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Counsel, Head of Energy and Natural resources, LLM (Cantab), Arzinger
Ukrainian Green Energy: Obstacles to Opportunities
Ukraine has become a perspective market for large-scale construction of “green” energy power stations, which marks the inflow of a large amount of investment into the industry. At the beginning of 2020, global investors reconfirmed their readiness and willingness to invest in the development of the Ukrainian renewable energy sector.
Considering the inevitability of a gradual global transition towards renewable energy, significant legislative and political processes in Ukraine are under way to establish effective regulation in this area. Nevertheless, Ukraine’s “green” energy market is now seeing the appearance of barriers for RES producers. Below is a short summary of the non-exclusive risks that RES investors need to be aware of when planning investment in RTB projects.
Restriction (Curtailment) of Electricity Production
Considering the precedents set this year and last of forced curtailment of electricity production and increased construction of new SPPs and WPPs, the Integrated Power System of Ukraine has shown its inability to operate with such amounts of overproduced energy. Therefore, cases of restrictions of green electricity will allegedly become more frequent. According to the Electricity Market Law in the event of a threat to the operational security of modes of the Integrated Power System of Ukraine, the Transmission System Operator (NEC Ukrenergo) can restrict electricity production. Undoubtedly, this leads to significant financial losses for RES producers. Thus, full (green tariff equivalent) compensation of the electricity which was curtailed is statutorily envisaged. However, due to the absence of a mechanism for compensation in the law, actual compensation is not paid out.
The above demonstrates the need to develop a more flexible power system, as production volumes grow faster and faster each year and consumption and exports decrease, as well as amending primary/secondary legislation to define who (TSO or Guaranteed Buyer) should compensate for losses and under which methodology such losses will be calculated.
Guaranteed Buyer Balance Deficit
The viable work of the sole buyer of electricity of RES producers, i.e. SE Guaranteed Buyer, has proven to be a significant issue. Due to the large-scale growth of alternative electricity generation in Ukraine, the payment discipline of the Guaranteed Buyer is becoming rather poor. Currently, due to the lack of a sustainable and sufficient source for “green” tariff payments, the Guaranteed Buyer is unable to pay all guaranteed payments to RES producers (the debt is over UAH 7.5 billion), which harms the electricity market of Ukraine and its reputation in the eyes of foreign investors. In this regard, it is necessary to find new sources for the Guaranteed Buyer’s income or amend existing ones.
Memorandum of Understanding between Government and RES Investors
On the last week of May or so it is expected that the Ministry of Energy and Environmental Protection of Ukraine will finally sign the Memorandum of Understanding with the two associations of renewable energy producers after a rather lengthy mediation process under the supervision of the Energy Community Secretariat. The final version of the memorandum, although not publicly available, is widely discussed and criticized for the majority of RES producers (medium and small) not involved in the mediation process.
The memorandum will most probably serve as a base for further legislative changes in Ukraine governing relations in renewable energy production and related areas. The new legislation will impact all renewable energy producers as well as solar panels/wind turbines producers, EPC contractors, creditors of RES projects, and other related stakeholders.
Thus, without the final details, it is understood from public sources that
– RES producers will be asked to ’opt into’ the voluntary restructuring process and decrease the feed-in tariff. Those who opt out of the restructuring process will most likely lose the priority right to payments from the Guaranteed Buyer (whose payment discipline is already rather poor and payment deficit is expected to grow massively).
– There will be acceleration in the liability for non-balances (for those who opt out of restricting liability it will increase immediately).
– There will be acceleration in cut-off dates for projects with valid pre-PPAs.
– A solution will be proposed to the curtailment issue.
Expected changes will inevitably lead to a decrease in cash flow for RES producers, which will further affect their loan repayment plans. Moreover, the mere fact of reduction in the feed-in tariff will most likely be treated as a Material Adverse Effect and constitute an Event of Default under loan agreements. Thus, it is expected that RES producers and their lenders will have to negotiate restructuring of outstanding debt.
In this respect, we expect that RES producers need to closely watch the developments of proposed changes and assess the risks associated with it, and assess the possibilities of arbitration and restructuring of loans received for the RES projects. We note that Ukraine has, in the past, already cut the feed-in tariff and changed the rules of the game.
Submission to the Constitutional Court of Ukraine
Several media outlets recently circulated news that MPs have prepared a submission to the Constitutional Court of Ukraine seeking to declare unconstitutional a number of legislative provisions on the establishment of “green” tariffs.
The main arguments of these MPs in the submission are as follows:
- The Parliament of Ukraine (Verkhovna Rada of Ukraine) acted ultra vires and had no power to set up the GT value, as this power is vested in executive authority (Cabinet of Ministers of Ukraine)
- The GT is too high, and thus:
– the title of the Ukrainian people to its resources is infringed;
– the GT is not aimed at social justice;
– the GT does not meet the requirement of the state budget to be balanced (i.e. the reimbursement for green energy constituted 7.9% of total produced energy value, while the share of RE in total energy production was only 1.9%);
– the protection of competition is not respected due to the favourable GT
Such submission has not yet been registered with the Constitutional Court of Ukraine, and we assess the chances of its registration by 49 MPs as being low. Nevertheless, critical assessment of the aforesaid submission should be carried out. Declaring the establishment of the GT to be unconstitutional would undoubtedly severely impact the investment climate in Ukraine.
Switch from the GT Automatic Granting to Green Auctions
Parliament decided to introduce green auctions in order to have a lower price for RES-produced electricity. Their aim is to get fair distribution of state support (via auction prices) based on the quotas determined by the Cabinet of Ministers of Ukraine upon the submission of Ministry of Energy and Environmental Protection of Ukraine. Such quotas are established once every five years.
As now envisaged by the Alternative Energy Sources Law the auctions should be conducted twice a year. However, despite the changes adopted almost a year ago, no auctions have been held yet. Even a pilot auction, which was linked to the adoption of the Government Procedure for the Conduct of Auctions has not been held yet, and the market is totally unaware of the planned amount of quotas.
The fulfilment of the obligations of the government and state bodies regarding green auctions is currently very slow and ineffective. The latest declarations named April 2020 as a scheduled timeline for the holding of green auctions. But this did not happen, and it seems impossible in the near future taking into account the pandemic.
Green auctions seem to serve as a good instrument for future regulation of granting state support, but the current situation requires clear and constructive measures to be taken.
Today, the initiatives are not clear enough on the changes to be undertaken for implementation. One can observe that state executives make feasible endeavours to have dialogue with business and to figure out workable solutions. Before the COVID-19 collapse, the Ukrainian energy market faced a lot of working meetings and public events involving major stakeholders and decision-makers in the alternative energy market. Moreover, delays by the Guaranteed Buyer with making payments even worsen the situation, generating additional stress for existing players on the market and forcing new players to reconsider their options for investing in the market.
A sound approach to the establishment of clear rules for the payment of existing debts is vital for overcoming the existing situation and saving the market’s attractiveness for international investors. We hope that a balance between the interests of the investors and the state will finally be found and formalized, and that this will serve as a key source for sustainable development of renewable energy in Ukraine.