Under impetus from the European Commission, and following the adoption on 17 August 2015 of the so-called law on energy transition (hereinafter the “Law”), the renewable energy sector in France is on the verge of a revolution.
The scheduled end of the feed-in tariffs and the generalization of calls for tender should in fact encourage the players in the sector to review the existing business model.
If the entry into force of this new mechanism is scheduled for 1 January 2016, its effective implementation remains subject to the adoption of a supplementary decree, the draft of which has recently been circulated by the French Government and which should be published by the end of 2015.
Without waiting for the adoption of the final and complete mechanism, this memorandum offers you the chance to anticipate future changes, by enabling you to understand more fully the objectives and essential parameters of the future legal and regulatory framework intended to regulate the renewable energy sector in France.
General overview and purposes of the Law
According to the European Commission’s Environmental and Energy Aid Guidelines for the period 2014-2020 (dated 28 June 2014), the European States must comply with their climate targets in 2020, focusing on reducing their energy consumption and the emission of greenhouse gases. They also have to render all renewable energy sources profitable and fight against the distortions of competition.
In this context, the Law on energy transition and green growth was enacted on 17 August 2015 by the French Parliament. The purpose of this Law is to create 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 access to energy for everyone.
The Law will substantially modify the currently applicable legal framework on renewable energy, and shall enter into force on 1 st January 2016.
The main objective of this Law is to put an end to the currently applicable feed-in tariffs system, and to promote a new support mechanism that will not affect the competition on the renewable energy market.
A new support mechanism for the future: the “Additional Remuneration” or “feed-in-premium”
Currently, the regulatory framework on renewable energy is mainly based on feed-in tariffs and mandatory power purchase agreements to the benefit of renewable energy producers. The French government intended to guarantee to any producer of renewable energy, the purchase of his electricity production by Electricity de France (hereinafter “EDF”) at a level above the market price. EDF is indeed obliged to purchase the produced energy following the specifications of a feed-in-tariffs system, consisting in fixed prices determined by the French government for a specified period of time; such system ultimately guaranteed the capital investment in the generation of electric power from renewable energies.
Despite its success, the feed-in tariff system has generated a distortion of competition on the European Market, and has been assimilated to State aids by the European Commission.
In this context, article 23 of the Law stipulates a new mechanism, known as “Additional Remuneration” mechanism (or feed-in premium), which intends to facilitate a better integration of renewable energy on the market in accordance with European guidelines.
The proposed mechanism of “Additional Remuneration” anticipates the implementation of the new Environmental and Energy Aid Guidelines from the European Commission that require, in particular, the support mechanisms to be built in the form of a “feed-in-premium” where the producers receive a premium as a supplement to their remuneration on the market from 2016.
Therefore, the “Additional Remuneration” system shall become the new main support mechanism for renewable energy, while feed-in tariffs will only be applicable to a quite limited number of power plants.
General overview on the new “Additional Remuneration” mechanism
Feed-in-tariffs and power purchase obligation
As mentioned above, only a limited number of power plants will remain eligible for the feed-in tariffs and power purchase obligation system. A decree (to be presumably published by the end of the year), shall identify the kind of power plants that will remain eligible for feed-in tariffs and will articulate this mechanism with the new “Additional Remuneration” mechanism.
As a principle, the Law states that any installation that benefits from a power purchase agreement and feed-in tariffs cannot benefit from the Additional remuneration system. However, the Law states the conditions under which some installations that benefit from a power purchase agreement could subsequently benefit from the new regime.
Characteristics of the “Additional Remuneration”
The French Energy Code will be modified in order to regulate the “Additional Remuneration” mechanism.
According to the new article L.314-8 of Energy Code, EDF will be obliged to enter into a contract with renewable energy producers, according to which an additional remuneration shall be paid to the relevant renewable energy producer; the duration of such contract will depend upon the type of renewable energy at stake, but shall not exceed 20 years (except for power plants located in the French overseas territories where the duration shall not exceed 25 years).
A decree (currently under discussion and to be presumably published by the end of the year 2015) will define in detail the characteristics of the power plants that will be eligible for such mechanism.
Such a contract is substantially different from the existing power purchase agreement currently in force, as EDF does not purchase the produced electricity but only commits to pay, under certain circumstances, an additional remuneration to the producer. Indeed, under the Additional Remuneration mechanism, energy producers sell the generated energy directly to the market, and the market price can be complemented with a premium as a financial aid, should the market prices not be complying with certain characteristics to be defined by the above mentioned decree. Furthermore, it should be noted that the “Additional Remuneration” shall be attributed ex post, according to the evolution of market prices.
Calculation formula of the “Additional Remuneration”
According to the new article L.314-20 of the French Energy Code, the amount of the Additional Remuneration is calculated taking into account specially:
- the investments and operating costs of efficient plants that are representative of each energy sector;
- the cost of integration into the electrical system/network ;
- the revenues from the installation, including the value from the generated electricity and value from guarantees on capacity ;
- whether these facilities contribute to achieving the national electricity policy goals ;
- whether the consumer concerned also produces some or part of the electricity generated by the plant.
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.
Details on the Additional Remuneration system are to be disclosed in a decree currently under review that should be published by the end of 2015. Ministerial orders applicable to each category of renewable energy are also expected to be published by the end of this year.
General overview on the draft application order disclosed by the French government:
A draft decree, published by the French Government on September 15, 2015 and currently under discussion, sets out the conditions for access to support mechanisms for renewable energy provided for by the Law on energy transition.
In fact, it is expected that the production of electricity from renewable sources can either be subject to additional remuneration, or remuneration by fixed feed-in tariffs. In both cases an agreement is entered into, either directly between the producer and EDF, or in response to a tender offer organized by the State. This draft decree, once finalized and published, shall enter into force on the 1st January 2016.
The Additional Remuneration
The draft decree defines the additional remuneration as a bonus pro rata to the energy produced and calculated as the difference between a reference rate (comparable to the current feed-in tariff) and a benchmark rate.
The additional remuneration 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. This mechanism for supplementing remuneration should cover the following installations:
- Installations using hydraulic energy, with a capacity of less than or equal to 1MW ;
- Installations using essentially energy generated from thermal power released from household waste combustion;
- Installations using essentially biogas produced by methanization or derived from landfill sites ;
- Installations using essentially energy extracted from geothermal deposits;
- Installations using cogeneration of electricity and recovered thermal energy from natural gas, with an installed capacity of or equal to 1MW.
The other types of installations, including wind power and photovoltaic, would not be concerned by the additional remuneration.
In order to benefit from the additional remuneration, the decree provides that the producer must send a completed application for a contract of additional remuneration to Electricity de France. EDF then has a time limit of 3 months in which to offer this contract to the producer whose installation is eligible for additional remuneration. It is specified that the contract of additional remuneration remains in force throughout the life span of the installation set at a maximum duration of 20 years. Specific Ministerial orders will define for each category of renewable energy, the duration of the said contract. This contract 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 decrees applicable to each category of renewable energy. It is also provided for that the contract of additional remuneration can be transferred to another producer after signature of an amendment to the original contract.
The 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:
The draft 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 draft 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.
The purchase obligation
The draft decree also provides for the continuance of a mechanism for compulsory purchase, the conditions of which have however been renewed.
In fact, it revises the mechanism of obligation to purchase by introducing a simplified procedure, and in particularly by eliminating the provisions of decree No.2001-410 of 10 May 2001 relating to the certificate for compulsory purchase (the so-called “CODOA”).
The draft decree lists the installations that should be concerned by this mechanism namely:
- Installations using the hydraulic energy of lakes, rivers and collected water, of a capacity of less than 500 KW ;
- Installations using mechanical energy derived from wind;
- Installations using photovoltaic energy, with a capacity of less than or equal to 100 KW ;
- Installations with a capacity of less than 500 KW using the biogas produced by methanization of non-hazardous waste and compost matter ;
- 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;
- Installations with a capacity of less than 500 KW using the biogas from storage facilities for non-hazardous waste products;
- Floating/offshore installations located in the maritime public area using wind energy;
- Floating installations located in the maritime public area using wave and tidal energy;
- Floating installations located in the maritime public area using hydrokinetic energy from ocean currents;
- Installations with capacity of less than 250 KW of cogeneration of electricity and thermal heat recovered from natural gas ;
- 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;
- Installations using mechanical wind energy located in areas particularly exposed to cyclonic risk which have a device for forecasting and leveling the production ;
- Installations located in non-interconnected zones using the biogas produced by methanization of non-hazardous waste and compost matter ;
- 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;
- Installations located in non-interconnected zones using the biogas from storage facilities for non-hazardous waste products.•
In order to benefit from the mechanism for compulsory purchase, the producer must submit a complete application of the purchase contract to the buyer, namely EDF. After receipt of all the items, the buyer has a time limit of 3 months in which to transmit the purchase contract to the producer. It is specified that the purchase contract is concluded for the installation and remains in 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. This certification is requested by the producer from an approved body, which can only issue it once the installation has been completed at the capacity specified in the contract application. This completion must occur under conditions and within a time limit to be defined by the Ministerial orders.
Finally, in the same way as for the contract of additional remuneration, the draft decree provides that in the case of transfer of an installation for which the producer benefits from a purchase contract, the latter can be transferred to another producer in the wake of the signing of an amendment to the original contract.
The supplementary Ministerial orders will therefore set the duration of the purchase contract, the feed-in tariffs as well as the detail of the conditions of purchase of electricity.
In this new context, it will be up to each operator in the sector of renewable energies to carefully assess the new mechanism applicable in order to assess its impact on the business model currently used.
We, of course, remain at your entire disposal to answer any questions you may have on the new legal framework applicable to renewable energy in France.