Portugal confirms clawback tax for most PPAs

Portuguese authorities have confirmed that the "clawback mechanism" tax will be levied on electricity sold through most types of power purchase agreements (PPAs), despite recent clarification from energy regulator ERSE.

The tax will be applied on power from fixed-price PPAs for physical delivery between merchant renewable plant operators and retailers in case the latter subsequently sell the energy in the Omie day-ahead market or at prices linked to the pool, Portugal's general directorate of energy (DGEG) said in a recent document.

The exemption would only be valid if the retailer sold the electricity to a final consumer at fixed prices with no indexation to the Iberian day-ahead market, as the intermediation fee in such a case would not characterise windfall profits, DGEG said.

PPAs need to be for physical delivery for companies to gain tax exemption, DGEG said.

DGEG's clarification came shortly after ERSE told Argus that the exemption would be valid for physical and financial contracts and even if the energy was subsequently sold by retailers in the Omie market.

Queried again, ERSE said there was "no contradiction" between its previous reply and DGEG's latest clarification, as contracts with any exposure to day-ahead prices would not benefit from the exemption.

"Indeed, in situations where there is a cascade of contracts, the contract signed between the producer and the retailer requires the former to physically deliver the energy, with the latter financially settling its responsibilities," ERSE said.

Despite claiming no contradiction with DGEG, ERSE was previously asked about what would happen in a specific case of such contracts in cascade involving plant operator, retailer and final consumer. It said then that the clawback mechanism was only applied on power generators, "with the exemption operationalised for these agents and by reference to the contract(s) in which they are the selling counterparty".

ERSE declined to make further comments on the matter, including a question on whether the tax would be levied retroactively on power sold through PPAs negotiated or already active before the publication of decree 104/2019 in August last year, which changed the clawback mechanism for the first time since it was implemented.

Limited application

The clawback was introduced in 2013, mainly in response to Spain's introduction of a 7pc tax on power generation. Under the mechanism, Portuguese generators must pay a tax to ensure they do not benefit from windfall profits arising from market distortions between the two Iberian countries — considering that Spain and Portugal share the Mibel Iberian wholesale market, with equal prices on both sides for most hours of the year.

With the latest DGEG clarification and ERSE's position, market participants said the tax exemption would in principle be applied in just two cases — direct contracts between plant operators and final consumers — the so-called corporate power purchase agreements (CPPAs) — and contracts involving retailers as intermediaries. In both cases, contracts would always need to be for physical delivery at fixed prices with no indexation to the Omie market.

Fixed-price financial PPAs between producers and final consumers would not be exempt, sources noted. This is because such agreements work under a contract-for-difference basis with exposure to the day-ahead market, with the counterparties receiving or paying the difference between pool and PPA prices.

For Daniel Perez, PPA lead and chief legal officer at Spanish utility Holaluz, there is a "misunderstanding on the functioning of PPAs" from the Portuguese authorities. "PPAs are used by retailers to hedge their portfolio, not to obtain windfall profits. Companies can either win or lose, but the reasoning is securing margin," he noted.

"What happens, for instance, if a retailer signs a PPA with a producer at €35/MWh and the market price is €30/MWh — would it also need to pay the clawback? Where is the windfall profit in this case?"

And under the clarified rules, the exemption would mostly benefit PPAs with big industrial consumers, Perez pointed out. "If only big consumers are allowed, and not small ones, the Portuguese authorities would be discriminating against households, who would have to pay more for their electricity, as they will have to ultimately cover the costs of the clawback tax."

A similar view was shared by Pedro Gomes Pereira, managing director in Southern Europe at Danish renewable developer Eurowind Energy. "Everything will be kept the same with the exception of a few corporate PPAs, whereby the counterpart is a large energy consumer — which, in a market like Portugal, will be a handful of contracts at most."

The clawback tax will now be calculated every year, following a study by ERSE, Gomes Pereira noted.

"There's no floor or cap, meaning that for a producer this is a totally uncertain variable both in terms of amount and longevity. Last year's clawback amount for solar plants, for instance, was equivalent to 10-12pc of the energy price," he pointed out.

"Relevant business decisions are taken by stakeholders in the sector assuming regulatory stability. The change of positions from the government on such crucial matters has a significant economic impact on stakeholders and a substantial effect on the confidence in the investment in the sector."

The tax recently was set at €2.24/MWh for power generated this year, retroactive to 1 January. This was down by 46pc from the last revised figure for 2019, at €4.18/MWh.

By Juan Weik