The National Assembly approved the draft Finance Law on 17 November 2020 and submitted the draft to the Senate for review.2 On 19 November, the Government’s proposed Amendment suffered an important setback as a Senate commission (les sénateurs réunis en commission) decided to strike out the text of the Amendment from the draft Finance Law. However, regardless of the Senate vote, the Government may still push to include the Amendment in the final draft of the Finance Law. The final vote on the draft Finance Law must be cast by 18 December 2020.
If finally approved, this interference with the economic rights of investors in renewable energy is not a first, and follows the examples of other EU Member States, who have been (and still are) exposed to claims brought by affected investors alleging that the proposed cuts breach the investment protections contained in the Energy Charter Treaty (ECT). Many of these investors have been successful in their endeavours (in particular in proceedings brought against Spain, in many of which Allen & Overy has acted as counsel to the claimants). It remains to be seen whether a similar wave will hit France.
Retroactive cuts to the feed-in tariff paid to large-scale photovoltaic energy producers
On 13 November 2020, the French National Assembly approved an amendment proposed by the Government to the draft Finance Law for 2021, through which the Government seeks to cut the guaranteed purchase price paid to large-scale photovoltaic projects (with a capacity above 250kWp).3 The cut, which the Government itself qualifies as “retroactive”, will affect a few hundred contracts concluded between 2006 and 20104, out of the 235,000 signed in that period. Pursuant to the text of the Amendment, the purchase price will be revised so that the return on fixed capital – taking into account all the financial and tax incentives received by the installation – does not exceed a “reasonable return on capital”. The Government will enact a decree – after consultation with the national commission for energy regulation (the Energy Regulation Commission)5 – setting out further details for the implementation of the measure.
The stated aim of the Amendment is to review contracts that allegedly benefit from a “remuneration manifestly excessive in relation to the investment made”. In particular, in a press release, the Ministry of Ecologic Transition pointed to certain projects earning an “internal rate of return greater than 20%” and a return on equity of 80%. The Amendment also envisages that the Ministers responsible for energy and finance may, upon request from an electricity producer, and following a proposal from the Energy Regulation Commission, approve a different tariff level or set a different date for the tariff cut if the economic viability of a project would be affected by the retroactive cut.
Background of the cuts
Since 2000, France has implemented several support schemes to promote the deployment of renewable energy. Among those schemes, France has adopted a system of feed-in tariffs whereby operators of renewable electricity plants enter into contracts with the relevant distribution grid operator (in the vast majority of cases, a subsidiary of the majority State-owned Electricité de France) entitling them to payment for electricity exported to the grid. The distribution grid operators are obliged to enter into these agreements for the purchase of electricity at a guaranteed price fixed by decree (“obligation to conclude agreements”).6
In 2018, the French Court of Auditors issued a report at the request of the Senate analysing the cost of renewable energy promotion for the State budget.7 The report stated that the support granted to certain renewable energy projects before 2011 was disproportionate in relation to their contribution to the renewable energy objectives. In particular, in respect of photovoltaic solar energy, the report concluded that while photovoltaic solar energy cost €2 billion per year (i.e. €38.4 billion cumulatively), it only accounted for 0.7% of the electricity mix.
Although certain regulatory changes in 2010 reviewed the feed-in tariff to address alleged instances of “excessive” remuneration, the changes had no retroactive effect for projects that had signed purchase contracts between 2006 and 2010.8 It is those contracts from 2006 to 2010 that are now affected by the current Amendment.
The retroactive cut is still awaiting Parliamentary approval
The draft Finance Law has not yet been adopted. The draft was approved through a so-called “solemn” vote by the National Assembly on 17 November 2020. A few days later, on 19 November 2020, the Amendment suffered an important setback, as a Senate commission decided to strike out the text of the Amendment from the draft Finance Law. The Senate commission’s decision gives some hope to affected solar producers who had publicly criticised the Amendment and urged politicians to reject it.9 However, the Government may still seek to overcome this setback by reintroducing the Amendment in the final draft Finance Law. This must be voted upon by the Assembly by 18 December 2020. Whether the proposed cuts will ultimately be implemented therefore now hinges on how determined the Government is on targeting these renewable energy contracts.
France follows other EU States that have applied retroactive cuts to renewable energy schemes, at the risk of facing investment-treaty claims
If the draft Finance Law is finally adopted as it currently stands, France could be the latest of a number of EU States that have faced ECT claims for adopting retroactive cuts to renewable energy schemes. More than 40 cases of this nature have been brought against Spain, Italy, the Czech Republic and other countries. Allen & Overy successfully represented many investors in these claims.
The ECT requires, among other things, that States afford investors “fair and equitable treatment” (FET). The obligation to afford FET requires the “host” State to observe the specific commitments it has entered into vis-à-vis foreign investors and to avoid substantially altering the regulatory framework that induced an investor to make its investment. The possibility to bring an ECT claim against France is only open to foreign investors, i.e. either companies or other organisations incorporated in a Contracting Party to the ECT other than France or incorporated in France but controlled by foreign investors.
Italy’s example might serve as a cautionary tale for France. Between 2003 and 2011, Italy implemented a feed-in tariff scheme whereby the owners of photovoltaic installations were entitled to sign contracts for the production of energy with a national state-owned energy company. A legislative decree established the minimum prices at which the State-owned company would purchase electricity from the renewable energy producer. In 2011 Italy started to pass a series of measures aimed at reducing the electricity bill of consumers, including cutting the prices that applied under the minimum guaranteed price scheme. These regulatory changes led to foreign investors bringing several claims against Italy. In at least two cases, international tribunals held that Italy breached the ECT by failing to observe the specific commitments it entered into with investors.10 The tribunals gave particular weight to the fact that Italy had made clear and specific commitments towards investors through the contracts. Given that the French feed-in tariff scheme is also implemented through State contracts with photovoltaic energy producers, it remains to be seen whether the proposed retroactive cuts will now prompt foreign investors to bring ECT claims against France.
These proposed changes to the French feed-in tariff regime occur against the backdrop of an initiative to amend the current provisions of the ECT. On 15 July 2019 the Council of the European Union authorised the European Commission to begin negotiations for the modernisation of the ECT.11 One of the Council’s stated aims in the negotiations is to include an explicit reference in the ECT to the so-called “right to regulate” and a clarification that investment protection provisions cannot be interpreted as a commitment by the contracting parties not to change their laws. Those negotiations are still on-going (a third round of negotiations took place between 3 and 6 November 2020) and the ECT as it stands remains binding for its Contracting Parties, including France.
Footnotes:
1. Ministry of Ecologic Transition, press release, 13 November 2020 (last accessed on 16 November 2020).
2. The Amendment became new Article 54(6) of the draft Finance Law transmitted to the Senate.
4. Amendment II-3369 to modify Article 54 proposed by the Government on 7 November 2020 (Amendment) (last accessed on 16 November 2020).
5. Commission de régulation de l'énergie. This requirement was introduced through a sub-amendment No. II-3350, adopted on 13 November 2020.
6. Law No. 2000-108, of 10 February 2000, Article 10.
7. Cour des Comptes, Le Soutien Aux Énergies Renouvables, Communication à la commission des finances du Sénat, March 2018 (Court of Auditors, 2018 Report), p.70 (last accessed on 16 November 2020).
9. See Enerplan press release dated 13 November 2020, calling the French senators to "go back on this amendment and force the government to foster discussion with the professionals to reach an agreement". See also the statements published on the same day by the Syndicat des énergies renouvelables and by the Solidarité Renouvelables (both accessed on 16 November 2020).
10. These cases are Greentech Energy Systems A/S, NovEnergia II Energy & Environment (SCA) SICAR, and NovEnergia II Italian Portfolio SA v. The Italian Republic (SCC Case No. V 2015/095) and CEF Energia BV v. Italian Republic, SCC Case No. 158/2015.
11. See the 15 July 2019 press release from the Council (last accessed on 18 November 2020).
