LAW FIRM DIRECTORY

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Green Light

The impetus for developing Ukraine’s energy sector is the desire to reduce energy capacity in all areas and step up "green" technologies of power generation. For the time being, however, investors are considering the Ukrainian market with trepidation

IRYNA GONCHAR

The course of Ukraine towards European Union integration and the European Energy Community, which was set a few years ago, results, as its logical continuation, in convergence of legislative regulation of issues on energy with European regulations. Energy issues have already ceased to be exclusively national because of the territorial location of Ukraine and the ongoing conflict with the big northern neighbor. The supply of energy resources to many countries in Europe depends on the development of energy in our country.

This year Ukraine has completed many processes at legislative level aimed, first, to stimulate the industry’s development within the state, secondly, to improve the investment climate and, thirdly, to minimize energy dependence on fossil energy resources. The new Laws "On the Electric Energy Market", "On the National Commission Responsible for State Regulation in the Area of Energy and Utility Services", approval of the Energy Strategy, amendment of the standard Power Purchase Agreement (PPA) were a significant step and determined the course of the industry’s development, but not all problem issues have been answered yet.

 

SOURCES OF LAW

Energy companies, especially new market players, stand for reducing the state’s role in energy pricing, for intensive industry demonopolization and for development of domestic competition before integration with the EEC, and experienced European players will enter the Ukrainian market. The state is not abandoning its intention to retain only the functions of oversight, but the influence of politics on the industry is still great.

Lawyers, in turn, accompanying investors' projects primarily, shall try to find a balance between insufficient state guarantees for their clients and understanding the importance of infusing foreign capital for the sector’s development, using tools provided by domestic legislators

Thus, Oleksandr Burtovoy, partner of Antika Law Firm, notes that in 2017 the energy market was characterized by these two main trends: further initiatives aimed to reduce energy consumption and continue the reforms on the power market, especially the electricity market.

In particular, the new Law of Ukraine "On the Electric Energy Market" was adopted after long disputes in April 2017. This legislative act is a part of the so-called Third Energy Package, which shall bring market activities into line with European standards. However, the impact of the law’s adoption is still being assessed. The majority of the critical innovations have not been tested yet because of the delayed coming into force of certain provisions and the need to adopt the necessary regulatory framework.

Marina Hritsyshina, manager of Legal Support Department of WIND POWER LLC, confirms that opinion: "With the adoption of the Law of Ukraine  ‘On the Electric Energy Market’, all of Ukraine’s energy industry began to prepare for the introduction of the new market. Active work on the preparation of secondary legislative acts for regulation of new market activities and on bringing the legislation into compliance with the requirements of the Energy Community and the Third Energy Package is currently being carried out."

Answers to some issues not regulated by the law may be found in by-laws, but lawyers predict that the law’s effectiveness may be lower than expected. This means that amendments will be made shortly to bring it into line with market realities. However, until political influence over the market is weakened, lawyers will have no special illusions to this effect. "The presence in the Verkhovna Rada and the Government of an active lobby by various energy producers will not contribute to market development in any way, as everyone will try to hog the blanket", Oleksandr Burtovoy predicts.

Vitaliya Kargova, advisor, Head of the Energy and Natural Resources Practice at Spenser & Kauffmann, believes that development and introduction of a large number of acts of secondary legislation in connection with the adoption of the law on the electricity market will take a great deal of time, and such changes can be analyzed only in the second half of 2019.

As for state regulation of industry, Antika Law Firm pays attention to another important event of 2017, namely the failure of the Government initiative to create the Energy Saving Fund widely publicized last year. The fund has not actually started its activities, and the  prospects of work remain vague this year.

But there are positive trends, and some were laid out earlier, but later they were left out. "The Verkhovna Rada ‘recalled’ the existence of the law, adopted a few years ago and blocked by it, and managed to resume the operation of the ESCO contracts mechanism. With the adoption of the Law ‘On Public Procurement’, procurement of ESCO services was not possible because of the contradiction between provisions of a special law and the new procurement mechanism, after introduction in spring of last year of necessary changes to the ProZorro system preparations for the appropriate technical base began, and finally in October 2017 the process of energy services procurement became real. Thus, it is hoped that in early 2018 the first mass procurement of these services will already be made, and the market will be able to assess the effectiveness of the mechanism not only on the basis of several pilot projects", Oleksandr Burtovoy says.

 

SOFTWARE RENEWAL

"In post-Soviet countries there is a rather high energy capacity in the economy due to the technological backwardness of equipment and its limited competitiveness. In addition, many questions in the energy sector of Ukraine still remain open today: outdated power lines, power plants which have exhausted their resource long ago, consequences of the Chernobyl disaster, huge dependence on imported fuel for TPP and NPP. According to Bloomberg, Ukraine ranked ninth in the anti-rating of countries with the most polluted air and high mortality rate due to environmental factors", notes Vitaliya Karhova.

In this regard, for Ukraine, like  for other countries, the best option for preventing negative factors in the energy industry, especially regarding climate change, is to eliminate them now, not in coming decades, and positive trends in this direction can already be seen.

Certainly, the most dynamic segment of the energy market is alternative or renewable energy. In the Energy Strategy until 2035 it was declared that by the said term 25% of consumed energy will be obtained from renewable sources. By 2050, the figure of 90% of planned consumption is even more ambitious, but this intention has not been documented yet.

Vitaliya Karhova is optimistic about the situation and notes that in recent years the global trend in the development of renewable energy has been observed and Ukraine is actively involved in promoting this trend. "It is obvious that such processes are the result of a number of factors, among which are depletion of traditional energy resource reserves, desire for energy independence and global warming, as caused by the negative influence of the traditional energy sector on the environment", the lawyer explains. "In the context of the Paris Climate Agreement, which provides for transition from fossil energy sources to ecological ones, many countries have already begun to implement such an energy transition procedure. Ukraine is also taking steps in this direction, slightly changing the goal set in the new energy strategy, namely to achieve a share of renewable energy sources (RES) of up to 25% by 2035." The high "green" tariff contributes to increasing the number of solar power plants, fixed in EUR and operating until 2030, to development of technology and reduction in construction costs. At the same time, big players who had not previously specialized in the market of power production from renewable sources became interested in the investment attractiveness of RES.

According to Marina Hritsyshina, work on implementing projects for producing electric power from renewable energy sources has intensified considerably this year. In particular, DTEK Renewables has implemented a project to construct the  Trifanovska SPP with a capacity of 10 MW in Kherson Region and began active work on construction of the Primorsk WPP with a capacity of 200 MW in Zaporizhzhya region. Therefore, negotiations with equipment suppliers, contractors and financial institutions can be attributed to the main legal issues of 2017. In order to attract financing to RES projects, issues relating to legal due diligence often arise, and  options for minimizing risks in project implementation are considered. Certainly, the implementation of the Trifanovska SPP project included the issues of obtaining a license for electricity generation, green tariff and obtaining the status of member of the Wholesale Electricity Market.

With regard to development of industry, Ms. Hritsyshina noted: the share of RES in Ukraine’s energy balance is still very small and is about 1.6%, but now mechanisms permitting the reduction in possible negative consequences from the unavailability of networks to increase RES are being used. First of all, these are mechanisms for balancing power generation from RES. Therefore, the methods of forecasting electricity generation from RES are being actively studied in unison with Danish funds in Ukraine.

 

INVESTMENT TECHNOLOGIES

There is no doubt that the evolution of the electricity market from fossil sources in favor of renewable ones is impossible without investment. Therefore, according to Vitaliya Karhova, most enterprises face the issue of project financing, as the development of projects in the field of RES requires significant investment. "At the same time, loans in Ukraine in the field of RES are developing rapidly, and more and more banks consider it expedient to provide funds for ‘green projects’", the advisor of Spenser & Kauffmann says. Another problem issue that almost every enterprise has to solve within expansion of its activity is connection to electric grids: according to the IFC’s annual study, many business representatives do not observe simplification of this procedure and do not confirm the stated transparency.

"At the moment, investors face difficulties associated with changes in the assigned purpose of land plots, obtaining additional authorization documents in the construction process (due to attribution of RES objects to the CC2 category), foreign exchange restrictions imposed by the National Bank of Ukraine, lack of tax privileges and limited privileges aimed at exempting equipment from duty and VAT for RES, as well as inability to obtain the green tariff prior to a facility being commissioned. Simplification of settlement of these issues will significantly increase the interest of both foreign and local investors which, in turn, will contribute not only to decarbonization, but also to the development of renewable energy in Ukraine", Vitaliya Karhova believes.

At the same time, Marina Hritsyshina noting the need legislation to be brought further into line with the requirements of the Energy Community, warns against unbalanced actions: "Any changes require a balanced approach, reasonable and weighted decisions so as not to stop positive changes that are now taking place."

 

PROTECTION MECHANISMS

It is obvious that the instability of national legislation must be balanced by instruments to protect rights so that investors do  take risk after all to invest in Ukraine’s energy sector. Recent trends in the development of judicial practice in energy disputes show that Ukraine is ready to work on this.

Talking of court decisions that are key for the power industry, Boris Hrek, judge of the Supreme Economic Court of Ukraine, drew attention to the following court practice.

For example, if a consumer proves that the decision to charge extra for the price of electricity was adopted unlawfully, despite denial of the circumstances on violating of the Rules for Use of Electric Power (RUEP), the courts render decisions on full cancellation of operational and economic sanctions. Proof of absence of violation of RUEP by the consumer and violation of the procedure for consumption control and accrual of operational and economic sanctions by the supplier will be the determining factors for the decision.

In the event of appeal against the accrual procedure and the size of the operational and economic sanction when exceeding contractual volumes of electricity consumption, courts take into account violation of regulatory documents by the utility company in the field of electric power as to the procedure for recording (activation) the offense, in particular, the Law of Ukraine "On Electric Power" and the RUEP, the Methodology for determining the volume and cost of electric energy, unaccounted for due to violation of the RUEP by consumers. If  facts of violation when recording and/or determining the volume and cost of electric power are proved, the courts will satisfy appropriate statements of claim.

When considering disputes over conclusion of power supply agreements, the courts generally satisfy the requirements for obligations regarding their conclusion, based on the requirements of relevance of proper regulation of the legal relations between the parties in the said sphere. If the consumer does not recognize the right of a producer (contractor) of services to conclude a contract that complies with the requirements of the model contract, such right shall be protected by the court via recognition of the contract concluded under the terms established by  mandatory regulations.

When deciding on the content and validity of contractual terms, the courts, analyzing the content of the agreement, apply provisions of Article 277 of the Commercial Code of Ukraine, according to which amendments to a contract shall comply with requirements of the RUEP provisions and do not contradict them. If the fact of such non-compliance is proven, the courts shall decide to satisfy the requirements of power consumption companies to amend the terms of the power supply agreement.

In general, the courts are inclined to satisfy the statements of claim asserted by energy companies to collect indebtedness for violation of contractual terms of electricity consumption, including (financial) penalties stipulated by agreements between the parties and/or by  legislation for their improper execution, if claimants submit appropriate evidence of such violations.

Practice Leaders. Energy & Natural Resources

Leading INDIVIDUALS

1

Vitaliy Radchenko (CMS Cameron McKenna)

2

Olexander Martinenko (CMS Cameron McKenna)

3

Armen Khachaturyan (Asters)

4

Serhiy Piontkovsky (Baker McKenzie)

5

Myron Rabij (Dentons)

Other notable PRACTITIONERS Listed in alphabetical order

Oleg Alyoshin (Vasil Kisil & Partners)

Alexander Borodkin (Vasil Kisil & Partners)

Alexander Burtovoy (ANTIKA)

Nazar Chernyavsky (Sayenko Kharenko)

Yevheniy Deyneko (EVERLEGAL)

Taras Dumych (Wolf Theiss)

Dmytro Fedoruk (Redcliffe Partners)

Konstantin Gribov (Sayenko Kharenko)

Maryna Ilchuk (Arzinger)

Mikhail Ilyashev (Ilyashev & Partners)

Alexey Kot (ANTIKA)

Oleksandr Kurdydyk (DLA Piper Ukraine)

Tamara Lukanina (Asters)

Denis Lysenko (AEQUO)

Oleh Malskyy (Eterna Law)

Adam Mycyk (Dentons)

Ihor Olekhov (Baker McKenzie)

Andriy Olenyuk (EVERLEGAL)

Yaroslav Petrov (Asters)

Vladimir Sayenko(Sayenko Kharenko)

Albert Sych (EY Ukraine)

Maksym Sysoiev (Dentons)

Yuriy Zabiyaka (Gramatskiy & Partners)

Leading Firms

1

CMS Cameron McKenna

2

Baker McKenzie

3

Asters

4

Dentons

5

AEQUO

Other Established Practices

Listed in alphabetical order

1

ANTIKA

2

Arzinger

3

EVERLEGAL

4

EY Ukraine

5

Gramatskiy & Partners

6

Ilyashev & Partners

7

Redcliffe Partners

8

Sayenko Kharenko

9

Vasil Kisil & Partners

10

Wolf Theiss