The contractual framework pertaining to the Kosova e Re project – the Secretariat’s preliminary concerns 

Electricity
14 June 2018

In the conclusions of the “Kosovo Sustainable Development Week” held in Pristina at the beginning of June 2018, the Secretariat was called upon by the participants to issue a position on the compliance of the so-called Kosova e Re project with the rules of the Energy Community. While the Secretariat acknowledges the right of the public in Kosovo* to be informed about the nature of the issues currently under scrutiny, it will continue discussing all matters in more detail with the competent authorities in Kosovo*, and try to find solutions in line with Energy Community law.

The Kosova e Re project concerns the construction and operation of a lignite-fired power plant of a net capacity of 470 MW, thus covering 45-50% of the demand in Kosovo*. The power plant is planned to be operational in 2023. Following a tender procedure, ContourGlobal was selected as the operator of the plant in December 2017. The contractual framework, consisting of eight agreements published on 21 January 2018, requires the Government to establish a public company (the so-called NKEC) to serve as the only counterparty for ContourGlobal under a power purchase agreement. The newly established company will buy the power produced by the plant against an energy payment (for the electricity produced) and a capacity payment (for making available electricity). The power purchase agreement is concluded for a duration of 20 years, i.e until 2043. The new public company will also compensate ContourGlobal for the lignite the latter procures under a so-called take-or-pay clause from the public mining company, for the power plant’s network charges, and for potential charges resulting from imbalances caused by Kosova e Re. The public company will further be in charge of scheduling the electricity generated by Kosova e Re and will sell on that electricity to suppliers.

The Secretariat shared its prima facie concerns with the Government by letter of 22 March 2018. The concerns relate to the contractual framework for the operation of the planned power plant, and most notably the power purchase agreement signed in December 2017. The Secretariat believes that several elements of the contracts signed constitute State aid.

As in the European Union, State aid is prohibited under Energy Community Law (Article 18(1)(c) of the Treaty). The purpose of this prohibition is to prevent the single energy market established by the Energy Community from being distorted through advantages granted from public resources to certain undertakings. Under the Third Energy Package applicable to Kosovo* under the Energy Community Treaty, electricity markets should be open to competition and non-distorted. In cases comparable to the Kosova e Re investment in pre-EU-accession Poland and Hungary, the European Commission and the European Court of Justice found that the power purchase agreements concluded there constitute State aid.

In the Secretariat’s preliminary view, the power purchase agreement for Kosova e Re envisages a distribution of the risks usually associated with operating a power plant entirely in favour of ContourGlobal. ContourGlobal is shielded from commercial risks such as the production risk (including investment and variable costs), the market risk (risk of end-user demand and price fluctuations), the operational risk (imbalance risk and scheduling), regulatory and tax risks (use of system fees and other fees and taxes, including any future carbon costs), credit risk (counterparty risk and margining), etc. The same generous conditions as those offered under the power purchase agreements could not have been achieved under market circumstances. Instead, the risks are borne by the government of Kosovo* through its public company – and ultimately translate into costs for suppliers and customers or direct and continuous subsidies by the Government – while ContourGlobal enjoys a guaranteed and risk-free profit. The Secretariat is also concerned that the contractual arrangements will further reduce Kosovo*’s capacities for participating in the regional market, including the planned market coupling with Albania.

Other potentially critical elements in the set of contracts concluded in December 2017 include exemptions from taxes and customs duties, state guarantees, and the transfer/lease of land below market price.

It is important to note that the Secretariat’s preliminary assessment does not necessarily mean that the advantages identified as State aid could not have been considered compatible with the objectives of the Energy Community Treaty. That would, however, have required an in-depth assessment and approval by the Kosovo* State Aid Commission before the signature of the power purchase agreement, potentially in cooperation with the Secretariat. As far as we know, however, the agreements have never been notified to that Commission which, in itself, is in breach of Energy Community and Kosovo* law. The experience in Poland and Hungary shows that there is a considerable risk that the investor will have make good for any unlawful aid granted (at the very latest after EU accession) which in turn  could lead to investment arbitration.

The Secretariat will continue the discussions on the contractual framework applying to the Kosova e Re project with the Kosovo* authorities. Ultimately, it will have to ensure compliance with the Treaty establishing the Energy Community for the benefit of the citizens of Kosovo* and the region. It will take that responsibility seriously.