FRANCE: UPDATE ON THE SUPPORT MECHANISM FOR RENEWABLE ENERGY PROJECTS

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1 BRIEFING FRANCE: UPDATE ON THE SUPPORT MECHANISM FOR RENEWABLE ENERGY PROJECTS SEPTEMBER 2015 ENERGY TRANSITION ACT ADOPTED ON 22 JULY 2015 NEW SUPPORT MECHANISM THE CONTRACT FOR DIFFERENCE CALCULATION OF THE PREMIUM TRANSITION REGIME The Energy Transition Act The Energy Transition Act was adopted by the French Parliament on 22 July 2015 and published on 18 August From a general point of view, the Energy Transition Act provides the following goals for the promotion of renewable energy projects in France: renewable energy projects shall constitute 23% of the final consumption of energy in 2020 and 32% in 2030; renewable energy projects shall constitute 40% of electricity production in 2030; electricity produced by nuclear plants shall be reduced to 50% in 2025; the adoption of an energy programme for which will define the development and investment goals for renewable energy projects. In compliance with the new European guidelines on State aid for environmental protection and energy published by the European Commission on 28 June 2014 (the New European Guidelines ), the Energy Transition Act aims to better integrate renewable energy projects into the internal electricity market in a gradual way. In this respect, for significant renewable energy projects, particularly onshore wind farms and photovoltaic plants, it provides for the gradual replacement of the existing support mechanism, the FITs, by a new support mechanism, the contract for difference.

2 2 Watson Farley & Williams New support mechanism the contract for difference According to the Energy Transition Act, a renewable energy project may be eligible for FITs or for a contract for difference. It has been indicated that these two support mechanisms cannot be combined. Renewable energy projects which will be eligible either for FITs or for a contract for difference will be determined by Decrees still to be enacted (rather than the Energy Transition Act itself). According to the New European Guidelines, as from 1 January 2016, at the latest, significant renewable energy projects (such as photovoltaic plants with an installed power capacity which is higher than or equal to 500 kw and onshore wind farms with an installed power capacity which is higher than or equal to 3 MW or made up of at least 3 WTGs) should be only eligible for a contract for difference. The Energy Transition Act provides for the implementation of the contract for difference only for renewable energy projects located on the metropolitan territory. The renewable energy projects located on overseas territories would remain eligible for FITs due to the absence of a real electricity market on these territories. In the context of a contract for difference, the power producers shall sell the electricity produced on the wholesale market (marché de gros) and will benefit from a contract with EDF (as obliged off-taker) under which a premium (complément de rémuneration) will be paid to the power producers. At this stage no template of such contract for difference has been disclosed by the French government. Sale of the electricity on the wholesale market In the context of a contract for difference, a power producer shall sell the electricity on the wholesale market. The electricity can be sold on the wholesale market mainly on the basis of the three following options: 1. under the European Power Exchange (EPEX SPOT, Day-ahead transactions and Intraday transactions); 2. under a commercial power purchase agreement concluded with an off-taker, such as EDF, a local entity in charge of the public electricity network or any electricity suppliers, with negotiated price and duration; 3. under a commercial power purchase agreement concluded with an aggregator. In this case, the aggregator undertakes to purchase the electricity at a certain price and is responsible for the sale of the electricity on the spot markets. It seems that the third option could be the most appropriate for the majority of power producers. However, regarding commercial power purchase agreements concluded with aggregators, please note that at this stage there is no real benchmark in France due to the absence of a real market (unlike in Germany). Nevertheless, from our discussions with certain French aggregators, we understand that such commercial power purchase agreements are likely to have the following main characteristics: short term, around two to three years; the purchase price of the electricity can be (i) exactly aligned with the variation of the price observed on the French spot market, (ii) defined with a floor and a cap or (iii) fixed;

3 Update on the Support Mechanism for Renewable Energy Projects 3 some insurances could also be subscribed in order to cover the risk of variation of the price on the French spot market and/or the risk of variation of production (for example, we understand that insurances could be proposed by entities such as Hydroption); in order to mitigate the counterparty risk, the aggregator should be able to propose a guarantor which would undertake payments to the power producer in case of default of the aggregator. In any event, a comparative approach of the solutions developed by aggregators, in particular in Germany, will be helpful in the context of the negotiation of commercial power purchase agreements with aggregators in France. Calculation of the premium The calculation formula of the premium (CR) will be defined by a Decree currently under discussion by the French Ministry for Energy and the French associations France Energie Eolienne and Syndicat des Energies Renouvelables. In addition, the premium amount will be established by specific ministerial orders for each type of renewable energy. From a general point of view, the Energy Transition Act provides that the premium shall not exceed a reasonable remuneration taking into account (i) the investments and the operation costs observed for efficient and representative installations for each type of renewable energy, (ii) the costs related to the integration of the installation in the electrical system and (iii) the revenues/proceeds resulting from the operation of the installation (including notably the sale of the electricity, the sale of guarantees of origin and the sale of capacity certificates). In addition, the Energy Transition Act provides that the conditions of the premium will be revised periodically in order to take into account the evolution of costs borne by new or existing installations benefiting from it. On the basis of the current draft of the Decree disclosed by the French Ministry for Energy, the calculation formula is as follows: CR = P.Min(N;N 0 ).( αt e - M 0 ) - (Nb capa.p ref capa ) - (Nb GO.P ref GO ) + P.N.P gestion Under which: P corresponds to the theoretical maximum power capacity of the installation in MW; N and N 0 correspond respectively to the number of operating hours of the installation at full capacity production and a number of operating hours equivalent to a full capacity production reference; α corresponds to a coefficient of decrease on a gradual basis (dégressivité) to be implemented throughout the duration of the contract for difference, being indicated that this coefficient cannot lead to the situation where the premium would not cover the costs necessary to maintain installations in operation; T e corresponds to the representative reference tariff of the costs incurred by a reference installation and defined in /MWh. This representative reference tariff shall take into account all the relevant costs and revenues for a reference

4 4 Watson Farley & Williams installation (including financial and tax aids). This parameter will lead to an automatic adjustment in order to adapt the level of the remuneration to the development of each type of renewable energy, being indicated that this adjustment will not be applicable to ongoing contracts; M 0 corresponds to the reference market positive price, representative of the price of the electricity on the French market (supply for tomorrow) and defined in /MWh. This price will be calculated by the French Energy Regulation Commission (CRE); Nb capa and P ref capa correspond respectively to the valuation of the capacity guarantees of the installation and the reference price of these guarantees defined in /MWh; Nb GO and P refgo correspond respectively to the valuation of the origin guarantees of the installation and the reference price of these guarantees defined in /MWh; P gestion corresponds to a unitary administrative management premium for the costs borne by the power producer for the balance responsibilities/adjustment mechanisms and for the sale of its production on the electricity market, the capacity market and, as the case may be, the guarantees of origin market, and defined in /MWh; The term P.Min(N;N 0 ).( αt e -M 0 ) is called energy premium (prime à l énergie). Please note that several parameters/provisions are still under discussion with the French Ministry for Energy, in particular: N o This parameter creates an uncertain annual threshold beyond which no premium would be paid. Proposal under discussion: deletion of the N 0 parameter. M 0 The draft Decree provides that for each type of renewable energy project this parameter shall be equivalent to the average of the reference market positive prices observed on the French electricity market (supply for tomorrow) weighted by the production observed for the concerned type of renewable energy project on an annual basis. Considering that the premium will be paid on a monthly basis, in certain circumstances the calculation of the M 0 on an annual basis could lead to liquidity problems. Proposal under discussion: calculation of the M 0 parameter on a monthly basis. Nb capa and P ref capa / Nb GO and P refgo The draft Decree provides that the sale prices on the capacity market and the guarantees of origin market are calculated ex ante. Considering that these two French markets are not really in place and therefore there is no relevant benchmark to consider, this creates the risk that the premium paid will not be sufficient. Proposal under discussion: at the end of each operating year, deduction limited to the sale prices really obtained during the last operating year on the capacity market and/or the guarantees of origin market. Negative prices The draft Decree provides that no premium will be paid to power producers for electricity sold on the French electricity market (supply for

5 Update on the Support Mechanism for Renewable Energy Projects 5 tomorrow) during a period of negative prices. Proposal under discussion: if the number of negative prices observed during one year on the market is more than [50] hours, the loss of remuneration resulting from the absence of production during the hours of negative prices can be compensated beyond the [50] hours threshold. In this case, only the installations which were able to produce electricity but have not produced during the hours of negative prices are compensated. The value of the parameters of the calculation formula provided by the abovementioned Decree will be defined by ministerial orders to be adopted for each type of renewable energy. At this stage, the adoption of this Decree and these ministerial orders is scheduled for the end of 2015 with an entry into force from 1 January Off-taker of last resort The Energy Transition Act provides for the French government the possibility to designate an off-taker of last resort which will be obliged to conclude a power purchase agreement with a power producer at its request and provided that this power producer can evidence the impossibility of selling its electricity. In this case, the power purchase agreement concluded with the off-taker of last resort is substituted to the contract for difference concluded with EDF and the remuneration of the electricity produced cannot exceed 80% of the whole remuneration which would have resulted from the sale of the electricity on the market and the benefit of the premium. The conditions for the implementation of these provisions will be further defined by a Decree. Duration of the contracts for difference The duration of the contract for difference will be determined for each type of renewable energy by ministerial orders for the definition of the value of the parameters in the calculation formula. In any event, the Energy Transition Act provides that its duration cannot exceed 20 years. In addition, the Energy Transition Act notably provides: the possibility for a one-time contract for difference after the termination/expiration of a PPA, subject to the implementation of an investment programme to be defined by ministerial order; the possibility to terminate a PPA before its expiration date in order to benefit from a one-time contract for difference for the remaining duration of the initial PPA (without the obligation to implement an investment programme); the possibility to benefit from a one-time contract for difference after the termination/expiration of a PPA without the obligation to implement an investment programme. This applies to installations to be defined by a Decree and for which the initial investments have been amortized and the operation costs for an efficient representative installation are higher than all revenues (including any financial and tax aid). In this case, remuneration is to be adapted to the economic

6 6 Watson Farley & Williams conditions under which the installation operates; the possibility to conclude new contracts for difference after the initial one expires. A new contract for difference would cover the period during which the operational costs for an efficient representative installation are higher than all the revenues (including any financial and tax aid). Such possibility is provided (i) for hydroelectric installations subject to the implementation of an investment programme to be defined by ministerial order and (ii) for installations to be defined by a Decree and for which the initial investments have been amortized. In this case, the remuneration is to be adapted to the economic conditions under which the installation operates. Installations which remain eligible for FITs will be able to conclude, after the expiration of an initial PPA, a new PPA for (i) installations located in overseas territories and (ii) for installations to be defined by a Decree, located on the metropolitan territory and for which the initial investments have been amortized and the operation costs for an efficient representative installation are higher than all revenues (including any financial and tax aid). In this case, the power purchase conditions are to be adapted to the economic conditions under which the installation operates. Transition regime The Energy Transition Act provides a transition regime pursuant to which projects for which a power purchase obligation has been requested before the Decrees defining the remuneration systems enter into force, will continue to benefit from the existing FITs, provided that the installations will be built within 18 months of the entry into force of these Decrees. According to the information disclosed at this stage, we understand that such Decrees should be adopted by the end of the year and should enter into force from 1 January 2016, the same as the Decree related to the calculation formula of the premium. On this basis, the above-mentioned deadline for completion of these installations should be 30 June The 18-month deadline can be extended by order of the Ministry for Energy when it is justified by the conditions of the specific project. As the European Commission was notified of the FIT for onshore wind farms, this could be extended for an additional period up to 10 years as it is possible in accordance with the New European Guidelines. In this respect, according to the information disclosed at this stage by the French Syndicat des Energies Renouvelables, the French Ministry for Energy envisages maintaining the benefit of FITs for onshore wind farms until 31 December This will be determined by a ministerial order for the value of the parameters of the calculation formula of the premium applicable to onshore wind farms. We also noted that the above-mentioned transition regime does not expressly cover projects which are eligible for FITs under a call for tender but only projects eligible for FITs under ministerial tariff orders. This can be explained by the fact that these FITs are specifically granted pursuant to conditions defined by the French government for each individual call for tender (article L of the French Energy Code) and therefore no specific provision was required in this respect to maintain the benefit of the FITs granted under a call for tender.

7 Update on the Support Mechanism for Renewable Energy Projects 7 Generalisation of the calls for tender As indicated by the European Commission, the development of competitive bidding processes aims to increase cost effectiveness and limit distortions of competition. In this respect, the Energy Transition Act provides the possibility for the French government to organise calls for tender under which the awarded projects will benefit from FITs (as is already the case) or from a contract for difference. According to the New European Guidelines, a call for tender should be systematically organized from 1 January 2017 for significant renewable energy projects (such as photovoltaic plants with an installed power capacity which is higher than or equal to 1 MW and onshore wind farms with an installed power capacity which is higher than or equal to 6 MW or comprising at least 6 WTGs) and for calls for tender organised from 1 January 2016, the support mechanism for the awarded projects should be a contract for difference (except for small installations, innovation installations and installations located on the overseas territories). Other significant modifications Please note that the Energy Transition Act provides other provisions related to renewable energy, in particular: an obligation for the grid operator to complete grid connection works within an 18-month period for renewable energy projects with an installed power capacity of more than 3 KW. In case of delay, the grid operator will be required to pay an indemnity. The calculation of this indemnity will be defined by further Decree. In addition, a Decree will determine the type of installations and the situations in which, due to the specific technical and administrative constraints, the 18-month deadline can be extended (this is most likely to apply to offshore wind farms); the reduction of the time period under which a third party can challenge a classified installation authorisation granted to onshore wind farms (four months instead of six); the application of the unique authorisation for onshore wind farms (which replaces both the building permit, the classified installation authorisation and, as the case may be, the tree clearing permit and the electric cables authorisation) throughout the French territory; a definition of a general framework to be detailed by further Decrees for the organisation of bidding processes for awarding hydroelectric concessions in the coming years; the characterisation of (i) PPAs concluded under calls for tender and (ii) contracts for difference concluded under calls for tender or concluded under ministerial order as public contracts (as is already the case for PPAs concluded under ministerial tariff orders); the extension of the control of the installations benefiting from public support mechanisms (FITs or contracts for difference). In this respect, it is specified that the PPA could be cancelled or suspended if the installation does not comply with regulations including the French Energy Code and the French Labour Code. The conditions and the process of such control will be defined by specific Decrees.

8 8 Watson Farley & Williams Please note that the French government has scheduled to continue, during the course of September, the discussions with the French associations France Energie Eolienne and Syndicat des Energies Renouvelables regarding the Decrees to be adopted for the implementation of the contract for difference. This briefing remains subject to the modifications which could result from these discussions and will be updated accordingly. * * *

9 Update on the Support Mechanism for Renewable Energy Projects 9 FOR MORE INFORMATION If you wish to discuss any of the matters raised in this briefing, please speak with the author, Laurent Battoue, or your regular contact at Watson Farley & Williams. LAURENT BATTOUE lbattoue@wfw.com LAURENCE MARTINEZ-BELLET lmartinez-bellet@wfw.com VINCENT TREVISANI vtrevisani@wfw.com ARNAUD FÉLIX afelix@wfw.com GUILLAUME ANSALONI gansaloni@wfw.com ROMAIN GIRTANNER rgartinner@wfw.com ALEXIA RUSSELL T arussell@wfw.com Publication code number: v1 Watson Farley & Williams 2015 All references to Watson Farley & Williams, WFW and the firm in this document mean Watson Farley & Williams LLP and/or its Affiliated Entities. Any reference to a partner means a member of Watson Farley & Williams LLP, or a member or partner in an Affiliated Entity, or an employee or consultant with equivalent standing and qualification. The transactions and matters referred to in this document represent the experience of our lawyers. This publication is produced by Watson Farley & Williams. It provides a summary of the legal issues, but is not intended to give specific legal advice. The situation described may not apply to your circumstances. If you require advice or have questions or comments on its subject, please speak to your usual contact at Watson Farley & Williams. This publication constitutes attorney advertising. wfw.com