The memorandum of understanding of the assistance plan between EU-IMF-ECB and Portugal and the Renewables Sector

The memorandum of understanding (MoU) signed by Portugal, the International Monetary Fund (IMF) and the European Union and the European Central Bank (ECB) on 3 May as part of the bailout package, commits the Portuguese government to “assess in a report the possibility of agreeing a renegotiation of the contracts in view of a lower feed-in tariff”.  This applies to the existing contracts.

The MoU also commits the government to “revise downward” the feed-in-tariffs for new contracts and ensure that the tariffs do not over compensate producers for their costs and continue to provide an incentive to reduce costs further, through digressive tariffs and develop alternative mechanisms for more mature technologies, such as feed-in premiums.

Portugal must report on its progress in the third quarter of every year.

Two more commitments in RES chapter are established:

• Decisions on future investments, in particular in less mature technologies, will be based on a rigorous analysis in terms of its costs and consequences for energy prices. 
• Reduction on delays and uncertainty surrounding planning and certification procedures and improvement of the transparency of administrative requirements and charges for RES producers (in line with Article 13 and 14 of EU Directive 2009/28/EC).

I read a comment on these measures somewhere which concluded that “renewable energy is for rich countries that have money to burn“.  This is a big misunderstanding of the importance of RES on climate change and reveals ignorance in respect of the country reality. 

Portugal doesn’t have natural gas, coal or oil and its dependence on external energy is around 85%.  The use of alternative renewable sources of energy to produce electricity in 2010 has saved more than 500 M€ in imported coal and natural gas alone.

However, reduction of our external dependence on energy was not the only reason for Portugal to support private investments on RES.  Portugal, as a member of the European Union, has to comply with the ambitious objectives set by the Union on climate/energy to be reached by 2020.  Portugal has seen its contribution of the renewable sources growing from 20.4 %, in 2005, to 31% in 2020, the fifth highest within the EU.

To get to this objective of 31% Portugal has to achieve 60% for the production of electricity coming from renewable sources.    

Incorporation of renewable energy sources in the gross consumption of electricity for Directive 2001/77/CE purposed was 39% in 2010, but a value of 45.6% was achieved.  

RES showed the strongest growth reaching an electricity generation of about 24.8 TWh in November 2010 (Portugal needs around 50 TWh, and in 2020 around 60 TWh)

A stable policy framework stimulated continuous growth of RES in the electricity sector in Portugal.  Since the first Decree-law that approved the regulation of the electric energy generation business by using renewable resources, the succeeding Portuguese Governments have undergone a major restructuring of the regulatory framework regarding pricing terms, by changing the tariffs mechanism in accordance with certain principles that reflect the environmental benefits of the use of RES.

Along the years, several changes into the tariffs regime were introduced, namely on different pricing conditions according with the renewable source used in the production and the term settled for the green tariff component.

Currently, the sole instrument in force for supporting market deployment of RES technologies is a feed-in tariff mechanism, as an incentive-on-production.  Incentives on investment are currently suspended.

Tariffs paid for renewable electricity are based on (i) the cost avoided by the Public Electric System with the entry into service of the power plant, including (a) the investment avoided with new power plants; and (b) the transportation, operation and maintenance cost, including the acquisition of raw materials and (ii) The environmental benefits of the use of RES (‘green tariff’ component).

Renegotiating support contracts for renewable energy projects may not be easy since investors have made their investment plans considering the revenues from tariffs and their duration.  Renegotiations do not depend only on the good will of the promoters but also of the banks since most of the projects were financed through project finance structures.  Refinancing such projects within the current finance circumstances will not be an easy task.

A revision of the feed-in tariffs for new contracts lowering the tariffs for RES shall assess all aspects of the tariff, including levels, administration and technology eligibility.  A revision has already happened in Spain, Germany and Italy and shall be seen as a necessary measure, especially in respect of mature technologies but it shall look simultaneously to the licensing procedure since Portugal has a long and bureaucratic procedure and it is the country where promoters pay more for interconnection. 

The revision will lead through a change in the law and, certainly, it will not occur immediately.  Government shall listen to promoters on such a revision to avoid bringing investments in the RES sector to a halt.

This revision shall also not ignore that most of the electricity comes from wind projects and projects which have granted capacity or are in a licensing procedure or under construction, as well as the ones that have entered into operation in 2009, have a tariff lower than 70€/MWh (minus 2.5% which is paid to the municipalities) which is the lowest tariff in Europe (being the guaranteed period also the lowest – 11 to 15 years).  

Although, in the current situation of the country it is an obligation, not only of the government but also of all the citizens, to commit with all that is necessary for recovery, we shall not forget that feed-in-tariffs have promoted rapid expansion of RES in Portugal.  Portugal may not be a rich country but it is rich in endogenous resources (sun, wind, water) and its contribution for low-carbon electricity generation should not be diminished.

Mónica Carneiro Pacheco works primarily in the areas of Public Law, with an emphasis on Energy, PPP projects, Public Procurement, Concessions and Environmental law.  Mónica has been heavily involved with work in the energy sector including projects on a project finance regime. She is also involved in innovative renewable energy projects with a highlight on wind, water, biomass, waves and solar photovoltaic energy. She is recognized by the main international directories as a leader in her field. RPA partner since 2007, Mónica has a strong and well known professional carrier as a lawyer.  She can be contacted on +351 21 095 8100 or by email at mcarneiropacheco@rpa.pt