Foreword

Arbitration is often regarded as providing advantages over national court litigation for resolving disputes.

IBA Rules on the Taking of Evidence in International Arbitration (“IBA Rules”) were first published in 1999 as a resource to parties and to arbitrators to provide an efficient, economical and fair process for the taking of evidence in international arbitration. IBA Rules have been revised in 2010 and in late 2020, having gained wide acceptance within the international arbitral community.

However, due to complaints raised by the arbitration community regarding arbitral proceedings inefficiency in terms of time and costs, another working group drafted Prague Rules on the Efficient Conduct of Proceedings in International Arbitration (“Prague Rules”), which were released in December 2018.

In this paper, we intend to provide an overview on the main differences and similarities between IBA Rules and Prague Rules.

Generalities about IBA Rules and Prague Rules

IBA Rules

In international arbitration, it is common for litigants to come from very different legal systems.

As such, IBA Rules are a comprehensive set of rules which are intended to provide an efficient, economical and fair process for the taking of evidence in international arbitrations, particularly those between Parties from different legal traditions (Preamble 1).

The main goal of IBA Rules is to fill the gap between all different legal systems rules on the taking of evidence, and more specifically to minimize the differences and find the balance between “common law” and “civil law” origin practitioners, particularly relating to evidentiary matters.

IBA Rules have often been adopted by parties and arbitral tribunals, more as guidance in determining evidential matters rather than as mandatory rules.

IBA Rules have the advantage of allowing a more transnational approach and avoiding discussions about the applicability of evidential rules.

Prague Rules

Prague Rules were drafted by a working group predominantly formed by representatives of civil law jurisdictions.

As such, Prague Rules seek to promote procedural efficiency in international arbitration by adopting procedures more akin to a civil law inquisitorial litigation style.

The distinction between the inquisitorial approach and the adversarial approach rests on the distribution of burdens and powers between parties and arbitrators.

An inquisitorial proceeding relies on an active role of the arbitrator, who may take initiative both in fact-finding (production of evidence) and in the ascertainment of the law.

In turn, the adversarial approach burdens the parties with those activities and confers upon the arbitrator a more passive stance.

Prague Rules consist of 12 articles, which deal with the arbitral tribunal’s proactive role, fact finding, documentary evidence, fact witnesses, experts and assistance in amicable settlements.

Main differences and similarities

Proactive Approach and Case Management. Prague Rules expressly state that the arbitral tribunal is entitled and encouraged to take a proactive role in establishing the facts of the case which it considers relevant for the resolution of the dispute (Article 3.1.).

The arbitral tribunal is given the power to indicate, at the case management conference, its preliminary views on the issues in dispute, the relief sought and the evidence submitted (Article 2.4(e)).

Although IBA Rules have no mandatory rule for the arbitral tribunal to adopt an active role, Article 2.3. of IBA Rules also authorizes the arbitral tribunal to unveil to the parties the issues it deems relevant, as well as the factual and evidential material it considers necessary to the resolution of the dispute.

Hearings. Prague Rules even suggest not having a hearing, and when possible resolving the dispute on a document basis only (Article 8.1).

Parties must request a hearing, but the rules are silent on whether the tribunal retains discretion over the decision to hold a hearing following such a request or whether any request must be automatically granted (Article 8.2).

In turn, the IBA Rules contain detailed provisions for conducting the final evidentiary hearing (Article 8).

Document Production. Prague Rules limit document production, with the arbitral tribunal and the parties being "encouraged to avoid any form of document production, including e-discovery" (Article 4.2).

Under IBA Rules (Article 3.2.) parties shall submit all documents available and relevant to the dispute.

Number of Witnesses. Under Prague Rules, the arbitral tribunal will have the final say regarding the number of witnesses to be heard throughout the proceedings (Article 5). After having read the witness’s written statements and considered the facts of the case, the arbitral tribunal may reject calling certain witnesses for examination, if it deems their testimony irrelevant or unnecessary to the resolution of the dispute.

Similarly, under Article 8.2. of IBA Rules, the arbitral tribunal may limit or exclude any question to, answer by or appearance of a witness, if it considers such question, answer or appearance to be irrelevant, immaterial, unreasonably burdensome, duplicative or otherwise covered by a reason for objection set forth in Article 9.2.

Examination of Witnesses and Witness Statements. Under Prague Rules, examination of witnesses is made through a cross-examination process, which shall be conducted under the direction and control of the arbitral tribunal (Article 5.9.).

IBA Rules follow the same cross-examination approach, as set forth in Article 8.3.

Prague Rules do not stipulate the content of witness statements nor admit their additional submission or revision, contrarily to Articles 4.5. and 4.6. of IBA Rules.

Experts. Under Prague Rules, the arbitral tribunal may appoint an expert or a joint expert commission, at its own initiative or at request, after hearing the parties (Article 6.1.).

Under the IBA Rules, tribunal-appointed experts are a possibility, but party-appointed experts are more common (Article 5).

Settlement. Under Prague Rules, the arbitral tribunal may assist the parties in reaching an amicable settlement of the dispute at any stage of the proceedings, unless the parties object (Article 9). Further, upon the prior written consent of all parties, any arbitrator may act as a mediator to assist in the amicable settlement of the dispute.

If a settlement is not achieved, the arbitrator who acted as a mediator requires the written consent of all parties in order to continue to act as an arbitrator in the proceedings.

IBA Rules make no provision for members of the arbitral tribunal to act as mediators of the parties.

Iura Novit Curia. Under Prague Rules, the arbitral tribunal may determine the applicable law on its own initiative and apply legal provisions that were not set out by the parties (Article 7). Notwithstanding, the arbitral tribunal is obliged to hear the parties on the legal provisions it intends to apply.

IBA Rules do not include this principle.

Conclusions

Arbitration is very often a preferred type of dispute resolution because of its flexibility and openness to the parties’ choices regarding most procedural issues.

Despite its differences, Prague Rules are not wildly different from IBA Rules, because they have some procedural aspects in common.

The underlying difference between the two is that IBA Rules are more aligned with common law, and offer an adversarial approach to arbitration when compared to Prague Rules.

Prague Rules, on the other hand, openly adopt a more inquisitorial approach more in line with the civil law tradition.

Whether or not to adopt IBA Rules or Prague Rules in whole or in part in an arbitration proceeding mainly depends on what the parties deem most practical according to their own legal traditions.

IBA Rules intend to harmonize the arbitration practice by finding a compromise between civil law and common law, whereas Prague Rules are relatively new and are more exclusively tailored for civil law.

IBA Rules might be more suitable to a party domiciled in a common law country. In turn, Prague Rules offer a more comprehensive approach to arbitration for civil law parties.

The choice of the applicable rules can have an impact on the costs and duration of the proceedings but also on the parties’ right to be heard, so these factors must be taken into consideration by the parties when choosing the procedural rules for their dispute.

The Portuguese Energy Transition goals

The National Hydrogen Strategy (EN?H2), of 14 August 2020, sets commitment to ensure the neutrality of Portugal's carbon emissions by the end of 2050:

• Greenhouse gas (GHG) emissions to be reduced by 85% to 90% in relation to 2005 levels.
• Carbon sequestration to reach levels of 9 to 13 million tons of CO2 in 2050.
• A 55% reduction in GHG emissions and a 47% share of renewable energy in gross final energy consumption is expected to be achieved by 2030.

All this is aligned with the 2050 Carbon Neutral Roadmap (RNC2050) and the 2030 National Energy and Climate Plan (PNEC 2030).

Green hydrogen arises as an efficient solution to promote the energy transition in various sectors, particularly with the decarbonizing of transport and industrial sectors while strengthening the national economy and promote scientific development. It is an energy carrier with high energy density, which makes it the ideal solution for energy-intensive industrial processes, for the storage of energy produced through renewable sources and for the emergence of other renewable based fuels.

To achieve this transition, EN-H2 assumes as main goals for 2030:

• 5% green hydrogen in final energy consumption, road transport and industry;
• 15% green hydrogen injected into natural gas networks;
• 50 to 100 hydrogen refuelling stations; and
• Between 2 and 2.5 GW of installed production capacity.

Although EN?H2 sets out the intent to carry out a large production of green hydrogen in Sines with a capacity of 1 GW by 2030, support measures for decentralized hydrogen production projects of different scales, spread throughout the Portuguese territory are also expected.

Green H2 production and usages in the en-h2

Although hydrogen exists in great abundance, it almost always appears in combination with other chemical elements, and their combination constitutes other elements, such as water. As a result, the production of hydrogen requires the use of processes to separate it from the compounds in which it appears.

Hydrogen production can be accomplished using a wide variety of technologies, which always require energy in the form of heat, light or electricity. One of this technologies is water electrolysis, which is a simple process of breaking down water into its two components (splitting the hydrogen and oxygen atoms) using electric power.

For the purposes of EN-H2, green hydrogen is defined as hydrogen produced exclusively from processes using energy from renewable sources and whose GHG emissions throughout its production life cycle are zero or very close to zero.

EN-H2 foresees that Portugal can benefit from the following uses of green hydrogen:

• Fuel for various types of transport, with particular potential for heavy road transport, maritime or even rail and air transport through the use of fuel cells (which can store hydrogen and use it to produce electricity in a controlled way);
• Replacing natural gas as a fuel in the industrial sector, which contributes to reducing GHG emissions;
• Decarbonize and replace fuel production with synthetic fuels produced from mixtures of hydrogen and carbon dioxide;
• Conversion of excess renewable electricity into hydrogen, stored and then reconverted back into electricity using fuel cells; or
• Injected into the natural gas network or by converting hydrogen into synthetic methane to be used directly by residential and industrial consumers.

Starting with the Prior Registration

Production of hydrogen through renewable origin is ruled by Decree-Law No. 62/2020, of 28 August (the “National Gas Law”) and it is only accessible to legal persons that display relevant technical, financial and management capacity.

Performance of green hydrogen production activity is subject to prior registration at the Directorate of Energy and Geology (Direção Geral de Energia e Geologia – DGEG) to start construction and operating of the generating facilities.

Promotors must submit their requests to DGEG through e.Portugal with several documents, including: (i) proof of the land rights for the project, (ii) execution project of the generating facility, (iii) project plan and timeline deadline for entry into operation, and (iv) evidence of the technical, economic and financial capacity and experience of the promoter to ensure the development of the project.

The file is then forwarded to the licensing platform of the Portuguese Environment Agency (APA) (SILAIMB) where an environmental assessment will be conducted.

After registration application, the TSO, in Portugal REN GASODUTOS, SA, or the DSOs (Beiragás, Lisboagás, Lusitaniagás, RENPortgás, Setgás and Tagusgás each one with its exclusive distribution area) (as applicable), on a first come first served basis depending on the grid capacity proposed conditions, accepts or not the project as proposed by the promoter and sets the conditions for its connection to the grid.

DGEG shall confirm the prior registration (subject to payment of a €600 fee) within 30 days as from grid operator’s decision.

After the prior registration, the promoter must start operating the hydrogen plant within a maximum period of two years subject to an additional extension of one year when its insufficiency is due to unavoidable reasons not attributable to the promoter.

The promoter has then the right to inject the hydrogen into the grid and to sell the plant’s production: (i) in organized market or through bilateral contracting, at a price previously agreed between the parties, or (ii) through the last resort supplier against payment of fixed remuneration.

Environmental requirements

Hydrogen plants are subject not only to a prior registration, but they are also subject to environmental regulations. Hence, H2 plants must go through:

• Environmental Impact Assessment: According to Decree-Law no. 151-B/2013, of 31 October, should be made (i) directly, if the project reaches the thresholds set out in Annexes I and II; or (ii) indirectly, If the project does not meet the thresholds of Annexes I or II but is likely to have significant effects on the environment, according to Annex III.
• Major Accident Prevention: As hydrogen is a dangerous substance, whenever in quantities of 5 tons and 50 tons or more, producers are subject to a set of obligations, namely the communication and evaluation of compatibility of location where the production plant will be installed, as well as in the definition of a Policy for the prevention of major accidents.
• Integrated Pollution Prevention and Control Regime: To produce hydrogen on an industrial scale, by chemical or biological transformation, whose commercialization is in bulk and/or by injection into the gas or transport networks, is necessary an environmental licensing permit (TUA) issued by APA, which must be requested by operators through the SILIAMB Platform.
• European Emissions Trading Framework: green hydrogen projects that are based on the electrolysis of water using renewable energy are not covered by this regime, but other types of production may be, namely in case production is based on fuel combustion with thermal input exceeding 20 MW and that generate greenhouse gas emissions being subject to obtain greenhouse gas permit to be issued by APA and to register in the Portuguese Emission Allowances Registry.
• Air Emissions Permit: If there are sources of air pollution associated with the production process, obtaining an Emission Permit to be issued by APA or by competent Regional Coordination and Development Commission (CCDR) is mandatory. 
• Water Resources Use Regime: Water abstraction and wastewater discharge for hydrogen production are subject to obtain a Water Use Title (TURH). The use of sea water is subject to obtaining a title for occupation of the maritime space (TUPEM).

Connecting to the grid

After the prior registration, promotors shall enter into an agreement with the relevant grid operator setting forth the technical and commercial conditions for connecting the hydrogen plant to the grid.

Promoters will have to bear the costs of the construction of the necessary connection infrastructures to the public gas grid under the conditions established in the agreement executed with the grid operator, including the costs related to the occupation of the land which may be necessary for the installation of said infrastructures. In addition, promoter is also subject to the payment of a grid contribution fee, which is calculated pursuant to a formula published by the Portuguese Energy Services Regulator (ERSE).

However, in case a connection branch becomes used by a new producer, the promoters that have borne the costs of its construction shall be reimbursed by that producer, under terms defined by ERSE.

For the execution of the infrastructures necessary for connection and injection into the grid, promoters may constitute easements and request expropriation for public utility of the necessary real estate under the same terms and conditions as the concessionaires of the public gas grid.

Investments in the grid (namely to accommodate the injection of hydrogen) are made by the relevant transmission and distribution operators, according to their development and investment plans, which, in general terms, end up being supported by the consumers through network access tariffs.

Connection infrastructures shall become part of the grid and integrated in the concession of the relevant grid operator after construction and as soon as they are in technical operating condition.

The grid operator may request the promoter to provide a guarantee, valid for a period of two years, corresponding to a maximum of 10% of the value of the connection elements in order to make up for any construction deficiencies.

Prior to the start of operation of the hydrogen plant, a contract for the use of the grid infrastructures shall be entered into between the promotor and the relevant grid operator for the purpose to establish the conditions related to the use of the grid and interconnections, as well as the technical conditions for injection and the terms under which injection may be stopped or limited.

Construction permit

The construction of a hydrogen plant requires a construction license to build the plant and related infrastructure. The promotor may obtain prior information about the feasibility of carrying out the construction of the project, as well as on the respective legal or regulatory conditions, by submitting in the municipality of the plant’s location a pedido de informação prévia (“PIP”).

A positive PIP binds the municipality for a period of one year to the issuance of the construction license, in the exact terms in which the PIP was granted.

The request for a construction permit can be submitted online (at the municipalities’ website).

Within 45 days from the date of receipt of the last of the opinions the municipality must obtain from other authorities, the municipality will grant a construction license and issue an alvará de construcção (a construction permit certificate) at the request of the promotor.

Issuing of the construction permit is subject to the provision of a deposit by the promoter to the Municipality as well as a valid insurance policy covering work accidents.

The construction of the hydrogen plant must start within one year after the issuing of the permit, under penalty of expiration of the relevant construction license.

After completion of the construction works, the promoter needs a license of use for the plant issued again by the Municipality following submission of (i) the final blueprints, and (ii) a term of responsibility subscribed by the director of the works, in which they declare that the work is completed and that it has been executed in accordance with the architectural and specialty projects, as well as with the legal and regulatory rules that apply to it.

The license of use is granted within 10 days of receipt of the application, unless a survey to the work is decided by the President of the Municipality.

Support Mechanisms

EN-H2 provides for serval support mechanisms to encourage new investments in green hydrogen. These are still subject to the publication of specific regulations:

• The injection of hydrogen into natural gas networks may benefit from a partial or total exemption from network access tariffs for an initial period.
• A public allowance to hydrogen production, through a premium that covers the difference between the production price of green hydrogen and the price of natural gas in the Iberian natural gas market (MIBGAS).
• Fiscal mechanisms to encourage replacement of natural gas by green hydrogen, adjusting the relative prices between the two alternatives, penalizing natural gas and reducing the cost of hydrogen. Tax benefits and positive discriminations in applicable taxes shall be established based on the advantages of green hydrogen.

Renewable gases are covered by the system of guarantees of origin (GO), granting producers access to the GO market.

The Recovery and Resilience Plan (PRR) includes a first call for 62 million euros launched for projects that aim to produce renewable gases for self-consumption and/or injection into the grid. Projects for developing and testing new technologies, or tested technologies that are not sufficiently disseminated in Portugal, are eligible.

The program applies to all public or private companies that: (i) requested prior registration to produce renewable gases; and (ii) obtained a prior assessment from DGEG that it is an eligible operation. Funding per beneficiary and per project will have a maximum amount of support of 5 million Euros, although this may rise to 10 million Euros if projects cover more elements of the value chain (i.e. that include the integration of production, distribution and the final consumer). The maximum co-financing rate is 100% of the total expenditure considered eligible.

As European support instruments, we highlight (i) Horizon Europe: which aims to finance projects linked to the transition to a low-carbon economy, with a budget of €5 billion; (ii) the Innovation Fund: which focuses on low-carbon projects in carbon-intensive industries; and (iii) the InnovFin Energy Demonstration Projects: which is designed to provide loans, typically between €7.5 and €75 million, for innovative renewable energy projects.

The market reaction

There are currently 37 PRR approved projects involving public and private companies, universities, municipality organizations and other institutions, related to the production of green hydrogen, which include, namely the following players: The Navigator Company, Altri, Bondalti Chemicals, Dourogás, Turbogás, Tejo Energia, Prio, CaetanoBus, and Grupo Águas de Portugal.

EDP plans to install about 250 MW of electrolysers over the next four years, which will represent an additional investment in 0.5 to 1 GW of new renewable capacity in green hydrogen production.

The company Fusion Welcome announced a fusion fuel production project, aiming to achieve a production capacity of 27,000 tons of green hydrogen per year. The consortium formed by AkuoEnergy and Solarbelt has also received approval to build a hydrogen jet fuel plant.

"Green Pipeline Project" in Seixal is the first project in Portugal that will inject green hydrogen into the gas grid, targeting 80 residential, commercial, and industrial customers who, as of January 2022, will start receiving a mixture of natural gas and hydrogen.

The mega consortium "H2 Sines“ has already received a first permission from Brussels to move forward with the production of green hydrogen. The next step is reaching an agreement with the European Commission regarding funding for this project. This project aims to produce green hydrogen using an electrolyzer with a capacity of 10 MW.

This technology already exists in Évora and Benavente and is expected to be extended to more regions of Portugal during the course of 2022 to produce green hydrogen through photovoltaic plants, which capture and concentrate solar radiation and then perform electrolysis to produce green hydrogen with high efficiency and low cost.

More recently the European Clean Hydrogen Alliance published a list of projects that European industry is committed to creating the European hydrogen economy at a large scale. With more than 750 projects, the list includes projects ranging from clean hydrogen production (446) to its use in industry (172), mobility (240), energy (143), and buildings (77). Portugal appears with 23 projects listed in the northern region, 67 in the center, 23 in the Lisbon Metropolitan Area and 18 in the Alentejo. The aim of the alliance is to facilitate investments in clean hydrogen by promoting sustainable projects and contact with investors being its membership open to all entities with activities in the renewable or low-carbon hydrogen.

The issue with contaminated soil

The issue with contaminated soil is, from time to time, discussed in Portugal. It is mainly associated with the conversion of old industrial areas: when old contamination is detected in the soil during the execution of construction works.
Directive 2004/35/EC, of 21 April, on environmental liability regarding prevention and remedying of environmental damage was transposed in Portugal through Decree-Law 147/2008, of 29 July, which approved the legal framework of liability for environmental damage (‘RJRDA).

However, this regime fell short of what was expected, and the issue with contaminated soils and environmental liabilities remained largely unsolved. The RJRDA even excluded administrative responsibility for the prevention and repair of environmental damage caused by harmful occurrences:

• Prior to 1August 2008, the date of its entry into force; and
• Occurred after 1 August 2008, but which resulted from an activity carried out and concluded before that date.

That same legal framework also states that damages caused by any emissions, events or incidents that have occurred more than 30 years before the damage occurred are time-barred.

In 2015, the Portuguese Environment Agency ("APA") placed under public discussion the draft decree-law on the prevention of contamination and remediation of contaminated soils ("Prosolos Project"), an initiative considered globally positive by the participants in the consultation even though it has not been implemented to date.

In May 2021 the Portuguese Parliament approved a resolution recommending its publication to the Government.

When recent news indicated that Prosolos Project will finally see the light of day, we gathered the main aspects of the legal framework in force as well as some of the most relevant known features of the Prosolos Project and wrote this article.

 

Liability for environmental damage

In general terms, RJRDA:

• Applies to environmental damage caused as a result of the exercise of any activity developed within the scope of an economic activity, no matter its public or private nature or if it generates profit or not;
• It also applies when there is an imminent threat of such damage, that is, a sufficient probability of environmental damage occurring in the near future;
• It is based on the polluter pays principle established by Directive 2004/35/EC of 21 April;
• Determines that the causal link between the fact and the damage is based on a criterion of likelihood and probability;
• Establishes two types of liability: the civil liability of whoever causes damage to people and property through an offence against the environment and the administrative liability for the prevention and remedying of environmental damage aimed at repairing the environmental damage itself, caused to society as a whole;
• Establishes that, in any activity, the operator is responsible for environmental damage when he has acted with intent or negligence;
• Establishes that, when the activities indicated in Annex III of RJRDA are in question, the responsibility - civil and administrative - is objective, in other words, it exists regardless of the fault of the agent (operator) because they are especially dangerous activities;
• Foresees joint liability in various situations, namely of the members of the administrative body when the operator is a legal person and of the parent company and controlling company when the operator is a company in a group or dominion relationship and there is abusive use of the legal personality or fraud against the law; and 
• Obliges operators who carry out the activities listed in Annex III of RJRDA to provide a financial guarantee to cover the environmental liability that comes with the activity developed.

 

Liability for environmental damage, in particular, to soil (I)

Regarding administrative liability, environmental soil damage is "any soil contamination which creates a significant risk to human health as a result of the direct or indirect introduction, in or on the soil, of substances, preparations, organisms or micro-organisms".

The reference concept for soil damage is thus human health.

If the operator causes environmental damage, or an imminent threat of damage, to soil (including surface and subsoil):

• Through an activity listed in Annex III of RJRDA, he/ she must implement measures to prevent and remedy the damage or threats caused regardless of the existence of fault or intent;
• Through an activity not covered by Annex III of RJRDA he/ she must implement measures to prevent and repair the damage or threats caused if he/ she has acted with intent or negligence.

When damage has already occurred, the operator shall adopt measures to prevent further damage from occurring, whether or not the operator is obliged to repair the damage.

When there is an imminent threat of damage, the preventive measures shall be adopted immediately and without the need for any notification or act by the competent authority.

Soil remediation operations are subject to licensing with the competent Regional Coordination and Development Commission ("CCDR"), and the General Regime of Waste Management approved by Decree-Law no. 102-D/2020, of 10 December, amended by Law no. 52/2021, of 10 August, applies to them.

Liability for environmental damage, in particular, to soil (II)

As mentioned, RJRDA excludes administrative responsibility for the prevention and repair of environmental damage to the soil caused by harmful occurrences:

• Prior to 1 August 2008, the date of its entry into force; and
• Occurred after 1 August 2008, but which result from an activity carried out and concluded before that date.

It should be noted, however, that Directive 2004/35/EC of 21 April establishes 30 April 2007 as the reference date for application of the environmental liability framework.

In Guidelines establishing a common understanding of the concept of 'environmental damage' within the meaning of Article 2 of that Directive, published on 7 April 2021, the Commission further considered that the Directive's requirements on environmental liability must, as a minimum, be met in every respect.

APA makes available on its website several technical guides and recommendations on soil contamination prevention and remediation.

In particular, in the event of transfer of ownership rights of a soil where a potentially contaminating activity is or has been carried out, or where there are indications or evidence of contamination, APA recommends that a soil quality assessment be carried out.

 

Prosolos Project: outlines

Prosolos Project:

• It is based on 3 cornerstones: assessment of soil quality, remediation and accountability for contamination;
• It applies to operators who develop one of the activities listed in Annex I and to those responsible for contamination or potential contamination of the soil when one of these activities has been developed or when hazardous waste has been abandoned or when accidents have occurred, among other situations;
• Provides for the preparation of a Soil Quality Atlas, bringing together information available on contaminated and remediated sites and aggregate information on potentially contaminating activities, types of contamination and remediation techniques;
• Regulates situations of environmental liabilities, establishing the State's responsibility for the assessment of soil quality and possible remediation if such liabilities constitute imminent danger to public health and/or the environment and it is not possible to identify the polluter or to apply the principle of liability;
• Defines who is responsible for carrying out the soil quality assessment and its remediation;
• Establishes the soil quality assessment process, the reference values and criteria to be considered in the different assessments that are part of it and the issue of the Soil Contamination Risk Statement and Soil Quality Certificate;
• It relates soil quality assessment to the licensing of the activities covered by the regime (the activities cannot begin without the operator carrying out a soil quality assessment and, where appropriate, soil remediation) and with changes of soil use to a more restrictive use (a Soil Quality Certificate is required in the case of a change from industrial use to urban or agricultural use or from urban to agricultural use);
• Establishes, in an innovative way, restrictions to the transfer of the right of ownership of the soil and land registry requirements, also relating them to the assessment of soil quality.

 

Prosolos Project: liability and transfer of ownership

The operator carrying out at least one of the activities listed in Annex I shall be presumed responsible for conducting the soil quality assessment and for its possible remediation.
This liability may be waived when it is proven that the contamination predates the beginning of its activity or that it does not originate from the activity it carries out. If one of these situations occurs, the responsibility for carrying out the soil quality assessment and its possible remediation lies with:

• The previous operator of the activity carried out on the site or a third party, provided that it is proven that it was the activity that contaminated the soil; or
• The current owner of the soil, if it is impossible to identify the operator or if the person causing the potential contamination no longer exists.

Exceptions to this rule are situations where it is proven that the contamination resulted from compliance with an order or instruction issued by a public authority.

The transfer of the right of ownership of a soil:

• Where one of the activities referred to in Annex I is carried out must be preceded by a preliminary or exploratory assessment and is subject to the presentation by the transferor, for the purposes of land registration, of the Soil Contamination Risk Declaration or the Soil Quality Certificate as the case may be;
• Where any of the activities referred to in Appendix I have been carried out, or where hazardous waste has been abandoned, or where accidents have occurred, among other situations, is subject to the presentation by the transferor, for the purposes of land registration, of the Soil Quality Certificate.

The presentation of the Declaration or Certificate referred to above may be dispensed with if the buyer declares, at the time of the deed, that he/ she takes responsibility for the possible contamination of the soil.

The acquirer may also declare, at the moment of the deed, that he/ she assumes the responsibility for the evaluation of the soil quality and its eventual remediation, according to the Soil Contamination Risk Declaration or Soil Quality Certificate delivered by the transferor.

For more, please download our PDF down below. 

Introduction

Law 19/2012, of May 8, 2012 (the “Competition Law”), which entered into in force on July 8, 2012 and repealed the former competition law, Law 18/2003, of June 11, 2003, establishes merger control rules applicable to concentrations having effects in Portugal.

The Competition Law brought relevant changes on merger control rules, particularly by (i) putting the merger substantive test in line with the Significant Impediment of Effective Competition (“SIEC”) test of the European merger rules; (ii) changing the turnover thresholds required for the notification to the Portuguese competition authority (Autoridade da Concorrência – the “Competition Authority”), including adding a new de minimis market share notification threshold, (iii) deleting the previous notification deadline, and (iv) amending some deadlines applicable to the merger procedure.

In order to prevent the risk of competition restrictions, the Competition Authority exercises control over planned concentrations with effects in the national market.

A concentration is the legal combination of two or more undertakings, by the merger between two or more undertakings or by the control acquisition, directly or indirectly, of the whole or parts of one or several other undertakings.
Following an assessment phase, the Competition Authority may approve the concentration, including upon the application of remedies to be carried out by the undertakings, or prohibit the transaction insofar as it creates significant impediments to effective competition in the national market, particularly in case of creation or reinforcement of a dominant position in the national market.

Undertakings that execute concentrations which have been suspended or prohibited by the Competition Authority may be subject to fines and the legal acts related to the transaction could be declared null and void. The maximum amount of the fine could be 10% of the aggregate annual turnover of the associated undertakings that have engaged in the prohibited behavior.

This paper reviews some of the most important legal aspects regarding merger control rules in Portugal.

 

Powers of the Competition Authority

The Competition Authority is an independent authority with financial autonomy, which was created in 2003 by Decree-Law 10/2003, of January 18, 2003. The role of the Competition Authority is to conduct the enforcement of the competition rules in Portugal with a view to ensuring an efficient market performance and a fair division of the resources and to protect the interests of the consumers under the market economy and free competition principles.

In contrast to antitrust practices, for which the Competition Authority is empowered to apply the Competition Law in parallel with European competition rules whenever an impact on trade between Member States exists; in merger control, the Competition Authority may only take action against concentrations to the extent that the relevant merger thresholds, as set out in Council Regulation (EU) 139/2004, of January 20, 2004 (the EU Merger Regulation), are not met. There is however a referral mechanism that allows the Competition Authority and the European Commission to transfer the case between themselves, both at the request of the involved undertakings and of the Competition Authority, in order for the undertakings to benefit from a one-stop-shop review.

The powers of the Competition Authority include:

• The power to investigate any practices that may infringe the national and the European Union competition rules, to conduct the required procedures and to decide on the applicable sanctions, if any;
• The power to decide on the compatibility of undertakings’ agreements with the competition rules and to conduct the applicable administrative procedures;
• The power to review and decide on merger transactions and to conduct the applicable administrative procedures; and
• The power to approve regulations on competition issues as well as codes of conduct and manuals of corporate good practices.

 

Notification thresholds

The Competition Law does not establish a specific deadline for the filing of a notification. Transactions subject to notification may not be however completed before clearance from the Competition Authority.

The notification is required to the extent one of the following thresholds is fulfilled:

• Turnover threshold: the aggregate net turnover obtained in Portugal by the undertakings involved in the transaction (“Participating Undertakings”) exceeds €100 million in the preceding financial year (after deduction of taxes directly related to turnover), provided that the turnover individually obtained in Portugal by at least two of the Participating Undertakings exceeds €5 million; or
• Standard market share threshold: the transaction leads to the acquisition, creation or reinforcement of a market share of equal to or above 50% of the national relevant market, or in a substantial part thereof; or
• “De minimis” market share threshold: the transaction leads to the acquisition, creation or reinforcement of a market share equal to or above 30% and less than 50% of the national relevant market, or in a substantial part thereof, provided that the net turnover individually obtained in Portugal by at least two of the Participating Undertakings exceeds €5 million in the previous financial year.

Merger transactions may be subject to a preliminary assessment within at least fifteen working days prior to the notification of the transaction to the Competition Authority. This preliminary procedure aims to promote informal and confidential discussions on any proposed transaction with the Competition Authority. Typically, this preliminary procedure is made through one or more meetings with the Competition Authority and subsequent additional information requests. The preliminary procedure may, in practice, entail a reduction in time for the assessment of the transaction by the Competition Authority, as it may prevent that the notification form includes incomplete information and it may reduce any additional information requests by the Competition Authority. The preliminary procedure does not, however, imply the taking of a decision by the Competition Authority concerning the compliance of any transaction with the competition rules.

 

Merger control procedure

The merger control procedure is very similar to the review procedure set out in the EU Merger Regulation and relevant implementing regulation.

After the filing of the notification, which becomes effective after the Competition Authority receives payment of the relevant fees and insofar as the notification is complete, the Competition Authority publishes a summary of the notification on its website and in two national newspapers within five days, so that any interested third parties may present their comments or objections to the proposed transaction.

Within thirty working days from the date the notification becomes effective, the Competition Authority must complete the evidence taking proceeding and decide (Phase 1):

• That the concentration is not subject to mandatory notification;
• Not to oppose to the transaction; or
• To initiate an in-depth investigation, if it considers that from the transaction, taking into account the evidence gathered, may result significant impediments to effective competition.

The in-depth investigation phase (Phase 2) may not exceed ninety working days from the notification date, which means that the deadline of Phase 2 already comprises the deadline of Phase 1 and, in practice, is of sixty working days.

In Phase 2, the Competition Authority must decide:

• To authorize the transaction unconditionally;
• To authorize the transaction subject to the fulfilment of certain commitments by the parties; or
• To prohibit the transaction, in case it creates significant impediments to effective competition in the national market or in a substantial part of it – the so-called “Significant Impediment to Effective Competition”, SIEC test.

In case the Competition Authority fails to adopt a decision within ninety days from the filing date of the notification, the transaction will be deemed as approved.

Both clearance or prohibition decisions may be subject to appeal to the Competition, Supervision and Regulation Court (Tribunal da Concorrência, Regulação e Supervisão) created in 2011. The Competition Authority’s decision that prohibits the transaction may be also subject to an extraordinary appeal to the Minister of Economy.

 

Consequences for breach of merger control rules

The Competition Authority will prohibit any operations that create significant impediments to effective competition in the national market or in a substantial part of it – the SIEC test –, particularly whether the impediments result from the creation or the reinforcement of a dominant position in the internal market. The Competition Authority will be responsible for defining the criteria for the existence of a dominant position based on the precedents set by the European case law.

In general terms, an undertaking will be deemed to have a dominant position in the relevant market if it dominates the market and has no relevant competitors. Two or more undertakings operating jointly in the relevant market and having no relevant competitors will be also deemed to hold a dominant position in such market. Conversely, concentrations, which do not create a SIEC in the national market (or in a substantial part of it), are allowed and will be approved by the Competition Authority.

Failure to notify the Competition Authority (whenever the notification thresholds are met) or the completion of a transaction in breach of a decision issued by the Competition Authority refusing to approve the transaction or approving the transaction with remedies, may entail the parties to severe consequences, as follows:

• A fine up to 10% of the previous year’s turnover for each of the involved undertakings;
• Periodic penalty payments, in an amount not exceeding 5% of the average daily aggregate turnover of the undertakings in the preceding year to the Competition Authority’s decision for each day of failure; and
• All legal acts related to the transaction are null and void to the extent that they are in breach of the Competition Authority’s decision. If the transaction has already been completed, the Competition Authority may order to perform the measures required for the re-establishment of effective competition in the market including, but not limited to, the splitting of the merged undertakings or the transfer of control over the acquired undertaking or business units thereof.

If you wish to find out more, please download our PFD down below. 

Introdução

It is often said that Portugal is the country with the largest number of sunny days in Europe, with more than 300 days of sunshine in a year.

These weather conditions give Portugal the perfect recipe to use solar energy at its full potential. As such, the Portuguese photovoltaic market is experiencing an all-time high at the present moment, thanks to various successful small and large-scale projects.

In addition, the Portuguese Government is committed to a long-term strategy for carbon neutrality by 2050, with the most recent data (January 2021) showing that 71,2 % of the electricity generated in Continental Portugal came from renewable sources.

Solar power currently represents 3.8% of the electricity generated in Portugal mainland, but it is expected that this figure will grow, particularly, thanks to the competitive solar auctions conducted in 2020 and in 2021, with more expected to be launched in the following years.

This study´s goal was to determine which taxes are applicable during the construction and the operation phase of solar power plants in Portugal, including national and municipal taxes and fees.

As such, this analysis is focused on Real Estate Taxes, Corporate Income Tax, Value Added Tax and other taxes applicable in the energy sector.

 

Real estate taxes

Construction phase

Solar plants may be built over land acquired or leased by the solar plant owner.

The acquisition of the ownership (direito de propriedade) or a surface right (direito de superfície) over the land will be subject to municipal real estate transfer tax (“RETT”) and stamp duty.

RETT rates vary depending on the type of asset:

• Land: 5%; and
• Urban buildings (other than housing) and other onerous acquisitions: 6.5%.

The stamp duty is charged at a rate of 0.8%.

As a rule, RETT and stamp duty will be levied on the acquisition price or the asset tax value, if higher.

The lease of the land is not subject to RETT and is only subject to stamp duty at a rate of 10% over the lease rent.

 

Operation phase

The ownership and surface rights are subject to municipal real estate tax (“RET”).

RET is levied on the asset tax value.

RET rates are different depending to the type of real estate asset:

• Urban buildings: 0,3% to 0.45%; and
• Land: 0.8%.

As a rule, the owner or surface right holder must pay RET in May of every year, although it may also be paid in instalments under certain conditions.

If the land is leased, RET will be paid by the owner unless the parties agree otherwise.

 

Corporate income tax

Construction phase

(i) Deduction of costs and losses

The costs and losses necessary for the generation of the income or gains subject to Corporate Income Tax (“CIT”) or for the maintenance of the producing source may be deducted for tax purposes. These include:

• Production or acquisition cost of any goods or services, such as materials used, labour, energy and other general manufacturing, maintenance and repair costs; and
• Distribution and sale charges, covering transport, advertising and placement of goods.

However, some expenses incurred during the construction phase are not accounted as costs, but rather as tangible fixed assets. Capitalised costs will not be deductible as tax costs but may be amortized according to Portuguese tax rules.

(ii) Tax loss carry forward

As a rule, losses may be deducted from taxable profits within the following 5 tax years. Nevertheless, companies that qualify as micro, small and medium-sized enterprises ("SMEs") may carry forward tax losses in the following 12 tax years with an annual limit equal to 70% of the taxable income.

In view of the current pandemic crisis caused by Covid-19, the 2020 Supplementary Budget approved a set of special rules for the years 2020 and 2021:

• Tax losses generated in 2020 and 2021 may be carried forward in the following 12 years;
• The annual limit of the deduction is extended from 70% to 80%; and
• The years 2020 and 2021 will be disregarded when counting the period for carrying forward tax losses (of 5 or 12 years).

 

Operation phase

(i) Taxation of income

The general CIT rate applicable to taxable profit is 21%.

Companies that qualify as SMEs benefit from a 17% rate on the first €25,000.

The amount of CIT due in each tax period can be increased by the Municipality Surcharge (Derrama Municipal), which varies according to the municipality where the company's head office is located and eventually the company's turnover.

The Municipal Surcharge rate is fixed annually by each municipality up to a maximum of 1.5%. However, municipalities may approve exemptions for:

• Companies with a turnover of less than €150,000 in the previous financial year;
• Companies operating under a certain Code of Economic Activity (the so-called “CAE”); and
• Companies that have been recently incorporated and create jobs.

As a rule, the income is deemed to be generated in the municipality where the taxpayer has its head office or effective management.

If the taxable profit exceeds €1,500,000, a State Surcharge (Derrama Estadual) will be applicable at the following rates:

• On the taxable profit between €1,500,000 and €7,500,000: 3%;
• On the taxable profit between €7,500,000 and €35,000,000: 5%; and
• On the taxable profit exceeding €35,000,000: 9%.

As a rule, CIT and municipal taxes must be self-assessed and paid by the companies after submission of the annual tax returns (Form 22) by 31 May of each year.

Companies will be entitled to deduct to the CIT any advance tax payments, special advance payments and additional advance payments that may be made by them during each tax year.

(ii) Amortization of tangible assets

The expenses incurred during the construction phase of the solar plants which are recorded as tangible fixed assets are subject to impairment due to their loss of value because of their use, the passage of time, technical progress, or other causes.

Portuguese tax laws determine that these assets may be subject to depreciation as from their entry into operation and the relevant amortization periods.

As a rule, the amortization must be carried out during the maximum period of useful life, which implies that at least the minimum quota of depreciation is accounted as a cost. As a result, depreciations made beyond the maximum life span are not accepted as tax costs.

According to the depreciation regime, the life span may vary between a minimum of 12.5 years and a maximum of 25 years.

As a rule, the calculation of the depreciation and amortization of the assets is made in accordance with the straight-line method. However, companies may choose the declining-line method under certain conditions.

The adoption by the taxpayer of other amortisation methods, which result in the application of depreciation or amortisation quotas higher than those provided in the law, is subject to the Tax and Customs Authority’s authorisation.

 

Limits on deductibility of financing expenses

Net financing expenses can contribute to the determination of taxable profit up to the higher of the following limits:

• €1,000,000; or
• 30% of the earnings before taxes, net finance costs, depreciation and amortization.

However, there are two exceptions:

• Net financing costs that may not be deductible in a given year may be considered in one or more of the five subsequent tax periods, after the deduction of the net financing costs of that period, subject to the above-mentioned limitations; and
• If the amount of financing costs deducted is less than 30% of the earnings before taxes, net finance costs, depreciation and amortization, the unused portion is added to the maximum amount deductible in the five subsequent tax periods.

The right to carry forward the financing costs ceases to apply when it is verified, at the end of the tax period in which the deduction is made or the limit is increased, that there is a change in the ownership of more than 50% of the share capital or majority voting rights of the taxpayer, except in cases provided in the law or if authorization is obtained from the member of the Government responsible for the area of finance in cases of recognized economic interest, by means of an application to be filed with the Tax and Customs Authority under the terms of the law.

 

Value added tax

Construction phase

(i) Acquisition of equipment in Portugal

Acquisitions of appliances, machinery and other equipment used exclusively or mainly for capturing and using solar energy are subject to Value Added tax (“VAT”) at a rate of 13%. Acquisitions of other goods and services are subject to the general rate of 23%.

In the case of acquisition of equipment where the vendor is based in Portugal, VAT is assessed by the seller of the goods.

There may be an inversion of the taxable person in case the supplier performs the installation, and this installation involves civil construction work, as explained below.

(ii) Aqcquisition of equipment in another Member-State

Where the supplier of the equipment is resident in another Member State and the equipment is dispatched from that Member State, the supply will constitute an intra-community supply.

Intra-community transfers will give rise to two operations:

• An intra-community supply of goods which is VAT exempt in the Member State of origin; and
• An intra-community acquisition of goods which is subject to VAT in the Member State of destination.

In intra-community acquisitions, there is a reverse charge, since it is the purchaser - and not the supplier - who must pay VAT.

In the case of transfers of goods dispatched or transported from another Member State in which the installation or assembly in Portuguese territory is made by or on behalf of the supplier, the transaction is also considered located in Portuguese territory and, consequently, will be subject to VAT in Portugal.

(iii) VAT reduction, VAT deduction, VAT credit and VAT refund

As a rule, the VAT will be deducted at the moment the tax becomes chargeable, i.e.:

• In transfers of goods, when they are placed at the disposal of the purchaser; and
• In the provision of services, at the time of their performance.

Whenever the VAT deduction exceeds the amount due for taxable transactions, in the corresponding period, the excess is deducted in the following tax periods, which translates into a VAT credit.

If the value of the VAT credit continues for 12 months in relation to the period when the excess began, a refund can be requested, provided the value is greater than €250.

The company may also apply for a refund before the end of the 12th month period in cases where a VAT credit exists at the time of end of activity, change of the VAT taxation regime, or if the credit in favour of the taxpayer is higher than €3,000.

The reimbursement of the VAT shall be made by the Directorate-General for Taxation (“Direção-Geral dos Impostos”) until the end of the second month following the month in which the request was presented, at the end of which the payment of compensatory interest may be requested, provided that certain conditions are met, namely:

• Submission of the VAT returns in which the refund request was made within the deadline; and
• Delivery of a guarantee (usually in the form of a cash bond or bank guarantee) that may be required by the Directorate-General of Taxation whenever the amount to be reimbursed exceeds €30,000.

(iv) Construction services: reverse charge rule

Generally, VAT is assessed by the companies that provide the services. In the case of construction services, there is a reverse charge.

The reverse charge will apply when the following (cumulative) requirements are met:

• There is a purchase of “construction services”; and
• The purchaser is a VAT taxpayer in Portugal and carries out transactions that confer, in whole or in part, the right to deduct VAT.

As a result of the reverse charge, the purchaser of the construction services is responsible for assessing and paying the VAT due, without prejudice to the right to deduct it under the general rules.

It should be noted that in cases where the obligation to assess and pay the VAT falls in the purchaser of the goods and services, only the tax assessed by virtue of that obligation confers the right to deduct.

Regarding the supply of movable assets in connection with the construction services, the Tax and Customs Authority has published several opinions that clarify the application of the reverse charge rules.

 

Operation phase

(i) Sale of energy in Portugal

A supply of goods carried out for consideration within the Portuguese territory by a VAT taxpayer is subject to VAT.

Electricity, gas, heat, refrigeration and the like are considered tangible goods for VAT purposes.

Thus, the sale of energy by a photovoltaic power plant will be considered a transfer of goods and is subject to the general VAT rate of 23% and the seller must pay VAT.

(ii) Sale of energy to a Member-State

The sale of energy to a buyer based in another Member State constitutes a intra-community transfer. As such, the following rules are applicable:

• The intra-community supply made by the seller is VAT exempt in Portugal; and
• The intra-community acquisition by the buyer is subject to VAT in the Member State of destination.

In this way, the seller does not have to account for VAT and it is up to the buyer to do so, provided this does not affect the right to deduct input VAT.

 

Other taxes and tariffs

Social electricity tariff

The social electricity tariff was created with the purpose of guaranteeing access by all consumers to the essential electricity supply service, namely economically vulnerable customers.

The payment of this tariff is ensured by the owners of electricity generating centers under the ordinary regime, in proportion to the installed capacity of each electricity generating center.

The amount of income obtained with the financing of the costs of the social tariff by the owners of the generating power plants, as well as its allocation to the operators intervening in the electricity sector value chain until the attribution of the social tariff by the distribution network operator are determined in accordance with that established in the tariff regulations applicable to the electricity sector.

Nevertheless, in accordance with the Clarification of 17 June 2020 of the Directorate-General for Energy and Geology (“DGEG”), the holders of the rights arising from the auction procedures of July 2019 and August 2020 for the allocation of reception capacity in the Public Service Electricity Network (“RESP”) of electricity produced at solar power plants ("Rights Holders") are exempt from the social tariff for electricity.

 

Extraordinary contribution over the energy sector

The State Budget Law for 2014 created an extraordinary contribution over the energy sector. This contribution is imposed on natural or legal persons that make part of the national energy sector and that are VAT taxpayers.

This contribution is levied on the value of the following assets:

• Tangible fixed assets;
• Intangible assets, with the exception of industrial property; and
• Financial assets allocated to concessions or to activities licensed under the terms of the previous article.

The rate of the extraordinary contribution on the energy sector is 0.85%.

According to the DGEG clarification, the Rights Holders are exempted from this extraordinary contribution.

 

Clawback mechanism

Under Decree-Law no. 74/2013 (“Clawback Law”), the Portuguese Government approved a regulatory mechanism aimed at compensating the distortions that the extra-market measures and events registered within the European Union cause in the formation of the average electricity prices in the wholesale market in Portugal.

This way, whenever the abovementioned extra-market events give rise to benefits not expected for domestic producers, the corresponding compensation is made, within the scope of the distribution of costs of general economic interest, ensuring the balance of competition in the wholesale electricity market in Portugal.

In this sense, Decree-Law no. 104/2019 amended the Clawback Law introduced the possibility of a payment on account which mitigates the time lag occurring between the verification of the extra-market event and the respective compensation. It also allowed to adjust the external event to the electricity production technology on which it is focused, to avoid distortions of undifferentiated application to different energy production sources. Important to note that with this amendment, the Clawback Law has now expressly established that the clawback charges apply to all electricity producers that sell electricity at a price by reference to OMIE (the Iberian electricity daily market).

The value of the payment on account to be applied in 2021 to electricity producers covered by the clawback mechanism is €2,24/MWh, per unit of energy injected in the public service electricity grid, which already takes into account and internalises local events that affected the Electric National System (“SEN”) such as the taxation of petroleum products and energy, the extraordinary contribution on the energy sector and the social tariff for electricity.

Nevertheless, although Clawback Law only established that this charge is to be applied to electricity producers, the Portuguese Energy Secretary of State determined that in the case the supplier acquires electricity from a producer under a power purchase agreement (“PPA”) with a fixed price to sell it at OMIE, receiving the respective marginal price as return, there will be an increase in gain with the nature of a windfall profit at the level of the supplier, which must be subject to the Clawback Law mechanism.

Between 1 July and 30 September 2021, by Order no. 6398-A/2021, the Portuguese government decided to suspend the application of this rate, which corresponds to the suspension of tax measures in Spain, identified by Energy Services Regulatory Authority (“Entidade Reguladora dos Serviços Energéticos – ERSE”) as having an impact on the formation of average electricity prices in the wholesale market in Portugal.

According to the DGEG Clarification, the Rights Holders are exempt from the clawback mechanism.

To learn more, please download our PDF down below. 

Introduction

Data is everywhere. Information assets are highly valued by companies. Nowadays, businesses depend more frequently on information technologies and data than a few years ago, mainly before the entry into force and application of the European General Data Protection Regulation (GDPR).

In M&A transactions, data is the key for the evaluation of the target company and the risks associated with the deal. Transactions rely on cybersecurity to protect sensitive and confidential information. However, as insurance coverage over information assets is still not widely sought for, risks are greater for companies that may be more vulnerable during M&A transactions.

But if not the risk of an information breach, or the risk of mispricing the transaction, then the risk of being held legally liable for such breach, including personal data violation, must be of alarming to businesses during M&A transactions.

Within the context of a transaction, there are two key points regarding data protection compliance to be considered: whether personal data can be transferred from the target to the acquiror; and whether the parties comply with privacy laws.
In general, asset deals may be more exposed to data protection compliance risks than share deals or corporate reorganizations, since, in these latest two cases, there is no change in the position of the parties to contracts with employees, customers, and suppliers; that is, there is no transfer of the data controller position, which, even though a shareholders’ change, will remain the same entity. However, there are still significant compliance risks associated with share deals. The differences stages of a M&A transaction require different measures to ensure proper data protection compliance.

With this paper, we intend to provide you with the main points of interest that should concern the parties to a transaction, and to outline potential solutions to minimize or eliminate compliance risks.

 

Pre-signing

The typical M&A transaction kicks off with a due diligence on the acquiror, the target, or both. The due diligence is essentially an analytical review of data disclosed by the relevant party to a transaction. And the disclosure of data poses a significant compliance risk for those attributed the duty off keeping it safe.
Usually, access to data in a due diligence is assured via a data room, from which the reviewing party will obtain the contents that are object of the due diligence, including personal data, e.g., information on employees, customers. For this purpose, it may be advisable that data rooms disable save and print options, which is already common practice in many transactions.

Even before the transaction agreement is done, the parties are already obliged to comply with applicable data protection rules, as the pieces of information reviewed during a due diligence will most likely include personal data. And because data rooms usually host personal data, the parties to a transaction must execute data processing agreements with data room providers.
Personal data includes any information relating to an identified or identifiable natural person, as defined by the GDPR.
Deal structure and industry-specific due diligence is of great relevance, too. On one hand, personal data cannot always be transferred in asset deals, and, on the other, for businesses which are data-intensive, handling great amounts of personal data, it is advisable to conduct further compliance due diligence focusing on data protection.

When extra care is advisable, because e.g., the target company handles sensitive data, there are at least three main areas of play:

• The transferability of data and, when applicable, the consent of data subjects on data transfer;
• Whether the original purposes of the data processing (and for which, for example, data subjects gave their consent) are compatible with the acquiror’s business and data processing purposes in connection with the M&A transaction; and
• The security standards in place at both target and acquiror to keep data safe.

Either for valuation or risk assessment, the acquiror should hence understand what the target’s liabilities on privacy matters are, as the acquiror may take on the target’s liabilities at completion.

What you should watch for:

• Access to the data room should be restricted and information disclosed in the data room should be the necessary (data minimization principle). The employees or customers should not be identified or identifiable. For this purpose, and so that the information keeps meaningful value to the due diligence, the disclosing party can anonymize/pseudonymize information;
• Alternatively, employees or customers should be informed that their information will be processed for the purpose of a due diligence and the disclosing party should obtain their consent. Not only this is impractical in large transactions, but also the parties should consider the fact that consent is only an appropriate lawful basis for data processing if it is genuine, which is not likely in an employment context, and thus the parties should rely on a different lawful basis for transferring data of employees;
• The information disclosed should be limited to that that is strictly necessary to perform the due diligence. For this purpose, e.g., employment agreements can be sampled, or the information can be aggregated, or only key information can be disclosed, or the disclosure of sensitive data should be avoided;
• The valuation of the target company should take into consideration that there may be restrictions to the use of personal data by the acquiror post-closing;
• Whenever the target is processing data on behalf of a third party, data sharing agreements will likely include change of control or change of ownership clauses, which should be accounted for by the acquiror;
• Both deal structure and the industry of the target are relevant for the purpose of assessing price, exposure to risk and steps required for a compliant M&A transaction.

 

Signing

If it were not for the comprehensive set of privacy rules, the assumption would be that the target company owned (and could freely exploit) the personal data it acquired over the years. But that is not the case.
Once the due diligence is complete, the transaction documents should safeguard the party’s position in view of any potential data breaches or infringement of data protection rules.

There are plentiful ways to ensure one’s position during negotiations and at signing: contract negotiations should entail an adequate level of protection against the findings resulting from the due diligence, whether this is reflected on the price or in contractual provisions; the share and purchase agreement should include representations and warranties that are tailored for data protection compliance and/or transferring the risk of violation; the counterparty should be able to warrant that it is compliant with privacy laws and has put in place adequate security standards, etc.
The target should warrant the acquiror, e.g., that there are not any pending proceedings related with data security breaches, that it has adequate security standards in place, or that it is compliant with the applicable privacy laws. Indemnification clauses and limitations of liability are also relevant in view of any potential breaches and/or liability resulting from the target’s business up until the completion date.
Insomuch as some transactions may be of greater complexity as regards data, data sharing and data integration, it may be cost-effective and legally advisable to include ancillary services agreements for the specific purpose of ensuring data protection compliance in the transaction documents.
There should be extra care in international M&A transactions due to potential international data transfers.
If data is transferred to a country outside of the EU-EEA, an assessment of the level of adequacy of the jurisdiction, to which the data will be transferred, has to be carried out. Alternatively, mechanisms such as standard contractual clauses, binding corporate rules, approved codes of conduct, approved certifications or a combination thereof have to be included in the transaction documents.
At signing, if the target processes or controls data, the acquiror should have obtained a comprehensive catalogue of data and respective consents, Records of Processing Activities (RoPAs), Data Protection Impact Assessments (DPIAs), if applicable, and Legitimate Interests Assessments (LIAs).

What you should watch for:

• Data breaches and infringements of privacy laws are costly. Whenever appropriate, privacy-related risks should be accounted for with remediation and indemnification clauses;
• If deemed adequate, it may be advisable that the parties agree to conditions precedent and covenants in respect to data processing;
• Non-disclosure agreements (NDAs) should include data protection clauses and contractual penalties in case of failure to keep information confidential. We should note that NDAs executed by the parties for the purpose of ensuring confidentiality during the transaction process will most likely expire at signing of the asset purchase agreement (APA) or share purchase agreement (SPA), so it may be relevant to execute a new NDA at signing or include a non-disclosure provision in the purchase agreement;
• If the target does not warrant that it is legally authorised to share the data with the acquiror, the acquiror risks exposure to liability for unauthorised processing of data;
• Insurance on cyber risks is valuable and may even be a solution to a deadlock where the target is reluctant to be exposed to such a relevant liability.

 

Pre and post-closing

The day the share and purchase agreement are executed by the parties does not always match the closing of the transaction. The period between signing and the closing date could, in fact, take months. During this period, the transaction parties may also exchange information.
The parties should take into consideration that while the transaction is not closed, the acquiror is a third party and sharing information can result in responsibility before the competition authorities.

Some deals require a level of confidentiality that is sometimes conflicting with the interests of privacy laws. The timing for transfer of liability is key, then. When possible, and to avoid unnecessary exposure to compliance risks, the acquiror can be provided with statistical information instead of actual data, even if it is pseudonymized.

After the deal is closed, it is likely that the acquiror might have to face limitations on the use of data.

The acquiror should mind that the consent provided to the target by data subjects sometime in the past may both enable and limit the data processing by the acquiror. And even in a share deal, where the controller of data does not change, privacy policies will need to be updated, should the purpose or use of personal data change after completion.

What you should watch for:

• Data sharing before the closing date should be limited to that strictly necessary for data integration purposes, and those handling data should be limited to the minimum;
• Should the transaction not occur, the parties must be able to adequately eliminate and dispose of any data obtained during negotiations and before closing date;
• Consent is not transferable in the context of an M&A transaction unless the data subject was informed of such a possibility when providing his consent, so this should be considered by the acquiror;
• Data sharing before the closing date should be limited to that strictly necessary for data integration purposes, and those handling data should be limited to the minimum;
• Where the purpose or use of data does change after completion, the acquiror will need to obtain the consent of the data subjects for their data to be processed under the revised privacy policies.

 

How does the GDPR impact M&A?

In the context of an M&A transaction, personal data of many sorts is handled and/or transferred from target to acquiror. This will include employees’ information, applicants’ CVs, IP addresses, suppliers’ information, etc..
The right to data privacy is not an absolute right. It is relative to its function in society. Throughout the transaction process, it is crucial that the parties weigh their legitimate interests against the fundamental rights and freedoms of data subjects.
The assessment of an adequate balance between the right to protection of individual data and freedom of enterprise adds a layer of complexity to M&A that is novel to the market.

During negotiations, the acquiror is a third party as it is neither the data subject, nor the controller, processor, or an entity who, under the direct authority of the controller or processor, are authorized to process personal data. This puts the parties in a very delicate position as to what information can be shared at a stage where trust and disclosure is key to the success of the transaction:

• On one side, the logistics are seriously impacted as parties must go on tiptoe through each stage of negotiations and even after executing the agreement, bearing in mind that sharing information means exposure to a compliance risk.
• On the other, data privacy influences both valuation and deal structure. As we explored, the price may be adjusted by exposure to compliance risks, and the structure of the deal must be compatible with the transfer of data from the target to the acquiror.
• On the third, where transactions are negotiated behind closed doors, the current data protection framework, compliance obligations, and recent history of sanctions motivated by infringements during negotiations, suggest that even though the door is closed, it is not locked, and personal data protection concerns may not be neglected.

If you wish to find out more, please download our PDF down below.

As part of the Recovery and Resilience Plan ("Plano de Recuperação e Resiliência - PRR"), which supports sustainable economic recovery in the context of the post-Covid-19 pandemic, the Portuguese Government announced that the forestry sector now has a total of 615 million euros available for its reform.

Three key reforms were outlined for this sector. First, the transformation of the Landscape of Vulnerable Forest Territories, based on integrated approaches and territorialities foreseen by the Landscape Transformation Program, approved through the Resolution of the Council of Ministers no. 49/2020, of June 24. It is intended to transform the landscape of vulnerable forest territories in order to define a new land use matrix.

The goal is to create a new landscape, which discontinues the areas of pine and eucalyptus, and fosters the introduction of crops that are more profitable for landlords and the territory and, at the same time, make the territory safer, according to the possibilities that territories have for crops.

Secondly, the plan is to Reorganize the Rural Property Registry System and the Land Use and Occupancy Monitoring System.
This reform’s goal is to provide the country with up-to-date and detailed knowledge of the territory, by expanding the simplified cadastral information system and universalizing the Single Office for Buildings (BUPi) platform, and by developing a Land Occupation Monitoring System and reference cartography with high-resolution image coverage.
With this reform, knowing each property, also knowing what is inside each plot, this information is available for owners, investors, and for those who protect the territory.

Finally, it also has de purpose of preventing and fighting rural fires, which includes the implementation of a primary network of fuel management strips and equipping the responsible entities with means and resources that include machinery, equipment, and aerial means for fighting fires (MAIs Forest Program).
In this last phase, thousands of linear kilometers must be opened to interrupt forest masses, to allow firefighters to circulate and stop when necessary.

With all these measures, the Government intends to adopt a non-conformist vision of the fires that ravage the Portuguese territory every year, while at the same time developing and promoting a more sustainable forest.

In a more general tone, the following study is intended to provide readers with an overview of the forestry sector in Portugal. It aims to demonstrate the risks, obligations, organization and capacities of the Portuguese forestry sector.
Forestry activity and its products are of significant economic importance to Portugal due to their contribution to GDP and employment

The sector is mainly supported by national raw materials. More than 60% of Portuguese continental territory is made up of forest areas, 84.2% being private property, 13.8% community lands and only 2% public areas.

Nowadays, the forestry sector is facing important challenges, such as: (i) globalization of the market and economy; (ii) sustainability of resources and the quality of products with consequences in forest management certification and forest products chain-of-custody certification; (iii) greater susceptibility to pests, diseases and fires; and (iv) competition in the use of national forest raw materials.

Despite several potential uses for each forest species, eucalyptus row is used on the pulp and paper industry, pinus pinaster row is used on the wood and furniture industry and cork oak row is typical on the cork industry, for corks, acoustic and thermal insulation material or as fashion accessories.

Portugal imports lumber, veneer, plywood, and firewood into the industry, as well as more than two million cubic meters of logs annually.

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Introduction

In the current context of the coronavirus (Covid-19) pandemic, it is likely that in the coming months several businesses will be unable to pay their debts due to severe cash-flow shortages. As stated by International Monetary Fund, this crisis is not simply about liquidity, but primarily about solvency at a time when large segments of the global economy are or have recently been in a complete stop.
According to official data, the sectors of tourism, non-food retail, automotive and components, textile/clothing, consumer durables, leisure and cultural activities will be the most affected by the crisis caused by Covid-19 in Portugal.
Other sectors that were developing positively in 2020 will likely suffer a reversal in the upward trend of their activity. Particularly, due to their high weight in GDP, the sectors of construction and materials and real estate activities. In some industries, the consequences will be positive in the very short term, although the sharp deterioration of the economy will probably affect negatively their activity in the upcoming months.

Seeking to reduce the economic impact of Covid-19, the Portuguese Government approved various crisis containment measures – legal, financial, and regulatory – to protect businesses and individuals negatively affected by the Covid-19 pandemic.
Many of these measures directly or indirectly relate to corporate restructuring. Such measures were essentially designed to support financially distressed companies and prevent unnecessary insolvency of companies that in the ordinary course of events would be viable.

During and in the short-medium term after Covid-19, it may be even more relevant to use out-of-court solutions. The special recovery proceeding (Processo Especial de Revitalização or PER) and the extrajudicial recovery scheme (Regime Extrajudicial de Recuperação de Empresas or RERE) allow debtors to start negotiations with their creditors and avoid increasing their distressful financial situation and ultimately their insolvency.

 

Economic relief measures package

To mitigate the economic effects of the Covid-19 outbreak, the Portuguese Government approved a EUR 9.2 billion incentive package of economic relief measures designed to address actual and future challenges.
The relief package includes:

• EUR 5.2 billion euros in fiscal incentives;
• EUR 1 billion for Social Security payments and a deferral of some Tax payments, corporate income tax (CIT) and VAT; and
• EUR 3 billion in state-backed credit guarantees.

This package includes a procedure called “simplified lay-off”, specifically aimed at keeping employment contracts.
The simplified lay-off may involve temporary suspensions of employment contracts or the reduction of the normal working period.
Companies that choose the simplified lay-off are entitled to a financial support granted by the Social Security corresponding to 70% of 2/3 of the employees’ gross salary up to EUR 1,905, for the duration of 1 month, which may be extended monthly for as long as the obligation to close the company remains (the remaining 30% being borne by the employer). An exceptional and temporary regime of exemption from the payment of Social Security contributions is also available during the simplified lay-off period for employers (and self-employed individuals who are employers).
In a phase of normalization of the business activity (after the outbreak), companies that used the simplified lay-off mechanism may also benefit from an extraordinary financial support corresponding to a maximum of EUR 635 per employee, to support salary payments.

Other measures already in place include financial incentive measures under QREN or Portugal 2020 incentive programs, including, among others:

• Acceleration of incentives advance payments or reimbursements;
• Extension of the maturity of the loans, provided with no interest;
• Eligibility of the expenses incurred with, cancelled or postponed initiatives or events.

The Program “Capitalizar” Financial Facility – Covid-19 was created and gave EUR 400 million to support companies affected by the economic effects of the outbreak.

Until September 30, 2021, a moratorium on loans is also in force, allowing:

• A restriction on lenders’ acceleration or termination rights;
• An extension of financings with bullet repayments; and
• The deferral of all payment obligations.

The insolvency declaration of the landlord, the submission to a special revitalization proceeding or to the extrajudicial company recovery scheme shall not affect the lenders’ rights.

To sum up, the measures taken can be divided into four categories:

• Simplified lay-off and extraordinary training plan;
• Tax and contributory measures;
• Economic incentive measures; and
• Moratorium on loans. 

 

Restructuring procedures

If a company has a sustainable business still, but current debts and additional losses caused by the Covid-19 crisis are preventing it from working normally, there are several extrajudicial and judicial options available before filing for an insolvency proceeding.

 

PEVE

PEVE is a proceeding that seeks the judicial homologation of an extrajudicial agreement to ensure the viability of a company, established (out of court) between the company and its creditors.
It was specifically created by Law No. 75/2020 of November 27, 2020, to secure the viability of companies affected by the COVID-19 containment measures, and that out of the pandemic scenario would be financially stable.
It will be in force at least until December 31, 2021, and its lifetime may be further extended by Decree-Law.
PEVE is applicable:

• To companies in a difficult economic situation or in imminent or current insolvency, provided that: (i) they are still viable; (ii) their assets exceed their liabilities as of December 31, 2019, and (iii) they are not under PER or insolvency proceedings;
• To micro or small companies, even if on December 31, 2019, their assets were not in greater number than their liabilities, provided that: (i) they have received State aid funds that have not yet been repaid, or they are in a restructuring plan under the State aid measures; (ii) they are not in a pending PER or insolvency proceeding;
• To companies that have managed to regularize their financial situation through RERE and filed the restructuring agreement in due time, while not having more assets than liabilities on December 31, 2019.

 

Insolvency

Broadly, insolvency is deemed to exist when the company becomes unable to fulfil the generality of its obligations as they fall due, does not pay one of its major creditors or defaults on an important contract putting at risk the continuation of its business.
If directors are aware that the company became unable to comply with its outstanding obligations, they must file for the insolvency of the company within thirty days from the date they acknowledged this situation.
Due to COVID-19, the directors’ duty to file for insolvency was suspended with effects from March 9, 2020 (the “suspension period”).
The temporary exemption of the duty to file for an insolvency proceeding may well protect managing directors with genuine short-term issues but long-term viable businesses, but it may also have the effect of artificially supporting companies that would otherwise have been unable to sustain their business regardless of the economic circumstances. The removal of liability can be a shield for those who may be careless as to their directors’ duties, adversely impacting the rights of their creditors and employees.
The said exemption does not mean that directors were released from a “business judgment rule” during the COVID-19 pandemic.
They remain obliged to act according with statutory and fiduciary duties such as the duty of care and the duty to act in good faith and in the way most likely to promote the success of the company.

Directors must prevent any actions that might:

• Damage or endanger the company’s assets;
• Artificially create or worsen liabilities and losses, in particular, by means of damaging transactions; or
• Manage the company in a way that would foreseeably lead it to insolvency.

 

Final remarks

Due to the COVID-19 medium and long-term effects over the economy and companies, a considerable increase of restructuring and insolvency proceedings is expectable along the second semester of 2020, 2021 and 2022, mainly after the end of the economic incentive measures and in case out-of-court arrangements are not fruitful.

In fact, there are three stages:

• A first stage, during which companies can take advantage of government support measures to continue operating during the COVID-19 outbreak;
• A second stage, immediately after lockdown measures are mitigated and economic activity gradually begins to return to normal, where it is likely that companies seek for negotiating with their creditors to prevent immediate defaults by getting waivers and/or other restructurings of liabilities;
• A third stage, where government support measures have not been sufficient to remedy businesses’ cash-flow difficulties and the entities are unable to reach immediate agreements with creditors. In this stage, there will be first an increase on the use of out-of-court recovering mechanisms (RERE and PER) and, if not possible, of insolvency proceedings with investigations into steps taken and transactions entered, and potentially the use of the insolvency administrator’s powers to challenge decisions/transactions and seek to recover value for the benefit of creditors.

Apart from the insolvency-related measures already taken by the Portuguese Government, it could be required to consider additional measures to allow businesses the chance to negotiate with their creditors and reach arrangements without the risk of litigation. 
Moreover, it is needed to redefine the voidable transactions regime in times of COVID-19 and include specific rules to be applied in this context in order to avoid the cashback of transactions carried out by businesses whose financial situation has been deteriorated due to COVID-19, and distinguish this situation from those in which businesses are already insolvent before the pandemic. As this does not reveal to be an easy task, these measures should be subject to temporal limitations (e.g. three or six months) that can be adjusted according to the progress of the pandemic.
Although current and future measures may provide companies with a valuable breathing space, they do not answer the structural economic challenges faced by companies affected by COVID-19: the existence of losses (due to fixed costs and lack of revenues) and the lack of cash-flows.
Changes to out-of-courts remedies (possibly together with a more comprehensive package of legal, financial, and economic measures) may reveal crucial to avoid distressed companies’ situations (previously viable) to be extended over time, ultimately leading to insolvency proceedings.

If you wish to learn more, please download of PDF down below. 

 

Overview

Until the first half of the 1990’s, the promotion of electricity and the development of the system’s main infrastructures was handled by state-owned Eletricidade de Portugal, E.P. (“EDP”). From 2006 onwards, a centralized planning of generating centers was replaced by a liberalized marketplace, in which the State acts as a complement to private initiative.

As a result of these changes, the electricity sector was unbundled, and is currently divided into several activities, each one with different operators.

The sector is structured in:

• Production;
• Transportation;
• Distribution;
• Transmission; and
• Supply.

According to the most recent data of 2020 published by REN – Rede Elétrica Nacional, S.A. (“REN”) the electricity market has been witnessing a decrease in consumption of 2,2% since 2019.

Renewable production was responsible for 56% of consumption, divided between:

• Hydroelectric with 24%;
• Wind with 23%;
• Biomass with 7%; and
• Photovoltaic with about 3%.

Non-renewable production supplied 39% of consumption, mainly natural gas, with coal accounting for about 3% of consumption.

 

Electricity Production

• Ordinary production regime: this electricity production regime applies to the production of electricity based on traditional non-renewable sources and large water-producing centers. The production activity of electricity is fully liberalized and subject to a competitive market, since 2007, following the implementation of MIBEL (Iberian Electricity Market). Thus, power plants have started to offer their energy on a common energy platform, integrated at the Iberian level, only requiring the granting of a production license to be issued by DGEG (“Portuguese National Energy Agency”), in accordance with the Electricity System Law. There are only 4 producers included in this regime, which are: Grupo EDP (Produção); ElecGas, S.A.; Tejo Energia - Produção e Distribuição de Energia Eléctrica, S.A.; and Turbogás - Produtora Energética, S.A.
• Special production regime: this production regime refers to the activity of production subject to special legal regimes, as is the case with electricity production through cogeneration and endogenous, renewable and non-renewable resources, micro-production, mini-production and production without injection of power into the grid. It is expected that as renewable energy technologies mature and become more competitive, special regime producers will also offer energy produced on the market on similar terms to ordinary producers.

 

Electricity transmission network

The activity of electricity transmission is carried out through the operation of the national transmission network (RNT) to which corresponds a single concession exercised exclusively and as a public service.

The concession is granted for a period of fifty years, and cannot be transferred, sold or otherwise charged by the concessionaire, without prior authorization from the Government.

The concession includes the planning, construction, operation and maintenance of the RNT, as well as the overall planning and technical management of the National Electric System to ensure the harmonized functioning of its infrastructures, as well as the continuity of service and the security of electricity supply.

The electricity produced in places far from the areas of consumption is delivered to the transmission grid and conducted at very high voltage (EHV), in order to bring large amounts of energy to the various points of the territory without significant losses, thus guaranteeing the supply regardless of the distance to the power plants.

This task is called Global System Management and is carried out by the transmission system operator (TSO), which is REN.

Investment in the transmission network has kept pace with the growth in national consumption. Currently, the transmission network operated by REN has an extension of 8,733 km of lines throughout the country.

REN´s stakeholder structure is diverse. Major stakeholders include:

• State Grid Corporation of China (25%);
• Oman Oil Company SAOC (12%);
• Lazard Asset Management (7%); and
• Fidelidade – Companhia de Seguros, S.A. (5,3%), which is owned by Chinese multinational Fosun.

 

Energy distribution network

The distribution activity is carried out by the exploitation of the infrastructures that, as a whole, make up the National Network of Distribution of Electricity.

Electricity distribution is carried out under public service concessions granted by the Portuguese State. The entities responsible for the distribution must be legally unbundled, not being able to carry out other activities within the sector.

The electricity distribution activity is carried out in the following forms:

• Concession of national distribution networks exercised exclusively and under public service in high and medium low voltage (HV and MV);
• Concessions of regional distribution networks under public service in low voltage (LV).

The public service concession for national distribution of electricity has been granted to EDP Distribuição – Energia, S.A.

 

Electricity supply

The supply activity of electricity is fully liberalized and subject to a competitive market, only requiring the granting of a license to be issued by the Portuguese State, in accordance with the Electricity System Law.

Licensed suppliers, in the exercise of their activity, can freely buy and sell electricity and have the right to access the transmission and distribution networks upon payment of access tariffs set by ERSE.

 

The energy regulator

The Regulatory Entity for Energy Services (ERSE) is the entity responsible for regulating the electricity and natural gas at national level.

ERSE has the responsibility to ensure that operators in the electricity and natural gas sectors comply with public service obligations and other obligations laid down in laws and regulations, as well as in the concession contracts.

Specifically, regarding the electricity sector, ERSE has the following attributions:

• Ensure the existence of conditions to meet the demand for electricity efficiently; and
• To guarantee concessionaires and licensed entities the existence of conditions that allow them, within an adequate and efficient management, to obtain the economic and financial balance necessary to fulfill the obligations set forth in the concession agreement and in the respective licenses.

This briefing intends to give an overview on the functioning and organization of the different activities of the Portuguese Electricity Sector, as well as on the main players that operate on the market. if you want to find out more, please download our PDF down below. 

Energy production and comsuption

Energy production. Consumers have been, until recently, seen as mere recipients of energy policies, that do not take an active role in managing their energy consumption.

However, as of 2014, Portugal began to focus on decentralized energy production solutions which, combined with technological innovation on PV, began to enhance the role of the producer-consumer of electricity.

The energy transition has accelerated since 2019, with the integration of European policies for self-consumption of energy and decarbonization, making it possible for consumers to invest more simply and quickly in the production of electricity through renewable energy.

This transition is part of the goal of achieving a 47% share of energy from renewable sources by 2030, which will only be possible with the development of electricity production by consumers.

Producers-consumers are being placed at the center of energy production, assuming themselves as the main figure in the energy transition process.

Currently, there are two models of decentralized energy production in Portugal, in which the consumer has an active role in energy production.

• Small Production Units (Unidades de Pequena Produção - "UPP"), which are installations with a maximum connection power of 1 MW, based on a single renewable production technology, with all the electricity produced being sold to the Public Service Electricity Grid (Rede Elétrica de Serviço Público - “RESP"); and
• Production Units for Self-Consumption (Unidade de Produção para Auto-Consumo - "UPAC"), which are electricity production installations, based or not on renewable technologies, whose energy is intended predominantly for self-consumption, with the possibility of selling the surplus to RESP.

UPP regime may be found in articles 27º-B, 27º-C and 27º-D of Decree-Law No. 172/2006, of 23 August, and it is only accessible to natural or legal persons.

The electricity produced by UPP and delivered to RESP is remunerated, at the producer's option by one of the following mechanisms:

• General: where producers sell the electricity produced: (i) on the market, (ii) through bilateral contracting, or (iii) through the market facilitator at a price previously agreed between the parties.
• Guaranteed: through a tariff assigned based on a bidding model, in which producers offer discounts to the reference tariff set at €45,00.

The second modality cannot be cumulative with another type of incentive to the production of electricity and is in force for 15 years, after which the producer transits to the general remuneration regime. Access to the guaranteed remuneration scheme is carried out through monthly injection power allocation sessions promoted by DGEG, with an annual quota limit of 20 MW. Producers that have failed to obtain injection capacity in a relevant allocation session are carried over to the next one, and so forth.

The UPAC regime results from Decree-Law No. 162/2019 of 25 October, and it is accessible to:

• Individual self-consumers;
• Collective, organized in condominiums/apartments/houses located in the same geographical area; industrial, commercial or agricultural units, and other infrastructures; and
• Renewable energy communities (RECs).

Excess energy from production for self-consumption may be sold and remunerated in the following ways:

• In an organized market or through bilateral contracting, at a price previously agreed between the parties;
• Through the market participant against payment of a price freely agreed upon between the parties;
• Through the market facilitator, who is subject to the obligation to purchase the energy produced by the producers; and
• Through the LRS until the market facilitator license is granted against payment of a market-based fee.

LRS is only bound to acquire the electricity produced by producers whose authorized injection capacity does not exceed 1 MW.

 

What does the future hold for small production?

Pursuant to the Paris Agreement, Portugal intends to promote solar energy produced until in the country reaches 1 GW by the end of 2030.

To achieve this goal, it will be important for Portugal to reinforce its measures to promote energy transition and to reinforce its grid infrastructure, so that over the next few years a greater capacity for injecting electricity into the grid can be achieved.

These measures are part of the Government's strategic plans, which include meeting 80% of the country's energy demand from renewable energies by 2030 and electrifying 65% of the economy by 2050.

Regarding decentralized solar photovoltaic energy, the objectives outlined in the National Energy and Climate Plan are for Portugal to have 0.8 GW of installed capacity by 2025 and 2 GW by 2030.

Currently the market presents installation solutions for UPACs in which the receiver of this technology does not assume any financial burden, committing only to self-consume the energy produced and sharing the costs reduction and all or part of the surplus energy being handed over to the installer as compensation for the installation, operation and maintenance of UPAC.

The Portuguese Government has announced a new law to reinforce renewable energy communities, opening the possibility of managing communities on dynamic management digital platforms and giving differentiated treatment for self-consumption to industrial communities involving electro-intensive consumers. The so-called heavy industry will be allowed to produce offsite energy for self-consumption.

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