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Spain: PPAs and the remuneration reduction under RDL 17/2021

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​published on 17th November 2021

 

Hardship, Change in Law and Arbitration: Conflict resolution for electricity supply contracts with reference to Spain

The temporary measures enacted by the Spanish government in mid-September to reduce the price of electricity affect many owners of wind and solar power plants (renewable energy installations) on the Spanish mainland to varying degrees.

 

Content of the decree

The measures were adopted by decree and after only a few days were concretized by an additional explanation (aclaración) (Real Decreto-ley 17/2021 of 14/09/21, in conjunction with the ministerial announcement „Respuesta al operador del sistema sobre la aplicación del RDL 17/21” of the Ministry of the Environment of 21/09/21).


On the one hand, the package of measures includes tax benefits and, on the other, a reduction in remuneration until the end of March 2022. The owners of renewable energy installations must pay the reduction amounts to the Spanish transmission system operator TSO. Taken together, the economic losses of the reduction outweigh the positive effects of the tax relief so that in extreme circumstances project owners could find themselves forced to shut down plants in individual cases to limit the losses incurred.

Personal scope

The temporary reduction particularly affects owners of renewable energy installations with a capacity of more than 10 MW, the produced energy volumes of which are traded on the spot market and thus, along with other types of plants, benefit „extraordinarily” from the current sharp rise in electricity prices. Thus, it is assumed for the newly introduced reduction in remuneration that the sales revenue to be reduced has „internalized” or „indexed”, as it were, the increase caused primarily by the gas price (as one of the main factors in electricity price formation).


Accordingly, installations whose sales proceeds are not „indexed” in whole or in part are excluded from the reduction. First and foremost, this concerns renewable energy installations that have agreed to physical, bilateral power supply contracts („physical PPAs”) with fixed prices, provided that these PPAs were not concluded among affiliated companies and before September 16, 2021.


Secondly, „financial PPAs” are also exempt from the reduction, provided they were agreed in whole or in part with non-indexed hedging transactions ("hedging") during the period of validity of RDL 17/2021, not with affiliated companies and also before September 16, 2021. This, therefore, applies to financial PPAs with a mixed pricing mechanism (e.g. cap-floor pricing) and financial PPAs relating to several power plants of an owner (power plant parks), but only in relation to the revenue portion that is priced on a fixed and non-indexed basis. The non-hedged „net revenue share” is then subject to pro-rata reduction.


Lastly, those renewable energy installations that either receive a special state-subsidized feed-in tariff or are subject to a remuneration scheme based on tenders are also exempt from the reduction. With regard to these aforementioned exemptions, the exact details have not yet been finalized. It is not unlikely that RDL 17/2021 will be amended any further in the next weeks until it is either confirmed or repealed by parliament.


In particular, the setting of the time limit for PPAs (PPA conclusion before September 16, 2021) as a condition for exemption from the reduction is strongly debated and attacked in the market, as this regulation is in direct contradiction to the government's idea of intensively promoting the use of long-term electricity supply contracts in the future as well.


In any case, however, the affected plant owners are required to assess the economic impact of RDL 17/2021 in terms of responsible contract management in legal terms, either because they already manage applicable PPAs in their portfolio or because they are about to conclude a PPA.

 

Contractual law view point

From a contract law perspective, the effects of the clawback according to RDL 17/2021 should be examined for events that could, in extreme cases, open the possibility for the renewable energy plant owner and contracting party to a PPA to adjust the contract. In the following, this particular case will be briefly outlined and finally summarized as a concise practical tip:

  1. Applicable law
    First of all, when examining the contractual clauses, it is necessary to clarify which law is applicable to the electricity supply contract. Even if contractual adjustments are usually regulated in detail in the PPA, these clauses always apply only in the context and on the basis of the contract law chosen by the contracting parties. For PPAs with reference to Spain, this usually means the application of Spanish law. However, foreign legal systems must also be taken into account, provided that a corresponding choice of law has been made.
  2. „Hardship” and „Change in Law” under Spanish law
    „Hardship” refers to events that make the performance obligations of the parties agreed in the contract more difficult than is tolerable to the detriment of only one party to the contract, but not impossible. They thus represent an exception to the principle of the obligation to perform the contract („pacta sunt servanda”). This exception usually applies if the fundamental contractual circumstances originally found by the contracting parties have changed outside the sphere of responsibility of the parties unforeseeably and seriously in such a way that adherence to the contract would lead to undue hardship for one party to the contract.


Whereas in German law, for example, the exception to the general obligation to perform described above is explicitly regulated in § 313 BGB („Interference with the basis of the transaction”), there is no appropriate statutory regulation in Spain. As an unwritten principle of a „change of the contractual circumstances” („rebus sic stantibus”), the exception is nevertheless recognized in Spanish doctrine and case law. The local case law on the application of hardship clauses was consolidated by Spanish courts for the last time in the context of the global financial crisis to resolve extreme distortions in contractual symmetry. As in German law, this is based on the hypothetical will of the contracting parties at the time of the conclusion of the contract and thus also defines the specific standard of reasonableness in each case.


The so-called „change in law” clauses usually agreed on in electricity supply contracts in Spain are to be qualified as a subcategory of a hardship clause. They are also based on unforeseen events outside the risk sphere of the contracting parties, which can occur specifically due to legal interventions, such as regulatory changes. The reduction in remuneration due to RDL 17/2021, therefore, fulfills the requirements of a hardship clause in any case on the merits. The decisive factor is then that the economic burdens and effects which the reduction in remuneration means for a plant in a specific case exceed the threshold of unreasonableness.

 

Since every plant has different initial economic parameters, the special features of every plant must be taken into account. With regard to the type of PPA, for example, contracts to secure plant financing („upstream PPAs”), with their specific bank-related requirements, would have to be differentiated accordingly.


For the future, the RDL, which has now come into force, means not least a shift in the „unforeseeability requirement” for the application of the „change in law” clause. This must be taken into account in particular when reformulating PPAs.

 

Processual view

Even though the reduction in remuneration under RDL 17/2021 will lead to noticeable losses for most renewable energy installations, only a few are likely to exceed the unreasonableness threshold for a typical PPA hardship clause.

 

The primary objective is then to adjust the contract before it is terminated. In this respect, it is the responsibility of the (Spanish) court to adjust the contract at its own discretion. Those who have concluded an arbitration agreement in the electricity supply contract as a precautionary measure can consider themselves lucky, as this enables the parties to select suitable arbitrators themselves in view of the judicial discretion to be exercised. The substantially shorter duration of arbitration proceedings compared to proceedings before state courts lasting several years is also an advantage that should not be underestimated in the case of disputes over electricity tariffs.  Against the background of the latest decisions of the Court of Justice of the EU, the competent arbitral tribunals must ensure in their decisions that this adjustment is proportionate and in any case within the limits of competition law.

 

Practical tips

For existing PPAs with indexed price clauses

Review the existing contracts and assess the economic impact of RDL 17/2021. If your PPA is affected by the clawback so heavily that you would be forced from an economic point of view to (temporarily) shut down the plant, inform your contractual partners as well as investors and financial institutions in advance about this possible step. In the event that the contractual partner is considering legal action in the event of a shutdown, try to reach an out-of-court solution to the conflict at an early stage, ideally within the framework of commercial mediation (ADR). If this does not succeed, there remains the possibility of a contract adjustment by the (arbitration) court called upon.


For PPAs to be negotiated

Use suitable hardship clauses, tailoring them to your specific contractual situation and chosen law, and in particular providing for cases of contract adjustment by court or expert. Suitable clauses can be found on the ICC website. Note that the RDL now enacted has now shifted the requirements for the unforeseeability of reductions in remuneration.

 

 

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