dorad Power Plant
was constructed as a turnkey project, with the consideration denominated in US dollars, and commenced commercial operations in May 2014.
The electricity produced by the Dorad Power Plant is sold to end-users throughout Israel and to the Israeli National Electrical Grid.
The transmission of electricity to the end-users is done via the existing transmission and distribution grid, in accordance with the provisions
of the Israeli Electricity Market Law, 1996, or the Electricity Law, and its regulations, and the standards and the tariffs determined
by the Israeli Electricity Authority. The existing transmission and the majority of the existing distribution lines are operated by the
Israeli Electric Company, or IEC, which is the only entity that holds a transmission license in Israel.
The Dorad Power Plant is a combined cycle power plant based on
natural gas, with a license to produce approximately 860 MW. The production capacity of the Dorad Power Plant is subject to degradation
and is currently approximately 850 MW.
The Dorad Power Plant is based on combined cycle technology using
natural gas. The combined cycle configuration is a modern technology to produce electricity, where gas turbines serve as the prime mover.
After combustion in the gas turbine to produce electricity, the hot gases from the gas turbine exhaust are directed through an additional
heat exchanger to produce steam. The steam powers a steam turbine connected to a generator, which produces additional electric energy.
The Dorad Power Plant is comprised of twelve natural gas turbines, each with an installed capacity of 50 MWp and two steam turbines, each
with an installed capacity of 100 MWp. These turbines can be turned on and off quickly, with no material losses in energy efficiency,
which provides operational flexibility in accordance with the expected needs of customers and the IEC, calculated based on a proprietary
forecasting system implemented by Dorad.
The other shareholders in Dorad are Eilat Ashkelon Infrastructure
Services Ltd., or EAIS (37.5%), an Israeli private company owned by Eilat-Ashkelon Pipeline Company Ltd., or EAPC, and Edelcom Ltd., or
Edelcom, (18.75%), an Israeli private company indirectly owned by Mr. Ori Edelsburg, and Zorlu Enerji Elektrik Uretim A.S., or Zorlu,
(25%), a publicly traded Turkish company. Dorad’s shareholders, including Dori Energy, are parties to a shareholders agreement dated
November 2010 that includes customary provisions including provisions in connection with the holdings of Dorad’s shares, the investments
in Dorad, its financing and management, restrictions of transfer of shares, including a right of first refusal, pre-emption rights, arrangements
in connection with the financing of Dorad’s operations and mechanisms that will be implemented in the event any of Dorad’s
shareholders does not meet its financing obligations, including dilution mechanisms, certain special shareholder or board, as applicable,
majority requirements (either a 66% majority or for certain resolutions a unanimous vote requirement) and the right of each shareholder
holding 10% of Dorad’s shares to nominate, replace or terminate the service of one member to Dorad’s Board of Directors, providing
that shareholders may aggregate holdings for purposes of appointment of a director and that each director will be entitled to the voting
rights determined based on a division of the holdings of the shareholder that appointed such director by the number of directors appointed
by such director. As noted below, pursuant to the shareholders’ agreement among Dori Energy’s shareholders and Dori Energy,
or the Dori Energy Shareholders Agreement, we are currently entitled to recommend the nomination of the Dorad board member on behalf of
Dorad Credit Facility
Dorad entered into a credit facility agreement with a consortium
led by Bank Hapoalim Ltd. as the arranger of the debt and Clal Credit and Financing Ltd. of the Clal Insurance Company Ltd. group as the
organizer of the institutional lenders’ consortium, or the Dorad Credit Facility, and financial closing of the Dorad Power Plant
was reached in November 2010, with the first drawdown received in January 2011. The Dorad Credit Facility provides that the consortium
will fund up to NIS 3.85 billion, indexed to the Israeli CPI, which in any event will not be more than 80% of the cost of the project,
with the remainder to be funded by Dorad’s shareholders and that guarantees will be provided to third parties in accordance with
the project’s documents.
The funding is linked to the Israeli consumer price index and bears
interest at a rate that is subject to updates every three years based on Dorad’s credit rating. As of December 31, 2022, the effective
interest rate is approximately 5.1%. The funding is repaid (interest and principal) in semi-annual payments (on May 26 and November 26
of each year), commencing six months of the commencement of operations of the Dorad Power Plant and for a period of 17 years thereafter.
Dorad is also required to pay annual commissions in the aggregate amount of approximately $0.17 million. The Dorad Credit Facility further
includes customary provisions, representations and warranties, including early repayment under certain circumstances and floating and
fixed charges on Dorad’s assets and rights in connection with the Dorad Power Plant, whereby a breach of representations and warranties
is likely to lead, among others, to a demand for immediate repayment, a breach of Dorad’s undertakings under its licenses and potentially
the termination of the licenses.
The Dorad Credit Facility requires Dorad to comply with the following
financial standards: (i) a debt coverage ratio of 1.10:1 over two consecutive calculation periods, and a debt coverage ratio of 1.05:1
over the entire calculation period, and (ii) a minimal loan life coverage ratio of 1.10:1. Dorad is in compliance with these financial
standards as of December 31, 2022.
As noted above, Dorad’s senior loan facility is linked to
the Israeli CPI. As the production tariff is partially linked to the Israeli CPI, the exposure is minimized. However, as the production
tariff is published in delay with respect to the actual changes in the CPI, Dorad executed derivative transactions on the Israeli CPI.
In connection with the Dorad Credit Facility, Dorad’s shareholders (including Dori Energy) undertook to provide guarantees to the
IEC and to various suppliers and service provides of Dorad and also undertook to indemnify Dorad and the consortium in connection with
certain expenses, including certain environmental hazards. During 2022, the Israeli CPI increased by approximately 5.3%, which increased
Dorad’s financing expenses in an aggregate amount of approximately NIS 135 million.
The aggregate investment of Dorad in the construction of the Dorad
Power Plant was approximately NIS 4.7 billion (equivalent to approximately €1.1 billion). The Dorad Credit Facility provides for
the establishment of the project’s accounts and determines the distribution of the cash flows among the accounts. In addition, the
Dorad Credit Facility includes terms and procedures for executing deposits and withdrawals from each account and determines the minimum
balances in each of the capital reserves. In connection with the Dorad Credit Facility, Dorad also provided pledges on its properties,
including fixed, floating and real property pledges.
As of December 31, 2022, the outstanding balance of the Dorad Credit
Facility was approximately NIS 2.49 billion. As of December 31, 2022, no additional withdrawals are permitted under the Dorad Credit Facility.
In connection with the Dorad Credit Facility, Dorad executed an
accounts agreement that regulates the opening of the project accounts and the distribution of cash flows between the accounts. In addition,
the agreement provides conditions and procedures for making deposits and withdrawals from each account, determines the total minimum balances
in each of the reserve funds, regulates the order of priorities for payments between the accounts and other conditions in connection with
the management of the accounts, including regarding transfers between accounts. The reserve funds include a fund for debt service, a fund
for heavy maintenance, a fund for distribution and a fund for regulatory fines. As of December 31, 2022, the remaining deposits in respect
of the aforementioned reserve funds are in the aggregate amount of approximately NIS 515 million.
The Dorad Credit Facility includes limitations on distributions
by Dorad based on compliance with financial covenants and certain undertakings. For the purposes of the Dorad Credit Facility, a “distribution”
includes also the repayment of shareholders’ loans. A distribution that is not in compliance with the Dorad Credit Facility will
cause for immediate repayment of the financing obtained by Dorad.
In connection with the Dorad Credit Facility, Dorad’s shareholders
executed an equity injection agreement and subordinated loan agreement with Dorad and the financing entities. These agreements include
undertakings by Dorad’s shareholders to inject, separately and each according to their relative share, from time to time and simultaneously
with each withdrawal request from the Dorad Credit Facility, a total of up to 20% cash, whether as equity or by way of shareholders’
loans, which in any case will be subordinated and pledged to Dorad’s obligations towards the financing entities, in accordance with
the terms of the agreements. In accordance with the capital injection agreement and to guarantee the shareholders’ obligations to
provide their relative share of funding, the shareholders provided at that time cash and bank guarantees in the amount of their commitment
net of any amounts transferred to Dorad prior to such date. The capital injection agreement includes representations and undertakings
in relation to Dorad’s shareholders and the project, the violation of which may, among other things, cause a demand for immediate
repayment of the Dorad Credit Facility, a breach of Dorad’s undertakings under its licenses and potentially the termination of the
licenses. In accordance with the subordinated loan agreement, commencing on the financial closing date, any amount that will be designated
as a loan will be linked to the Israeli CPI and will bear an annual interest rate of 10%, and it is also determined that any distribution
to Dorad’s shareholders, including loan repayment, will be possible subject to compliance with financial standards as detailed in
the financing agreements (see above). As part of the Dorad Credit Facility, all of Dorad’s issued share capital is pledged in favor
of Poalim Trust Services Ltd., as trustee for the financing entities.
As of December 31, 2022, we (through Dori Energy) provided guarantees
to the Israeli Electricity Authority, to the System Manager, to the Israeli Electricity Authority and to Israel Natural Gas Lines Ltd.
in the aggregate amount of approximately NIS 13.7 million. The guarantees were provided pursuant to a Guarantee Provision Agreement between
Dori Energy and an Israeli bank, which includes customary provisions and also undertakings of the Company to comply with certain financial
standards and an agreement of the shareholders of Dori Energy that upon the occurrence of certain events, including non-compliance with
the financial standards, an event of default under the Dorad Credit Facility, a breach by the Luzon Group, the Company, Ellomay Energy,
Ellomay Energy LP or Dori Energy of undertakings to the bank and a change of control of the Luzon Group, the Company, Ellomay Energy and/or
Ellomay Energy LP, the shareholders’ loans provided to Dori Energy will be subordinated to amounts due from Dori Energy to the bank
under this agreement and Dori Energy will not be permitted to distribute any dividends or make any payments to its shareholders. Dori
Energy is in compliance with the financial covenants included in the Guarantee Provision Agreement.
The Dorad Power Plant commenced operations in May 2014, following
the receipt of the permanent production and supply licenses discussed under “Material Effects of Government Regulations on Dorad’s
Dorad previously entered into an operation and maintenance agreement
with Eilat-Ashkelon Power Plant Services Ltd., or EAPPS, a wholly-owned subsidiary of EAIS, which holds 37.5% of Dorad. Certain of the
obligations under such agreement were subcontracted to Zorlu, which holds 25% of Dorad. During 2013, EAPPS entered into an agreement with
Edeltech O&M Ltd. (f/k/a Ezom Ltd.), or Edeltech O&M, which, to our knowledge, is 75% owned by the controlling shareholder of
Edelcom (which holds 18.75% of Dorad) with the remainder held by a company controlled by Zorlu, for the provision of sub-contracting services
to EAPPS. Despite the assignment and subcontracting agreement, EAPPS remained liable to Dorad for all obligations under the agreement.
In 2016, the prices of certain services included in the agreement was updated based on the mechanism included in the agreement, effective
retroactively to the beginning of 2016. In December 2017, Dorad and Edeltech O&M executed an operation and maintenance agreement for
the Dorad Power Plant, or the Dorad O&M Agreement, replacing EAPPS by Edeltech O&M as the O&M contractor of the Dorad Power
Plant under the same terms. On November 29, 2022, the agreement between Dorad and EAPPS was assigned to EAIS. On August 22, 2022, the
operating contractor informed Dorad that 25% of the ordinary shares and voting rights in the maintenance contractor were transferred to
Edeltech Holdings 2006 Ltd., or Edeltech Holdings, which from that date owns 100% of the issued and paid-up share capital of the maintenance
The Dorad O&M Agreement is for a period of 24 years and 11
months commencing upon receipt of a permanent license by Dorad, and in no event for a period that is longer than the period of the lease
of the Dorad Power Plant premises. Pursuant to the O&M agreement, Dorad receives operation and maintenance services, including purchase
of spare parts and repairs in consideration for a fixed and variable (depending on production during the period) monthly payment.
Due to the location of the Dorad Power Plant, Dorad has implemented
various security measures in order to enable continued operations of the Dorad Power Plant during attacks on its premises.
In 2008, Dorad executed a lease with respect to the land on which
the Dorad Power Plant is located (approximately 18.5 acres) with EAIS (one of Dorad’s shareholders who leases the land from the
Israel Land Authority) for the construction period and for a period of 24 years and 11 months following the commencement of commercial
operations of the Dorad Power Plant. The lease agreement was executed by the Israel Land Authority in April 2015 and expires on May 20,
2039. The annual payment under the lease agreement is approximately NIS 3.7 million, linked to the Israeli CPI. Dorad undertook to indemnify
EAPC and EAIS for payments and expenses paid or to be paid by EAIS, including the improvement, tax payments, fines for expenses and other
payments, in respect of the land due to the construction of the power plant. In addition, Dorad’s shareholders signed a guarantee
in favor of EAPC (which transferred its lease right to EAIS) to fulfill Dorad’s obligations as stated above to indemnify EAIS. The
liability of Dorad’s shareholders according to the guarantee will be up to their holdings in Dorad’s share capital (pro rata).
On February 27, 2020, Dorad’s Board of Directors decided
to distribute a dividend of NIS 120 million (approximately €31.6 million). In connection with such dividend distribution, Dori Energy
received NIS 22.5 million (approximately €5.8 million) and repaid an amount of NIS 10.25 million (approximately €2.6 million)
loan to us. On May 6, 2021, Dorad’s Board of Directors approved the distribution of a dividend in the amount of NIS 100 million
(approximately €25.4 million) and such dividend was distributed during May 2021. In connection with such dividend distribution,
Dori Energy received an amount of approximately NIS 18.8 million (approximately €4.5 million) and repaid an amount of approximately
NIS 9 million (approximately €2.3 million) loan to us.
We and Dori Energy, and several of the other shareholders of Dorad
and their representatives and Dorad, are involved in various litigations as follows:
Petition to Approve a Derivative Claim filed
by Dori Energy and Hemi Raphael
During April 2015, Dori Energy approached Dorad in writing, requesting
that Dorad take legal steps to demand that Zorlu, Wood Group Gas Turbines Ltd., the engineering, procurement & construction contractor
of the Dorad Power Plant, or Wood Group, and the representatives of Zorlu on the Dorad Board of Directors disclose details concerning
the contractual relationship between Zorlu and Wood Group. In its letters, Dori Energy notes that if Dorad will not act as requested,
Dori Energy intends to file a derivative suit in the matter.
Following this demand, in July 2015, Dori Energy and Dori Energy’s
representative on Dorad’s Board of Directors, who is also a member of our Board of Directors, filed a petition, or the Petition,
for approval of a derivative action on behalf of Dorad with the Economic Department of the Tel Aviv-Jaffa District Court. The Petition
was filed against Zorlu, Zorlu’s current and past representatives on Dorad’s Board of Directors and Wood Group and several
of its affiliates, all together, the Defendants. The petition requested, inter alia, that the court instruct the Defendants to disclose
and provide to Dorad documents and information relating to the contractual relationship between Zorlu and Wood Group, which included the
transfer of funds from Wood Group to Zorlu in connection with the EPC agreement of the Dorad Power Plant. For the sake of caution, Plaintiffs
further requested to reserve their rights to demand, on behalf of Dorad, monetary damages in a separate complaint after Dorad receives
the aforementioned information and documents.
In January 2016, Dori Energy filed a motion to amend the Petition
to add Ori Edelsburg (a director in Dorad) and affiliated companies as additional respondents, to remove Zorlu’s representatives
and to add several documents which were obtained by Dori Energy, after the Petition had been filed. Dorad and Wood Group filed their response
to the motion to amend the Petition and Zorlu filed a motion for dismissal. During the hearing held in March 2016, Zorlu withdrew the
motion for dismissal and is required to submit its response to the motion to amend the Petition by March 31, 2016.
At a hearing held in April 2016, the request submitted in January
2016 to amend the Dori Energy Petition to add Ori Edelsburg (a director in Dorad) and affiliated companies as additional respondents was
approved. At the end of July 2016, the respondents filed their responses to the amended Dori Energy Petition. Dori Energy and Hemi Raphael
had until December 19, 2016 to reply to the respondents’ response. Following the recusal of the judges in the Economic Department
of the Tel Aviv-Jaffa District Court, in September 2016 the President of the Israeli Supreme Court instructed that the parties will inform
the court as to the proper venue in which the petition should be heard and to update the court whether the parties reached an agreement
as to the transfer of the dispute to an arbitration proceeding. During October 2016, Dori Energy notified the court that the parties have
not yet reached an agreement and requested that the court determine which judges will decide on the petition and the respondents notified
the court that the discussion concerning transferring the dispute to an arbitration process are advancing and an attempt will be made
to reach an arbitration agreement during November 2016. On November 15, 2016, the President of the Israeli Supreme Court instructed that
the parties will update the court on the proposed transfer of the proceeding to an arbitration process by early December 2016.
In December 2016, an arbitration agreement was executed pursuant
to which this proceeding, as well as the petition to approve a derivative claim filed by Edelcom mentioned
below will be arbitrated before Judge (retired) Hila Gerstel. In January 2017, the arbitrator ruled, among other things, that the statements
of claim in the various proceedings will be submitted by February 19, 2017, the statements of defense will be submitted by April 4, 2017,
discovery affidavits will be submitted by April 6, 2017, responses will be submitted by May 4, 2017 and a preliminary hearing will be
held on May 10, 2017. These dates were extended with the agreement of the parties so that the statements of claim will be submitted by
February 23, 2017 and the statements of defense will be submitted by April 9, 2017. Following the execution of the arbitration agreement,
Dori Energy and Mr. Raphael requested the deletion of the proceeding and the request was approved. A statement of claim, or the Claim,
was filed by Dori Energy and Mr. Raphael on behalf of Dorad against Zorlu, Mr. Edelsburg, Edelcom and Edeltech Holdings, which owns Edelcom,
or Edeltech, and, together with Mr. Edelsburg and Edelcom, the Edelsburg Group, on February 23, 2017 in which they repeated their claims
included in the amended Petition and in which they required the arbitrator to obligate the defendants, jointly and severally, to pay an
amount of $183,367,953 plus interest and linkage to Dorad. During March 2017, the respondents filed two motions with the arbitrator as
follows: (i) to instruct the plaintiffs to resubmit the statement of claim filed in connection with the arbitration proceedings in a form
that will be identical to the form of the statement of claim submitted to the court, with the addition of the monetary demand only or,
alternatively, to instruct that several sections and exhibits will be deleted from the statement of claim and (ii) to postpone the date
for filing their responses by 45 days from the date the motion set forth under (i) is decided upon. The plaintiffs filed their objection
to both motions and some of the respondents filed their responses to the objection. In April 2017, the Defendants filed their statements
of defense. Within the said statements of defense, Zorlu attached a third party notice against Dorad, Dori Energy and the Luzon Group,
in the framework of which it repeated the claims on which its defense statement was based and claimed, among other claims, that if the
plaintiffs’ claim against Zorlu was accepted and would negate Zorlu’s right receive compensation and profit from its agreement
with Dorad and therefore Zorlu should be compensated in the amount of approximately NIS 906.4 million (approximately €218.3 million).
Similarly, also within their statement of defense, Edelcom, Mr. Edelsburg and Edeltech filed a third-party notice against Dori Energy
claiming for breaches by Dori Energy of the duty to act in good faith in contract negotiations and that any amount ruled will constitute
In October 2017, EAIS, which holds 37.5% of Dorad’s shares,
filed a statement of claim in this arbitration proceeding. In its statement of claim, EAIS joins Dori Energy’s and Mr. Raphael’s
request as set forth in the Claim and raises claims that are similar to the claims raised by Dori Energy and Mr. Raphael in the Claim.
In November 2017, Dori Energy and Mr. Raphael filed their responses
to the defendants’ statements of defense and in December 2017, Dori Energy, Mr. Raphael and EAIS filed their statements of defense
to the third-party notices submitted by the defendants. In December 2017, Zorlu filed a request in connection with the Dori Energy statement
of claim to the extent i