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6 January 2021
Client Alert| France | Energy | Regulation
"It is the 'act of Government' (fait du prince) in all its splendour". This is how Eric Woerth, chairman of the finance commission of the National Assembly, described on 13 November 2020 the Government's intention to lower the feed-in tariffs for electricity produced by the largest photovoltaic facilities for power purchase agreements concluded between 2006 and 2010.
It should be recalled that the renewable electricity purchase obligation mechanism was introduced by the law dated of 10 February 2000[1] to encourage the industry. This system is now being called into question after a series of twists and turns.
It all began on 16 September 2020 with an article in the newspaper Les Echos announcing that, according to a confidential source, the State would plan to renegotiate the feed-in tariffs granted to solar facilities before 2011, which are much higher than current market prices, resulting in savings then estimated at EUR 600 million.
This announcement, which for weeks was not confirmed by the Government, caused a stir among players of the sector who denounced the questioning of the State's word as well as the lack of an impact study and of coordination.
In vain. The law No. 2020-1721 dated of 29 December 2020 (the "finance law for 2021") has been published in the Official Journal (Journal Officiel) on 30 December 2020 with an article 225 providing for the reduction of feed-in tariffs for electricity produced by the largest photovoltaic installations for power purchase agreements concluded between 2006 and 2010.
Let’s look back on this controversial measure.
On 7 November 2020, confirming the rumours published in the press, the Government introduced an amendment to the finance law for 2021. Its purpose: reducing the feed-in tariffs for electricity produced by facilities with a capacity of more than 250 kilowatts peak (kWp) for current power purchase agreements concluded pursuant to the ministerial orders of 10 July 2006, 12 January 2010 and 31 August 2010, "in order to bring their profitability back to a level corresponding to a reasonable return on capital"[2].
For the Minister in charge of energy, this measure should lead to savings "of around EUR 350 to 400 million per year, or around 4 billion over ten years, which will be reinvested in the form of aid for renewable energies" and would in any case concern "less than 0.5% of old contracts, i.e. 800 contracts out of 230,000"[3].
The amendment was passed in a public session of the National Assembly on 13 November, and transcribed into article 54 sexies of the finance law for 2021.
In the Senate, the reduction of the feed-in tariffs was strongly criticised. On 27 November, the senators unanimously adopted in public session an amendment to repeal article 54 sexies[4]. According to them, "this article calls into question the State’s word" and "will create real uncertainty and generate a risk premium"[5].
The repeal of article 54 sexies was in fact merely temporary. On 17 December, after the failure of the joint commission (commission mixte paritaire), the parliamentary shuttle resulted in the adoption, during the final reading, of the finance law for 2021 including its article 54 sexies, now article 225.
In a final attempt, more than sixty parliamentarians referred the matter to the Constitutional Council (Conseil constitutionnel), arguing that (i) this article is a “legislative cavalier” (cavalier législatif), (ii) that it disregards contractual freedom, the guarantee of rights and the right to maintain legally concluded agreements without it being justified by general interest, (iii) that the difference in treatment between installations above and below 250 kWp is unjustified, and finally, (iv) that article 225 is neither precise nor clear.
Finally, the Constitutional Council dismissed these grievances and declared article 225 to be in accordance with the Constitution by a decision dated of 28 December 2020[6].
Article 225 of the finance law for 2021 provides for a reduction of the feed-in tariff for electricity produced by certain solar facilities for current power purchase agreements entered into between 2006 and 2010.
More specifically, this measure affects feed-in tariffs for electricity produced by:
The level of the contemplated reduction will be set by order of the Ministers in charge of energy and of the budget, after public notice from the Energy Regulatory Commission (CRE).
Several safeguards are provided to limit the extent of the reduction of the feed-in tariffs:
(i) on the one hand, the level must be determined "in such a way that the total return on capital employed, resulting from the accumulation of all the revenues of the facility and the financial or tax assistance granted in respect thereof, does not exceed a reasonable return on capital, taking into account the risks inherent in its operation";
(ii) on the other hand, it must take into account (i) the ministerial tariff order applicable to the facility, (ii) its technical characteristics, (iii) its location, (iv) the date of commissioning and (v) the conditions of its operation.
A safeguard clause is also provided for in paragraph 2 of article 225 for producers whose new tariffs would be likely to compromise their economic viability, particularly with regard to "the specific financing requirements of non-interconnected areas". This addition was first proposed by a sub-amendment No. 3560 before the National Assembly in order to mitigate the Government's amendment.
At the motivated request of the producer, the Ministers in charge of energy and of the budget can thus:
(i) on a proposal of the CRE, set by joint ministerial order a different tariff level or date, to the extent strictly necessary to preserve the viability of the producer;
(ii) extend the duration of the power purchase agreement, provided that the sum of the financial aid resulting from all the modifications is less than the sum of the financial aid that would have been paid under the initial conditions.
The consideration of the economic viability of the producer is nevertheless limited. First of all, the producer must have taken "all the remedial measures at his disposal". The persons who directly or indirectly hold the producer must also have adopted "all support measures at their disposal, and to the extent strictly necessary to preserve that viability".
In addition, this safeguard clause may not benefit to "producers who have made changes in their capital structure or financing arrangements after 7 November 2020, with the exception of the aforementioned recovery and support measures ".
According to article 225 of the finance law for 2021, the application of the said measures is subject to (i) a decree of the Council of State (Conseil d'Etat) after obtaining the opinion of the CRE in order to specify the terms and conditions and, as explained above, (ii) a ministerial order also issued after obtaining the opinion of the CRE. A number of questions therefore remain unresolved with regard to this new mechanism, which is therefore not yet applicable. The opinions of the CRE, which has not yet formally pronounced itself on this measure, will undoubtedly be closely followed by the players of the sector.
In addition, as parliamentarians and industry actors have said several times since September 2020, such a measure would create a risk of increased litigation by industry actors in the weeks and months ahead.
Finally, there is also the question of the impact of such a measure on other power purchase agreements and feed-in premium, in particular on the investors’ confidence in these renewable energy support mechanisms.
According to the Minister in charge of energy "the new projects are based on solid contracts, the level of which has been formally validated by the European Commission, and will therefore obviously not be called into question". However, it is legitimate to wonder about the consequences of the Government's decision to revise the feed-in tariffs for electricity produced by photovoltaic installations more than ten years after the start of these contracts in other sectors that are still booming.
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[1] Law No. 2000-108 dated of 10 February 2000 on the modernization and development of the public electricity service.
[2] Amendment II-3369 dated of 7 November 2020 presented by the Government to the National Assembly.
[3] Parliamentary debates during the public session of 13 November 2020 in the National Assembly at first reading.
[4] Amendment No. II-28 dated of 20 November 2020 presented by Mrs. Christine Lavarde before the Senate.
[5] Public session of 27 November 2020 in the Senate in first reading.
[6] Decision No. 2020-813 DC dated of 28 December 2020.
This legal update is not intended to be and should not be construed as providing legal advice. The addressee is solely liable for any use of the information contained herein and the Law Firm shall not be held responsible for any damages, direct, indirect or otherwise, arising from the use of the information by the addressee.
