Legal Regulation of Electricity Investment Contracts

Importance of the Contract:

Electricity investment contracts are of significant importance today due to their vital role in economic development and their connection to essential public utilities. Many countries are turning to the private sector by entering into investment contracts to establish power generation plants. Iraq, for example, has signed numerous such contracts, including the Basmaia Power Plant project executed by Mass Holding to meet the country's increasing energy demands.

 

Definition of an Electricity Investment Contract:

An electricity investment contract is an agreement where the state is one of the parties involved, aiming to develop and enhance electricity production projects. A power purchase agreement (PPA) is a contract between two parties: one is the seller of electricity—the owner of the necessary facilities and stations for electricity generation—and the other is the buyer, often the Ministry of Electricity. This contract falls within the framework of public-private partnerships after obtaining an investment license.

Characteristics of the Investment Contract:

• Types of Contracts: These contracts are often formulated in various models such as Build-Operate-Transfer (B.O.T) or Build-Own-Operate (B.O.O). They involve the construction and operation of power generation plants for a specified period under the supervision of the Ministry of Electricity and in coordination with the National Investment Commission.

• Arbitration Procedures: Power purchase agreements frequently include clauses that allow disputes arising from the contract to be referred to international arbitration bodies, providing a legal remedy for foreign investors.

• Rights and Privileges of the Investor: Investors enjoy all rights, privileges, and guarantees provided under the amended Investment Law No. 13 of 2006. This includes exemptions from taxes and fees for up to ten years starting from the date of commercial operation, as well as exemptions for imported raw materials used for operational purposes.

• Procedures for Land Allocation: The contract involves handing over the designated project site. It is generally advisable to enter into a land lease agreement to ensure the land reverts to the state upon contract termination. In the case of the Basmaia station, the land was owned by the investor in accordance with the amended Regulation No. 6 of 2017.

• Investor Obligations: The investor is committed to producing electricity according to the contract's terms within the specified timeframe, adhering to a fixed energy tariff without alterations.

• Sales to the Contracting Party: The investor agrees not to sell electricity to any third party other than the contracting entity. Upon the contract's expiration, negotiations may occur to renew it at a new price or to sell the plant to the government if the investor so desires.

• Required Financial Close Date: Both parties agree to achieve financial close within a specified period from the date of signing the contract.

Supervision of Contract Implementation:

The state retains the right to monitor and supervise all stages of contract implementation, including testing periods and trial operations. The Ministry of Electricity, in collaboration with the Investment Commission, carries out this supervisory role.

 

Dispute Resolution:

Investors often prefer to include arbitration clauses in contracts to settle disputes. The state usually agrees to this provision to encourage foreign investment and ensure a fair legal environment.

Legislative Changes:

Contracts typically contain clauses addressing situations where legislative changes lead to increased costs or decreased revenues. These clauses obligate the state to provide appropriate compensation to the investor.

Force Majeure:

The contract includes a force majeure clause, which absolves the investor from responsibilities or obligations arising from circumstances beyond their control. It also grants them an extension of time to implement the project corresponding to the period affected.

Water Resources:

The investor is responsible for securing the necessary water resources for the project at their own expense.

Issuance of Investment License:

The Investment Commission is obligated to issue an investment license to the investor after the formal submission of their application and before the financial close date. It also facilitates procedures for granting entry visas, work permits, and customs exemptions.

Compensation:

The contract generally includes a clause stating that neither party is liable to compensate the other in the event of contract termination, regardless of the termination's cause.

Conclusion and Recommendations:

Adopting the B.O.T contract model is preferable over B.O.O to better serve the public interest. It is essential to clearly define the conditions for contract termination, grant priority to the investor in case of renewal, and ensure their rights are protected fairly.