Update on payments by the Ukrainian state offtaker to RES producers, constitutional proceedings on Ukrainian FIT and curtailment compensation

Current and expected status of payments by the Ukrainian state offtaker to RES producers

Please be informed that during the meeting of the members of the American Chamber of Commerce in Ukraine with the Prime Minister of Ukraine on 24 September 2020, the Prime Minister informed that there are available funds to cover 85% of payments for electricity produced in September 2020 and there is a possibility to cover 100% of payments for September as well as in the following months. The Prime Minister also mentioned that after covering September and allocating funds pay for electricity in the following months they would start working on procuring funds to pay already incurred indebtedness as per Memorandum of understanding on resolution of problematic issues in renewables sector (MoU) between the Ukrainian state authorities and RES producers and investors dated 10 June 2020. Please note that in accordance with the MOU 40% of already incurred indebtedness shall be paid during Q4 2020.

Please note that National Commission On State Regulation in the Sphere of Energy and Utilities (the “Regulator”) on  approved the value of services to increase the share of RES in electricity production rendered by Guaranteed Buyer” (the “GB”) to PrJSC “NPC Ukrenergo” (the “TSO”) in August 2020 in the amount of UAH 4.3 bln. (see information in Ukrainian at https://www.gpee.com.ua/main/news?id=429).

In accordance with the information at the GB’s site, as of 20 September 2020, the indebtedness of the TSO to the GB was UAH 21,7 bln. Thus the GB has paid only UAH 11.9 bln or 32.3% of the value of all produced electricity from RES in 2020 or (in April-July the figure was 5% and less, in August 65% and in September 51%). Relevant information is available in Ukrainian at https://www.gpee.com.ua/main/news?id=342.

Please note that during September there have been several meetings of the working group with the Ministry of Energy of Ukraine, where stakeholders discussed possible solutions for payments to RES producers, in particular:

·        increase of a transmission tariff of the TSO (key source of financing FIT payments in Ukraine);

·        loans from state owned banks and IFIs;

·        issue of state bonds to cover the indebtedness.

Constitutional Proceedings regarding Ukrainian FIT

47 members of the Ukrainian parliament filed a constitutional submission registration No. 3/332(20) on 17 July 2020 to the Constitutional Court of Ukraine (the “CCU”) requesting to declare certain provisions of the Ukrainian FIT unconstitutional, namely:

·        provisions of Article 9-1 of Law of Ukraine “On Alternative Energy Sources” (the “Alternative Energy Law”) which establish coefficients and formula for calculation of FIT;

·        provisions of Article 9-2 of the Alternative Energy Law establishing the amount and rules for calculation of the premium for the use of local equipment;

·        provisions of Article 65 of the Law of Ukraine “On Electricity Market” as to obligations of the GB to buy electricity at FIT and auction price considering the premium for local content.

 Amongst the main arguments of the members of the parliament are the following:

·        the Ukrainian parliament is entitled only to establish main provision of price policy. However, establishment of tariffs, prices, etc. it is a competence of the executive branch, the Cabinet of Ministers of Ukraine (the “CMU”);

·        the Ukrainian parliament breached the right of the Ukrainian people because due to high FIT the expenses are too high which detrimentally affect the Ukrainian economy and people at large;

·        RES producers get unsubstantiated payments due to the  use of natural resources belonging to the Ukrainian people;

·        FIT legislation does not comply with the constitutional requirement of the balancing the state budget and violates the principle of the state to secure economic competition.

In accordance with the effective legislation, the CCU has 6 months to hear the case. On 8 September 2020 the CCU ruled that the case will be heard in a writing form.

Leading renewable energy associations (Ukrainian Wind Energy Association, European-Ukrainian Energy Agency, Ukrainian Association of Renewable Energy) submitted a motion to engage them as third parties in the process with the possibility to participate in hearings and provide oral statements during hearings.

At the moment, it is unclear what would be the outcome of  the CCU’s hearings. If the CCU declares provisions of the Ukrainian legislation on FIT unconstitutional, it may either declare the FIT legislation unconstitutional from the date of the decision or give a transition period for the parliament to bring such legislation in compliance with the Constitution. In any event such decision might affect the amount of FIT or its payment to RES producers. It may not be excluded that RES producers will have to sell electricity at the market, and there will be the only source of revenue for them. Potentially, such changes may be a ground for investment arbitration by RES Producers.  

Draft Legislation on Compensation for Curtailments of RES Producers

On 23 September 2020 the Regulator approved the draft Resolution “On Approval of Amendments to the Markets Rule” (the “Draft”) for the purpose of publishing and obtaining suggestions to the Draft. The Draft envisages, inter alia, the following changes:

·        formula and procedure for reimbursement of curtailed electricity which will be paid by the TSO to the RES Producers;

·        formula and procedure for payments by RES producers to the TSO in case of their failure to follow dispatching commands of the TSO.

Information about the approval of the Draft in Ukrainian is available at http://www.nerc.gov.ua/?news=10526 and the Draft itself is available at http://www.nerc.gov.ua/data/filearch/Materialy_zasidan/2020/veresen/23.09.2020/p28_23-09-20.pdf.

The Regulator suggests the following methods to calculate the volume of curtailed electricity:

·        etalon method which envisages determination of 1 or several generating units (inverters or wind turbines) with separate commercial metering point to establish the volume of the curtailed production of the entire power plant;

·        calculation method which envisages the use of generation volumes in the previous periods (the same hours of curtailment as the average figure in previous 5 days). The calculation method is used only if it is impossible to use the etalon method.

After the publication of the Draft market players would be able to provide their comments and suggestions. Please note that it is not the first time when the draft is being discussed, and there have been already several iterations on its discussion due to changes in the primary legislation.

We cannot exclude that recent legislative changes and developments in the RES market will be considered adverse to investors to such extent so they will be forced to initiate individual or collective (mass) claims via investment arbitration. Our firm held webinars on collective claims in arbitration and consider holding them to discuss the above mentioned and other developments as well as queries raised by interested investors. If you want to register for future webinars, please contact our PR Specialist Myroslava Tretiak via e-mail myroslava.treitiak@dentons.com.

Please also note that we created our database of investors interested in potential claims against Ukraine, and if you or your contacts are interested to add our database for the purpose of possible mass claims against Ukraine, please do not hesitate to contact me.

This information does not constitute legal advice and is merely the opinion of the author.

Best,

Maksym