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MATERIAŁY PROBLEMOWE

Virtual PPA contracts - qualification under MIFID and its consequences
24.02.2020r. 05:21

Tadeusz Zieliński, Legal Counsel, Tauron Polska Energia
Due to rising energy prices and growing environmental awareness in recent years, both the energy industry and customers more and more took interest in corporate power purchase agreements (Corporate PPAs). In response to that demand - there were published various reports, guides and articles on the subject. Many of these papers indicate, that Virtual PPAs are in fact contracts for difference (CfDs) and constitute financial instruments. At the same time, it's hard to find in them the elaboration of this question and discussion on the regulatory consequences of such qualification. Which may be decisive for the possibility of offering and executing this type of PPAs.

That is why I think it would be beneficial to present the question of possible qualification of Virtual PPAs under Directive 2014/65/EU of The European Parliament And Of The Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (MIFID) and its consequences for developers (project owners; electricity generators).

To begin with, it has to be noticed that Virtual PPAs currently seem to fall within two types of financial instruments specified in Section C of Annex I to MiFID:
- Financial contracts for differences - from Section C(9) or
- Options, futures, swaps, forwards and any other derivative contracts relating to commodities that must be settled in cash or may be settled in cash at the option of one of the parties other than by reason of default or other termination event - from Section C(5).

Generally, there can be found arguments speaking in favor of both qualifications. On the one hand numerous common descriptions of Virtual PPAs can serve as reasoning for considering them as financial contracts for differences referred to in Section C(9). For example:
- as M. Gurch explains Under a virtual PPA, the project owner sells power into the wholesale market and is paid the prevailing market price. At the end of each negotiated settlement period (usually a month), the project owner calculates its aggregate sales proceeds. If this amount exceeds the product of the fixed or "strike" price and the quantity of power specified in the PPA, then the project owner pays the difference to the corporate offtaker. If this amount is less, the corporate offtaker pays the difference to the project owner (M. Gurch "Financing Projects with Virtual PPAs" [in:] Project Finance NewsWire by Chadbourne - Norton Rose Fulbright, October 1 2017);
- F. Lowther and J. Bondareff points out that (...) it is NOT an agreement to purchase power. (...) By definition (i.e., the term "virtual"), the party entering in the "purchase" - usually called the "Buyer" -- does not actually buy or consume the power generated by the power project (Use of a Virtual Power Purchase Agreement (VPPA): The New Way to Acquire Green Credits by BlankRome, May 16, 2018);
- United States' Environmental Protection Agency describes Virtual PPA as Financially-settled arrangement between renewable energy project and buyer, with buyer owning RECs (presentation "Introduction to Virtual Power Purchase Agreements").
Moreover, in one of its earlier documents concerning CfDs, ESMA along with EBA defined CfD as an agreement between a 'buyer' and a 'seller' to exchange the difference between the cur- rent price of an underlying asset (shares, currencies, commodities, indices, etc.) and its price when the contract is closed (ESMA's and EBA's "Investor Warning" of 28 February 2013). Also, the wording of the latest ESMA's decision No 2019/679 of 17 April 2019 renewing the temporary restriction on the marketing, distribution or sale of contracts for differences to retail clients (no longer in force) seems not to provide any passages that could be interpreted as excluding CfDs on commodities.

On the other, there can be found European Commission's Q&A on previous MiFID with such explanation Financial contracts for differences are covered under Annex I, Section C(9) of Directive 2004/39/EC. A 'financial' contract for differences is a contract for differences in relation to MiFID instruments, currencies, interest rates or other financial indices. A contract for differences in the form of a credit derivative contract would also be covered. CFDs on commodities are covered by Section C(5) and CFDs in relation to other underlyings such as climatic variables, freight rates, emission allowances or inflation rates are covered by Section C(10) [emphasis added]. In my opinion, this is enough to raise doubts on how to approach the issue.

Here, it has to be indicated and stressed that this qualification isn't (just) an "academic" problem. It decides on the requirements that have to be met by developers (project owners; electricity generators), who want to offer and conclude CfDs without the necessity to obtain proper authorization (for investment firms).

The reason lies in art. 2 of MiFID relating to exemptions. Again, there are two possibilities that can be taken into consideration:
- so-called "dealing on own account exemption" from art. 2.1.d) of MiFID or
- so-called "ancillary activity exemption" from art. 2.1.j) of MiFID.

While the first of exemptions isn't connected with any additional conditions, the second one requires:
- verifying if activities relating to financial instruments (so Virtual PPAs) constitute "ancillary services", what has to be done in accordance to methodology set out in Commission Delegated Regulation (EU) No. 2017/592 of 1st December 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards for the criteria to establish when an activity is considered to be ancillary to the main business;
- informing national financial authority (in Poland - Financial Supervision Authority) about the intention to make use of the exemption in question.

In consequence, falling under and making use of ancillary services exemption is more complicated and may generates additional costs for developers (project owners; electricity generators).

That is why it should be considered whether developers (project owners; electricity generators) are persons dealing on own account in financial instruments other than commodity derivatives or emission allowances or derivatives thereof and not providing any other investment services or performing any other investment activities in financial instruments other than commodity derivatives or emission allowances or derivatives thereof (...) who benefit of dealing on own account exemption from art. 2.1.d) of MiFID? Or maybe they are persons:
- dealing on own account, including market makers, in commodity derivatives or emission allowances or derivatives thereof, excluding persons who deal on own account when executing client orders; or
- providing investment services, other than dealing on own account, in commodity derivatives or emission allowances or derivatives thereof to the customers or suppliers of their main business (...)
who benefit from ancillary activity exemption from art. 2.1.j) of MiFID?

It seems that for settling this question deciding role might have the definition of "commodity derivatives" provided by art. 2.1.(30) of Regulation (EU) No 600/2014 of The European Parliament and The Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 (MiFIR) (applied on the basis of art. 4.1.(50) of MiFID). According to art. 2.1.(30) of MiFIR 'commodity derivatives' means those financial instruments defined in point (44)(c) of Article 4(1) of Directive 2014/65/EU; which relate to a commodity or an underlying referred to in Section C(10) of Annex I to Directive 2014/65/EU; or in points (5), (6), (7) and (10) of Section C of Annex I thereto [emphasis added].

In the light of the above-quoted definition it may be stated that CfDs, which are referred to in point (9) of Section C of Annex I to MiFID , don't constitute "commodity derivative" within the meaning of art. 2.1.(30) of MiFIR and thus MiFID. In such a case, CfDs should be classified as "financial instruments other than commodity derivatives" referred to in art. 2.1.d) of MiFID. Therefore, persons offering CfDs would benefit from dealing on own account exemption, with no further requirements.

To sum up, in my opinion, definition of "commodity derivatives" provided by art. 2.1.(30) of MiFIR, along with general descriptions of Virtual PPAs and some ESMA's explanations speak for classification of this type of power purchase agreements as CfDs indicated in point (9) of Section C in Annex I to MiFID. For this reason, developers (project owners; electricity generators) offering Virtual PPAs should benefit from exemption set out in art. 2.1.d) of MiFID. Accepting and adopting such interpretation by regulatory authorities would be beneficial for developers (project owners; electricity generators), who wouldn't have to meet complex requirements for ancillary activities exemption, resulting from art. 2.1.j) of MiFID, and incur the related costs.

Nevertheless, as for now, the question remains open for a wider discussion and the decision of regulatory authorities.

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Autor: mg 25.02.2020r. 07:01
Tyle się pisze o VPPA w różnych miejscach ale to co naprawdę istotne od strony prawnej w tych umowach poruszył... pełna treść komentarza
ODPOWIEDZ ZGŁOŚ DO MODERACJI
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