France is Europe’s second largest hydroelectric producer after Norway and in 2010 initiated a process for renewing hydropower concessions. 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 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 could allow existing holders to retain their concessions indefinitely, contravening the principle of equal treatment of economic operators. Moreover, the preference right benefited companies that 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 [1] The preference right was repealed in 2006 [2] and in 2008 a decree set out new rules for the renewal of hydropower concessions based on a competitive bidding process.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 connection with the end of preferential rights for historic concessionaires, Parliament established a new royalty mechanism, which applies to new concessions awarded upon renewal. [4]

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. [5]  Several concessions have expired since 2011; however, in the absence of renewal, they have been extended under the previous royalty scheme. The court estimated that the delay in launching the renewal of the hydropower concessions could result in a loss of fiscal revenues of  €600 million by 2020.

Key features of planned reform

Parliament is considering a draft energy transition bill that seeks to implement substantial changes to the hydropower concessions regime.

‘Barycentre’ method for renewal of concessions

The underlying idea of the 2010 renewal process was to bundle several concessions situated in the same locale, in order to launch tenders for coherent groups of concessions. In order to create these groups, the plan was for the state to purchase some of those concessions before their terms expired, with the incumbent concessionaires being indemnified accordingly. The new administration considered this method to be a barrier to market access, due to the high compensation needed to be paid to incumbent concessionaires by new entrants. Moreover, this financial effort would have penalised both (1) new entrants, who would have reduced their investments accordingly, and (2) 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 area and setting a single maturity date prior to launch of a bidding process. The single maturity date, set by decree for each concession, would be determined by weighing the maturity dates of the contracts in proportion to the revenues generated by each.

The draft bill sets out the principle that the concessionaire maintains an economic equilibrium, assessed on the basis of all bundled concessions.

The Barycentre method will apply to concessions 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 an 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 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 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 (i.e., a blocking minority).
  • The industrial partner must also hold a blocking minority.
  • Before selecting the industrial partner within an SEMH, public entities must 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 that 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 will be based largely on these principles. A consensus is forming along these lines between the two houses of Parliament as the parliamentary process comes to a close.

The implementation of a new hydropower concession regime will require the enactment of several decrees. Therefore, it may take several months to a year before there is clarification  as to the duration of the concessions, which concessions will be put to tender, and which will be awarded to SEMHs. Moreover, implementation of the reform is likely to encounter obstacles.  Regional elected officials and energy sector trade unions have already expressed opposition and  have denounced the privatisation of the hydropower sector.

This article was originally published in the Energy & Natural Resources – France Newsletter of the International Law Office.