Spanish PPAs and the remuneration reduction under RDL 17/2021

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 in RDL 17/2021 includes tax benefits and, on the other, a reduction in remuneration (“clawback”) until the end of March 2022, which must be paid to the Spanish TSO by the owner of the renewable energy plants.

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 of RDL 17/2021

The temporary reduction particularly affects owners of renewable energy plants 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 regulatory purposes 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, investments 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 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 assets of an owner (asset pool), but only in relation to the revenue portion that is priced on a fixed and non-indexed basis. The unsecured “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 a remuneration scheme based on tenders are also exempt from the curtailment.

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 in the coming weeks until it is either confirmed or repealed by Parliament.

In particular, the setting of the time limit for PPAs as a condition for exemption from curtailment (PPA conclusion before September 16, 2021) is strongly debated and attacked in the market. 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 view

From a contract law perspective, the effects of the clawback according to RDL 17/2021 should be examined as 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. a) 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 regularly 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. On 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.

1. b) Hardship/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”). They regularly apply if the contractual situation originally found by the contracting parties outside the sphere of responsibility of the parties involved unforeseen and serious changes 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 now explicitly regulated in § 313 BGB (“Störung der Geschäftsgrundlage”), there is no corresponding statutory regulation in Spain. As an unwritten principle of a “change of the contractual situation” (“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 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.

In relation to an electricity supply contract in Spain, the regularly agreed so-called “change in law” clauses 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 tariff means for a plant in a specific case exceed the threshold of unreasonableness. Since each plant has different initial economic parameters, the special features of each 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 requirements, would have to be differentiated according to their financial structure.

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 plants, only a few are likely to exceed the unreasonableness threshold of a typical PPA hardship clause.

The primary objective is 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 that this adjustment is proportionate and in any case within the limits of competition law.

Practice Tip:

For existing PPAs with indexed price clauses

Review the existing contracts and assess their economic impact. If your PPA is affected by the clawback to such an extent 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 state reductions in remuneration.