Energy Policy Lessons: Creating Opportunities
Dependence on energy import became the fundamental reason for a streamlined policy towards its reduction. The world shale gas revolution was followed by a number of production share agreements in the country. At the same time, the renewable side has undergone contradictory legislative changes. The Ukrainian “green” tariff remains one of the highest in Europe. Given the energy saving course, such projects have stumbled on legislative gaps. And finally, a number of energy disputes have arisen.
The first interactive expert discussion this year is dedicated to energy policy, one of the strategic areas of state control.
New projects for the production of oil, gas and other minerals are mainly based on production sharing agreements (PSA). What norms are particularly attractive for investors in PSA projects?
Ukrainian legislation on product sharing agreements provides potential investors with a number of advantages compared to general established legal practice for subsoil users.
First and foremost this refers to certain obligations pursuant to legislation and/or provisions on product sharing agreements. The government provides investors with approvals, quotas, special permits for subsoil use and licenses to carry out the activities of prospecting (exploration) and operation of mineral deposits, mining licenses and other permits.
In cases where the land plots necessary to perform the concluded product sharing agreement are in state or municipal ownership, the subsoil area (mineral deposits) are provided together with such areas. In all other cases the government provides the investor, at his request, with land plots necessary to perform the concluded product sharing agreement through the procedure stipulated by this agreement. The licensing and quota allocation are not applied to the investor and its contractors while importing equipment, materials and others to Ukraine. Moreover, they are provided with special guarantees against changes in legislation. In other words, the government guarantees that to investor’s rights and obligations stipulated by the product sharing agreement within its effect legislation acting at the moment of concluding such an agreement is going to be applied, except for cases when changes in legislation improve an investor’s situation.
How did the recent legislative changes in the regulation of the “green” tariff affect implementation of projects in this area?
The recently adopted On Operating Principles of Electricity Market of Ukraine Act of Ukraine, No.663-VII which is effective from 1 January 2014 (the Act), introduces some important amendments to the On Electric Power Industry Act of Ukraine, No.575/97-ВР. Such amendments provide that with effect from 1 January 2015 (i) getting the “green” tariff for electricity produced by electricity generating companies using alternative energy sources (except for certain types of alternative energy sources) with installed capacity exceeding 5 MW, and (ii) financing of 50% of the costs of connection to the grid of electricity generating facilities producing electric power from alternative energy sources will be possible provided that projects for the construction of electricity generating facilities are in compliance with the Ukraine’s unified energy system development plan for the next 10 years (the Plan). It is worth noting that this rule does not extend to electricity generating facilities with whom the agreement on connection to the grid is entered into before 1 July 2014. Generally, market players, including the Ukrainian Wind Energy Association, negatively assess the provisions of the Act introducing requirements for compliance with the Plan for the following reasons: (i) absence of long-term plans for development of the Ukrainian economy complicates the development of the Plan; (ii) potential of abuse and possible inclusion in the Plan of requirements that electric power producers will not be able to comply with; (iii) inability of producers to obtain the “green” tariff on formal grounds and enjoy preferential terms for connection in case the Plan is not approved by the Cabinet of Ministers of Ukraine within the prescribed period of time; and (iv) lack of transparency of the process of confirming the compliance of electricity generating facility construction project with the Plan which opens broad possibilities for abuse.
In recent years, Ukraine has witnessed intensified energy efficiency projects. What are the regulatory features of their implementation, and how are the relevant transactions structured?
It is worth mentioning that green legislation in Ukraine is constantly changing. According to the latest changes introduced by the On Operating Principles of Electricity Market of Ukraine Act of Ukraine, alternative energy may be sold in (1) the bilateral contracts market, (2) the day-ahead market, and (3) the balancing market at the prices prevailing in a given market. The obligation to buy, at “green” tariffs, all energy generated from renewable sources, whose obligation shall be valid until 1 January 2030, is imposed on a guaranteed buyer (i.e., a state-owned company designated by, and subordinated to the Cabinet of Ministers of Ukraine) who subsequently sells energy in the day-ahead market. The guaranteed buyer is to form a balancing group of electricity generators eligible for “green” tariffs consisting only of those who generate energy at “green” tariffs. The Group will be active until 1 January 2030. New alternative energy facilities with a capacity of above 5 MW shall meet yet another “green” tariff eligibility criterion which is considered to be satisfied provided that such facilities are constructed in compliance with the Ukrainian Integrated Energy System Development Plan for the next 10 years (the Plan). Connection of the alternative energy facilities to the electrical grid is funded by 50% from a statutory share of energy transmission charges, and by 50% from the repayable financial support provided by electricity transmission customers as long as the construction of such facilities complies with the Plan. The system operator shall issue construction compliance reports in relation to the Plan at the time of approval of the technical conditions for grid connection in accordance with the Electrical Grid Code. However, notwithstanding the above changes, the local component requirement is one of the principal legal peculiarities of the green energy market in Ukraine. According to such requirement, a certain percentage of the works and materials used in construction of green energy power stations shall be of Ukrainian origin. Therefore, proper structuring of green energy projects so that the local component criteria are met shall be a key priority for business.
What are the peculiarities of project financing in energy conservation in Ukraine? What are the most meaningful projects? Is there any legislative activity in this area?
Large scale energy efficiency projects are usually treated as infrastructure projects, and their financing can ordinarily be afforded only by the state, supranational or large strategic investors due to the lengthy investment return periods. While private companies are more flexible and have better chances to find investors or creditors, the state and municipal sector, which is underfunded in Ukraine, has to come up with some alternative ways to secure financing for such projects.
In developed countries one of the ways of financing energy efficiency projects without incurring expenditure from the state budget is to use energy service companies (ESCO), which provide energy efficiency services to the relevant state or municipal entity on the basis of energy performance contracts (EnPC) and retain, within a certain period of time, savings achieved as a result of the implemented energy efficiency measures to repay such investment (either their own funds or borrowed). The stumbling block for the operation of such a financing scheme in Ukraine is underdeveloped legislation, which inter alia does not recognize long-term commitments with regard to the use of savings from the budget perspective and does not create conditions for the effective procurement of ESCO services.
Currently we are working together with the EBRD on the texts of three draft laws (registered under No.2548a, 2549a and 2550a), which aimis to establish a general framework for energy performance services, as well as to eliminate respective legal barriers. For example, according to the proposed laws, ESCO would be entitled to payments only if and to the extent the savings are achieved and relevant budgetary obligations under the EnPC would not constitute state/local debt; while procurement of such services would be carried out on the basis of the net present value (NPV) formula. We hope that adoption of the proper ESCO legislation will create more opportunities for financing of energy efficiency projects in Ukraine and make our country less dependent on external energy supplies.
The practices of international commercial arbitration in recent years have indicated an increase in the number of disputes in the energy sector. What are the features of such disputes? What arbitration institutions do participants of energy disputes address most often and why?
The number of arbitration cases in the energy sector has indeed grown in our company of late. The majority of such cases relate to price disputes and the supply of energy sources.
The peculiarities of the activity of energy companies consist of a challenging business environment, such companies are operating in, the change of regulatory regimes, political and economic inconstancy in the energy sector, shareholder agreements in relation to the energy sector, environmental issues, high-value investments in the energy and high-risk transactions. Consequently, disputes in the energy sector may be described as complicated cases with the high price of a claim, such which often require involvement of experts and are accompanied with high volumes of documents and facts. One of the parties to proceedings is very often a state enterprise.
The Institute of the Stockholm Chamber of Commerce and London Court of International Arbitration are very popular and recognized institutes to consider energy disputes, which can be explained by their good expertise in the corresponding sphere of cases. The Energy Charter Treaty, the parties of which are 52 states, foresees the following dispute settlement mechanisms: disputes between parties to the Treaty and disputes between investors and host governments. With relation to the latter mechanism, the said Treaty prescribes consideration of disputes in the International Centre for the Settlement of Investment Disputes (ICSID), by a sole arbitrator or an ad hoc arbitration tribunal established under the rules of the United Nations Commission on International Trade Law (UNCITRAL) or in Arbitration Institute of the Stockholm Chamber of Commerce.
