The French government is proposing to retroactively cut subsidies awarded to certain large photovoltaic (PV) power contracts, with repercussions for project developers and their funders.
France's 2021 Finance Act will impose tariff cuts on 800 such contracts based on tariff decrees published between 2006 and 2010, which the government now considers to be excessive due to the collapse in the price of PV cells. Officials are concerned that developers would otherwise benefit from excessive profitability, with some investments generating margins of more than 20%. The French government expects the measure to save it €350-400 million annually.
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France introduced a feed-in tariff (FiT) regime in 2000, designed to accelerate the deployment of renewable energy investments by offering long-term contracts to renewable energy developers. The goal at the time was to offer cost-based compensation to these developers, providing price certainty and helping developers to obtain financing. However, in 2018, the Court of Auditors said that incentives available to the solar industry were too generous as the cost of installing solar panels had since fallen to a quarter of what it had been, prompting the government's decision to partially scale back its support for solar power.
The retroactive cuts should not have a massive impact on the French solar sector. As reaffirmed at the National Solar Photovoltaic Conference on 19 January 2021, the sector remains strong with a target of increasing its share of renewable energy in France's gross consumption to 32% by 2030. In addition, France's coronavirus recovery package includes €30 billion (US$36 billion) to be spent on an “ecological transition” that will also spearhead low carbon hydrogen production exclusively through renewable electricity.
Although lawmakers have included a 'safeguard' clause in the 2021 Finance Act to preserve the position of existing projects, additional legal and regulatory remedies are available to investors and lenders to mitigate the consequences of the FiTs cuts.
The new feed-in tariff scheme
The government's planned cuts will impact historic FiT contracts concluded during the original PV investment 'bubble' of 2006-10. Out of the 235,000 contracts signed over this period, only installations of more than 250KW will be affected, representing 800 contracts.
Some members of the French parliament, supported by the solar industry lobby, submitted the government's plan to retroactively renegotiate the FiT contracts to the Constitutional Council (Conseil Constitutionnel) as they were unconvinced that the state had the right to break the original contracts. In its decision, the Council set aside the grievances raised by investors, considering that the government was acting “in the public interest”. The decision upheld the government's position of saving public money in order to finance further investment in renewable energy.
While the new FiTs and their effective date are still to be set by France's energy and budget ministers following the opinion of the Energy Regulation Commission (Commission de Régulation de l'Energie, CRE), they will be calculated in such a way that they will provide “reasonable remuneration” given the inherent risks of PV project investment. The 2021 Finance Act does not specify the criteria for assessing the fairness of the developers' future remuneration, but the decree of the Council of State (Conseil d'Etat) will specify the terms and conditions of the retroactive cuts as well as the safeguard measures.
Safeguards for French solar investors
Reneging on FiT contracts concluded over 10 years ago has the potential to undermine the credibility of the state, cripple the French solar industry and loom over future PV projects in France. In response to industry concerns, the French government has assured that there will be a safeguard clause to prevent corporate failure.
Preserving the profitability of PV projects
The 2021 Finance Act provides for safeguards against excessively low FiTs. The Act specifies that the new tariff will be based on the contextual elements of the related historical feed-in contract – i.e. previous FiT; technical characteristics; location; date of commissioning; and operating conditions of the PV project.
To avoid any arbitrary setting, the new FiT will also be submitted to the CRE for its opinion, which will be made public.
Protecting the bankability of French solar developers
The 2021 Finance Act also introduces a waiver procedure that allows renewable investors to apply for a modulated tariff or an extension of the term of their contract, if strict application of the tariff revision could jeopardise their financial position.
The procedure that will be triggered by such a request raises questions that are still outstanding at this stage, but provides a safety net for the investors.
Developers' right to compensation
Should the FiT cuts directly or indirectly make the performance of the purchase contract more costly for the developers, they could be entitled to full compensation for their loss under French law.
Impact of FiT cuts on project finance
Non-recourse project financing relies on both equity from the sponsors and senior debt. The profitability of the project is therefore essential to ensure proper repayment of the bank debt and an acceptable return rate on the sponsor's equity.
In a solar energy project, cash flow is generated by the FiT set in the power purchase agreement (PPA). The FiT cuts may affect the project company's ability to continue operations and the borrower's capacity to repay the loan. For certain projects, either one of these will have a material adverse effect on the operation of the power plant, the borrower's assets or the borrower's financial condition.
Most project finance loan agreements contain a 'material adverse effect' or 'material adverse change' clause which allows the lender, depending on the drafting of the relevant provision, to suspend its future financing, cancel its commitments or request an early repayment of the loan. Usually this clause refers to the occurrence of a fact or event regardless of nature, cause or origin that affects, or is likely to affect, immediately or in the future, in a materially adverse way, the borrower's capacity to fulfil its obligations under the loan agreement.
Developers and funders should carry out due diligence of all their loan agreements to identity whether they contain these clauses and establish their effect on the sustainability of their financing. This due diligence will also allow borrowers to identify clauses that could remedy the consequences of the tariff revision.
Forecasting regulatory changes in loan agreements
Recent regulatory changes in the renewable energy sector have forced borrowers and lenders to adapt their finance documents to proactively address shifts in PV prices and technical trends affecting the market. Some of these mechanisms can be used by parties to address the impact of the 2021 FiTs cuts.
Amendments and waivers
Solar market players who are no longer able to fulfil certain clauses in their contracts because of the state's decision could request that the lender reschedules the debt by way of an amendment to the loan agreement. They may also submit a waiver request to the lender in anticipation of a default or delayed repayment of the principal or interest, allowing them to avoid an event of default under the loan documentation.
Change of law clause
The risk of a change in law or regulation is almost unavoidable during the life of a project. As a result, 'change of law' clauses are generally included in finance documents. These clauses deal with the risks related to new legislation that comes into force after the start of a project and changes the conditions for its operation.
If deferred repayment clauses have not been included in the finance documents, lenders and sponsors could negotiate standstill agreements. These agreements could allow the solar developer to benefit from a deferral of loan repayments under conditions related to the waiver procedure outlined in the 2021 Finance Act for a period agreed between the parties to the loan agreement.
The loan agreements may provide for instalment adjustment clauses which allow for a reduction in instalments in the event of lower cash flows. These may only be triggered on a limited and ad hoc basis. Like deferred repayment provisions, instalment adjustment clauses are rarely included in project finance documents.
Some lenders also insert 'rendez-vous' clauses in their loan agreements. These provisions bind the parties to provide flexibility in the performance of the contract and to enter into renegotiations for a possible extension to the relationship. Developers affected by the 2021 Finance Act will be able to trigger these clauses to achieve a new contractual balance.
Parent company guarantees
Lending institutions and sponsors may agree to set up a parent company guarantee (PCG) under certain conditions. Similar to the joint and several guarantee ('caution solidaire') or, as the case may be, the first demand autonomous guarantee ('garantie à première demande'), the PCG could be issued during the waiver procedure, which would allow developers to apply for the modulated tariff or an extension of the term of their PPA. The PCG will be released following a positive outcome of the waiver procedure.
In future, developers, investors and lenders will have to pay close attention to how their finance documents are drafted in order to manage the risks associated with future legislative or regulatory change.