PPA, CMCE and PHD: two decades of history

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PPA, CMCE and PHD: two decades of history

1995
PPA
Power Purchase Agreements (PPAs) were created in 1995 and established a system to compensate investment in power plants. The producers were paid for the investment and for the production availability of their plants, and were compensated for all the costs they incurred during production. The producer's role was to produce the amount of energy indicated by REN.

Power Purchase Agreements (PPAs) were created to attract investments for the power plants the country needed, but which the State could not or did not want to finance.

The PPAs established that producers who invested in these plants would receive a compensation for their investment and availability and would be compensated for all the costs they would incur during production.

Decree-Law 182/95

Establishes a new organization model for the energy sector and establishes PPAs as a form of remuneration for the production activity. download

Decree-Law 183/95

Creates the PPAs and establishes that non-binding generation licenses, as in the case of Sines, have no deadline. It also determines that the water domain usage should be sub-contracted to the binding producers who, in 1995, had acquired rights to use that public good for the purposes of hydroelectric generation.

It also establishes that EDP would receive 1356 million euros of the plant's residual value at the end of those contracts if the plants were delivered to the State.download

2003
LIBERALIZED MARKET
Created in 2007 for all consumers, the liberalized market started giving customers the freedom to choose their electricity and natural gas provider. In the liberalized market, it is the providers who define the commercial supply and the respective energy prices, which encourages competition for the benefit of the consumers.

Specific steps are now being taken to phase out the PPAs with the community directive that establishes the rules for the operation of the liberalized electricity market.

Council of Ministers' Resolution #63/2003

Establishes the necessary rules for the start of the market operation within the MIBEL.download

Directive 2003/54/CE

Reinforces the separation of regulated and unregulated activities and the market operation of the production activity. download

Decree-Law 184/2003

Decree-Law 184/2003 - Defines the creation of a market liberalization framework (MIBEL). download

Decree-Law 185/2003

Establishes the principles for the early termination of the PPAs. download

Order 14315/2003

Establishes the methodology's general principles and main valuation parameters for the early termination of the PPAs. download

2004
CMCE
The Costs of Maintenance of Contractual Equilibrium (CMCE) were created in 2004 and implemented in 2007 after the early termination of the PPAs. The aim of the CMCEs was to maintain financial neutrality in relation to the PPAs. Thus, it was established that the compensation would be the difference between the value of the PPA and the revenues that the plants obtained in the market. This mechanism, negotiated between the State and the European Commission, was approved by the Portuguese Parliament and validated by Brussels.

The early termination of the PPAs was decided, which forced the adoption of a compensation mechanism that ensured financial neutrality and which was approved by the European Commission and the Portuguese Parliament - the Costs of Maintenance of Contractual Equilibrium (CMCE).

EDP, which had the State as its largest shareholder, was the only producer that agreed to transit to the new regime.

Decree 96/2004

Defines the method and criteria for the determination of the amount of annual remuneration that the RNT (REN) concessionary entity is entitled to. It also establishes that producers who had terminated the PPAs in advance and had chosen to rent the land, would have the respective costs recognized by the CMCEdownload

ERSE Statement on CMCE's Decree-Law

Analysis by the regulatory authority of the regulations provided in Decree Law 240/2004. download

EC Approval

Approval by the European Commission of the CMCE mechanism, considering them State aid compatible with Community regulations. download

Decree-Law 52/2004

Grants legislative authorization for the Government to define the compensatory measures' conditions for the early termination of the PPAs. download

Decree-Law 240/2004

Approves a new remuneration mechanism, the CMCEs, which ensures financial neutrality in relation to the PPAs. download

2005
TERMINATION AGREEMENTS
The termination agreements, established between producers and REN and approved by the Government, stipulate the detailed conditions for achieving the early termination of the PPAs. These agreements always have as guiding line and limits what was defined in the Decree-Law that created the CMCE.

The Government approves the agreements for the termination of the PPAs.

Rectification Statements 1-A 2005 and 1-B 2005

Rectify inaccuracies contained in Decree Law 240/2004. download 1-A 2005 download 1-B 2005

Ordinance 228/2005

Establishes the correction coefficient of the Valorágua model.download

Order 4672/2005

Approves the early termination of CMCE contracts between REN and EDP. download

2007
PHD
In 1995, with the PPAs creation, the rules for the use of the Public Hydric Domain (PHD) are established, establishing that EDP would receive the residual value of the power plants at the end of those contracts if it delivered the dams to the State. However, since it was also possible for the producer to choose to continue to operate the plants beyond the end of the PPAs, EDP decided to do so by giving up a 1356 million sum and paying 759 million euros for the PHD extension. The amount paid, which includes the rate of utilization of water resources, was calculated after consulting two independent entities at the request of the Government and following a methodology already validated by the European Commission.

CMCEs are implemented in accordance to the rules defined in 2004, updating the market parameters - which reduced the value of EDP's remuneration.

In the context of the Public Hydric Domain, EDP abdicates of 1 356 million euros and pays 759 million euros to the State for its extension.

Decree-Law 199/2007

Market parameters' value to be used for the DL 240/2004 application, with the increase of the electricity reference price from €36/MWh to €50/MWh, leading to the reduction of the initial CMCE value to €833M. download

Decree-Law 226-A/2007

Establishes the rules for the regularization of the PHD utilization licenses and recognizes the existence of the right of use of the PHD by the PPAs plants from the entry into force of DL 183/1995, against payment of an economic-financial balance. download

Order 15290/2007

Approves the addenda to the agreements on the early termination of the PPAs. download

Ordinance 611/2007

Realizes the value obtained using the DL 240/2004 methodology, setting a nominal rate of 7.55% before taxes (5.47% after taxes) for EDP.download

Decree-Law 264/2007

New legal provisions to regulate the sale of energy due to Turbogás and Tejo Energia not having agreed to extinguish their PPAs in advance. download

ERSE's 2007 Statement on Revisability

Favorable opinion of the regulator on the remuneration to be attributed to EDP in this year.download

ERSE Statement

Analysis of the regulatory authority to the changes introduced by Decree-Law 199/2007. download

2013

The CMCE suffer a cut of 14 million euros per year, for a total of 120 million euros in NPV for the period between 2013 and 2017.

ERSE's statement on the remuneration rate

Regulator analysis of the reformulation of the CMCE remuneration rate. download

ERSE Statement on the new nominal rate

Regulator analysis of the new nominal rate applicable to the CMCE fixed installment annuity. download

Decree-Law 32/2013

Amends the Decree-Law that created the CMCE in 2004, and reformulates the rates applied to the remuneration, allowing the annuity rate to be modified on EDP's proposal - provided that it is lower than the value set in 2007. download

Ordinance 85-A/2013

Approves the new nominal rate applicable to the calculation of the fixed installment of the contract maintenance cost (CMCE) (reduction of the tax rate from 7.55% to 4.72% reducing the initial CMCE value by €120M in NPV). download

Ordinance 172/2013

Establishes the system for checking the availability of the power plants. download

ERSE's 2013 Statement on Revisability

Favorable opinion of the regulator on the remuneration to be attributed to EDP in that year. download

2017
FINAL REVISION
With the creation of the CMCEs, a sum of 3356 million euros was set, which the State would have to pay in stages to EDP to compensate for the end of the PPAs. This amount resulted from the calculation between the remuneration provided in the PPAs and the expected revenues from the plants. However, in 2007 the sum was eventually reduced to 833 million euros, after the market prices of electricity and fuels were updated. This value was the target of annual adjustment in the first ten years of the mechanism, between 2017 and 2027. For the last decade, which will end in 2027, the final revisability was calculated, the last of the CMCEs settlement of scores. This adjustment consists in updating the amounts receivable by the producers against the remuneration initially set.

The European Commission closes the PHD complaint and reinstates the CMCE mechanism. ERSE proposes final CMCE revisability value, for the period between 2017 and 2027

European Commission's Decision

The European Commission decides to close the complaint on the extension of the PHD after concluding that it did not constitute State aid. download

ERSE's Press Release

Press release from ERSE on the study that calculated the final revision of the CMCEs. download

2018
TESTS TO THE PLANTS' AVAILABILITY
A part of the power plants' remuneration is due to their capacity to be able to produce if that is necessary (availability). In this sense, within the CMCEs framework, there is a reference value above which the plants receive a higher remuneration; and a value below which they receive a lower remuneration. From the creation of the PPAs up until today, power stations have declared to the system operator (REN) whether they are available or not. This availability is introduced in the remuneration models and the compensation paid to CMCE stations is calculated.

The Government approved the final review of the CMEC, and its value has already been disputed by EDP. By governmental order, the alleged overcompensation of EDP was also quantified in relation to the calculation of the coefficient of availability verified in the plants that operated in the CMEC regime. The alleged overcompensation will be discounted over the next three years to the remuneration owed to EDP, according to a decision made by ERSE in December. The Parliamentary Commission of Inquiry for the Payment of Excessive Income to Electricity Producers also started.

CPI Constitution

The Parliamentary Commission of Inquiry for the Payment of Excessive Income to Electricity Producers is constituted, the hearings are still pending.download

Memorandum on the calculation of alleged overcompensation of CMECs

By governmental order, the alleged overcompensation of EDP was quantified at 285 million euros for the calculation of the coefficient of availability verified in the plants that operated in the CMCE regime. In a statement, EDP considered that said order lacks legal, economic and technical basis.download

ERSE tariff proposal

On October 15, ERSE released the tariff proposal for 2019. download

João Manso Neto’s presentation at the Portuguese Parliement

Parliamentary Committee of Inquiry into the Payment of Excess Income to Electricity Producers download

Decision on rates and prices for 2019

On December 17, ERSE published the rates and prices for 2019 and decided to deduct, over three years, the alleged overcompensation of EDP. download

2019

EDP requested the nullity of the acts of the Government and ERSE that support the thesis of the alleged overcompensation received by EDP under the CMEC regime.

António Mexia's presentation at the Portuguese Parliament

Parliamentary Committee of Inquiry into the Payment of Excess Income to Electricity Producers. download