Controversial reductions in the tariffs for some solar contracts upheld in France but could this still be challenged?

Legal background

In 2001, a decree⁴ entitled the French government to set the FITs for solar energy contracts, following an opinion issued by the Energy Regulation Commission (CRE). The FITs for the contracts entered into between 2006 and 2010 were set by decrees dated 10 July 2006, 12 January 2010 and 31 August 2010. A moratorium took place in 2010 preventing the entry into future solar energy contracts, until a reduction in the level of the FITs was introduced to take into account the significant decrease of solar panels production costs⁵.

As a result of the grandfathering principle, the new FITs did not apply retrospectively to the contracts entered into between 2006 and 2010, which therefore still benefited from the previous, more generous FITs. However, the benefit of those early FITs was recently deemed excessive and unjustified by the government, who introduced an amendment during the parliamentary debates on the FL21, to introduce Article 225. As stated by the government in the context of the referral to the French Constitutional Supreme Court, Article 225 purports to be “an answer to this situation by reducing the FITs for the facilities with a maximum capacity of more than 250 kW (…) in order to bring their profitability back to a level corresponding to a reasonable return on capital”.

Establishing a new mechanism through Article 225 FL21

Article 225 provides that the FITs for electricity produced by the Targeted Solar Facilities is reduced to a level and as from a date set by decree of the ministers responsible for energy and the budget.  The level of FITs will be set so that the total return on capital assets, resulting from all revenues from the facility and any financial or tax assistance granted in respect thereof, does not exceed a reasonable return on capital, taking into account the risks inherent its operation.

Article 225 FL21 states that the reduction of the FITs for the contracts entered into before 2011 will take into account “the tariff order according to which the contract was concluded, the technical characteristics of the facility, its location, its start date, and its operating conditions”. Details for the implementation of Article 225 will be decided by way of decree. The French government announced that this decree should “define a certain number of typical cases, on the basis of a combination of criteria, tariff orders being afterwards enacted for each of these typical cases”.

Decision of the French Constitutional Supreme Court

In its decision, the French Constitutional Supreme Court upheld Article 225 FL21, which was therefore enacted on the 29 of December 2020.

The Court followed the government’s argument, and ruled that the legislature had pursued a general interest objective as it "sought to remedy the contractual imbalance between electricity generators and distributors and thus put an end to the windfall profits enjoyed by certain generators, to the detriment of the proper use of public funds and the financial interests of the State". As a consequence, the infringement of the grandfathering principle regarding the solar energy contracts entered into between 2006 and 2010 was considered by the Court to be justified.

The infringement was also considered proportionate, since the legislature must ensure that the tariff reduction preserves the profitability of the facilities. Article 225 indeed includes a safeguard clause for the benefit of Targeted Solar Facilities in the event that its application would be likely to jeopardise the economic viability of the generator. At the reasoned request of the generator, the ministers responsible for energy and the budget may, on the basis of a proposal from the CRE, set by joint order (arrêté) a different level of tariff reduction, or change the tariff reduction start date. However this is provided that the generator has taken all the remedial measures at its disposal and that the persons directly or indirectly owning it have implemented all the support measures at their disposal, strictly necessary to preserve this viability. The specific financing characteristics of non-grid connected areas (zones non interconnectées) will also be taken into account. Moreover, the ministers responsible for energy and the budget could also extend the duration of the purchase contract, provided that the amount of the financial aid resulting from all the changes is less than the amount of the financial aid that would have been paid under the original contract terms. Generators who have made changes in their capital structure or in their financing arrangements after 7 November 2020, with the exception of the recovery and support measures mentioned previously, may not avail themselves of the measures.

Finally, the Court considered that Article 225 does not infringe the equality principle by treating solar energy facilities of less than 250 kW differently. According to the Court, the profitability of the facilities of more than 250 kW is “significantly higher than that of other generators” but this difference of treatment between these two categories of generators is justified by an objective difference in circumstances.

In summary, the French Constitutional Supreme Court rejected all the arguments put forward and confirmed the constitutionality of Article 225.

Consequences of the revision of the FITs

Even though the French Constitutional Supreme Court upheld Article 225 FL21, the legality of such a measure – and the implementation of the safeguard clause – could be challenged before tribunals. In any case, this mechanism raises the risk of insolvency and bankruptcy cases due to the impact on investors’ return expectations. Most PV power plants are project financed and the expected loss of revenues is a serious concern for lenders which will have to work with their borrowers to look for solutions. It could also lead to a loss of confidence in the stability of French regulatory framework for renewable energy and therefore deter investments and financings. This was highlighted by the ‘Solidarité renouvelables’ collective in a press release co-signed by 300 federations, associations and companies. The collective denounced "an arbitrary, unequal and pernicious measure for the solar sector, the green revival wanted by the government, and the environment in general".

In November 2020, the French Minister of Environment, Barbara Pompili, replied to the criticism by saying that the new mechanism – applicable to the Targeted Solar Facilities – would only concern “800 of the 235 000 existing contracts”. Even if this assertion is accurate, this new mechanism sends a negative signal to stakeholders in the French renewables market.

The industry will have to wait for the actual implementation of Article 225 – in particular the extent of the reduction of the FITs – and its safeguard clause by way of decree, in order to evaluate the impact on the Targeted Solar Facilities as well as on the reputation of the French Renewables market. This could take a long time as it will require important inter-ministerial work and further discussions with various stakeholders.

It will be of interest to see if any claim is brought on the basis of the right to peaceful enjoyment of one’s possessions under Article 1 of the First Protocol of the European Convention on Human Rights. The European Court of Human Rights has a broad understanding of the concept of "possession” which can be either “existing possessions” or assets, including claims, in respect of which the applicant can argue that he or she has at least a “legitimate expectation” of obtaining effective enjoyment of a property right⁶.

Article 225 of FL21 could indeed be considered as interfering with the legitimate expectation of the generators of the Targeted Solar Facilities to continue to benefit from the feed-in tariff set by the decrees dated 10 July 2006, 12 January 2010 and 31 August 2010. It is interesting to note that in the UK, in Department for Energy and Climate Change v Breyer Group plc and others⁷, the English Court of Appeal had held that as a result of a review of solar FITs which was held to be unlawful, there had been an infringement of the right of peaceful enjoyment of possessions under Article 1 of Protocol No. 1, because of interference with contracts entered into in reliance on the FIT tariff rate.

In addition, if the French administrative supreme court (Conseil d’Etat) ruled concerning the moratorium that took place in 2010 that no legitimate expectation can arise when the generator is not yet a party to an electricity purchase contract (CE, 16 November 2011, n° 344972, n° 345003), it could be inferred from this ruling of the French administrative supreme court that the generators are entitled to rely on a legally acquired situation or, at the very least, a legitimate expectation to continue to benefit from the purchase obligation scheme and therefore the agreed tariff, in the context of contracts legally executed between 2006 and 2010.

And so, despite the French Constitutional Supreme Court ’s decision, there may be further arguments to be made by industry.