Over the past year, government agencies on both sides of the Atlantic have expressed a nascent desire to re-negotiate energy procurement contracts long since signed in support of projects long since financed and built. This should not be surprising as the great wonder of the Renewables Age is that we now live in an era of declining energy costs. Depending upon the exact shape and slope of the declining cost curve, and the delays which occur between when new power projects are contracted and when they are brought to completion, this can make it very difficult for political actors to resist the temptation to try to re-open or cancel contracts –using all available levers to put pressure on contract owners.
Playing the cards you were dealt
In September of 2020, France's Minister of the Economy and Finance, Bruno le Maire, announced his government's willingness to renegotiate the renewable energy Feed-in Tariff ("FiT") contracts entered into by la République prior to 2011. This renegotiation would involve either unilateral price reductions or a shortening of contract maturity dates. In France, this could be a unilateral government-initiated change based on the triggering of the state's "general interest" power – which empowers French public authorities to unilaterally modify or terminate contracts on the grounds of public interest.
Needless to say, the exercise of the general interest power in France, as elsewhere, is significantly constrained by the wariness of private project developers and their ever-watchful project lenders. If France wants to attract the interest, talent, and private sector investment necessary to build back better after the COVID-19 pandemic, it will likely need to restrain this exercise on the part of government ministers wielding general interest mandates.
Like France, the Canadian province of Ontario might also like to do away with existing FiT contracts negotiated and built back when solar and wind project development costs were higher. Ontario faces the same market pressures as France, but it lacks a general interest power and carries the weight of nearly four centuries of crystal clear and consistently applied common law which reflects a reticence (if not an outright prohibition) on allowing unilateral government overriding of contract rights.
That said, France and Ontario each have options to reduce current energy costs, without the unnerving exercise of government contract abrogation power.
France: a One-Time Unilateral Change
It all started on September 16, 2020, with the unexpected announcement in a French financial newspaper that the French Government had started a "revision" of the price or maturity of the Power Purchase Agreements ("PPA's") executed prior to 2011 (2006 and 2010 contracts, technically, "S06" and "S10"), with FiT ranging up to €600 per MwH.
As a reminder, the French Court of Auditors identified those contracts in its 2018 report as being extremely expensive, representing a cost of €2 Billion per year until 2030 (€38.4 Billion cumulatively) for only 0.7% of the energy mix. The incentives from the French Government, given at the time to strengthen the development of solar energy, were considered retrospectively as being too high relative to the continuing falling cost of the installation of solar panels.
Shortly after that news media release, the French General Direction of Energy and Climate ("DGEC") confirmed the scope of its proposed revisions –and that the ministry was, indeed, looking to reduce the burden of FiT contract costs. The French Government would be targeting solar power plants with a power output of more than 250 kW, representing 850 of approximately 235,000 20-year PPA's. However, among those 850 PPA's only "over-performing" PPA's would be impacted. A case-by-case analysis would determine which PPA's were "over-performing". The end result would be either a reduction of the PPA price, or a 3-5 year reduction of the PPA contract term.
A brief, lop-sided negotiation then took place between the DGEC and the solar industry, with industry expressing its concern that the uncertainty created by this unprecedented revision of existing contracts would lead to future increases to the cost of financing renewable energy projects. A counter-proposal was also made, involving the creation of an impact fund aimed at reducing state support for future tender offers in renewable energy.
Then, dissipating the last hopes of a negotiated solution, on November 7, 2020, the French Government filed an amendment to the 2021 Finance Law (the "Amendment"). The Amendment targets the same PPA's as the initial proposed revision, but with three significant changes:
- Scope: the Amendment no longer targets "over-performing" PPA's. Instead, the Amendment sets out a threshold of a reasonable return on capital, considering in particular the technical characteristics and location of the generator, as well as financing conditions.
- Consequences: the initial proposed revisions contemplated a reduction of the PPA's contract term and price, but the Amendment refers only to a price reduction. The extent of the price reduction is to be defined later by a decree.
- Safeguard Clause: the Amendment provides that the price reduction would not apply if it would compromise the economic viability of a generator. However, it is left to the competent minister to decide whether the safeguard clause protects a given generator, and the generator (or its parent) must take all necessary measures to support their project.
As set out in the Amendment to the 2021 Finance Law, the PPA revision attracted more criticism from professionals and members of Parliament than usual budgetary cuts. For example, Mr. Eric Woerth (former Budget Minister and current Member of Parliament) decried a "careless" and "unilateral rupture", done without the benefit of any impact study, which would create "a lot of litigation".
On November 13, 2020, the National Assembly adopted the Amendment to the 2021 Finance Law. The National Assembly also adopted two sub-amendments: one on the prior opinion of an independent administrative authority, the French "Commission régulation de l'énergie" (Energy regulation commission or "CRE") , and another on the need to take into account the specificity of the financing of French Overseas, considered as "non-interconnected zones" (Zones Non-Interconnectées (ZNI)).
Two weeks later, on November, 27, 2020, the Senate unanimously rejected the Amendment. In doing so, the Senate pointed to the contradiction inherent to the French Government's position: it wishes to promote the development of renewable energy, and at the same time it weakens the entire sector by unilaterally imposing revisions on existing contracts in order to save money.
Despite the Senate's pointed critique, the National Assembly filed the exact same Amendment on December 11, 2020, closing the door to a potential renegotiation with the solar industry. On December 16, 2020, the National Assembly finally adopted the Amendment as Article 225 of the 2021 Finance Law.
On December 17-18, 2020, the French Constitutional Council (Conseil Constitutionnel) heard a constitutional challenge brought by members of Parliament who targeted several articles of the 2021 Finance Law, including Article 225 which provides for the revision of PPA's. Just over a week later, the French Constitutional Council upheld Article 225, finding that:
- the legislature had pursued a general interest objective in its quest to remedy the contractual imbalance between electricity generators and distributors and to ensure the proper use of public funds;
- the safeguard clause in Article 225 offers legal protections to certain generators;
- Article 225 does not infringe the principle of equality because the affected generators (those with a power output of more than 250 kW) enjoy significantly greater profitability than other generators, and are thus in an objectively different situation.
With the constitutional challenge over and done with, there are now two stages left.
Stage one: the DGEC must prepare the implementing decree for Article 225 which sets the threshold of over-profitability and the amount and start date of the price reduction. In determining whether there has been a reasonable return on capital among the 850 PPA's, Article 225 states that the following factors will be considered:
(i) the tariff order according to which the contract was concluded,
(ii) the facility's technical characteristics, location, and start date, and
(iii) the financing conditions.
This decree will then be submitted to the CRE and to the Council of State (Conseil d'Etat) for an opinion.
Stage two: each generator above the threshold may request the application of the safeguard clause. The generator must prove:
- that its economic viability will be compromised; and
- that it has pursued all available remedial measures and that the persons who directly or indirectly own it have implemented all the support measures at their disposal.
If an affected generator successfully triggers the application of the safeguard clause, three outcomes are possible. The ministers responsible for energy and the budget will choose between a different level of tariff (enniveau de tarif différt) or a different start date for the new tariff (date de commencement différente). In addition, they can combine one of these two options with an extension of the length of the PPA (allongement de la durée du contrat).
The implementing decree for Article 225 should be finalized by June 2021. At the earliest, the coming into force of the reform, the notification of affected generators, and the examination of requests for the application of the safeguard clause would happen at the beginning of 2022. However, given that the CRE recently announced that it is looking to hire a project manager on a two-year contract specifically to carry out Article 225's revision of PPA's, the negotiations with affected generators could last until at least 2023.
As France carries out this revision of FiT contracts, important questions are raised, including whether Article 225 interferes with the legitimate expectation of the affected generators to continue to benefit from their existing contracts. This principle of legitimate expectations – grounded in European Union law – was considered by the French Council of State back in 2010 when a moratorium was instituted to prevent the entering into of more FiT contracts until prices were lowered; in that case, the French Council of State determined that there was no breach of the principle of legitimate expectations because a prudent and informed generator was in a position to foresee the reform.
Ontario: Yours to Discover or Open for Business?
Meanwhile, far away, in Canada, a similar story has played out in Ontario, a Province with a very different government and in a very different context. That being said, the French story and the Ontario story are eerily similar.
For context, starting in the early 2000's Ontario's Independent Electricity System Operator (the "IESO"), formerly the Ontario Power Authority (the "OPA"), entered into more than 20,000 Renewable Energy Supply ("RES"), Renewable Energy Standard Offer Program ("RESOP"), Feed-in Tariff ("FiT"), microFIT, and Large Renewable Procurement ("LRP") contracts adding over 7,000 MW of additional contracted generating capacity to the grid. These projects served multiple purposes, including maintaining the resource adequacy of Ontario's electricity system after the early and historic shutdown of the Province's gigantic coal-fired generating stations in 2014, reducing greenhouse gas emissions, and stimulating "green" economic development in the wake of the 2008 economic crisis.
A key feature of Ontario FiT contracts, based like virtually all FiT contracts worldwide on the German Stromeinspeisungsgesetz (StrEG) model, was their long tenure of 20+ years. This long contract life allowed generators to obtain favourable, low-cost financing terms, and matched by design the liability timelines of the major life insurers and pension fund investors who came to the table to make Ontario's initial renewable energy revolution a reality.
Note, these are the very same lifeco's and private equity players who the IESO and its sister agency Infrastructure Ontario will be calling upon to help fund major infrastructure projects in the recovery period after the COVID-19 pandemic. They represent the hard-earned savings of teachers, bus drivers, municipal workers, industrial workers, farmers, shopkeepers and virtually anyone else in the province who works for a wage or has some form of life insurance. They have plenty of other places to take their investment dollars and investment committees with rather long memories.
Fast forward to 2020, a key piece of Ontario's current policy agenda is an ambitious plan to cut electricity rates by twelve per cent. Soon after its election victory in 2018, the Ontario Government caused anxiety among renewable energy generators and their investors by directing the IESO to exercise its contractually-agreed upon early termination rights in over 750 FiT and LRP contracts that had not yet met certain early development and construction milestones. Shortly thereafter, the Ontario Government took the extreme unilateral measure of legislating the termination of the White Pines Wind Farm FIT contract, notwithstanding the fact that the IESO had already issued a Notice to Proceed for the project. Further, and perhaps more importantly, the Ontario Government also nixed the environmental approval of the fully-contracted and nearly completed Nation Rise Wind Farm, undermining the business reputation of the province in an arbitrary exercise of government power which was later easily set aside by the courts.
In November of 2019, just a few months before the arrival of the COVID-19 pandemic in the province, the Ontario Government heightened the fear among project investors when it directed the IESO to undertake a targeted review of existing generation contracts and identify ways to reduce costs for electricity consumers. The IESO was asked to focus in particular on larger wind, solar, and natural gas fired generation facility contracts expiring in the next 10 years. In February 2020, the IESO delivered its Contract Review Directive Report (the "Report") to Ontario's Minister of Energy, Northern Development and Mines.
First, the Report notes that potential cost-saving opportunities were screened for, among other things, contractual rights and obligations. In other words, opportunities for cost savings should be possible in accordance with the existing contractual terms and capable of being agreed to by the parties through negotiated contract amendments. The IESO was therefore keen to address the "sovereign risk" cloud which had been hanging over Ontario's energy sector and business climate since the legislated termination of the White Pines FIT contract.
Second, the Report acknowledges that the IESO's generation contracts do not provide the IESO with termination for convenience rights once a facility has achieved commercial operation. Further, as a practical matter, the Report acknowledges that once a project is operational, unilaterally terminating the contract in the earlier years of a facility's life offers minimal to no cost-saving opportunities, considering incurred costs and the contractual break fees that would normally result from an early termination.
Third, the Report sets out three main cost-lowering opportunities with respect to the IESO's existing contracts: contract buyouts, contract buydowns, and "blend-and-extend". In the buyout scenario, the IESO would make a lump-sum payment to a generator for the anticipated, future net revenue from the contract, and the contract between the IESO and the generator would be at an end. Project investors would be able to take their money off the table. By contrast, the buydown option would involve keeping the PPA contract in place, with the IESO making a lump-sum payment to a generator in exchange for a lower contract price for the remaining term. Finally, "blend-and-extend" is an arrangement by which the IESO and the generator agree to extend the term of the existing contract in return for lower rates paid to the generator but over an extended contract period.
The Report concludes that contract buydowns are the opportunity with the greatest cost-lowering potential, and this option can be applied to wind, solar, and gas contracts. The base case scenario is estimated to result in net cost savings of $37 Million in the first year of implementation, with $32 Million attributable to wind and solar projects. The Report notes further that the net present value of the net savings from the buydown option ranges from $303 to $443 Million over the term of the program and would require over $2.1 Billion of new debt.
After setting out those cost saving figures, the IESO cautions in its Report that they are not set in stone. The Report elaborates that those potential savings figures are not adjusted for any risks and do not include any implementation or transaction costs related to the buydowns. When it comes to the implementation costs to pursue these buydowns, the IESO's preliminary estimate is to the tune of $3 Million, depending on the approach and scope. What's more, the projected savings will not be immediate: the IESO estimates it would take more than a year before cost reductions could begin to be realized by consumers.
Despite some reassurances, renewable energy generators face continued uncertainty in post-pandemic Ontario
Although the IESO's Report may have calmed the nerves of renewable energy generators who had feared they would be the next victims of legislated contract terminations, the cost-lowering opportunities set out by the IESO did raise a number of questions. For example, one of the buydown scenarios canvassed in the Report involves the IESO providing replacement financing to the generator at below market rates by utilizing the province's preferential credit rating. Even though this might seem attractive at first glance, it's not obvious that anxious renewable energy generators would feel more secure with the IESO as both their power off-taker and their lender, especially when the IESO trumpets the fact that it "strictly enforces the obligations in its contracts".
Moreover, the Report – delivered to the Ontario government in February 2020 – was written for the pre-pandemic world (yes, remember that?). Faced with unprecedented budgetary pressures and deficits as a result of the pandemic, the provincial government will undoubtedly be ratcheting up the pressure on the IESO to find even greater cost-saving opportunities. Indeed, despite its 2018 election promise to cut electricity rates by 12 per cent, the Ontario government announced in October 2020 that electricity rates would have to jump again by another two per cent compared to pre-pandemic prices.
The provincial government may again be tempted to bring about a contract-holding renewable energy generator's worst scenario: legislated contract termination.
Paths Forward to a Sunnier Future
COVID-19 cleared the decks for significant economic and social policy change in jurisdictions around the world and a lot can and will happen in the coming months and years of recovery. In Ontario, we think the IESO's Contract Review Directive Report provides a good playbook for tough policy choices to be made with respect to existing energy assets in a post-pandemic world. As for France, the government's unilateral revision of solar PPA's has increased the prospect of insolvencies among affected generators, caught the attention of concerned project lenders, and ultimately reduced investor confidence.
Whether in Canada or France, investors will be interested when approached by rational government actors with well-prepared buyout, buy-down and blend-and-extend options. Furthermore, because solar and wind energy power prices are very likely to decline for years to come – with solar continuing its price decline past wind – the renewable future is in fact bright and sunny. Investors will want access to new projects and deal opportunities. Offering existing investors viable choices, thereby allowing them to use the financial restructuring tools at hand to actually help government agencies reduce net energy costs to consumers, is the cleanest and simplest option for policy makers. Demonstrating appropriate fiscal and financial stewardship to the market, and treating existing contract counterparties fairly, pays significant dividends.
As the world commences its recovery from COVID-19 and turns to face the broader global challenge of climate change in 2021 and beyond, the governments which get existing contract re-negotiations "right" will be the real winners. Not only will they reassure and continue to attract smart capital, but also the cost of that capital will be lower due to lower perceived risk. On top of that, and perhaps more importantly, the attendant know-how, human capital and innovation sector jobs of brand new industries (battery storage, peak prediction, smart-metering, EV integration, demand response and energy management AI) will tend to follow confident capital investment and land in our home towns and cities.
 The Case of the River Salwerpe (in Worcestershire, England) from 1693 follows an eerily similar fact pattern. "[I]t is of dangerous consequence to take away any person's right, purchased under an act of Parliament, without their consent." Some things never change.
 Court of Auditors, Support for renewable energies report, March 2018.
 Letter of 23 main French independent power producers to President Emmanuel Macron and a tribune of 350 renewable energy professionals published in the JDD on November 6, 2020.
 Amendment n°II-3369 to the 2021 Finance Law, 7 November 2020.
 Sub-amendment n°II-3550, to the Amendment n°II-3369, 9 November 2020.
 Sub-amendment n°II-3560, to the Amendment n°II-3369, 9 November 2020.
 Decision No. 2020 813 DC of the French Constitutional Council, 28 December 2020.
 Decision of the French Council of State (Conseil d'Etat), 16 November 2011, n°344972.
 Interestingly, the Report notes that in response to the IESO's solicitation of cost-lowering ideas from industry, "blend and extend" was cited most frequently in industry submissions, with general openness to discussing the concept with the IESO. This is not a surprise as Ontario is a great place to invest and lengthened exposure in the market would be sought after.