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Italy Opens First Geothermal Auction Under FER2 Incentives
Image: These are real operational geothermal power plants in Larderello, Tuscany—the world’s oldest geothermal production area. The visible steam plumes come from cooling towers that are part of electricity generation using underground heat.
By: Robert Buluma
Italy is preparing to reopen one of the most historically significant chapters in global energy innovation—its geothermal sector—through a structured, modern financial mechanism designed to unlock stalled development. Under the newly established FER2 incentive scheme, the country will hold its first-ever geothermal energy auction on 8 June 2026, marking a pivotal moment in Europe’s renewable energy transition.
This is not just another renewable energy policy update.
It represents a strategic attempt by Italy to revive a sector where it once led the world but has since seen stagnation for nearly a decade.
With 30 MW of geothermal capacity allocated specifically for zero-emission projects, the auction is modest in scale but potentially transformative in direction. It signals renewed political and financial commitment to geothermal energy as a stable, dispatchable, and land-efficient renewable resource.
A Historic Energy Return: Italy’s Geothermal Legacy
Italy is not new to geothermal energy. In fact, it holds a special place in global energy history. The world’s first geothermal power plant was built in Larderello, Tuscany, in the early 1900s, making Italy a pioneer in harnessing Earth’s internal heat for electricity generation.
Despite this legacy, geothermal development in Italy has slowed significantly in recent years. The last major geothermal plant commissioning occurred in 2018, and since then, progress has largely stalled due to regulatory complexity, investment uncertainty, and competition from faster-deploying renewables like solar and wind.
Now, under FER2, Italy is attempting to reverse this trend.
What is FER2 and Why It Matters
The FER2 (Fonti Energetiche Rinnovabili 2) incentive scheme is Italy’s updated support framework for renewable energy technologies that are either:
- Not yet fully mature in the market
- High-cost or high-risk to develop
- Strategically important for decarbonization
At its core, FER2 introduces a critical financial instrument: Contracts for Difference (CfD).
These long-term contracts guarantee a stable price for electricity producers over 25 years, protecting them from volatile energy markets.
If market prices fall below the agreed strike price, the government compensates producers. If prices rise above it, producers repay the difference.
This structure is especially important for geothermal energy, which requires high upfront drilling costs, long development timelines, and significant geological uncertainty.
By stabilizing revenue, FER2 reduces investor risk and improves project bankability.
The 2026 Geothermal Auction: Key Details
The upcoming geothermal auction is part of the first FER2 competitive window for 2026.
Key parameters include:
- Date: 8 June 2026
- Geothermal allocation: 30 MW
- Category: Zero-emission geothermal systems
- Contract duration: 25 years (CfD support)
- Technology focus: Advanced binary systems and closed-loop geothermal systems with full reinjection
Why Italy is Returning to Geothermal Now
Italy’s renewed geothermal push is driven by multiple converging pressures:
1. Energy security concerns
Europe’s energy volatility has increased the need for domestic, stable baseload energy sources.
2. Net-zero commitments
Italy must align with EU climate goals and reduce reliance on fossil fuels.
3. Technology maturity
New geothermal systems—especially enhanced geothermal systems and closed-loop designs—are reducing environmental and geological limitations.
4. Investment stagnation
Without incentives, geothermal development has been financially unattractive compared to solar and wind.
FER2 is designed to correct this imbalance.
The Structure of Geothermal Incentives
Under FER2, geothermal energy is divided into two main categories:
Conventional Geothermal with Innovations
- Strike price: approximately €100/MWh
- Capacity cap: around 100 MW nationally
- Focus: improved conventional hydrothermal systems
- Strike price: approximately €200/MWh
- Capacity cap: around 60 MW
- Focus: closed-loop and advanced systems with zero atmospheric emissions
Why 30 MW Matters More Than It Looks
At first glance, 30 MW may appear insignificant. In comparison, solar auctions often exceed gigawatt-scale capacity.
However, geothermal energy operates differently:
A 30 MW geothermal plant can run at more than 90% capacity factor.
That means it produces power continuously—day and night, regardless of weather conditions.
Equivalent solar capacity would require far more installed generation to match the same annual output.
Geothermal provides true baseload electricity, making even small capacity allocations strategically important.
More importantly, this auction is not about scale—it is about market reactivation.
Investor Confidence and Market Signal
One of the most important impacts of FER2 is psychological and financial.
It restores confidence in Italy’s geothermal pipeline, signals government willingness to share risk, and opens long-term financing pathways through CfDs.
Developers entering the auction are expected to already have:
- Exploration permits
- Environmental approvals
- Preliminary drilling data
- Grid connection assessments
Challenges Facing Italy’s Geothermal Expansion
Despite strong policy support, several challenges remain:
High upfront drilling costs remain a major barrier due to geological uncertainty.
Italy’s permitting processes can still be slow and complex.
The auction scale is relatively small, limiting immediate industry transformation.
Environmental scrutiny remains important, even for zero-emission systems.
Investor caution persists due to past stagnation in geothermal development.
Technological Shift: The Rise of Zero-Emission Geothermal
The FER2 framework reflects a technological shift in geothermal development.
Traditional systems rely on natural hydrothermal reservoirs, but new technologies are expanding the sector:
- Binary cycle geothermal plants
- Closed-loop geothermal systems
- Enhanced geothermal systems (EGS)
Italy’s auction explicitly prioritizes these innovations.
Economic and Industrial Implications
If successful, FER2 geothermal auctions could:
Re-establish Italy as a geothermal technology leader.
Attract European and global geothermal developers.
Stimulate drilling and engineering industries.
Create long-term stable electricity pricing.
Reduce dependence on imported fossil fuels.
Geothermal energy also integrates well with:
- District heating systems
- Industrial heat supply
- Hydrogen production
- High-demand energy users such as data centers
Broader European Context
Italy is not acting alone.
Across Europe:
Germany is expanding deep geothermal heating systems.
France is scaling geothermal district heating in urban regions.
Iceland continues to dominate global geothermal production.
The European Union is increasingly supporting dispatchable renewable technologies.
FER2 aligns Italy with this broader geothermal revival.
What Happens After the Auction
After the June 2026 auction:
Winning developers will receive 25-year Contracts for Difference.
Final permitting and financing arrangements will be completed.
Drilling and construction will begin.
Additional FER2 geothermal allocations are expected in future auction rounds.
The government may expand geothermal capacity if early results are successful.
Conclusion: A Small Auction With Big Implications
Italy’s first geothermal auction under FER2 is not about immediate energy transformation. It is about restarting a dormant industry with structured financial support.
While 30 MW may appear modest, its significance lies in:
Reintroducing geothermal into Italy’s active energy market.
Providing long-term financial certainty.
Encouraging next-generation geothermal technologies.
Reconnecting Italy with its geothermal heritage.
If successful, this auction could mark the beginning of a broader geothermal revival in Italy and potentially influence similar policy frameworks across Europe.
The country that pioneered geothermal energy more than a century ago may once again become one of its most important innovators.
Source: Button Down
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