Energy, Utilities & Mining Focus
Dana AbdulJaleelPartner,Banking & Finance
Carla NocerinoTrainee Lawyer,Banking & Finance
Socio-economic development is heavily reliant upon the accessibility to clean, affordable and reliable energy sources, such access enhances productivity by the mechanisation of agriculture and manufacturing, thereby incentivising economic growth and social development. In light of the COVID-19 virus and increased costs, the dynamics of energy consumption have drastically shifted; climate change and the social consciousness surrounding environmental sustainability have accelerated the transition into renewable sources of energy, whereby governments worldwide are curbing the use of fossil fuels as an energy source.
Jordan is amongst the first countries in the Middle East to diversify energy sources, and is now a regional front-runner in the development of renewables, whereby the generation of energy from renewable resources has grown from 0.7% in 2014 to over 20% in 2020. This Article will consider the bankability of solar projects, providing an overview of the process of establishing solar PV plants, project documentation, the licensing requirements for solar projects, as well as, some privileges and incentives offered by the Jordanian Government to encourage local and foreign investment in renewable energy.
The Ministry of Energy and Mineral Resources (“MEMR”) regulates the development of renewable energy sources including solar photovoltaic (PV) and wind. The process and most of the requisite documentation to establish a solar PV plant are provided for in the Renewable Energy Law No. (13) of 2012 and its amendments (the “Renewable Energy Law”). In summary, any entity wishing to establish a renewable energy plant must submit a proposal to MEMR; such a proposal to include a development plan, including the initial design, a reliable financing plan, the contribution of local inputs to the facility, supplies, construction and operation, a list of expertise and experience and the proposed tariff for the sale of electrical energy that will be generated by the solar PV plant (this must be a fixed tariff per kilowatt hour within an acceptable rate according to a measurement reference), in addition to, any other documents requested by MEMR or the Direct Display Committee for Renewable Energy Projects to Generate Electric Energy and Connectivity on the Network (the “Committee”).
It is worth noting that priority is given to projects that are built on the lands owned by the investor(s) or lands which are leased from the private sector. Generally speaking, Article 6 of the Renewable Energy Law provides that a direct proposal for the establishment of a PV Plant can be submitted with respect to any location (except for locations which are already listed by the Government of Jordan for purposes of renewable energy production, as under Article 5 of the Renewable Energy Law, which are therefore subject to regular tendering procedures). In the event that the plant site is built on state-owned land, the bidding entity must comply with the laws and regulations issued for this purposes.
Once a proposal is submitted to the MEMR, and is accepted subject to any terms or conditions attached thereto, the Government of Jordan will typically enter into a project sponsor agreement with the bidding entity, such agreement will govern the implementation framework for establishing the project company and obtaining the requisite licensing to power a solar PV plant.
In Jordan, any entity operating or owning a renewable energy plant to generate or distribute electricity must be licensed by the EMRC pursuant to Article 28 of the Electricity Law No (64) of 2002, and cannot obtain such licensing unless it is a company registered in Jordan. Licensing is not required if the entity falls under one of the recognized exemptions relating to small projects or personal usage.
Additionally, it is worth noting that the National Electric Power Company “NEPCO”) reserves the right to join the project or distribute any electricity generated locally or outside of Jordan; and is granted de facto exclusivity rights in that respect. Further, no licensed entity or otherwise may purchase electric energy from or sell such electric energy to an entity outside or Jordan without obtaining the prior written consent of the Council of Ministers.
The documentation for a solar energy project comprises of many agreements crucial to the implementation of the project, such agreements typically fall under three umbrellas: project agreements, financing agreements and contracting agreements.
The main project agreement will be a Power Purchase Agreement (“PPA”) entered into between a public sector purchaser that will act as an off-taker (NEPCO) and a privately-owned power producer (the project company). In addition to stipulating the obligations relating to the sale and purchase of the power generated, the PPA also contains agreed specifications with respect to the design, construction, operation and maintenance of the power plant and includes specific provisions for termination, most importantly the payment provisions in the event of early termination, whereby the off-taker will undertake to pay the project company in the event of a default committed by it or the Government of Jordan.
Other project agreements include a transmission connection agreement to allow the project company to connect to the grid and a land lease agreement for the project site.
In respect of financing documents, this will mainly involve one main agreement in the form of a syndicated loan typically referred to as a ‘common terms agreement’ entered into between the lenders and the project company which dictates the terms that are common to all the project finance documents and the relationship between them, pursuant to which the lenders will enter into multiple security agreements as collateral to the loan. The security package may include a mortgage on the plant and its equipment, assignment of the project documents, accounts and a sovereign guarantee issued by the Government of Jordan.
It is worth noting that, any assignments which form part of the security package are typically made by way of a direct agreement. The main advantage for assigning such securities via direct agreement vis-à-vis an assignment agreement is that a direct agreement will provide for step-in rights and other protections, whereby in the event of early termination, or if the project company is, for any reason, incapable of completing the project, the Government will appoint a third party to step-in and finish the project.
The remainder of the documents will typically include contracting documents to enforce and implement the project, usually an EPC contract, and O&M contract and other sub-contracting agreements. These contracts relate to the implementation and operational phase of the project.
Strong government support and robust regulation have pushed Jordan as one of the most attractive renewable energy markets in the Middle East.
As a party to such a project, the Government of Jordan typically offers the project company many reliefs and privileges including certain tax reliefs (excluding social security contributions), protection to the project company against events of force majeure, expropriation and change of law and waivers of sovereign immunity. Further, the Jordanian Government may also provide undertakings and guarantees to the project company and aid the licensing procedures.
It is however worth noting that, the approval of the Council of Ministers is required for the Government of Jordan to enter into agreements or provide rights or privileges to specific entities.
There has been significant growth and an increasing dependence on renewable energy, particularly, solar energy throughout Jordan, ranging from personal usage such as to cover domestic electrical consumption, to commercial usage and electricity generation. Strong government support and robust regulation have pushed Jordan as one of the most attractive renewable energy markets in the Middle East. The Government of Jordan shall continue to issue policies, regulations and incentives to catalyse the renewable energy market to advance economic development, improve energy security, improve access to energy, mitigate climate change and ensure access to affordable, reliable, sustainable, and modern energy for citizens.
For further information, please contact Dana AbdulJaleel or Carla Nocerino.
Published in November 2022
