Context analysis and business model

CONTEXT ANALYSIS

Acea monitors the reference scenario, identifying and analysing the factors that could take on a significant role in terms of the Group’s operations, such as competitiveness, sustainability and regulatory areas that can affect the achievement of strategic goals. In addition to these external factors, there is also the internal context of the Group, to be considered both in organisational terms and in relation to the energy and environmental impacts, the development of human capital, the protection of workers’ health and safety, the protection of company assets, and the sustainable and responsible management of the supply chain.

THE ENERGY MARKET AND COMPETITORS

Following the conversion into law of Decree Law 183/2020 (1000 Extensions) through Law 21/2021, the termination of the price protection regimes for domestic and micro-enterprise customers was postponed to 1 January 2023, while with the conversion law for Decree Law 152/2021, implementing the NRRP, which occurred afterwards, the schedules and methods for the management of the transition to a free market, through a gradual protection regime, were defined. In particular, micro-enterprises will be served through gradual protection as of 1 January 2023, by suppliers identified through auctions to be held during 2022, while domestic customers will be served through gradual protection by suppliers identified through auctions which must be held by 10 January 2024. Vulnerable and energy poor customers will be served under greater protection until an ad hoc offer is made available by all the sellers, which ARERA will define by 1 January 2023.
With regard to energy sales, once the greater protection service is no longer applicable, there will be an increase in competition among operators and the search for distinctive added-value elements, which are achievable through investments in technological innovation, digitalisation and sustainability. In this area, in 2021 Acea Energia proposed new services and offers, marking its entry into the electric mobility sector and energy efficiency services that benefit from tax bonuses and launching new environmentally sustainable energy and gas offers.

THE INTEGRATED WATER SYSTEM AND GAS DISTRIBUTION

Water and gas distribution are market areas in which Acea intends to play an active role, evaluating and participating in the new tenders called for the concession of the Integrated Water Service and gas distribution service, by the various contracting authorities (Regions, Municipalities, Area Authorities) throughout the country. In fact, Acea Group can easily compete with other operators in the sector as it fulfils the necessary economic, financial, organisational, experience and certified system requirements. In the water industry, in particular, the Group has planned works on strategic infrastructure of interest for the National Recovery and Resilience Plan and has implemented a digitalisation process of the commercial procedures as well as the greater application of technological innovation in the management of infrastructure.

THE WASTE MANAGEMENT MARKET

The market in which the Acea Group operates through Acea Ambiente involves the collection, selection, treatment, recovery and disposal of waste through the management of plants located in Latium, Umbria, Tuscany, Marche, Piedmont, Abruzzo, Veneto and Val d’Aosta.
Each operating centre has its own authorisation regime that also governs the reference market, enabling it to conclude service contracts with public or private entities.
In some plants, the processing of waste produces electricity to be fed into the grid and raw materials to be sold. Many activities carried out by companies in the Environment segment are classified as essential public services.
The Group intends to more frequently seize the growing opportunities in the field of the circular economy.

THE ENGINEERING AND SERVICES MARKET

With regard to the non-captive market, the company Acea Elabori aims to expand its activities by continuing to participate in tenders for districting, surveys and measurements, modelling and plans for water and sewer systems, and plant design and works. The Principals have mainly been integrated water service operators who require specialised services to support the plans for rationalisation and upgrading integrated water cycle networks and plants. To date Acea Elabori has been awarded two tenders, while others are in the process of being awarded. Participation is done through temporary joint ventures with other companies, implementing the organisational regulations for anti-trust compliance and prevention of unfair commercial practices. In particular, Acea Elabori has developed design activities, achieving in 2021 BIM (Building Information Modelling) certification, a digital methodology that makes it possible to acquire and manage all the design information in an integrated manner for the cycle phases of a project, creating economic, time and environmental efficiencies, and explores increasingly more advanced areas in terms of research and technological innovation and the laboratory monitoring sector, with an approach that values partnerships and sharing knowledge.

THE ENERGY EFFICIENCY MARKET

The energy efficiency market is influenced by updates made to the regulatory framework of incentives. Italian Decree Law 34/2020, no. 34 (Relaunch Decree), converted with Law 77/2020, which introduced tax subsidies (110% superbonus) with the possibility of financing and discounts for beneficiaries who carry out energy efficiency and seismic projects on their buildings has led to an increase in demand which offers the Acea Group, through the companies Ecogena, Acea Innovation and Acea Energia, opportunities for business development in the residential sector.
However, this sector is dependent on a regulatory context which means progress will not be linear: in 2021, the activities first experienced a slowdown before growth resumed in August 2021, after the publication of the so-called “Simplification Decree” bis. Additional acceleration will be seen due, among other things, to the expansion of those able to benefit from the measures, introduced in the 2022 Budget Law.
Some operational issues in this growing market are linked to the increase in materials prices (influenced by commodities prices and increased demand), limited availability of companies with qualified workers and the difficulty of obtaining supplies (unavailability of services and delays in the delivery of materials).

INSTITUTIONAL INVESTORS

Global stock markets in 2021 saw overall positive performance, thanks to the economic recovery supported by expansive measures implemented by central banks and the vaccine campaign, despite discontinuities associated with the spread of the Delta and Omicron variants of Covid-19. The vaccine campaign allowed a progressive reduction in the restrictions imposed by governments as well as a consequent recovery in economic and industrial activity.
Institutional investor interest has strengthened in ESG issues, which are increasingly integrated into investment decisions. In particular, an increase has been seen in the financial community’s sensitivity to social and environmental issues, with a growth in investor awareness of the interesting risk/return profile that can be offered by sustainable investments.

THE ENERGY EFFICIENCY MARKET

2021 saw the start of the revival of economic-productive systems, the resumption of social relations towards the "new normal" that follows the discontinuity generated by the health crisis. The pandemic emergency has joined the climate-environmental crisis, in a reciprocal relationship of causes and effects, with repercussions on the social context that still condition the scenario of future sustainability.
This contextual situation is also the key to interpreting numerous international and national events. On the political level, it is worth noting the inauguration of the 46th President of the United States of America, Joe Biden, and the re-admission of the USA into the Paris agreements to combat climate change. In the Italian context, with the formation of the new Draghi government, the NRRP for the post-emergency relaunch of Italy was prepared and initiated. Through the NRRP, and the related funds provided by the EU (Next Generation), a strategic plan is proposed that revolves around the strategic axes of digitalisation and innovation; ecological transition; social inclusion. In Europe, a climate law was passed setting the goal of carbon neutrality by 2050, with a milestone of a 55% GHG reduction by 2030 compared to 1990. Together with the "Fit for 55" legislative initiatives proposed by the von der Leyen Commission, the measure is part of the strategic framework of the European Green Deal. The G20 in Rome affirmed commitments to food security and adequate nutrition (Matera Declaration) and to gender equality, empowerment and leadership of women and girls at all levels for inclusive and sustainable development. 2021 was characterised by the careful management of the pandemic through vaccination campaigns, the continuation of remote work, the introduction of prevention and population monitoring systems to maximise safety while returning to work and social activities. At the environmental level, extreme events (hurricanes, floods, fires) have been recorded, with loss of life and economic impacts all over the planet, from the north-west coast of the USA to Europe, from the Henan region in China to India, from Canada to South Sudan.
At the end of the year, new criticalities emerged, health, with the spread of new variants of Covid, and social, with the rise in energy prices due to the cost of gas, and environmental, with the recording of increased levels of climate-changing emissions.
In Italy, the Asvis report indicates that progress towards sustainable development is still uneven, despite several important initiatives, such as the project to integrate the protection of the environment, biodiversity and ecosystems, also in the interest of future generations, into the fundamental principles of the Constitution and the regulation at national level in relation to equal pay for men and women.
In this context, essential service companies, close to the dynamics experienced by the territory, feel the solicitations and suggestions emerging from regulatory frameworks, such as the European Environmental Taxonomy, and managerial frameworks, with the spread of concepts such as stakeholder capitalism or "sustainable success" for listed companies.

ENVIRONMENTAL AND ENERGY IMPACTS

The natural environment is the scenario where the activities of the Group are performed and is to be preserved with a responsible and efficient use of resources, protecting sources, safeguarding the natural areas where the plants and service networks encroach, mitigating the physical and the external impacts generated in the ecological context of the operating processes. Despite the global adoption of periods of economic downtime or slowdown to limit the spread of Covid-19, Overshoot Day, when the Earth depletes its available renewable resources for the current year, arrived on 29 July in 2021, as it did in 2019, compared to a later arrival in 2020 (22 August). Nationally, this limit was reached on 13 May 2021, one day earlier than the previous year.
The global environmental outlook was the subject of COP26 in Glasgow. In this meeting, in which Italy served as a guide and co-leader, critical issues were examined and important decisions were taken. The 196 countries adhering to the UN Convention on Climate Change, although with results lower than expected, shared important goals, such as keeping the temperature increase to within 1.5° compared to the pre-industrial period, new and binding commitments towards decarbonisation, the cessation of deforestation by 2030 and the reduction of methane losses by 30%. It was also decided to double international funding for adaptation projects, especially in countries most vulnerable to the impacts of climate change, and a programme to define the "Global Goal on Adaptation” was approved, which will identify indicators to monitor the adaptation projects of individual countries. The European Union has continued its work to regulate, through Regulation 852/2020, the Taxonomy of eco-compatible activities with the aim of guiding private investment towards the promotion of an environmentally sustainable economy.
In 2021, the work of the Taskforce on climate-related financial disclosure (hereafter TCFD) continued, which promotes companies' reporting on climate change-related risks and opportunities and the description of impacts that these have on the company, so as to meet the expectations and needs of investors. Of particular importance in this context are the scenario analyses that companies are called upon to perform in order to assess the future impacts that the climate-related risks/opportunities generate on the company’s business.

STANDARDS IN THE REFERENCE MARKETS AT A LOCAL, NATIONAL AND SUPRA-NATIONAL LEVEL

The regulatory context of the Acea Group is wide-ranging and articulated according to the specificity of the businesses handled and the variety of the frameworks within which the legal and regulatory disciplines intervene, which affect the business operations, from administrative authorisation profiles to those protecting the market and competition. Added to such aspects is the peculiarity of the nature of listed Company, with the related legal impacts, for example, in terms of regulating communications to the market. The regulatory scenario is therefore analysed from a multidisciplinary viewpoint, applying a 360˚ overview and continuous interpretative analysis, in order to detect developments of particular significance, thus identifying and assessing risks and opportunities in terms of strategy and operating management.
Among the issues worthy of mention, note should be taken of the measures introduced through Italian Decree Law 77/2021, the so-called “Simplification Decree Bis”, containing “governance for the National Recovery and Resilience Plan (NRRP) and initial measures to strengthen administrative structures and accelerate and streamline procedures”, converted by Italian Law 108/2021. This is a package of structural reforms and investments for 2021-2026, intended to accelerate the implementation of the work called for in the Recovery Plan, strengthening administrative structures, streamlining procedures and establishing governance rules for the same.
The Decree also makes changes with regards to public tenders, in that the provisions do not exclusively affect the ordinary regulatory framework for public contracts (Code of Public Contracts, Italian Legislative Decree 50/2016), but also amend the emergency derogation rules such as “Reopen Building Sites” (Italian Decree Law 32/2019) – and the “Simplification Decree” (Italian Decree Law 76/2020), established to respond to the crisis caused by the pandemic. Finally, special attention was paid to Decree Law 2469 “Draft 2021 annual market and competition law” with provisions to promote the development of competition, remove obstacles to opening markets and guarantee consumer protection.

REGULATION OF THE SECTOR AUTHORITY

The Regulatory Authority for Energy, Networks and the Environment (ARERA) intervenes in Acea's business sectors (energy, water and environment) regulating their operation by defining technical and commercial service standards and regulating investment mechanisms.
For energy distribution, ARERA defines quality standard parameters for the electricity service at the national level, for each regulation cycle. These parameters are commercial (estimates, work, supply activation/deactivation, complaint response) and technical (continuity of service supply We are currently in the V regulation period for the quality of distribution, metering and transmission services for the years 2016-2023. In 2021, resolution 566/2021/R/eel was published on the application of the new capacity price for electricity market customers, which applies from 1 January 2022 with the aim of remunerating the capacity market (the system to make available electricity generation capacity) to ensure adequate production capacity is achieved and maintained to guarantee coverage of national demand as well as the necessary reserve margins.
Regarding the two-year limit on the seller’s right to payment for the electricity consumption of customers, with resolution 603/2021/R/com, the Authority amended resolution 569/2018/R/com on the invoicing of amounts for amounts dating back two years, clarifying that the two year limitation did not apply if the distributor had communicated the existence of obstructive conditions pursuant to the primary regulations.
In the water sector, the evolutionary drivers of regulation push operators towards efficiency in the commercial and technical quality and place greater emphasis on environmental sustainability issues. In 2021 the Authority released the fifth edition of the IWS Contractual Quality Data Collection, which provides information and analysis of the data underlying future regulatory activities. From 2022, a system of bonuses and penalties on operator performance will be launched and, in light of the payment of incentives, the Authority, in late 2021, issued its guidelines for consultation on the update of the methods for verifying contractual quality data and provided for related checks on operators. With resolution 639/2021 on the “Criteria for the biennial update (2022-2023) of the tariff arrangements for the Integrated Water Service”, the Authority introduced elements of flexibility into the contractual and technical performance assessment mechanisms, such as the cumulative two-year analysis (2022-2023) of the quality targets. With resolution 311/2019, ARERA identified at national level the measures to contain arrears in the sector with respect to user rights and taking into account the economic/financial balance of management. In addition to identifying end users who cannot be disconnected, the resolution governs the process of classifying non-paying users as in arrears, regulating limitation, suspension and supply deactivation procedures, establishing conditions, methods and schedules. On this matter, in amendment of resolution 311/2019, in 2021 resolution 610/2021 was passed, which also impacts contractual quality (RQSII) and the transparency of invoicing documents.

DEVELOPMENT AND TECHNOLOGICAL INNOVATION

In ACEA, the Innovation, Technology & Solutions Function reports directly to the CEO and has the task of ensuring a model of innovation for the Group through the adoption of processes and approaches typical of open innovation, with the involvement of internal and external stakeholders as defined by the Industrial Plan. The search for innovative solutions to achieve long-term goals for a decarbonised economy and smart urban infrastructures continues to be a central theme in the general technological scenario. In this context it is worth mentioning the participation of Acea in Zero Accelerator, created from the collaboration of key operators, to support innovative startups and SMEs engaged in reducing greenhouse gas emissions, optimisation of the waste cycle etc., and the Casa delle Tecnologie Emergenti in Rome, the first permanent living lab for ideas relating to the future Rome Smart City. Collaborative networks and partnership development to explore innovative solutions, business and technology opportunities and attract talent are a focal driver for Acea's positioning in the innovation ecosystem. To this end, it has adhered to initiatives such as InnovUp (formerly Italia Startup), SEP (Startup Europe Partnership), the Open Innovation programme that connects European scaleups with corporations, and Open Italy. Acea also works with the academic world and with specific Observatories, such as the Observatories for Digital Innovation, Startup Intelligence and Space Economy, all belonging to the Politecnico di Milano. The Group's industrial areas are committed to identifying innovative and technological approaches to improve industrial processes with a view to social and environmental sustainability. This commitment is also recognised at European level, there is already access to Horizon 2020 funding programmes for the PlatOne project, in the area of power grids, to develop cutting-edge technological solutions capable of enabling energy flexibility mechanisms, and in 2021 for the Promisces project aimed at removing very persistent, mobile and potentially toxic substances in the soil-sediment-water system (identified within the European REACH Regulation) and contributing to the goal of zero pollution and improving the protection of human health.

DEVELOPMENT OF HUMAN CAPITAL

For every organisation people represent a fundamental asset to remain competitive in a changing economic and social context. During the period in which the pandemic continued to represent the most complex challenge, the ongoing commitment of people allowed the Group to manage its services at a high level, providing continuity to the business with zero interruptions and in complete safety. Acea listens to the needs of its people and develops a People Strategy based on projects and initiatives that, by enhancing the main assets of the Business Plan, meet the needs of technological innovation, corporate culture, data analysis and monitoring, full utilisation of skills and development of well-being. The issues of Diversity & Inclusion has become increasingly important for organisations and Acea promotes greater sensitivity at all organisational levels through projects, initiatives and tools for the integration of these issues in the modus operandi of the Company and its stakeholders: in 2021 it defined a Diversity & Inclusion Plan and a Dashboard in relation to people strategy. Through training, the main lever for personal growth, Acea values the skills and talents of every individual and is continuously improving managerial and digital skills. Taking care of people's well-being forms part of the Company's awareness of its responsibilities towards its employees, especially within contexts, such as those still ongoing, of specific health and social emergencies. With reference to this, Acea has developed an integrated corporate welfare system, based on listening to employees and their needs and divided into six areas: health, psycho/physical well-being, family, reconciliation measures, income support measures and complementary social security.

SUSTAINABLE MANAGEMENT OF THE SUPPLY CHAIN

Aware of the positive contribution that sustainable supply chain management can offer to protecting the environment, ACEA is committed to defining purchasing methods that include intrinsic characteristics of the products and aspects of the process that limit environmental impact and foster initiatives aimed at minimising waste, reusing resources and protecting the social aspects involved in the procurement of goods, services and works. In tackling this green procurement issue, Acea has been using the minimum environmental criteria in force for several years, including non-compulsory bonus aspects in its tenders. In order to monitor the supply chain, Acea continued to develop the Group's Vendor Rating system aimed at analysing, assessing and monitoring the performance of suppliers of goods, services and works to increase the quality of the services rendered. Each company can contribute to promote sustainability along the supply chain, to this end Acea has undertaken a collaboration with Ecovadis, to carry out a performance assessment on specific sustainability criteria of its partners, with the prospect of integrating the sustainability indicator within the Vendor Rating model.

SAFETY AND HEALTH IN THE WORKPLACE

Safety as a strategy, not to be observed only for compliance purposes, is based on the desire to promote the widespread dissemination of a safety culture, involving all employees, and on the possibility of measuring and monitoring results. To this end, Acea runs awareness-raising campaigns on the issue and has adopted an advanced risk assessment model and implemented control and mitigation measures. The Group's contractors and sub-contractors, who are key partners in the implementation of its businesses, are also involved in awareness-raising and safety initiatives. Acea promotes active participation in analysing indicator trends; this aspect is often considered to be suggestive of the level of maturity of the safety culture and the culture of improvement in an organisation. An RSPP Coordination Committee is active within the Group. Its purpose is to share the results of safety performance, experiences, good practices and sustainable solutions to prevent accidents in the company. Safety is at the centre of numerous innovative experiments. Projects aimed at making operations in the field increasingly safe continued in 2021, such as the development of personal protective equipment with sensors that can signal proper usage (Smart PPE). During the year, comprehensive monitoring continued for the prevention and protection from the risk of infection by Covid-19, through: reorganisation of work activities and smart working, training courses, definition of specific protocols, dedicated communication channels, revision of risk assessment documents and health emergency plans, vaccination and screening campaigns for Acea personnel and activation of dedicated insurance coverage.

THE BUSINESS MODEL

The organisational structure (Chart 3) means that the Holding performs the role of steering and coordination of the Companies that make up the Group. Acea SpA offers managerial support by means of management and legal, logistic, technical, financial and administrative services. Acea SpA’s organisational macrostructure consists of corporate functions, departments and operating segments the operating companies report to (see Chart 4).

Chart no. 3 – Acea’s Business Model

Chart no. 4 – Acea SpA organisation chart as at 31/12/2021

Through Companies that it has equity investments in and for which it plays the role of industrial entity of reference, the Acea Group is involved in the chains of activities shown below. The business activities are broken down in the Strategic Plan (see the section titled Strategy and Sustainability), which defines corporate development guidelines based on the assessments of opportunities offered by the market, the regulatory and social context of reference, the governance system and a thorough identification and weighting of the risks that can impede the achievement of the goals. Acea Group pursues corporate management that is consistent with the principles of sustainable development and pays the utmost attention to interactions with the natural environment and stakeholder relations.