China’s renewable power projects policy and certain issues regarding enforceability of power purchase agreements and fuel supply agreements in China

This article provides an overview on China's policy in respect of renewable power projects, primary elements of power purchase agreements and fuel supply agreements, legal framework governing these agreements and factors affecting the validity and enforceability of these agreements.

Renewable Power Projects in China

China has a policy of encouraging the use of renewable energy. Renewable energy equipment is classified as a high-technology enterprise and thus enjoys certain incentives including:

• Business income tax holiday
• Customs, duties or VAT for imported equipment may be exempted
• Free conversion of RMB into hard currency: in 1996 the People's Bank of China announced that China would accept Provision 8 of the Agreement of IMF
• Priority loans from the Bank of China

Power Purchase Agreements (PPAs)

Generally the prime elements of PPA in China include the following:

• Construction milestones and indicators of commercial operation
• Tariff structures
• The plant's capacity as scheduled by the offtaker in a year
• Requisite levels of the plant's available capacity during periods when required to be available for scheduling

The major laws and regulations governing PPAs entered into, between the power purchaser and independent power producers include:

• Tentative Procedures for Administration of Power Purchase Contracts ("PPA law" - note that the PPA law is only applicable where the power producer is an independent power producer and the discussion on PPAs below is based on the PPA law unless otherwise specified.)
• Electricity Law and subsidiary regulations
• Electric Power Supply and User Regulations
• Contract Law (applicable to other PPAs: i.e. not entered into with the independent power producers other than those applicable to the PPA law)
• Grid Dispatch Regulations

The issues affecting the validity and enforceability of PPAs in China include:

• The power purchaser must be a grid operating enterprise qualified to buy and regulate power and must be a legal person established with approval and in accordance with the law. Note that the power purchasers are normally companies established by the provincial or municipal power bureaus or national power companies.
• The duration of a PPA can be long term or short term. A short term PPA cannot exceed one year. A long term PPA generally cannot exceed 20 years. If the power seller has foreign investment, then the duration of the PPA shall not exceed the duration approved by the State.
• A normal purchase amount of electricity may be set out in a PPA but subject to the State's plans on power resources and grids and the feasibility study report approved by the State for that power project. The normal purchase amount can be a nominal capacity of a generating unit times base hours (past projects suggest 5,500 hours a year).
• With respect to the tariff, there must be two components: capacity charge (including capital costs) and energy charge (including operating costs, e.g. fuel). The tariff should be different at peak and non-peak times. The initial tariff and any increase must be approved by the pricing department of the Government (either central or provincial level).
• According to the Electricity Law, an electric power enterprise will not bear liability for compensation if the electricity operations accident was due to an unavoidable circumstances or a fault on the part of the consumer. A force majeure event is defined in the PPA law as a social or natural event which is unforeseeable and its occurrence and consequence are unavoidable and can not be overcome, which usually refers to wars, strike, fire, storm, earthquake, thunders and epidemic disease.
• A PPA must be written in both English and Chinese. Both versions are equally effective. In the event of any inconsistency between the two versions, the Chinese version prevails.
• All PPAs must be approved by appropriate authorities before becoming effective.
• The applicable law of PPAs must be PRC law.
• Approval of the State Administration of Foreign Exchange either at the central or provincial level must be obtained before remitting any foreign exchange out of China.

Fuel Supply Agreements (FSAs)

Most of power projects in China use coal or other conventional energy sources. Therefore, some of the elements and major issues of FSAs listed below may not be relevant to renewable energy projects. Generally the prime elements of a FSA in China include quality of fuel, transportation, sufficient and timely supply of fuel and creditworthiness of fuel supplier.

There is no law or regulation governing FSAs equivalent to the one governing the PPAs. The major laws and regulations include:

• Electricity Law
• Administration Methods of Fuel Loading, Delivery and Receiving setting out the responsibilities of a power plant receiving fuel
• Contract Law

The issues affecting the validity and enforceability of FSAs in China include:

• All fuel producers and transportation enterprises must hold appropriate business licences issued by appropriate authorities to enter into a valid FSA.
• FSAs must also accord with relevant transportation laws. The power producer must abide by the requirements laid down in the Administration Methods of Fuel Loading, Delivery and Receiving in respect of necessary equipment, personnel and organisation for receiving fuel.
• Under the Contract Law, if the parties to a FSA are all established under PRC law, the applicable law must be PRC law. If any of the parties to a FSA is a foreign party, the applicable law may be a foreign law.
• A FSA will become invalid if it is against the public or national interest or against the provisions of the PRC laws or regulations. Also, if a contract is entered into due to a material mistake or proved to be unfair upon execution, the aggrieved party may apply to the People's Court or arbitration institute for amendment to or invalidation of the contract.

Enforcement

Another issue causing concern for the international investors is the creditworthiness of the power purchasers and fuel suppliers for the purpose of enforcing PPAs and FSAs. In China, the power purchasers and fuel suppliers generally do not have audited accounts available in the format that major international contractors generally offer for assessment of creditworthiness. It is the law of China that no government department is permitted to give guarantees or other security. Such guarantees or other security given by any government department will be invalid and unenforceable. Any PRC company (non-government entity) providing a guarantee or other security to a foreign entity will need approval from the State Administration of Foreign Exchange.

To learn more about this, please contact Luke Filei on +86 21 628 96363 or luke.filei@cms-cmck.com.