Client Alert I Solar and Wind Energies in France

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1 Client Alert I Solar and Wind Energies in France Solar and Wind Energies in France: From Feed-in-Tariffs to Feed-in-Premium With volumes of onshore wind transactions to increase and clear targets to develop 3 GW of power solar through six 500 MW solar tenders between 2017 and 2020 with a six months cadence, France has the necessary fundamentals to be one of the most attractive European markets over the coming years in the solar and the wind energy sectors. Therefore, in order to allow the current and the future players of the renewable energy sector to understand how the sector stands, this article will analyse the recent legal framework that was implemented by the French government in May 2016, without forgetting to mention what will be the trends in the years ahead in the solar and the wind energy sectors since France and the European Commission are currently involved in major discussions. New trends in the renewable energy sector Impulsion of the European Commission Whilst the French government, as many other European countries, a long time ago decided to support electricity producers by creating a support mechanism so-called the power purchase obligation to guarantee the capital investment in the generation of electric power from renewable energies, one cannot ignore that such mechanism would generate a distortion of competition on the European Market. After a first acceptance phase of these support mechanisms to aid development of the industrial sector dedicated to renewable energies, the European Commission decided that the time is now ripe to allow for competition and market mechanisms. As a result, the European Commission firmly criticized the French power purchase obligation mechanism and prompted France to put an end to its use in the energy sector, since it constituted a state aid according to article 107 of The Treaty on European Union, following the decision that the European Union Court of Justice had adopted in 2013 (CJEU, December 19th, 2013, aff. C-262/12, Association Vents de colère ), in which it qualified the French feed-in-tariffs for wind power generation as an illegal State aid. More importantly, the European Commission in its Commission s Environmental and Energy Aid Guidelines for the period (dated 28 June 2014) expressly stated that, European States had to comply with their climate targets in 2020 focusing on reducing their energy consumption and the emission of greenhouse gases, and that they also had to render all renewable energy sources profitable and to fight against the distortions of competition. Renewal of the legal framework In this context, the French parliament enacted a new law so-called Law on energy transition and on green growth on 17 August 2015, with the purpose of creating a new French energy model, more competitive with respect to the challenges in connection with energy supply, price changes, depletion of energy resources, the need to protect the environment and the access to energy for everyone. In this respect, this Law gave rise to a new support mechanism called the additional remuneration (or feed-in-premium), which is a bonus paid monthly to a producer of renewable energy in addition to the sale of energy on the market that he has produced, that would become the main support mechanism for renewable energy, while a revised feed-intariffs mechanism would only be applicable to a certain extent. More recently, the French government finally adopted three implementing decrees which give more details on the new support remuneration systems: u the decree n May, 27th 2016, which sets out the conditions for access to the support mechanisms for renewable energy provided by the Law on energy transition concerning the additional remuneration mechanism as well as the power purchase obligation mechanism. u the other decrees, the decree n May, 28th 2016 and decree n May, 28th 2016 respectively set out the conditions for the transfer of power purchase obligation contract to approved bodies, and lists the different installations which can benefit from the simplified power purchase obligation mechanism as well as from the Additional Remuneration mechanism. These decrees will soon be completed by ministerial orders defining for each type of renewable energy, certain conditions of implementation of the power purchase obligation and/or the additional remuneration mechanism.

2 The gradual expansion of tenders Finally, still regarding the new trends in the renewable energy sector, it has to be stressed that according to the European guidelines on environmental and energy aids, from 1st January 2017, any State aid granted by a European member State will have to be granted in a competitive bidding process on the basis of clear, transparent and non-discriminatory criteria. Meanwhile, during the transitional phase covering 2016, aid for at least 5% of the planned new electricity capacity from renewable energy sources should be granted in a competitive bidding process on the basis of clear, transparent and nondiscriminatory criteria. Therefore, it clearly appears that tenders shall in the short or medium term become the indispensable vector to benefit from any support mechanism in the renewable energy sector and especially in both the solar and the wind energy sectors. New support mechanisms for solar and wind energy sectors The implementation of a new legal framework in France regarding the renewable energy sector led to several evolutions for the solar and the wind energy sectors. As a matter of fact, whilst a new support mechanism called the additional remuneration was created for replacing over a larger period the former power purchase mechanism, the French government decided to maintain a revised version of the power purchase remuneration mechanism while restraining the number of installations now eligible for this support mechanism. In that respect, a quick review of the lists describing the installations that are eligible for feed-in tariffs and/or feedin-premium (a complete description of which can be found below) will make clear to professionals of the wind energy sector as well as those of the solar energy sector that: u Feed-in-tariffs onshore and offshore wind installations are both eligible for the new feed-in-tariffs and power purchase obligation system, while only owners of installations using photovoltaic energy with a capacity of less than or equal to 100 KW may still qualify for such support mechanism. u Additional remuneration (feed-in-premium) only onshore wind installations are eligible for the additional remuneration mechanism, while owners of installations using photovoltaic energy are excluded. Reflecting on this list, one can note that only a limited number of installations can actually benefit from the additional remuneration mechanism, which implies that the renewable energy sector and more precisely solar and wind energy sectors are currently and progressively being liberalised. The new power purchase obligation mechanism (Feed-intariffs) (a) List of solar and wind installations eligible for feed-intariffs Article 1 of the Decree n May, 28th 2016 listed the installations eligible for power purchase contract and feed-intariffs as follows: u Installations using the hydraulic energy of lakes, rivers and collected water, of a capacity of less than 500 KW ; u Installations using mechanical energy derived from wind; u Installations using photovoltaic energy, with a capacity of less than or equal to 100 KW ; u Installations with a capacity of less than 500 KW using the biogas produced by methanization of non-hazardous waste and compost matter ; u Installations with a capacity of less than 500 KW using the biogas produced by methanization of matter resulting from the treatment of urban sewage or industrial waste water; u Installations with a capacity of less than 500 KW using the biogas from storage facilities for non-hazardous waste products; u Floating/offshore installations located in the maritime public area using wind energy; u Floating installations located in the maritime public area using wave and tidal energy; u Floating installations located in the maritime public area using hydrokinetic energy from ocean currents; u Installations with capacity of less than 250 KW of cogeneration of electricity and thermal heat recovered from natural gas ; u Installations with a capacity of less than 12 MW, which recover the energy released by the combustion or the explosion of mine gas, on the condition that such gas is recovered, and that this recovery is done without intervention other than that made necessary by the suction of this gas from mining gaps in order to maintain the latter in depression; u Installations using mechanical wind energy located in areas particularly exposed to cyclonic risk which have a device for forecasting and levelling the production ; u Installations located in non-interconnected zones using the biogas produced by methanization of non-hazardous waste and compost matter ; u Installations located in non-interconnected zones using the biogas produced by methanization of matter resulting from the treatment of urban sewage or industrial waste water;

3 u Installations located in non-interconnected zones using the biogas from storage facilities for non-hazardous waste products. (b) How to apply for a PPA and feed-in-tariffs? The decree n which was adopted by the French government on 27th May 2016, established a similar procedure for owners of solar plants and/or of wind farms to follow in order to benefit from the new power purchase obligation mechanism. In fact, owners of installations using photovoltaic energy with a capacity of less than or equal to 100 KW as well as owners of wind farms, must submit a complete application of the purchase contract to the buyer, namely EDF. The decree provides that the application of the owners must contain details concerning the producer such as if the applicant is an individual person or a legal entity, and other personal details such as the home address or the legal form of the legal entity etc. More importantly, the applicants must provide accurate information about the installation such as: u its localization; and u its installed power capacity. The application shall contain all the elements set out in the decree, with the risk of seeing its application rejected. When the buyer (EDF) receives the application, it must formally acknowledge receipt of the application. From that moment on, the buyer (EDF) has a time limit of 3 months to transmit the draft power purchase contract to the producer, afterwards the producer must return to the buyer the draft power purchase contract that he signed before EDF signs it in return. The decree specifies that the power purchase contract is concluded for the installation and remains into force throughout the life span of the installation, set at a maximum duration of 20 years. This contract shall take effect once the producer has submitted to the purchaser a certificate of compliance of its installation with the terms of its application for contract and with the requirements set down by the ministerial orders applicable to each sector. The French energy code states that this certification is requested by the producer from an approved body, which can only issue it once the installation has been completed at the power capacity specified in the contract application. This completion must occur under conditions and within a time limit to be defined by the Ministerial orders. One must note that until EDF receives the certificate of compliance, the producer of electricity is entitled to modify to a certain extent some elements of its initial application. In such a case however, the producer will only be entitled to modify: u its own information; u the installed power capacity of its installations as long as it respects the eligibility threshold to the revised power purchase obligation and without exceeding 30% of the initial installed power capacity; u any other element to be listed/defined by a Ministerial order. As no other modifications can be accepted, should the producer be willing to make additional modifications not mentioned in the decree or in the future ministerial orders, he will be obliged to submit a new application. Therefore, once EDF received the certificate of compliance the producer will not be able to modify the previously mentioned elements, unless an amendment to the contract is made. The new additional remuneration mechanism (Feed-inpremium) (a) List of solar and/or wind installations eligible to the additional remuneration As mentioned above, the French government created a new support mechanism for electricity producers called the additional remuneration. Nonetheless, it appears that not all installations are eligible for the mechanism and especially photovoltaic installations. As a matter of fact, the French government decided to exclude photovoltaic installations in the Decree n May, 28 th 2016 from the installations which could benefit from additional remuneration, as listed below: u Installations using hydraulic energy, with a capacity of less than or equal to 1MW; u Installations using essentially energy generated from thermal power released from household waste combustion; u Installations using essentially biogas produced by methanization or derived from landfill sites ; u Installations using essentially energy extracted from geothermal deposits; u Installations using cogeneration of electricity and recovered thermal energy from natural gas, with an installed capacity of or equal to 1MW. u Installations using mechanical energy derived from wind.

4 (b) How to benefit from the additional remuneration? > Procedure Owners of onshore wind farms can benefit from this supplementing remuneration mechanism. Regarding the additional remuneration mechanism, the decree n , 27 th May 2016 provides, just as for the power purchase obligation mechanism, that in order to benefit from such mechanism, the producer must send a completed application for a contract of additional remuneration to Electricity de France (EDF). It should also be emphasized here that this additional remuneration contract is not a contract for the purchase of electricity, insofar as EDF does not commit to purchasing the electricity produced (as in the case of the purchase contract with feed-in-tariffs) but simply to pay an additional remuneration to its contracting electricity producer should the market tariffs do not exceed certain thresholds. The above mentioned decree provides that the application of the owners must also contain personal details concerning the producer, but that more importantly the applicants must provide accurate information about the installation such as: u Its localization, or u Its installed power capacity. When the buyer EDF receives the application, it must formally acknowledge the receipt of the application. EDF then has a time limit of 3 months to offer this contract to the producer whose installation is eligible for additional remuneration. The decree specifies that the contract of additional remuneration remains into force throughout the life span of the installation and that specific Ministerial orders will define for each category of renewable energy, the duration of the said contract. The contract of additional remuneration, shall take effect once the producer has submitted to EDF a certificate of compliance of its installation with the terms of its application for contract and the requirements set down by the Ministerial order applicable to the wind sector which has not been published yet. Moreover, as for the revised power purchase obligation mechanism, until EDF receives the certificate of compliance that the producer must send to it, some details of their initial application such as the producer s personal details or the installed power capacity as long as it respects the eligibility threshold and without exceeding 30% of the initial installed power capacity can be modified. The decree also specifies that when an owner of wind farms benefits from a power purchase obligation mechanism, he may decide to switch to the additional remuneration mechanism for the remaining duration of its PPA, by following the procedure that was previously described. Finally, it is also provided that the contract of additional remuneration can be transferred to another producer after signature of an amendment to the original contract. Regarding the calculation of the amount of the additional remuneration, it appears that the French government tried to make it as transparent as possible by setting in the French energy code the details of the calculation of such amount. > Calculation formula of the additional remuneration In fact, according to the new article L of the French energy code, the amount of the additional remuneration is calculated by especially taking into account: (i) The investments and operating costs of efficient plants that are representative of each energy sector; (ii) The cost of integration into the electrical system/network; (iii) The revenues from the installation, including the value from the generated electricity and value from guarantees on capacity; (iv) Whether these facilities contribute to achieving the national electricity policy goals; (v) Whether the consumer concerned also produces some or part of the electricity generated by the plant. Therefore, it appears that the level of the additional remuneration cannot have for effect that the total remuneration of the immobilized capital, resulting from the accumulation of all the incomes of the installation and of the financial tax aids, exceeds a reasonable remuneration of the capitals taking into account the risks inherent to these activities. Additionally, the Law mentions that such criteria will be subject to periodic reviews in order to take into account the evolution of the market prices applicable to the facilities that benefit from such additional remuneration. The main objective of this feed-in premium is to ensure a reasonable return on the capital, given the risks associated with these activities, in order to avoid an excessive return of investment capital and speculative bubbles. The exact amount of the additional remuneration will be fixed according to the terms of the Ministerial orders provided for each sector and in application of this formula:

5 In this regard, the decree defines precisely each of the parameters provided for in the above mentioned formula. This additional remuneration shall also be increased by a performance bonus representing the costs incurred by the producer for selling what it produces on the energy markets. This amount is calculated for a calendar year and therefore revised annually. Finally, the decree specifies the modalities for implementing the purchaser of last resort mechanism. In fact, the Law on energy transition provides for the possibility for the authorities to designate, by way of a tender offer, a purchaser of last resort required to conclude a contract for the purchase of electricity produced with any producer who makes the application and who justifies the impossibility of selling its electricity (impossibility of enlisting with a physical person or legal entity responsible for the sale of electricity on behalf of a producer or failing of this physical person or legal entity responsible for the sale of electricity). When this mechanism is implemented, the sale of electricity must not engender a level of remuneration higher than 80% of the total remuneration that would have come from the sale of the electricity produced on the market and the payment of the additional remuneration. By renewing the support mechanisms available for renewable energy producers, the French government unquestionably decided to progressively enhance the competitiveness in this sector in order to comply with the obligations which were set up by the European Commission. Contact uolivier Laffitte, Partner, Paris Projects T: +33 (0) o.laffitte@taylorwessing.com A bright future still on hold However and as previously mentioned, this new law still has to be completed by ministerial orders which will define for each category of renewable energy certain of the implementation measures of this new regulatory framework. Its effective entry into force is thus dependent on publication of these texts. Finally, it cannot be excluded that the current discussions between the French government and the European Commission regarding this new support mechanisms for renewable energies results in an ultimate modification of the latter. The European Commission seems particularly set on rapid implementation of transition mechanisms towards full liberalisation of the renewable energies market and is pleading the case in this regard for a generalisation of tenders as single vector for the granting of additional remuneration. Let s hope that these clarifications will soon be implemented so that the French renewable energies market will finally be able to fulfil the expectations of industrialists and investors and thus become a vital market for the next five years in Europe. Europe > Middle East > Asia taylorwessing.com Taylor Wessing 2016 This publication is intended for general public guidance and to highlight issues. It is not intended to apply to specific circumstances or to constitute legal advice. Taylor Wessing s international offices offer clients integrated international solutions. Though our offices are established as distinct legal entities and registered as separate law practices, we are able to help our clients succeed by providing clear and precise solutions with high-level legal and commercial insights. For further information about our offices and the regulatory regimes that apply to them, please refer to taylorwessing.com/regulatory.html and rhtlawtaylorwessing.com. TWF_00010_10.16