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COVID-19 regulations and their impact on the renewable energy sector

| COVID-19 / News | Corporate Law and M&A / Energy

The approved regulations establish the suspension of administrative deadlines but nothing is said about the suspension of contractual deadlines

These days we are seeing frenetic activity in the Official State Bulletin due to the crisis which is devastating the country.

This new wave of regulations is having an impact on a sector that, until the health crisis, was one of the driving forces of the Spanish economy and that, hopefully, will continue to be so when things return to normal: the decarbonisation of our energy model to reduce emissions of gases that cause the greenhouse effect.

The decarbonisation process is based, among other things, on the enhancement of energy production from renewable sources. Renewable energies are not alien to the reality of the country and are affected in all its dimensions. Thus, if we take the classic distinction that divides projects into greenfield and brownfield, we see that the regulation that is being approved these days impacts on both.

Brownfield projects are going to be affected and those associated with a bilateral electricity purchase agreement (PPA) in which the offtaker sees his activity and, therefore, his demand for electricity, decrease radically. It is at this point that all the contractual provisions established by the parties to regulate cases that at the time of negotiation seemed the furthest thing from the world will come into play: force majeure, take or pay clauses, guarantee packages, etc. This is not a trivial issue insofar as PPAs are very important in project financing in Project Finance schemes: a breach of the offtaker that in turn causes the owner of the production facility to default on its financial obligations may lead to the enforcement of guarantees by the bank. 

On the other hand, electricity prices are expected to fall considerably with the slowdown in the industry: the offtaker is likely to find cheaper prices outside his PPA which will test the strength of the guarantees that the owner of the producing facility has taken out.

If the impact on brownfield projects is serious, it is even more so for projects in the greenfield or development phase: the suspension of administrative deadlines and the slowing down of already slow rates within processes lasting years may lead many developers to see their projects and, with them, their guarantees, at risk. 

But it is not only the administrative side that will pose an additional problem at the promotion stage. Two aspects can be pointed out that are being raised repeatedly by promoters. On the one hand, there are leasing contracts with grace periods for obtaining the permits, licenses and authorizations necessary to begin construction work: these grace periods, already adjusted, can be very short depending on the duration of the standstill in which the administrative activity is immersed. On the other hand, the purchase and sale of projects in which part of the price is subject to the achievement of an administrative milestone within a certain period of time.

We find that the approved regulations establish the suspension of administrative deadlines but nothing is said about the suspension of contractual deadlines; this leads us to affirm that when we find ourselves in cases like the above, we must resort, firstly, to the contractually agreed remedies, and secondly, to legal figures such as force majeure or the rebus sic stantibus doctrine. The application of these last two figures, however, must be weighed on a case-by-case basis, since normally the delay in administrative action will manifest itself after the end of the state of alarm, and the cause-effect relationship between the failure to comply with the milestones and the general delay must be clearly appreciated. It will also be essential to scrupulously comply with any other requirements that may be required to achieve the milestones in the contract, and which do not depend on administrative action.

You can see the article in El Economista CV.

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