Long Term PPAs in PolandThe Origin

Post 1989 status quo:Large number of outdated power plantsLimited desulphurizationHuge needs for foreign investmentDesire to create bankable project finance opportunitiesConsiderable fragmentation of the Energy industry

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Long Term PPAs in PolandThe Program

PSE S.A. (predecessor of PGE: TSO and the single wholesaler) in charge of the ProgramLarge tender with over 40 participantsIndividual negotiations with over a dozen winning biddersCounterparties:ENRONPSEG, AES, other foreign playersPower plants on the verge of privatization (later e.g. EDF)Polish companies seeking external financing

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Long Term PPAs in PolandThe Features

Base-load operating programmes20+ years duration (the longest contract to expire in 2027)Two-component pricing (capacity and energy)price formulae or annual price negotiations based on stated principlesTAKE OR PAYSteep penalties for termination or non-performanceTypically pass-through cost of fuelContracts designed to allow non-recourse financingNo express protection from set electric tariffs

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Long terms PPAs in PolandThe QuestioningPPA Program very successful but:60% of energy sold under the PPAs and little room for energy marketAllegedly inflated energy price as a result of the PPAsEarly attempts to terminate the PPA ProgramMandatory termination deemed illegal under Polish ConstitutionForced termination as expropriationTermination as violation of Energy Charter Treaty and bi-lateral investment protection treatiesRole of PSE in the termination campaign threat of litigation against PSE by some of the counterparties *

Long term PPAs in PolandThe EU ChallengePoland never officially notified the Commission of the PPAsDraft law on PPAs termination prepared, based on:Voluntary terminationGenerous compensation for stranded costsPoland notifies the Commission of Draft Termination LawCommission commences inquiry with respect to:Termination LawLong Term PPAs (!!!!)Work on the Termination Law continues under the threat of all beneficiaries having to repay years of revenues as state aid!

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Long Term PPAs in PolandThe Argument Key arguments of the Commission:Involvement of state resources Unfair advantageImpact on tradeThe issue of New Aid: Poland failed to notify of the PPAs upon accession!Polands defence arguments:Would Preussen Electra apply?Reasonable Private Investor testSGEI (Altmark principles)*

Long Term PPAs in PolandThe Outcome

All long term PPAs voluntarily terminatedLevels of compensation negotiated with and agreed by the Investors No claims for expropriation or violation of international law filedSystem effectively managed by a special state-owned companyRegulators attempts to reduce compensation levels have been challenged in court, several judgements rendered against the Regulator *

Long Term PPAs in HungaryThe Story

Long term PPAs entered into by MVM (as a single buyer)Objectives similar to those in PolandPPAs not officially notified to the CommissionPrompted by a notification of a stranded cost compensation scheme Commission investigates the PPAs*

Long Term PPAs in HungaryThe Outcome

PPAs found to be State aid incompatible with the common marketHungary required to recover state aid from the beneficiaries (!!!)Determination of the amount left to the Hungarian stateEDF appeals from the decision to the European Court of JusticeECJ rejects all arguments presented by EDF*

Polish and Hungarian PPAsLessons Learned (1)Termination against the will of the parties would almost certainly lead to claims of expropriation or treaty violation by the PPAs beneficiaries and their financiersAny forced termination or renegotiation could have serious impact on the investors and financiers willingness to continue doing business in the host countryHaving the PPAs classified as illegal state aid by the EU may bring disastrous consequences to the beneficiaries

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Polish and Hungarian PPAsLessons Learned (2)Agreeing reasonable levels of compensation is possible (this could also apply in the renegotiation context!)Lenders are willing to play along if their interests are protectedLong term PPAs can be structured (or restructured) in a manner compliant with EU LawLong term contracts en vogue again?New trends in EU regulation show that long terms contracting may be a viable way of addressing certain market deficienciesRecent clearances granted to the UK in respect of contracts for differences and capacity markets, constitute an important precedent

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