Author: Rustu Mert Kaska
Introduction
The European Federation of Energy Traders (“EFET”) is an Amsterdam-based organization established in 1999 for promoting competition, transparency and open-access in the energy sector.[1] In addition to its activities concerning energy regulation and fostering competition in the energy sector, EFET has published standard agreements for wholesale electricity and gas trading. EFET’s General Agreement Concerning the Delivery and Acceptance of Electricity (“General Agreement”)[2] is widely used in the European Union for electricity trading.[3] Its use for electricity trading in the Turkish power sector has also increased over the last few years together with the increase in the number of companies having electricity supply licenses in Turkey.
The General Agreement provides a user-friendly mechanism for electricity trading by providing pre-determined contractual provisions for individual arrangements regarding purchase, sale, delivery and acceptance of electricity, hence reducing transaction costs in the wholesale electricity market. This paper is intended to outline the mechanism and main provisions of the General Agreement.
Framework and Key Provisions of the General Agreement
Contractual Documents
One of the biggest benefits of having a framework agreement is that it eliminates the need for the parties to individually negotiate extensive contractual terms for every single agreement that they conclude. The General Agreement achieves this goal by combination of several documents which are as follows:
- The General Agreement text
- Annex 1 which lays out the definitions used in the General Agreement
- Annex 2a for confirmation of individual contracts with fixed price
- Annex 2b for confirmation of individual contracts with floating price
- Annex 2c for confirmation of individual contracts for call options
- Annex 2d for confirmation of individual contracts for put options
- The Election Sheet
The General Agreement is structured as a general framework for selling electricity and articulating the matters which are most likely to cause disputes between the parties to an electricity supply agreement.[4] Through the Election Sheet, it gives the opportunity to the parties to efficiently opt-in or opt-out of the application of certain provisions of the General Agreement to their contractual relationship.
Once the parties execute the General Agreement and the Election Sheet, they may use the appropriate confirmation forms annexed to the General Agreement for entering into individual contracts regarding electricity sale and purchase (“Individual Contract”). It should be noted that the use of confirmations is not mandatory under the General Agreement. According to section §2.2 of the General Agreement, if there is an inconsistency between the General Agreement and the Election Sheet, the Election Sheet supersedes the General Agreement. In the event there is a conflict between the Individual Contract terms (whether recorded in a confirmation or not) and the General Agreement (including the Election Sheet) the terms of the Individual Contract take priority in the interpretation.
Conclusion of Individual Contracts
The General Agreement is, on its own, a framework agreement. Therefore, until the parties to the General Agreement conclude Individual Contracts based on the General Agreement, it will not generate performance obligations for the parties.[5]
Section §3 of the General Agreement defines the procedure through which the parties may conclude Individual Contracts. In line with the General Agreement’s user-friendly attitude, it expressly states that the Individual Contracts do not have to be recorded in writing unless otherwise agreed between the parties. In this case, either party may send a written confirmation to the other party regarding the agreement so reached. The party receiving the confirmation should promptly review it and inform the other party if the content of the confirmation differs from what was agreed between the parties.
Single Agreement Concept
The most prominent characteristic of the General Agreement is the single agreement concept. Under section §1.1 of the General Agreement, “[a]ll Individual Contracts and this General Agreement shall form a single agreement between the Parties”. Thus, whenever the term “Agreement” is used in the General Agreement, it refers to all of the Individual Contracts executed pursuant to the General Agreement, as well as to the terms of the General Agreement itself. Similar to the ISDA Master Agreement, this single agreement concept is mainly intended to link the Individual Contracts with each other and with the General Agreement so that, in the event of bankruptcy of one of the parties, the bankruptcy estate will not be able to cherry-pick advantageous individual contracts and terminate the ones which are onerous for the bankrupted party.
Primary Obligations and Remedies
Under the General Agreement, the primary obligations arising out of Individual Contracts are delivering and accepting the delivery of the agreed capacity in accordance with the delivery schedules agreed between the parties. In this respect, accepting the delivery is defined as a separate obligation in the General Agreement. Provided that failure to deliver or accept agreed electricity capacity is not attributable to a force majeure or to the other party’s failure to perform its obligations, the party who failed to perform its obligation will be liable to the other party. The General Agreement provides specific calculation methods for failure to deliver or failure to accept the delivery of electricity:
- In the event of failure to deliver by the seller, the seller will be responsible for the difference between the market price and the contract price for the undelivered quantity of electricity.
- In the event of failure to take delivery by the buyer, the buyer will be responsible against the seller for the difference between the contract price and the market price for the non-accepted quantity of electricity.
Additionally, the breaching party’s liability will be increased by additional transmission costs and other verifiable costs reasonably incurred by the non-defaulting party as a result of the breaching party’s failure.
Section §9 of the General Agreement provides a remedy for breaches of payment obligations or obligations to provide security. According to this provision, if one of the parties fails to make a payment due to the other party or if it does not comply with the performance assurance obligations under the General Agreement, the non-defaulting party may suspend all further deliveries of electricity by giving a three business days’ notice to the defaulting party until it receives the required assurance or payment of its receivables.
Credit Support and Performance Assurance
The parties may agree at any time on the circumstances in which they will be required to provide credit support documents and the form and amount of such guarantees. In such case, the agreed credit support documents should be provided pursuant to the parties’ agreement. In addition, when a material adverse change occurs as to a party, the other party may request additional securities as guarantees for the performance of the party about which such a material adverse change has occurred. The General Agreement, under section §17.2, lists the circumstances which are classified as material adverse changes.
Term, Termination and Close-Out Netting
The General Agreement does not have an expiration term unless the parties specify such a term in the Election Sheet. This is in line with the fact that electricity supply agreements tend to be for a long term. However, either party may terminate the General Agreement by giving 30 days’ notice in accordance with §10.2 if no expiration date is specified in the Election Sheet. This is referred as ordinary termination. In case the right to ordinary termination is exercised, the General Agreement will stay valid until the obligations arising out of existing individual contracts are carried out. That is to say, the close-out netting provisions of the General Agreement will not be triggered in this case.
In addition to ordinary termination, §10.3 regulates early termination, which may take place if one of the material reasons listed in this provision occurs. The General Agreement provides that, unless otherwise stated in the Election Sheet, the material reasons defined in the General Agreement are the exclusive grounds for early termination. In the event of early termination, unlike ordinary termination, the Individual Contracts will also be terminated and the parties’ contractual relationship will be liquidated, through the application of the concept of close-out netting, into a single amount which will be payable from one party to the other.
Limitation of Liability
Except for the amounts that become payable upon failure to deliver or accept electricity pursuant to section §8 and termination for material reasons pursuant to section §10.3, the General Agreement provides that the parties shall not be responsible for slight negligence in failing to perform. The General Agreement entirely excludes indirect damages and provides that the total liability, except for the amounts that become payable upon failure to deliver or accept electricity pursuant to section §8, and calculation of the termination amount pursuant to section §11, will be capped with the amounts payable under the relevant Individual Contracts. However, the parties’ liability is not limited for (1) intentional default, (2) fraud, and (3) actions jeopardizing fundamental legal rights or violating fundamental contractual duties of the parties.
Governing Law and Arbitration
Unless a contrary provision is made in the Election Sheet by the parties, the General Agreement and the Individual Contracts are governed by German law, application of the United Nations Convention on Contracts for the International Sale of Goods is excluded, and the disputes arising in connection with the Agreement will be referred to the German Institution of Arbitration according to its rules for arbitration.
Conclusion
The General Agreement provides a reliable and user-friendly mechanism for trading electricity. Its provisions cover the main issues which are most likely to cause disputes between the parties. With the increased usage of the General Agreement in the wholesale electricity trading in Turkey, it is possible to observe that it has been standardizing the terms of wholesale electricity trading and, therefore, creating a self-regulation amongst the companies operating in the
[1] https://www.efet.org/home/content?id=39. (Access date: 22.09.2021)
[2] The General Agreement is available at https://www.efet.org/home/documents?id=36; the General Agreement’s Turkish translation (translated by Energy Traders Association) is available at https://www.etd.org.tr/tr/sozlesmeler. (Access date: 22.09.2021)
[3] EFET Response to CESR Consultation Paper on Standardisation and Exchange Trading of OTC Derivatives, https://www.esma.europa.eu/file/9390/download?token=j5ocJQDF. (Access date: 27.09.2021)
[4] Ayrancı, Hasan: Enerji Sözleşmeleri, Yetkin Yayınları 2010, p.132 fn. 225.
[5] Ayrancı, p. 133.
