The confidence in the regulatory framework and contractual arrangements of electricity production from Renewable Energy (RE) is crucial, given the capital – intensive nature of the industry. Towards meeting the EU acquis communautaire, Cyprus has established an efficient investment platform and policy roadmap for the promotion and commercialization of renewable energy (RE) projects.
Spurred by the Electricity Market Law No. 122 (I) 2003 (the “Market Legislation”) and the law for the Promotion of the use from Renewable Energy Sources and of Energy Efficiency No. 33 (Ι) 2003, Cyprus has introduced financial incentives in the form of grants, subsidies and Support-Schemes under the mechanism of Feed-in-Tariff (FiT). The main providence of the latter legislation was the establishment of a RE fund whose purpose is the financing of support schemes and certain costs related to electricity generation from RE. The fund is financed through a special levy imposed on all electricity consumers and is subject to the Management of the Special Fund Committee.
Support schemes, when properly designed and implemented, are internationally recognized as one of the most attractive tools for the encouragement of RE investments. The most successful support scheme to date is the FiT, which was introduced by the Ministry of Energy and is determined by Cyprus Energy Regulatory Authority (CERA).
The Electricity Authority of Cyprus (EAC) undertakes to enter into agreements with independent power producers (IPP) in order to buy the electricity produced on a fixed rate per kilowatt-hour. The Fund for Renewable Energy pays a premium on top of the market price hence incentivizes electricity generation from RE sources.
The inclusion of the FiT mechanism into the agreement offers a protected flow of revenue and regulatory risk mitigation through long-term contractual security. Nevertheless risks are present, since the contractual provisions allows the contract terms to be altered where there is disruption to the network that does not fall under the control of EAC, as for instance in the event of emergencies under section 70 of the Market Legislation.
Pursuant to Article 32 (3) of the Market Legislation, CERA shall ensure that investors are permitted to recover all reasonable costs incurred in the operation of the business, including but not limited to the following:
- The cost of fuel, wages and salaries, and other operating and maintenance costs;
- Provision for capital depreciation;
- A reasonable return on the capital employed;
- The costs of public service obligations imposed in accordance with the Law and;
- The costs arising from ancillary service
As a rule of thumb, creditors and sponsors are reluctant to take risks when there can be unforeseeable variations in a project’s cash flow. The pricing mechanism in the power purchase agreement (the Agreement) with EAC is crucial to the financing structure, which in turn provides comfort to banks in granting construction as well as working capital loans for RE projects.
Another type of project financing is the government subsidies/grants that can contribute up to 55% of the total cost of the project and their approval is subject to the powers and responsibilities of The Fund Management Committee. The availability of the grant and the rate mainly depends, on the type of RE source, the expected environmental benefits and the level of the energy efficiency achieved.
An alternative source of funding, which has been extensively used in infrastructure developments in Europe, is the issuance of project bonds whose proceeds are used to finance the construction or the operation of the project. In terms of structure, a project bond for RE has the form of a classic project financing with the addition that the bond should be issued by a special purpose enterprise and on-lend the proceeds to the project.
However the investors prior considering any of the above financing options shall first acquire the required authorisation by CERA in order to undertake any activities related with the generation and supply of electricity.
Authorisation by CERA
Under Article 37 (2) of the Market Legislation, all natural and legal entities resident in an EU member state, are entitled to be granted an authorisation. In the case of natural person, it must be both a citizen and a resident of a member state. In the case of a legal entity, it must be incorporated in accordance with the legislation of a Member State and have its central management and registered office within the EU. Licensing is not limited to one company or natural person pursuing an economic activity in the industry but may include partnerships, joint ventures, and individuals acting together as a single entity.
In terms of Article 34 of the Market Legislation, an interested entity must be granted an authorization by CERA in order to undertake any activities related to the construction of an electricity generation plant, to supply electricity to consumers and any actions related to the Transmission (sections 59 and 46) or Distribution (section 52) system.
An authorisation granted under this Law may contain such terms, conditions and limitations as CERA considers necessary in the circumstances.
An application submitted by a legal entity for a granting of an authorization shall include, but is not limited to the following:
- Recent account statements of the Applicant in relation to any business or trade related undertakings he is currently directing.
- Business proposal of the applicant’s enterprise, for the next five (5) years.
- The timetable for the construction of the plant, details of the expected energy efficiency and documented calculations issued by the manufacturer of the plant.
CERA may grant an exemption from the requirement to hold an authorization in regards to the construction of a generating plant or for the generation of electricity and supply of electricity to eligible customers where one of the below criteria apply:
- The self-generation of electricity not exceeding 1MW capacity by any person or persons of a particular class;
- The generation of electricity from RE sources not exceeding 5MW capacity; or
- The supply of electricity by a particular person the total capacity of which does not exceed 0, 5 MW for each generating station.
Agreement with the transmission and distribution systems
Electricity – power undertakings shall submit an application to the Transmission System Operator for the connection and use of the transmission system. The Transmission System Operator shall offer to enter into an agreement with the applicant as provided in section 83 of the Market Legislation. The same applies when an application is submitted to the Distribution System Owner. Following the applications of the undertaking, CERA shall determine, inter alia, the terms and conditions for the connection to the Systems and the methods for determining the proportion of the costs of the counterparties.
The charge for the connection or for the use of the transmission system or distribution system shall be calculated in accordance with Decisions issued by CERA so as to enable the Transmission System Operator or the Distribution System Owner to recover the associated costs. Such calculations are subject to the approval of CERA.
Invoices for VAT purposes
In practice, EAC is the sole customer of the IPP. Therefore, through the contractual agreement, the IPP authorizes EAC to issue on its behalf and for his own account invoices to the latter for the whole duration of the contract. The IPP will not issue any VAT invoices and shall accept any invoices issued by EAC for transactions that are directly connected with the Agreement.
While the IPP and EAC will generally cooperate in harmony and good faith for the whole duration of the contract, disputes may nonetheless arise.
Without prejudice to any contrary provision of the legislative framework governing the purchase of electricity in Cyprus and in particular the Electricity Trading Rules, the first mode of dispute resolution is out of court settlements through direct negotiations. In the event of deadlock, the dispute may be referred to CERA under Article 25 of the Electricity Market Legislation in accordance with the Arbitration Law. However the District Courts of Cyprus remains the forum of last resort.
Furthermore, pending the dispute the contractual rights and obligations of the parties are not suspended, however if the dispute reaches the last resort, the Court may suspend the rights and obligations of the authorized holder if it considers reasonable and fair to do so.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought on your specific circumstances.
For further information, please contact Christos Tourvas.