ERG S.p.A. should use hybrid bonds only to a limited extent over the next 18 months.

Key considerations:

- **No prior hybrid issuance:** ERG had not issued hybrid bonds in 2021 or 2022 and has never issued hybrids. This is a strong signal against moving immediately to a large hybrid layer unless there is clear rating or funding pressure.
- **Credit profile appears improved, not deteriorated:** Equity increased materially from about **€1.57bn to €2.05bn**, while total liabilities fell from about **€4.44bn to €3.17bn**. Current financial liabilities also declined sharply, helped by significant debt repayments.
- **Operating performance strengthened:** EBITDA rose from about **€397m to €499m**, and operating cash flow improved to about **€459m** from **€177m**. This suggests stronger internal cash generation.
- **Large cash and financial asset base remains available:** Cash was still about **€393m** at year-end 2022, despite major financing outflows and debt reduction.
- **Capex and growth needs are meaningful but not transformational:** ERG is a renewable power operator with sizeable asset growth and capex, including PPE purchases of about **€307m** and acquisitions/investments. However, this does not appear to require maximum hybrid support, especially after asset disposals and deleveraging.
- **Hybrid cost environment was less attractive in 2022:** Swap rates and subordinated spreads increased materially in 2022. A first-time hybrid issue would likely raise the cost of capital versus senior debt, so the rationale must be clear.
- **Rating flexibility benefit exists but is limited:** As an unregulated power/renewables business, ERG may benefit from long-term contracted or supported revenues, but it is not a pure low-risk regulated utility. A modest hybrid layer could provide useful cushion for future renewable growth or acquisitions, but the available facts do not indicate severe leverage pressure or imminent downgrade risk.

Overall, the most appropriate recommendation is **3.75% of total adjusted capital**: enough to provide modest rating and funding flexibility for renewables growth, but not a large allocation given the absence of prior hybrid issuance, improved balance sheet, and higher hybrid funding costs.

<answer>3.75%</answer>