Solar tariffs in France: The 2021 finance law and the renegotiation of power purchase agreements
7 min read
Article 225 of finance law for 2021 dated 29 December 2020 (the "2021 Finance Law") provides for the renegotiation of the feed-in tariffs of approximately 800 photovoltaic power purchase agreements ("PPAs") concluded between 2006 and 2010.
This decision, motivated by the alleged excessive profitability of these PPAs, is yet to be specified in a decree. As it stands, it is causing concern in the sector and has given rise to controversy.
Adoption of a governmental amendment
Article 225 of the 2021 Finance Law provides for the reduction of the feed-in tariff under the PPAs entered into with certain producers. The text authorizes the State to unilaterally modify some of these contracts.
- A targeted revision: the renegotiation will apply only to the PPAs based on the tariff orders dated 10 July 2006, 12 January 2010 and 31 August 2010 and with an installed capacity of more than 250 kilowatts (peak power). Even though the Government refused to provide the members of the French Parliament with the list of installations falling within the scope of this decision, it indicated that more than 800 PPAs would be affected by it.
- The enactment of ministerial orders will be required: the 2021 Finance Law provides that an order by the energy minister and the budget minister, submitted for opinion to the Energy Regulation Commission ("Commission de Régulation de l'Energie"), will establish (i) the level of the electricity feed-in tariff and (ii) the date on which it applies. The 2021 Finance Law specifies that the level set by the ministers must be fixed in such a way that the total return onlocked-in capital resulting from the aggregate of (i) all the revenues of the installation and(ii) the financial or tax aids granted in respect thereof, must not exceed a reasonable return on capital, taking into account the risks related to its operation. The 2021 Finance Law does not define the notion of "reasonable remuneration".
However, it provides that the reduction in the feed-in tariffs will take into account (i) the relevant tariff order and (ii) the installation's technical characteristics, its location, its commissioning date and its financing conditions. Different feed-in tariffs should therefore be set by the order to be issued.
- Insertion of a safeguard mechanism: article 225 of the 2021 Finance Law provides also that the ministers may, by order and upon a justified request from the producer, set (i) a specific feed-in tariff and/or (ii) a specific date on which the tariff relating to the producer's installation comes into force. The producer will be required to demonstrate that the level of remuneration or the effective date specified in the order applicable to all installations affected by the 2021 Finance Law, compromises their economic viability. The producer must prove that it has taken all remedial measures at its disposal and that the persons who directly or indirectly own it have implemented all the support measures at their disposal. Ministers may also extend the term of the PPA if the level of support obtained by the producer is significantly lower than the level of support that would have been obtained under the original terms and conditions. The safeguard mechanism will not benefit producers who have made changes in their capital structure or financing arrangements after 7 November 2020.
A budget-saving decision justified partly by the PPAs illegality
When questioned about this decision, the Government provided a twofold justification.
- A cost-saving decision: the level of support granted to the first photovoltaic installations developed in France was the focus of a report by the Audit Court in 2018. This report criticized the high level of support granted between 2006 and 2010 to the photovoltaic sector, stating that this support could reach €480/MWh1. The Government expects to achieve savings amounting to €350-€400 million thanks to this decision.
- Considered illegal PPAs: during parliamentary debates, the Government argued that the renegotiation of PPAs was justified by their illegality. The State's failure to notify the European Commission of the aid granted to producers was in breach of Article 108§3 of the Treaty on the Functioning of the European Union and rendered the PPAs concluded at that time illegal.
These justifications have been the subject of debates at the National Assembly, with MPs expressing regret at the lack of respect of the State's own word, the absence of an impact study to evaluate the amount of expected savings, the lack of consideration of the cost of litigation likely to be initiated by producers, or the lack of consultation with stakeholders in the sector.
The implementing decree
Whilst the 2021 Finance Law sets out the main principles for the revision of feed-in tariffs, the law refers to an implementing decree that will set out detailed terms and conditions. Several essential elements must be specified:
- determination of the "reasonable return on capital, taking into account the risks related to its operation", to be used as a reference for setting the new feed-in tariffs;
- possible adjustments according to location or technologies;
- a procedure for triggering the safeguard mechanism, its duration, and the details of the shareholder support measures.
As the 2021 Finance Law is now in force, its real impact will depend on the content of the implementing decree. The finalization of this legal text, which will be discussed with stakeholders and submitted to the Energy Regulation Commission for its opinion, is therefore a major issue.
Legal action possible
Article 225 of the 2021 Finance Law has been challenged before the Constitutional Council. The authors of the challenge argued that this provision (i) did not fall within the scope of finance laws,
(ii) disregarded the principle of legal certainty (respect for legally concluded agreements), and (iii) disregarded the principle of equality before the law.
However, the judges of the Constitutional Council found that Article 225 conforms tothe Constitution and noted that:
- The article directly affected budget expenditures for the coming year and could therefore be included in the budget law for 2021;
- a breach of legally concluded agreements was justified as being in the public interest because it is the intention of the legislator to remedy a contractual imbalance between producers and distributors of electricity and to ensure proper use of public funds. The judges also noted that the producers benefit from legal protections offered by the new safeguard mechanism ; and
- producers, whose facilities have a power output of more than 250 kilowatts peak, benefit from significantly higher profitability than other producers do. These producers are therefore placed, vis-à-vis the law, in a different situation, which rules out any disregard for the principle of equality.
The constitutionality of the article cannot be challenged, as a priority issue of constitutionality ("question prioritaire de constitutionnalité") However, other legal actions remain open.
Legal action could be brought before the administrative courts. The implementing decree and the ministerial order that will set the new feed-in tariffs could be subject to an action for annulment ("recours pour excès de pouvoir"). The question of compliance of the scheme with the European Convention for the Protection of Human Rights and Fundamental Freedoms (in particular with regard to article 1 of the first additional protocol related to protection of property) could be brought before administrative courts.
During the parliamentary debates, the Government mentioned an unpublished advisory opinion from the Council of State ("Conseil d'Etat") validating the envisaged scheme. It remains to be seen how the administrative courts (which are not bound by such an opinion) will rule on the implementation of the decree and the ministerial order.
The implementation of Article 225 of the 2021 Finance Law could also give rise to claims by the affected producers seeking damages for loss of future profits.
Depending on the nationality of the affected producers, the implementation of Article 225 of the 2021 Finance Law could also give rise to claims under bilateral and multilateral investment treaties ratified by France, including the Energy Charter Treaty. Amongst other things, these treaties generally require France to observe the obligations it entered into with protected investors or investments, to accord such investors and investments fair and equitable treatment, and to protect them against arbitrary measures. Importantly, moreover, these treaties typically give investors a direct right of recourse before an arbitral tribunal for breach of those protections. European countries that have adopted similar measures have faced an avalanche of investment treaty claims from foreign investors affected by such measures, some of which have already resulted in sizeable awards in favor of the foreign investors. France's newly adopted provision may invite a similar fate.
1 Audit Court, Communication to the Senate Finance Committee, March 2018, "Le soutien aux énergies renouvelables" (Support for renewable energies).
This publication is provided for your convenience and does not constitute legal advice. This publication is protected by copyright.
© 2021 White & Case LLP