The Ukrainian Parliament Adopted the Draft Law on “Green” Tariff Restructuring in the Second Reading and Its Entirety

On 21 July 2020 Verkhovna Rada of Ukraine, the Ukrainian parliament, passed the Draft Law No. 3658 dated 15 June 2020 On Introduction of Amendments to Certain Laws of Ukraine as to Improvement of Conditions of Support for Production of Electricity from Alternative Energy Sources (the “Draft Law”) in the second reading and its entirety. The text of the Draft Law as well as information about adoption in the first reading and the chart of suggested amendments prepared by the energy parliamentary committee for the second reading is available in Ukrainian at https://w1.c1.rada.gov.ua/pls/zweb2/webproc4_1?pf3511=69138. The final version of the Draft Law passed in the second reading and its entirety is not yet available, and we hope that the final and official version will be available only after official publishing the Draft Law after signing by the President of Ukraine. Draft Law will take effect on the date following its official publishing (except for certain provisions) unless the President of Ukraine vetoes it.

As informed earlier, the Draft Law is based on 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.  Information about signing in Ukrainian is available at https://www.kmu.gov.ua/news/uryad-pidpisav-memorandum-z-virobnikami-zelenoyi-elektroenergiyi?fbclid=IwAR17y5S8tuty9UYM-E7wusiroZkuxOe7TAltjceZMfCHD8GtmrDXnsOt5ls.

The Draft Law proposes the following conditions to restructure “green” tariff (the “GT”) for solar power plants (SPPs) and wind power plants (WPPs) as well as introduce the following changes related to compensation of curtailed electricity and auctions for distribution of quotas for RES producers (information is based on the Draft Law adopted in the first reading, video of the energy parliamentary committee, the chart of amendments prepared by the energy parliamentary committee, but we cannot exclude that the official version of the Draft Law will be different):

1.    GT cut for SPPs and WPPs commissioned from 1 July 2015 to 31 December 2019:

1.1.  SPPs (1 MW and more) – 15%;

1.2.  SPPs ( up to 1 MW) – 7,5%;

1.3.  WPPs (wind turbines 2 MW and more) – 7,5%.

2.    In respect of RES power plants commissioned before 1 July 2015 the maximal GT is established at the level of GT tariff for SPPs over 10 MW commissioned until 31 March 2013 reduced by 5% (approximately 24,6 eurocents per kWh);

3.    The following GT cuts for SPPs and WPPs developed based on pre-PPAs executed before 2020 and commissioned in 2020 and afterwards.

3.1.  2.5% cut

3.1.1. SPPs

3.1.1.1. up to 1 MW without restrictions on dates of their commissioning;

3.1.1.2. 1 MW and up to 75 MW until 31 March 2021;

3.1.1.3.  75 MW and more until 31 October 2020;

3.1.2. WPPs (shall be commissioned within 3 years after the pre-PPA execution and afterwards such projects are not entitled to the GT)

3.2.  60 % cut

3.2.1. SPPs commissioned after dates in items 3.1.1.2 and 3.1.1.3.

4.    No extension of GT scheme of support (beyond 2029).

5.    Producers could be eligible for a premium of 5% of the eligible GT rate if the ”level of locally produced equipment” in a project is 30%, or a premium of 10% of the eligible GT rate if the project contains at least a 50% “level of locally produced equipment” and 20% if the ”level of locally produced equipment” in a project is 70% and more (20% premium is the novelty). In case of auction price, after 6 years of exploitation of RES power plants, the premium may not exceed 10%.

6.    Stabilization clause for restructured RES producers setting out that the Ukrainian state guarantees that the laws effective as of date of entry into force by the Draft Law shall apply (except for changes in the legislation which simplify regulation of commercial activity of RES power plants, ease procedures of state supervision (control) in the sphere of commercial activity, soften liability, or in another way improve the state of RES producers as well as changes in the legislation related to defence, national security, ensuring civil order and environmental protection. The stabilization clause was amended during voting to exclude stabilization of taxes and duties.

7.    The state guarantee that restructured GT of all RES producers (please note that GT of producers other than SPPs and WPPs are restructured without changes in the amount of the GT) either already established or to be established within the period from 1 July 2020 until 31 December 2029 will not be amended or cancelled in another way that may result tin losses and/or damages and/or failure to obtain expected lawful incomes.

8.    It appears that the said state guarantees apply to all RES producers eligible to the GT scheme of support (not only SPPs and WPPs) and shall apply for the entire period of GT application (until the end of 2029).

9.    The Draft Law introduces certain changes enabling compensation of curtailed electricity by RES producers, in particular it specifies that PrJSC “NPC Ukrenergo” (the “TSO”) may give commands to RES producers under GT or producers which received support as a result of auctions outside of the balancing market to reduce the load (curtail production of electricity). Such producers shall deliver the service on load reduction at the applicable GT or auction price of non-produced electricity. The methodology to calculate the volume of curtailed electricity as well as procedure for rendering the mentioned services shall be established by National Commission On State Regulation in the Sphere of Energy and Utilities (the “Regulator”).

10.  Expedited introduction of liability for imbalances, except for power plants up to 1 MW for which liability will be increased by 10% as provided by the effective law:

10.1. 2021 – 50%;

10.2. 2022 – 100%.

11.  All RES producers are subject to such liability regardless of date of their plants commissioning (the current laws release from liability producers commissioned before the entry into force by Law of Ukraine on Electricity Market).

12.  Tolerance margin for purpose of imbalances liability until 31 December 2029 (without any adjustments due to achievement of certain thresholds by RES producers in the energy mix):

12.1. SPPs – 5%;

12.2. WPPs – 10%.

13.  WPPs with 3 turbines regardless of their capacity are not entitled to GT and shall participate in the auctions. Only WPPs with power capacity up to 5 MW are exempted from mandatory auctions and still may enjoy GT scheme of support.

14.  The CMU shall be obliged to share the schedule of auctions for the following year by 1 December of each year.

15.  The CMU will establish annual quota and schedule for auctions for the next year only and for the following 4 years it will establish only indicative forecast figures of annual quotas.

16.  The CMU shall be entitled to set the following requirements for the auctions within the annual quota:

16.1. determine certain regions (oblasts) for construction of RES power plants;

16.2. determine maximal amounts of capacity of RES power plants which is entitled to get support based on auctions;

16.3. propose land plots and roofs and/or facades of buildings to be rented out by owners with determined technical parameters and conditions for connection to the grid.

17.  Minimal shares of  certain RES producers in the annual quota shall be reduced from 15% to 10% and will be:

17.1. SPPs – 10%;

17.2. WPPs – 10%;

17.3. all other eligible RES power plants – 10%.

18.  The CMU will be entitled to arrange auctions in accordance with certain types of technologies or technologically neutral auctions.

19.  Schedules of auctions will be determined by the CMU and its number and dates will not be restricted by certain dates as provided by the effective laws (not later than 1 April and 1 October).

20.  Developers of rooftop SPPs will be able to participate in auctions and shall provide documents confirming the use of or ownership in roofs and/or facades of buildings.

21.  Caps for auction price for SPPs and WPPs:

21.1. 9 eurocents per kWh for auctions until 31 December 2024;

21.2. 8 eurocents for auctions after 1 January 2025.

22.  Cap for auction price for all other RES power plants other than SPPs and WPPs – 12 eurocents per kWh.

23.  The Draft Law requires that not more than 80% of total capacity proposed by all participants to the auction may be distributed while the current law sets the same requirement towards quota of certain type of RES (baskets of RES for the purpose of the auctions).

24.  One ultimate beneficial owner may obtain up to 25% of annual distributed quota (decided to support the current law provision and refuse from the increase up to 35% as adopted in the first reading).

25.  Completion of projects that will get support under auctions shall be evidenced by certificate on completion of grid connection (not a mechanical completion).

26.  The Draft Law envisages that the CMU will elaborate within 3 months after the entry into force by the Draft Law the draft law allowing the RES producers to sell electricity in the market directly to any consumers and obtain compensation in the form of difference between a market price and GT.

27.  The Regulator shall adopt the methodology for compensation of curtailed electricity and procedure for such compensation within 1 month after the entry into force by the Draft Law. 

28.  The CMU shall envisage in the state budget costs for financial support of State Enterprise “Guaranteed Buyer” (the “GB”) for payments of electricity produced from renewables based on request from the Ministry of Energy and calculations from the Regulator in the amount of 20% of forecast produced electricity for the respective year.

29.  In order to cover indebtedness of the GB to RES Producers the CMU shall submit within 3 months the draft law to reimburse such indebtedness via issuing domestic state bonds for 5 years.

30.  Transmission tariff for metallurgic enterprises with CO2 emissions less than 250 kg per ton of steel products shall exclude costs of the TSO for special obligations related to the increase of RES shares

31.  70% of funds obtained by PrJSC “NPC Ukrenergo” (the “TSO”) as of 1 July 2020 from distribution of interstate interconnectors shall be used to cover debt of the TSO to GB in respect of services related to increase of RES share in the energy mix (50% of such payments shall be used by GB to pay nuclear power plants and 50% to pay RES producers).

32.  GT for producers from biomass and/or biogas may be established only for power plants commissioned by 1 January 2023.

We cannot exclude final conditions of the Draft Law will be considered to be 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 MoU, the Draft Law and queries raised by interested investors. If you want to register for future webinars, please contact our PR Specialist Myroslava Tretiak via e-mail [email protected].

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