France, which is Europe's second largest hydroelectric producer after Norway, initiated a process for renewing hydropower concessions in 2010. At the time, several European utilities expressed strong interest in bidding for these concessions. However, the renewal process slowed down and was finally interrupted in 2012 by a change in parliamentary majority. Nine years after the first steps were taken to liberalise the system at the request of the European Commission, this year could mark the difficult birth of a reform which is far from consensual.

Background

About 80% of the current 400 hydropower concessions in France are operated by EDF. The other major generators are Compagnie nationale du Rhône (CNR) and Société hydroélectrique du Midi (SHEM), both GDF SUEZ affiliates.

There are historical reasons for the low number of players in this market. Under the French hydropower concessions regime, established back in 1919, a preference right was granted to outgoing concession holders when hydropower concessions were renewed. In 2005 the European Commission opened infringement proceedings against France, stating that this preference right breached EU law. According to the commission, this right was likely to allow existing holders to retain their concessions indefinitely, which contravened the principle of equal treatment of economic operators. Moreover, the right benefited companies which were already established in France and was thus incompatible with the principle of freedom of establishment.(1) The preference right was repealed in 2006(2) and in 2008 a decree set out new rules for the renewal of hydropower concessions based on a competitive bidding process.(3)

In parallel with the end of the monopoly of historic concessionaires, Parliament decided to end the financial windfall that concessionaires enjoyed under the 1919 law . Under this system, the royalty paid by concessionaires is set very low, such that, for example, EDF pays only €5 million in exchange for operating 80% of French concessions.(4) A law passed in 2006 set out a new royalty mechanism, but this will only apply to new concessions awarded upon renewal.(5)

Renewal process at a standstill

A call for tenders for the renewal of concessions totalling 20% of the country's hydroelectric capacity (5,200 megawatts) was announced in 2010. However, the renewal process has stalled, presumably because of the complexity of this sensitive matter in a pre-election period.

The renewal process was interrupted in 2012 by the new parliamentary majority, which commissioned a report on the various alternative solutions available when renewing hydropower concessions.

The delay in launching the call for tenders prompted criticism from the National Audit Court, which highlighted the loss of fiscal revenues caused by the government's hesitations.(6) While several concessions have expired since 2011, in the absence of renewal they have been extended under the same conditions while awaiting the award of new concessions, meaning that they are still subject to the previous royalty scheme. The court pointed out that the loss of fiscal revenues due to the delay in launching the renewal of the hydropower concessions could reach €600 million by 2020.

Key features of planned reform

The draft energy transition bill which is being discussed before the Parliament seeks to implement substantial changes to the hydropower concessions regime.

'Barycentre' method for renewal of concessions

The underlying idea of the renewal process envisaged by the previous administration in 2010 was to bundle together several concessions located in the same valley, in order to launch tenders for coherent groups of concessions. In order to create such coherent groups of concessions to be put to tender, the state was to have bought back some of those concessions before their term expired, with the incumbent concessionaire being indemnified accordingly. The new administration considered that this method was likely to be a barrier to market access, due to the high compensation that would need to be paid to incumbent concessionaires by new entrants. Moreover, this financial effort would have penalised both new entrants – which would have reduced their investments accordingly – and the state, which would not have collected the expected amount of royalties.

An alternative solution for the renewal of concessions – the 'barycentre' method – was therefore set out in the draft energy transition bill. This method involves bundling together several concessions located in the same valley and setting a single maturity date prior to launch of a bidding process. The single maturity date, which shall be set by decree for each concession, shall be determined by weighing the maturity dates of the various contracts in proportion to the revenues generated by each contract. In determining this date, the duration of some contracts will be shortened, while other agreements will be extended.

The draft bill sets out the principle according to which the bundling of several concessions shall ensure that the concessionaire maintains an economic equilibrium, assessed on the basis of all bundled concessions.

The barycentre method will apply to concessions located in the same valley, irrespective of whether these are granted to one or several concession holders. In the latter case, the holders of concessions which are extended shall indemnify the holders of concessions which are shortened, with the amount of such indemnification being established by decree. Concession holders might also be subject to payment of an additional royalty if payment of this indemnification is insufficient to restore the initial economic balance of their concession agreements.

Exceptional extension of some concessions

The maximum duration of hydropower concession agreements set out by the 1919 law is 75 years. Most of the agreements have been entered into for this maximum duration, which has been seen as a barrier to entry to the French market.

A parliamentary amendment has been tabled in order to allow the duration of some concession agreements to be extended beyond this limit. This amendment reflects a provision of EU Directive 2014/23/EC on the award of concession contracts. The directive provides that a concession contract can be modified without having to undertake a new concessions award procedure where additional works or services by the original concessionaire, which were not included in the initial concession, have become necessary, but a change of concessionaire

  • cannot be made for either economic or technical reasons; and
  • would cause significant inconvenience or substantial duplication of costs for the contracting authority.

The concessions which could be extended pursuant to this provision are not yet known.

New royalty scheme

The draft energy transition bill sets out the basis of a newly royalty scheme and provides that:

  • a revenue-based royalty shall be paid to the state for all new or renewed concessions;
  • the royalty shall not exceed a ceiling set out by the concession agreement; and
  • the holders of concessions which are extended pursuant to the barycentre method or for the performance of new works shall be subject to this royalty, which shall be set by the grantor, taking into account the need to maintain the economic equilibrium of the contract.

The impact of the new royalty scheme is difficult to assess at this stage, as the amount of the royalty will be set by each concession agreement.

Public-private company system

The draft energy transition bill foresees the possibility for the state to establish dedicated public-private companies – sociétés d'économie mixte hydroélectriques (SEMHs), held jointly with a private partner and other public entities – which will be awarded concession agreements.

The bill sets out the following rules in this regard:

  • Each SEMH will be created for the term of the concession and will be dedicated to a single concession contract.
  • Riparian local authorities will be able to participate in the capital of SEMHs, subject to the state's approval.
  • The state will be able to require other public entities to make equity investments in the SEMHs.
  • Public entities must together hold at least 34% of the share capital and voting rights in an SEMH (ie, a blocking minority).
  • Similarly, the industrial partner must also hold a blocking minority.
  • Before selecting the industrial partner within an SEMH, public entities will need to specify the main terms and conditions of the envisaged partnership that will be set out in the shareholders' agreements, as well as the share of investments that will be carried out by the public entities.
  • Selection of the private partner of an SEMH will be made following a competitive bidding process, as for the award of other hydropower concessions.

The basis on which the state will identify the concessions which will be awarded directly to private partners and those which will be awarded to SEMHs including a private partner is not yet clear.

Implementation and next steps

It is expected that the new legal framework for hydropower concessions in France resulting from the energy transition bill will be based largely on these principles. A consensus seems to be taking shape along these lines between the two houses of Parliament and the parliamentary process is coming to a close.

Implementation of the new hydropower concession regime will require the enactment of several decrees. Therefore, it may be several months to a year before clarification is provided as to the duration of the concessions and which concessions will be put to tender and which will be awarded to SEMHs. Moreover, implementation of the reform is likely to encounter obstacles, due to the opposition that has already been expressed by regional elected officials and trade unions of the energy sector, who have denounced the privatisation of the hydropower sector.

For further information on this topic please contact Ruxandra Lazar at King & Spalding LLP by telephone (+33 1 7300 3900), fax (+33 1 7300 3959) or email (rlazar@kslaw.com). The King & Spalding LLP website can be accessed at www.kslaw.com.

Endnotes

(1) "Freedom of establishment: the Commission calls on France, Italy and Spain to amend their legislation on hydroelectric concessions. European Commission", July 13 2005, IP/05/920 (http://europa.eu/rapid/press-release_IP-05-920_en.htm?locale=en).

(2) Law 2006-1772 of December 30 2006 on water and aquatic environments.

(3) Decree 2008-1009 of September 26 2008.

(4) Information report on hydropower submitted by the commission for economic affairs of the National Assembly, October 7 2013.

(5) Amending Finance Law 2006-1771 of December 30 2006.

(6) Injunction of the National Audit Court, June 21 2013.

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