cases of severe non-compliance, termination of the PPA. In general, these requirements relate to the attainment of black economic empowerment, local economic development, and socio-economic development objectives. In addition, South Africa’s renewable energy program’s economic development requirements fit within the broader framework of the South African government’s empowerment program currently being implemented through the Broad-Based Black Economic Empowerment Act and the Codes of Good Practice on Broad-Based Black Economic Empowerment (“BEE”). These laws recognize two distinct mechanisms for the achievement of BEE objectives-compliance with codes of good practice, which have already been issued, and compliance with industry-specific transformation charters. One component of BEE is achieving a certain percentage of shareholdings by historically disadvantaged South Africans in South African businesses. Other components include procuring goods and services from black-owned businesses or from businesses that have earned good BEE scores, making contributions to charitable organizations and to small and medium sized majority black-owned businesses and achieving certain levels of black South African employment. Compliance with the codes and applicable charters are not enforced through civil or criminal sanction, but compliance will have an effect on our ability to secure contracts in the public and private sectors. If we acquire additional power plants located in South Africa, but are unable to comply with the requirements of the renewable energy program or achieve applicable BEE objectives, it could have a material adverse effect on our business, financial condition, results of operations, cash flows and cash available for distribution to shareholders.
Labor disputes and the labor laws could have a material adverse effect on the operation and financial performance of South African power plants.
Although there is a history of positive and constructive engagement with labor unions in South Africa in recent years, there have been periods during which the various stakeholders are unable to agree on dispute resolution processes resulting in significant labor disputes and disruptive labor activities. Although we expect to contract with third-parties for the O&M of our South African power plants and not hire local employees for such facilities, any such power plants will nonetheless be at risk of its operations being disrupted for indefinite periods due to labor strikes and other labor disputes related to the parties from whom we contract operating and maintenance services. Significant labor disruptions may have a material adverse effect on the operations and financial results and condition of our South African power plants.
The operating results of our power plants in China may be adversely affected by changes in governmental policies that currently subsidize renewable energy.
The Chinese government has enacted a series of financial incentives designed to promote the development of solar and wind facilities. Most importantly, the feed-in tariff program currently provides that solar power plants are eligible to receive increased tariffs in an amount in excess of the benchmark tariff received by local desulfurized coal-fired generating units. The amount of the tariff to be paid to the power plant is established by the government based on a number of factors that are designed to make the power plant economically viable. The operating results of a power plant would be adversely affected in the event the government reduced the tariff payable to one or more of our power plants. There can be no assurance that the Chinese government will not elect to reduce or eliminate the ongoing tariff payments to our power plants in China.
Pursuant to the Chinese government’s Renewable Energy Law, all electrical power generated from clean and renewable energy sources is required to be purchased by the grid company provided that on-grid technical standards have been complied with and required approvals have been obtained. Nevertheless, solar and wind power plants have periodically experienced periods of curtailment by the grid company due to a lack of infrastructure and transmission capacity. Curtailment results in reduced tariff payments to the power plant as the facility is only entitled to receive payment for energy delivered to the grid companies. Our power plants in China have experienced and may continue to experience periodic reductions in revenue due to curtailments attributable to limitations on the electricity grids served by these power plants.
Chinese solar and wind power plants typically enter into a “framework” PPA with a power grid company with an initial term typically ranging from three to five years. These framework PPAs do not necessarily specify any volume or price obligations on the part of the offtake counterparty purchaser. The solar and wind facilities and the power grid company will further enter into short-term agreements under the framework PPA, which are subject to automatic annual renewals. The terms of these annual supplemental agreements are subject to change to the extent the government changes its tariff rate. As a result, our power plants in China will likely not have any long-term contractual protection on the price at which they may sell the power they generate or on the amount of power they may sell to the grid company. The Chinese government is under no obligation to keep the subsidized tariff rates in effect for the foreseeable future, and therefore the profitability of solar and wind facilities in China is subject to change with little or no advance notice.
Changes in foreign withholding taxes could adversely affect our results of operations.
Distributions of earnings and other payments, including interest, to us from our power plants may be subject to withholding taxes imposed by the jurisdiction in which the project companies are formed or operating.