The extent to which tariffs will be reduced depends on several factors, including (i) the tariff order under which the purchase agreement was concluded, (ii) the date the installation was commissioned, (iii) the geographical location of the installation, (iv) the installation’s operating conditions (in particular its technical characteristics, notably its peak power), and (iv) whether or not it is integrated into the building within the meaning of the 2006 and 2010 orders.⁷ The new tariffs will apply for the remaining duration of the contract.

The implementing order, published on the same day as the decree, specifies the reduction mechanism, the details of the formulae for calculating tariffs and of the various parameters used in the calculation formulae. The annual energy that can be purchased is capped, with the cap being defined as the contractual peak power multiplied by the number of hours per year, which in turn depends on the type of installation and its location. Any energy produced over the cap is remunerated on the basis of the lowest of the revised tariff and €0.05/kWh.⁸

Article 5 of the implementing decree also provides that “purchase agreements affected by the tariff reductions may be terminated before their expiry date at the request of the producer.” However, the text provides that the termination indemnity under Article 314-9 of the French Energy Code remains payable by the producer in the event that the facility ceases to operate and when the date of cessation is earlier than that initially stipulated in the contract. The indemnity is equal to the discounted amounts received and paid under the agreement from its effective date until its termination.

Paragraph 2 of Article 225 provides for a “safeguard clause” allowing the tariff to be adapted to the installation, under which “upon the reasoned request of a producer, the ministers responsible for energy and the budget may, following a proposal of the Energy Regulation Commission, set a different tariff level or date ... by joint decree, if these are likely to compromise the economic viability of the producer ... [T]he ministers responsible for energy and for the budget may also extend the duration of the purchase agreement.”⁹

The implementing decree specifies the practical arrangements and requisite procedure to be followed in order to benefit from the safeguard mechanism.¹⁰ It states that only one request per purchase agreement may be submitted to the Energy Regulation Commission. The request for revision suspends the application of the tariff reduction for a maximum period of 16 months. At the end of this period of suspension, in the absence of a different decision, the new tariff will apply.

Consequences for producers

The feed-in tariff reductions for solar power will have an impact on a number of producers in the sector. Although the system does provide for a safeguard mechanism, it is reserved for producers whose economic viability is compromised by the tariff reductions. However, producers’ financial situation or the value of their assets can still be affected without necessarily compromising their economic viability.¹¹

Consequently, producers affected by the tariff reduction are strongly recommended to assess the financial impact of the reductions and, if necessary, activate the safeguard clause by applying for a different tariff level or application date.

Producers who are unable to benefit from the safeguard mechanism or whose request is not accepted, or for whom the safeguard conditions (the date of entry into force of the reduction or the amount of the adjusted tariff reduction) continue to cause undue hardship, may wish to consider initiating action against the State.

However, before doing so, a key distinction between French and foreign producers must be made: 

• French producers will have to use the internal remedies available to them under administrative law. That is, within two months of the implementing legislation’s entry into force, French producers may lodge an appeal contesting misuse of power before the Conseil d’Etat in order to challenge the legislation’s internal or external legality and attempt to obtain its annulment. There are other circumstances in which French producers may argue that the implementing legislation setting out the tariff revisions is unlawful, but these are not addressed in this client alert (though we can, of course, be contacted if you have any questions in this regard).
• Foreign producers, as discussed in the next section, are subject to different rules, and there is an important distinction to be made between producers who are based within the European Union, and those who are not.

Foreign investment protection and recourse to arbitration

Foreign investors affected by the tariff reductions (e.g., producers, their shareholders, or institutions that have financed these projects and whose payment deadlines risk being missed) can benefit from certain protections under bilateral or multilateral treaties that have been signed by France.

These investment protection treaties are concluded between at least two states and contain reciprocal commitments for the promotion and protection of investments made by the nationals of either Contracting State within the territory of the other Contracting State. France has signed more than 100 bilateral investment protection treaties and is signatory to the Energy Charter Treaty (ECT), a multilateral treaty that aims to promote trade and to protect energy investment, including the generation of electricity from renewable energy sources.

Investment protection treaties generally provide for international arbitration as the preferred dispute resolution mechanism, allowing investors to initiate arbitration proceedings. International arbitration is a form of private justice, recognized particularly for its neutrality and the expertise of the appointed arbitrators who render awards, which have the force of a court judgment and which the parties undertake to enforce. The investment protection treaties concluded by France therefore grant an investor from a contracting state that has invested in France or its territories a direct right of recourse against France in the event of a breach of its treaty commitments, by allowing it to initiate arbitration proceedings. 

Investment treaty protections include prohibiting the expropriation of investors without compensation and the right to fair and equitable treatment. The latter, which is protected by Article 10 of the ECT, has been interpreted as prohibiting the host state from radically changing its legislation or frustrating the legitimate expectations of investors. The guaranteed tariffs for power purchase agreements mentioned above may have given rise to investors’ legitimate expectations regarding the return they would receive. Similarly, the reduction of the feed-in tariffs, even though it is guaranteed for 20 years, may constitute an unforeseen change to the regime on which the investment is based. 

As a result, the tariff reductions envisaged by France, which run counter to the initial terms of the purchase agreement and therefore to the expectations of electricity producers and their investors, raise questions about the right to maintain legally binding agreements and about the principle of equality before the law due to the distinction made according to peak power. Even though the French Constitutional Council has already rejected these objections and validated the principle of the reduction in French law,¹² it remains to be seen whether the reductions constitute a violation of investment protection treaties and international law.

The example of Spain

This debate is not purely academic as shown by the case of Spain and the legislative changes that have affected its renewable energy sector.
In the late 1990s and early 2000s, Spain (along with other European countries) implemented a system of subsidies and tax incentives to encourage investment in the solar energy sector. After the 2008 financial crisis and especially from 2011 and 2013, as production costs in this sector fell, Spain passed laws to reduce or even remove these incentives. Around 50 investors initiated investment arbitration proceedings against the Spanish state on the basis of the protections afforded to them under the relevant investment treaties (including the ECT), in order to obtain compensation for the damages allegedly suffered.

In those cases, the debate focused on whether the change in legislation violated the obligation of states to provide fair and equitable treatment to foreign investors. Arbitral tribunals have thus examined the legitimacy of investors’ expectations and the predictability of the measures being challenged. Many arbitration proceedings (and there are many still pending) have resulted in awards that are favorable to investors, finding a violation of the protective provisions of the ECT due to the removal of the promised benefits.¹³ Arbitral tribunals have held that the reduction and subsequent abolition of the tax measures, which formed the basis for the investments, violated investors’ expectations and drastically changed the existing legal regime.

Unsurprisingly then, the tariff reductions proposed by France, which are far from being unprecedented, may be the subject of similar debates.

Much like Spain, it is possible that France will experience a similar wave of arbitrations as a result of the feed-in tariff reductions, which may be construed as a reduction in incentives, the difference being that France has not removed the incentives, but simply reduced them. It will then be up to the arbitral tribunals seized by the foreign investors impacted by the measures to determine whether the proposed tariff reductions violate the investment protections guaranteed by the treaties, in particular, the obligations to provide a stable legal environment and to meet investors’ legitimate expectations.

As the stated objective of the tariff reductions is to allow the total return on capital tied up by the producer not to exceed “a reasonable return on capital, taking into account the risks inherent in its operation” (Article 225), the concept of “reasonable return on capital” may be subject to significant debate. As it happens, the Spanish regime of July 2013 rightly set a reasonable rate of return at 7.398 percent over the lifetime of existing facilities before the Spanish law came into force. This means in practice that the future remuneration of producers would be reduced to this reasonable rate of return taking into account past remuneration that has already been received.

The specific case of EU-based investors

EU-based investors are in a considerably different situation to investors established outside the EU. Indeed, since the European Court of Justice’s (ECJ) Achmea ruling in 2018, and even more importantly since the ECJ’s Komstroy ruling in September 2021, the possibility for these investors to invoke the arbitration clauses included in intra-EU investment protection treaties and the ECT has been severely reduced, with the ECJ ruling that recourse to arbitration is incompatible with European law. The ECJ also confirmed very recently in the PL Holdings case that EU Member States are prohibited from concluding ad hoc arbitration agreements with EU-based investors where such agreements reproduce the content of arbitration clauses contained in a bilateral investment treaty found to be incompatible with EU law following the Achmea judgment.

In practice, if arbitration proceedings are initiated by European investors against France on the basis of an investment protection treaty or the ECT in relation to tariff reductions, there is a high risk that the award rendered by the arbitral tribunal will not be recognized in the EU or will be set aside at the seat of the arbitration if it is located in an EU Member State. Such investors will have to favor other dispute resolution forums, such as arbitration under the auspices of the International Centre for Settlement of Investment Disputes (ICSID) or domestic appeals before French administrative courts.

1. Decree No. 2010-1196 of December 9, 2010 suspended the purchase obligation arising from the tariff decrees of July 10, 2006, January 12, 2010 and 31 August 31, 2010 as of December 10, 2010, as it resulted in excessive remuneration. Contracts prior to that date continued to be executed.
2. Decree No. 2021-1385 of October 26, 2021 concerning the revision of certain support contracts for the production of electricity from photovoltaic sources as provided for in Article 225 of Finance Act No. 2020-1721 of December 29, 2020 in relation to the 2021 budget.
3. Implementing order dated October 26, 2021 concerning the revision of certain support contracts for the production of electricity from photovoltaic sources as provided for in Article 225 of Finance Act No. 2020-1721 of December 29, 2020 in relation to the 2021 budget.
4. Based on the government’s summary statement of amendment No. II-3369 to Article 225, dated November 7, 2020.
5. Article 225 of Law No. 2020-1721 of December 29, 2020 in relation to the 2021 budget.
6. Report made on behalf of the Committee on Finance, General Economy and Budgetary Control, re-reading, on the 2021 Finance Bill as amended by the Senate (No. 3642), December 11, 2020, p. 755
7. Article 3 of Decree No. 2021-1385 of October 26, 2021 on the revision of certain support contracts for the production of electricity from photovoltaic sources as provided for in Article 225 of Finance Act No. 2020-1721 of December 29, 2020 in relation to the 2021 budget.
8. Article 4 of the implementing order of October 26, 2021 concerning the revision of certain support contracts for the production of electricity from photovoltaic sources as provided for in Article 225 of Finance Act No. 2020-1721 of December 29, 2020 in relation to the 2021 budget.
9. Article 225 of Law No. 2020-1721 of December 29, 2020, supra at end-note (v).
10. Article 7 of Decree No. 2021-1385 of October 28, 2021, supra at end-note (ii).
11. Article 6 of the implementing decree provides that the economic viability of a producer must be assessed, in particular with regard to the effects of the tariff reduction on the continued operation of the installation, the conditions for the purchase of the installation’s material and equipment (both in terms of investment and operation), the producer’s ability to make payments to its co-contractors, lessors, suppliers and service providers, the producer’s ability to repay its debts (related to the studies and construction of the facility, past and anticipated distributions of part of the result to shareholders, any aid and subsidies received, the specific features of any financing related to non-interconnected areas (i.e., territories not (or not entirely) connected to the continental electricity network such as Corsica, the island of Chausey, Saint-Pierre-et-Miquelon, Wallis and Futuna), and the ability of the producer to maintain the viability of their other activities, should viability be compromised as a result of the tariff revision.
12. Decision No. 2020-813 of the Constitutional Council of December 28, 2020. 
13. It is estimated that total awards against the state have so far exceeded €800 million, with total claims of almost €10 billion. However, a minority of arbitral tribunals have nevertheless found in favor of Spain, rejecting the claims on the grounds that the measures were reasonable and pursued a legitimate objective, and so the state was entitled to introduce the legislation under its right to legislate, in the absence of a specific commitment by the state to maintain the favorable regime beyond a certain date.

In-depth 2021-300