With the state of emergency declared on March 15, 2020 and the discernible impact of the COVID-19 pandemic on Serbian industry, the authorities are trying to navigate the crisis as best as they can to help the Serbian economy survive. The key to this effort is preserving the stability of public finances, which may be done by revoking earlier incentives given to certain industry branches.
For instance, the authorities might decide to discontinue subsidies offered to privileged electricity producers in order to preserve the economy. But what would be the consequences of such measures?
Subsidies in the energy sector – what are they?
Subsidies are guaranteed rights of privileged producers of electricity originating from renewable sources or from power plants that simultaneously produce electricity and heat with a high degree of primary fuel utilization. Essentially, subsidies entitle privileged producers to sell electricity to public energy suppliers at a guaranteed price, preferential against the market price.
However, eligibility for these subsidies is subject to electricity producers first qualifying as “privileged”, in line with the Privileged Electricity Producers Regulation (“Decree”). Privileged electricity producers must also conclude a contract known as a Power Purchase Agreement (“PPA”) with the state-owned Elektroprivreda Srbije (“EPS”) by which EPS undertakes to buy all produced electricity at a preferential price. PPAs are model contracts and are typically concluded for a maximum term of 12 years.
May these subsidies be “frozen?”
As noted above, the dire economic situation caused by the COVID-19 pandemic may leave Serbian authorities with no option but to “freeze” future payments of subsidies to privileged electricity producers. In this scenario, what would be justified grounds for EPS, as buyer under the PPA, to legally default on its obligations?
The first answer that comes to mind is that EPS could invoke force majeure.
Force majeure is regulated primarily by the Contracts and Torts Act (“CTA”) and is understood to mean those circumstances that arise after conclusion of a contract that could not have been prevented, eliminated or avoided, making it impossible for a party to fulfill its obligations. In fact, the model PPA expressly classifies a state of emergency as force majeure.
In addition, the model PPA also regulates the effects of invoking force majeure. It prescribes that the contract will remain in force, but that its legal effects will be deferred until after force majeure has ceased. Finally, the PPA’s term will be extended by the length of time it had been “on hold” because of force majeure.
Another potential avenue that EPS may consider is to rely on substantial change of circumstances (the so-called rebus sic stantibus clause).
In line with the CTA, changed circumstances are circumstances that occur after the conclusion of a contract which makes it exceptionally difficult – although not impossible – for a party to fulfill its obligations. Such a party may seek termination or amendment of the contract due to these new circumstances.
However, it should be noted that the state of emergency does not in itself qualify as changed circumstances. If EPS wishes to amend or terminate the PPA on the grounds of changed circumstances, it must demonstrate exactly how the state of emergency affected performance of its obligations under the PPA. For instance, if consumers were to fail en masse to pay their electricity bills (which include renewable energy quotas that pay for subsidies) over a prolonged period of time, EPS could argue that the lack of income substantially impaired its ability to pay subsidies to privileged electricity producers. However, it is still too early to tell how the pandemic will play out and what its financial implications may be.
Recourse to Arbitration?
Since the model PPA allows for the parties to contract arbitration as the dispute resolution mechanism, we may see privileged electricity producers deciding to initiate arbitral proceedings if Serbia “freezes” their subsidies and instructs EPS to pull the plug on the PPAs. Whether or not this will happen depends on several factors, such as the severity of measures imposed by Serbia in relation to the state of emergency and the duration of such measures. However, this is always a possibility, and relevant stakeholders should bear that in mind when deciding whether to “freeze” subsidy payments to privileged electricity producers.
For more information, please contact us via covid19@geciclaw.com
