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23 June 2020

Energy sector of Ukraine: main changes

In the second decade of June, the Parliament accelerated its work on the laws for stabilisation of the situation on the Ukrainian energy market. In particular, the Parliament discussed the following laws:

  • a draft Law on Amendments to Certain Laws of Ukraine on Improving Conditions for Supporting Electricity Production from Alternative Energy Sources No. 3658 (the “Draft Law on Improving Conditions for Supporting Electricity from RES”)
  • the Law of Ukraine “On Measures for Paying Off the Debts Accumulated in the Wholesale Electricity Market” (draft Law No. 2386 of 6 November 2019) (the “Law on Payment of Debts”).

The above laws introduce the following changes.

 

The Draft Law on Improving Conditions for Supporting Electricity Production from RES

The draft was submitted to the Parliament on 15 June 2020 by the Cabinet of Ministers of Ukraine. Its goal is to bring applicable legislation in accordance with the Memorandum of Understanding concluded with the RES producers on 10 June 2020 (the “MoU”). The main points of the MoU were discussed in our previous article.

What are the main provisions of the Draft Law?

The Draft Law on Improving Conditions for Supporting Electricity from RES suggests the following amendments:

Amendments to the auction scheme:

  • the Draft introduces the auctions schedule for the next year and excludes the previously effective terms regarding the auctions held twice a year, no later than April 1 and October 1, respectively; it means that auctions will be organised according to the schedule approved by the Cabinet of Ministers of Ukraine rather than on the dates determined by law
  • distribution of the annual support quotas for solar and wind is decreased from 15 per cent to 10 per cent, which means that the minimum annual support quota will be established at 10 per cent for wind, 10 per cent for solar and 10 per cent  for other RES types
  • annual support quota for a joint ultimate beneficiary owner (supervisor) for the respective year is increased from 25 per cent to 35 per cent
  • the following price caps are introduced for the offers on auctions:
  • 9 eurocents for 1 kilowatt-hour for wind and solar by 31 December 2024
  • 8 eurocents for 1 kilowatt-hour for wind and solar from 1 January 2025
  • 12 eurocents for 1 kilowatt-hour for other RES objects.

Compliance of the Draft Law on Improving Conditions for Supporting Electricity from RES with the MoU conditions:

  • MoU provides for an approval of the annual support quotas within two months after the Law comes in effect and that the auctions will have been conducted by the end of 2020
  • the Draft Law includes a number of amendments to the auction scheme not discussed with the RES producers and RES investors when the general auction scheme was discussed before. At the same time, the Draft Law approves the schedule of auctions for the next year while not providing for any auctions in 2020, which does not comply with the initial conditions of the MoU.

Feed-in tariff restructuring:

  • the Draft Law includes the state guarantee as to the stability of the feed-in tariff rates and the protection of foreign investments
  • the feed-in tariffs are decreased retroactively
  • a cap for the feed-in tariff in the amount of 22 eurocent per kWh for the RES object commissioned before 31 March 2013 is introduced.

Compliance of the Draft Law on Improving Conditions for Supporting Electricity from RES with the MoU conditions:

  • MoU contains the feed-in tariff reduction in exchange for full and timely payment by the Guaranteed Buyer to the RES Producers for electricity. The Draft Law does not contain the guarantees as to the full and timely payments. The MoU includes the cut-off dates for the pre-PPAs for the solar projects from 31 July 2020 that were not included in the Draft Law.
  • draft Law contains significant reduction of the feed-in tariffs for solar projects instead of the cut-off dates for pre-PPA for solar from 31 July 2020.

Compensation of curtailment of RES producers:

  • full compensation under the feed-in tariff or the auction price of the curtailments of the RES producers by the transmission system operator
  • the methodology of the compensation shall be approved by the NEURC.

Compliance with the MoU conditions:

  • MoU imposes the obligations on the NEURC and the transmission system operator as to the compensation for RES producers for curtailments.

 Balance responsibility

The balance responsibility for an RES object with the installed capacity over 1 MW is as following:

  • 0 per cent  – by 31 December 2020
  • 50 per cent  – from 1 January 2021
  • 100 per cent  – from 1 January 2022
  • The tolerance margin for wind is 10 per cent  and for solar is 5 per cent.

Compliance with the MoU conditions:

  • MoU contains the same conditions.

When is the Parliament expected to adopt the Draft Law?

Due to the time pressure, on 19 June 2020 the Parliament voted to shorten the time frame for submission of the alternative draft law and to include the Draft Law on Improving Conditions for Supporting Electricity from RES in the agenda of the Parliament. The urgent legislative procedure is required to stabilise the situation with the payments for RES producers under the feed-in tariffs.

What conditions of the MoU were not implemented in the Draft Law?

The Draft Law does not include conditions as to the payment of the existing debts of the Guaranteed Buyers to the RES Producers as it was determined by the MoU. In particular, according to the MoU the existing debt shall be paid to the RES producers by the end of 2021.

Law on Payment of Debts

On 17 June 2020, the Parliament has adopted the Law on Payment of Debts.

What are the main conditions of the Law?

The Law on Payment of Debts provides for the obligations to pay off debts on electricity market. This relates to the debts owed by the consumers, distribution systems operators (“DSOs”), universal service suppliers, supplier of “the last resort” to SE “Energorynok”, and the debts of SE “Energorynok” to the electricity producers.

What debts shall be payed off?

According to the Law on Payment of Debts, the confirmed debts that arose before 1 July 2019 at the wholesale electricity market (“WEM”) shall be payed off. The debts are confirmed by the act of existence and amount of debt.

Who is involved in debt repayment:

  • participants (members) of the WEM – a party to the Agreement between the members of the Wholesale Electricity Market, which carried out (carries out) business activity related to the production of electric energy, transmission, supply, distribution and wholesale supply of electricity
  • their creditors and debtors
  • other business entities defined by the Law.

How debts are payed off?

Repayment of the confirmed debt is carried out according to:

  • procedures of mutual settlements, transfer of debt and assignment of the right of claim (from the date the Law comes into force) (according to the procedure which shall be approved by the Cabinet of Ministers of Ukraine):
  • procedures of using accounts with special mode of use, funds allocation algorithm and algorithm of transferring funds received by SE “Energorynok”, established by NEURC according to the scheme Debtor (DSOs, universal service suppliers, supplier of “last resort”) – SE “Energorynok”Creditor (electricity producers, NEC Ukrenergo)
  • carrying out other settlements at the expense of own and / or borrowed funds
  • by successive monetary fulfillment of obligations by participants in equal amounts of confirmed debt on the basis of concluded agreements on mutual settlements
    through additional current accounts with a special mode of use
  • transfer of debt and assignment of the right to claim for electricity purchased/sold at the WEM between electricity suppliers, DSOs, SE “Energorynok”, electricity producers and NEC Ukrenergo based on the concluded agreements.

Application of the mandatory procedure for replacing a party in obligation on debt balances (is in force from 1 July 2021) under agreements on replacing a party in an obligation (compulsory assignment of the right to claim) on the basis of sample contract, approved by the Cabinet of Ministers of Ukraine. Debt repayment is carried out at the expense of DSOs from sources not prohibited by law.

Repayment (write-off) of debt (based on sample contracts in accordance with the procedures approved by the Cabinet of Ministers of Ukraine):

  • certain debts of coal enterprises for electricity
  • for electricity in accordance with the purchase and sale agreements for the difference in the flows of DSO (the successors of the electricity suppliers) to the SE “Energorynok”
  • certain debts of SE “Energorynok” to NEC “Ukrenergo” for services
  • debt of SE “Energorynok” to electricity suppliers and producers operating in the temporarily occupied territory (land territory of the Autonomous Republic of Crimea and the city of Sevastopol), and debts of OJSC “Luganskkoblenergo”
  • balances of payables or receivables of SE “Energorynok” after applying the mandatory procedure for replacing a party to an obligation.

How is transfer of funds received by the SE “Energorynok” carried out?

Transfer of funds raised by the SE “Energorynok” based on the Law on Payment of Debts is carried out according to the transfer algorithm established by the NEURC, to:

  • producers of electric energy from alternative energy sources – primarily
  • electricity producers and NEC “Ukrenergo” – the distribution of funds is carried out in proportion to the amount of debt.

What are the special conditions for the procedure of debts repayment?

  • the moratorium on satisfying claims of creditors in bankruptcy cases on debts under the Law does not apply to settlement participants
  • until the end of debt repayment procedure, a motion for declaring a settlement participant bankrupt and opening a liquidation procedure shall not be considered
  • bankruptcy proceedings of SE “Energorynok” are terminated; applications for initiating bankruptcy of SE “Energorynok” are not considered until the end of debt repayment procedure
  • no foreclosure is made on funds of SE “Energorynok” on current accounts with a special mode of use; transactions on current accounts with a special mode of use cannot be stopped
  • enforcement proceedings and measures of enforcement regarding SE “Energorynok” are halted.

Conclusion.

The Draft Law on Improving Conditions for Supporting Electricity from RES and the Law on Payment of Debts are directed at stabilisation of the situation with payments on the electricity market of Ukraine, as well as at regulating consequences of growing amount of the renewable energy and payments under the feed-in tariff.

To avoid being negatively impacted by the Draft Law and the Law on Payment of Debts, you can contact the SK Energy practice team:

  • to get a qualified advice regarding Draft Law on Improving Conditions for Supporting Electricity from RES and its impact on the renewable projects and regarding debt repayment options under the Law on Payment of Debts
  • to analyse the current strategy of work in the renewable sector of Ukraine and consider possible changes in this strategy to avoid risks
  • to audit your possible risks in the current situation.

The information contained in this legal alert is for the general informational purposes only, does not constitute legal or other professional advice, and should not be relied upon as a substitute for a specific professional advice adapted to specific circumstances.

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