Regulatory/change in law risk

Solar PV Solar PV

Description (What is the Risk)

The risk of law changing and affecting the ability of the project to perform and the price at which compliance with law can be maintained.
Change in taxation.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

Change in law risk is included as an event of force majeure under the power purchase agreement.

Change in law risk may be assumed by the Contracting Authority although it is common for this to be limited and deal only with discriminatory changes which affect the project.

Mitigation Measures (What can be done to minimize the risk)

As the event is considered a force majeure, it is unlikely that the Private Partner will be able to claim damages from the contracting authority under the power purchase agreement. The Private Partner shall seek to mitigate this risk through insurance.

In many developed markets there are investor protection regimes and well recognised legal principles that ?protect investors against retrospective changes in law.

Government Support Arrangements (What other government measures may be needed to be taken)

The enabling legislation may contain specific grandfathering provisions which give the ? Private Partner comfort. In several markets there will be express protection in the PPA with the Contracting Authority assuming the risk of adverse changes in law.

Comparison with Emerging Market

Change in law risk ?is generally regarded as medium to high risk due to the frequency and severity of changes in law. In particular this has been a major concern in Europe and Australia.

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Description (What is the Risk)

The risk of law changing and affecting the ability of the project to perform and the price at which compliance with law can be maintained.
Change in taxation.

Risk Allocation (Who typically bears the risk)

Allocation: Public Private Shared
Rationale

The Contracting Authority typically bears principal responsibility for changes in law post-contract signature.

There is a degree of risk sharing with the Private Partner as follows:

Private Partner would look to be kept whole in respect of changes of law which are discriminatory (towards the project or the Private Partner), or specific (to the solar PV sector) or effects parties undertaking similar projects.

The Contracting Authority will not be responsible for an increase in taxes of general application which do not discriminate against the Private Partner or parties undertaking similar projects.

To the extent the change in law adversely affects the general economic position of the Private Partner, the Private Partner is entitled to such compensation or relief from the Contracting Authority as will place the Private Partner in the same net overall economic position as it would have been but for such change in law.

To the extent the change in law beneficially affects the general economic position of the Private Partner, the Private Partner shall pay the value of such benefit to the Contracting Authority so that the Private Partner remains in the same net overall economic position as it would have been had the materially beneficially change in law not occurred.

The Private Partner bears a certain financial level of risk before compensation becomes payable, which ensures that claims are only made for material changes in circumstances.

Changes in law entitle the Private Partner to engage with the Contracting Authority to effect a remedy with a specified period (which would more than likely be a variation where this is necessary so as to avoid an impossible obligation), failing which, the Private Partner may be entitled to compensation, including monetary compensation.

Mitigation Measures (What can be done to minimize the risk)

The Contracting Authority will need to ensure that various Government departments keep the project in mind when passing new laws to ensure that the Private Partner is not inadvertently affected.

The various Government departments that may impact on the project should therefore be cognisant of the risk allocation in the project when passing laws and regulations that may have an impact on it.

The Contracting Authority has an obligation to use all reasonable endeavours to minimise and mitigate the effects of any change in law.

Government Support Arrangements (What other government measures may be needed to be taken)

The Government stands behind payments of the Contracting Authority should it fail to compensate the Private Partner.

Comparison with Developed Market

The risk of adverse change in law in emerging markets may in practice be regarded as lower than some developed markets as the Contracting Authority is expressly taking all change in law risk under the power purchase agreement.

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