June 2020 - On 10 June 2020, Ukraine's prime minister and minister of energy signed a Memorandum of Understanding (the "Memorandum") with two major renewable energy associations in Ukraine. The document is the long-awaited result of a lengthy mediation process. With the Memorandum signed, the government expects to avoid investment treaty claims and to preserve the investment attractiveness of the country.
The Memorandum sets out commitments of the government and renewable energy ("RES") producers. It is not legislation but rather a policy roadmap for future regulatory measures. The government will submit a draft law implementing the Memorandum to parliament and facilitate its adoption by 1 August 2020 (the "Compromise Law"). Parliament will ultimately decide on final changes to the RES legislation.
The Memorandum is open to all RES producers to sign. They voluntarily decide whether or not to sign the document. RES producers dissatisfied with its terms can opt out, although the legal implications of this are currently unclear.
Below we summarise the key terms of the Memorandum (based on a draft as the official text has not been published yet).
Reduction of feed-in tariff
The central element of the Memorandum is the restructuring of the feed-in tariff, also known as a "green" tariff ("FIT"). The Memorandum suggests a retroactive FIT reduction for photovoltaic power stations ("PV projects") and wind projects.
Cuts for PV projects:
- 2.5% commissioned after 1 January 2020
- 12.5% capacity below 5 MW, commissioned 1 July 2015-31 December 2019
- 15% capacity above 5 MW, commissioned 1 July 2015-31 December 2019
- 15% commissioned before 1 July 20151
Cuts for wind projects:
- 2.5% commissioned after 1 January 2020
- 7.5% turbine capacity above 2 MW, commissioned 1 July 2015-31 December 2019
Contrary to many investors' expectations, power purchase agreements ("PPA") and, accordingly, FIT payments, will not be prolonged beyond the currently fixed date of 1 January 2030.
31 July 2020 is the suggested cut-off date for PV projects. PV projects commissioned after this date will not receive the FIT but will have an opportunity to bid at energy auctions.
At the same time, no cut-off date has been set for wind projects under construction. In order to qualify for the FIT, they can be commissioned within three years after the pre-PPA date.
Financial liability for imbalances
The Memorandum significantly increases the financial liability of RES producers for imbalances. Currently, there is a transition period to gradually introduce the balance responsibility. Under current rules, starting from 2021, RES producers pay only 10% of imbalance settlement costs. This share increases yearly by 10% until 2030. However, under the Memorandum, the share of the financial liability of RES producers will be 50% already in 2021 and 100% from 2022.
Additionally, the Memorandum halves the deviation tolerance margins for imbalances. Currently, the financial liability for imbalances does not apply if hourly power output deviates from the hourly generation schedule by 10% for PV projects and by 20% for wind projects. The Memorandum reduces the deviation tolerance margins to 5% for PV projects and 10% for wind projects.
Renewable energy auctions
RES producers not receiving the FIT will be interested in auctions, where lots representing output sales to Guaranteed Buyer (a state-owned off-taker) at the auctioned price for a period of 20 years will be offered. Under the Memorandum, the government guarantees to approve an annual quota (an amount of electricity generation capacity) offered to RES producers at these auctions within two months after the Compromise Law enters into force. Under the Memorandum, the first auctions are to be held already in 2020.
Repayment of debts of Guaranteed Buyer
The mounting debts of Guaranteed Buyer have been a central concern of RES producers. Under the Memorandum, the government guarantees that Guaranteed Buyer will pay the FIT in a timely manner and in full starting from the month after the month the Compromise Law enters into effect. Additionally, the government guarantees the repayment of the existing debt of Guaranteed Buyer until 31 December 2021, on a quarterly basis, in accordance with a schedule to be adopted soon.
Compensation for undispatched electricity
The National Energy and Utilities Regulatory Commission and the transmission system operator, NEC Ukrenergo, will develop a mechanism to compensate RES producers for electricity not generated due to restrictions on dispatch to the grid. The mechanism must be prepared within a month after the Compromise Law comes into force. Discussions on this mechanism are on-going.
Choice of a balancing group
Currently, all RES producers must be members of the balancing group of Guaranteed Buyer. Under the Memorandum, the government will initiate changes to legislation allowing RES producers to exit the balancing group of Guaranteed Buyer, form their own balancing groups, and either become or choose a balance responsible party.
Financing from Ukrainian state-owned banks
The government, the National Bank of Ukraine and Ukrainian state-owned banks will assess the impact of the restructuring on the creditworthiness of RES producers under loan financing. If necessary, they will amend the relevant banking regulations to mitigate any adverse impacts of the restructuring.
Stabilisation clause for PPAs
Under the Memorandum, the government guarantees to introduce a stabilisation clause to the Compromise Law. Accordingly, RES producers under PPAs will be protected from changes in RES regulations that may be enacted after the Compromise Law enters into force.
The Memorandum becomes effective after being signed by the prime minister, the minister of energy, the chair of the National Energy and Utilities Regulatory Commission and the chair of the Parliament Energy Committee. The Memorandum becomes effective for RES producers or their associations after acceding to the Memorandum, by sending a letter to the Ministry of Energy. The Memorandum becomes void if the Compromise Law contradicts the Memorandum.
Investment treaty claims
RES producers do not waive the right to initiate investment arbitration against Ukraine by signing the Memorandum. Indeed, many foreign investors in the renewables sector will remain dissatisfied about the terms of the Memorandum and the Compromise Law that will follow. These investors may consider bringing investment claims against Ukraine under the Energy Charter Treaty or a bilateral investment treaty.
For further information please contact Olena Kuchynska, Partner, at, Oleksandr Plachynta, Associate, at .
1. PV projects below 10 MW and commissioned before 31 March 2013 will have the FIT decreased by additional 25% during 2025-2029.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.