Investment in the French solar energy market has offered lucrative returns, but recent reforms mean that investors need to take action to protect their investments. In this briefing, we summarize the key regulatory changes which will impact solar projects and identify the avenues available to investors to protect their interests, and the long-term returns on their investments.
Since 2000, the French government has encouraged the development of the solar energy sector by implementing a favourable regulatory framework. EDF and various other local distribution operators (LDOs) were required to purchase electricity generated by independent power generators from renewable sources at a preferential tariff, the so-called “feed-in tariff”. Under this support scheme, EDF and the LDOs were obliged to enter into power purchases agreements (PPAs) with independent power generators at a price guaranteed for 20 years.
The high feed-in tariff rates set out in 2006 (which were indexed to inflation and reached EUR 600/MhH in 2009) made investments in French solar projects very attractive for investors at a time they required significant capital investment. An ensuing reduction in the cost of equipment, together with decisions by Spain and Germany to reduce incentive schemes for solar energy, further encouraged foreign investors to take a stake in the French market. However, the rapid growth in the number of solar projects benefitting from the French framework, together with the impact of the 2008 financial crisis, quickly led France to realize that it would need to scale back the financial cost of its incentive scheme.
In 2010, therefore, the French government implemented two tariff reductions to be applied to new projects and temporarily froze the power purchase obligation for solar projects. In 2011, a new incentive scheme was adopted. Fortunately for existing investors, however, those with PPAs entered into prior to the 2011 reform were unaffected by these changes and they retained the preferential 2006 feed-in tariffs.
It is that status quo which has now been upset by the latest reforms.
2. The 2021 Finance Law - Reduction in the feed-in tariffs
In 2020, the French government decided to reconsider the feed-in tariffs for PPAs entered into prior to the 2011 amendments, arguing that projects benefiting from those tariffs were excessively profitable1. Accordingly, the 2021 Finance Law provided for a reduction in the feed-in tariffs for these PPAs aimed at limiting the projects to a reasonable return on capital2.
The reduction of the feed-in tariffs is intended apply to all projects with an installed capacity of more than 250 KW, irrespective of the technology used (photovoltaic or thermodynamic). The reduction affects 436 facilities3, 20% of them being located in non-interconnected zones, i.e. Corsica or French overseas territories. According to the Energy Regulation Commission (Commission de régulation de l’énergie or CRE), the tariff reduction would entail savings for the State of about EUR 3.7 billion over the next ten years . The average reduction of the tariff is 47%, while 4% of the projects would suffer a 95% reduction5.
The reduction of the feed-in tariffs has been challenged before the Constitutional Council6, which considered that the measures did not infringe constitutional rights and guarantees. The Council found that:
- while the measure infringed the right to the maintenance of legally concluded agreements, the aim of the measures was in the public interest because it was intended to remedy an imbalance between producers and distributors of electricity -- ending the unintended windfall from which certain producers benefited, at the expense of the State’s financial interests;
- the measures preserve the profitability of affected installations, because the law provides that the new feed-in tariff must allow a reasonable return on capital;
- there was no breach of the principle of equality – the application of the measures only to projects with an installed capacity of more than 250 KW was justified by the fact that the producers operating the largest projects benefited from significantly higher profitability than that of smaller producers due to the economies of scale in equipment purchases and in production costs.
3. The implementation of the feed-in tariffs reduction
The rules for determining the new feed-in tariffs to be applied to the relevant PPAs were set by a decree7 and a ministerial order8, both dated 26 October 2021. Summary proceedings to challenge these regulations, brought by several professional associations representing renewable power producers, have failed. The Council of State, which is the highest court for administrative matters in France, ruled that there was no serious doubt as to the legality of these regulations and dismissed a request that there be a stay in the implementation of the regulations9. The case, however, will now proceed to a full review on the merits, although a decision is not expected to be rendered by the Council of State until at least 2023. This uncertainty is a significant cause for concern for affected investors.
Notifications have been sent to all affected producers setting out the new feed-in tariffs applicable to those projects falling within the scope of the Finance Law. Broadly speaking, for ground-mounted solar projects located in mainland France, the feed-in tariffs will be reduced from EUR 570 per MwH to EUR 30 per MwH. The minimum feed-in tariff will be in the range of EUR 18 to EUR 50 per MwH, and the average feed-in tariff will be around EUR 30 per MwH.
4. Investors’ rights
Investors will wish to assess their rights and strategic options in light of these regulatory changes. We will first address domestic avenues available to investors, and then consider international law protections on which foreign investors might be able to rely to protect their investments.
(i) Safeguard mechanism
The 2021 Finance Law provides for a safeguard mechanism (clause de sauvegarde) allowing producers to request the CRE to grant a feed-in tariff higher than that which has been notified to them. This mechanism is available to producers who can demonstrate that the revised feed-in tariff is likely to endanger their economic viability.
Producers will need to show that all available steps have been taken to mitigate the financial impact, including seeking support from their direct and indirect shareholders. Producers were required to submit requests for the safeguard mechanisms to be applied within three months of being notified of the new feed-in tariffs. By 16 December 2021, 320 such requests had been submitted to the CRE10. This means that 73% of the producers impacted by the measures took the position that the revised feed-in tariffs are likely to endanger their economic viability.
Once a request for the safeguard mechanism has been registered by the CRE, the application of the new feed-in tariffs is suspended for a maximum period of 16 months11. The CRE has 12 months to evaluate the request and make a proposal to the Ministers of Energy and Budget.
If the producer’s request is accepted, a ministerial order, adopted within one month after the CRE’s proposal, will set out the new level of the feed-in tariff, its effective date and, as the case may be, the new duration of the PPA12.
If the request for the implementation of the safeguard mechanism is rejected, the revised feed-in tariff will apply retrospectively to the date set out in the ministerial order establishing the revised feed-in tariff13.
Given the timelines described above, the decisions rejecting or approving the implementation of the safeguard mechanism are expected to be issued between the end of 2022 and the first quarter of 2023. In the meantime, investors must face great uncertainty as to the economic viability of their investments.
(ii) International law protections
In light of this uncertainty, investors should also be considering whether international law might protect their investments from the negative impact of the measures. The withdrawal of similar incentive schemes across Europe has given rise to a significant number of international law claims, notably against Spain, but also in other EU member states such as Italy and Romania.
Bilateral investment treaties signed by France, as well as multilateral treaties such as the Energy Charter Treaty, may offer investors protection against the measures that have been taken. These treaties typically allow investor to submit their disputes to international arbitration.
In parallel with challenging the measures by availing themselves of the safeguard mechanism, investors therefore should be assessing their rights under such treaties. Many of these treaties contain so-called “cooling off” provisions, which typically require investors to wait three or six months from giving notice of a dispute under the treaty before commencing arbitration. In order to minimize the financial impact of the measures, and to protect against an adverse outcome from the safeguard mechanism procedure, investors should be evaluating their options now.
While the costs of pursuing arbitration can be significant, those costs can often be recovered by the prevailing party in an arbitration. Moreover, products such as third party funding are available to claimants to allow them to seek a commercial balance between preserving their rights and minimizing legal spend. DLA Piper has a bespoke funding product offered through Aldersgate Funding Limited which is tailored to meet this need.