Electric power campaign
"The market and the regulator have yet to establish a balance between the need for state support of a 'green' investor and the interests of consumers"ANDRIY SIVAK, PARTNER AT SHKREBETS & PARTNERS ATTORNEYS-AT-LAW, EMPHASIZES
— The Ukrainian electric power market has undergone significant changes in the last two or three years, primarily in the legislative environment, but we almost saw no activity on the part of large international players in 2018. Does this mean that investors still look at Ukraine with certain concerns?
— Despite some progress achieved in recent years in the area of legislative implementation of reforms in the electric power sector, the majority of investors sit on the fence when it comes to Ukraine. They also understand that many relevant provisions, in particular, legislation on the natural gas and electric power market remain on paper and require adoption of adequate and efficient measures for their practical implementation. The specific exception is the renewable energy sources (RES) market, which has its own specifics due to the national approach towards regulation. The energy strategy of Ukraine for the period until 2035, in terms of creating the prerequisites for investment attractiveness, shows the need to improve business climate overall, including the establishment of the rule of law. Ukraine needs to form transparent, liquid markets, to integrate energy infrastructure into the European one (ENTSO-E, ENTSO-G) both institutionally and legally.
— What projects in terms of assets privatization in the electric power area are attractive to investors?
— According to the Order of the Cabinet of Ministers of Ukraine No. 358-p, dated May 10, 2018, holdings of shares in six regional power distribution companies and four central heating and power plants shall be considered as the objects of a large-scale privatization. As for participation in electric power-related projects, JSC Turboatom, the machine-building enterprise, is definitely of certain interest to investors. Positive changes in the state’s privatization policy can be observed, as exemplified by CentrEnergo. A tender on the sale of shares in CentrEnergo was held on December 13, 2018 by order of the State Property Fund of Ukraine. To increase the investment attractiveness of the item, the terms and conditions of sale included, in particular, the clause limiting the amount of dividends paid to 30 % of the profit following the results of financial and economic activities in 2018, and the due date for fulfillment of the buyer's obligations regarding terms and conditions without a certain time limit set for their fulfillment (except for mobilization tasks) was limited to a period of five years. In addition, Government Order No. 756-p, dated October 3, 2018 separately stipulates that the holding of shares purchase and sale agreements should include a clause on the seller’s payment to the buyer in proportion to the number of shares owned by the state in the authorized capital, the sums of damages accrued and recovered under the court order on the grounds that arose before alienation (so-called warranties and indemnities). This clause, together with the capability to subject the privatization agreement to the Laws of England and Wales, as prescribed by the law, increases the chances of attracting large foreign players to the privatization process.
— The RES market is of particular interest. Despite the fact that the "green tariff" is being reduced, competition among market participants is only increasing. What projects in this area would you note?
— The energy strategy of Ukraine for the period until 2035 implies an increase in the share of renewable energy sources in the total primary electric power supplies (including hydro generating capacities and ground source energy) to 25%. The trend towards an increase in the pace of joining the renewable energy sources to the energy system of Ukraine, primarily in the southern regions and within the territory of the Burshtyn CHP Island, is considered a prerequisite for destabilizing its work. As for competition in this area, it seems that it will only grow regardless of the prospect of tariffs falling, introduction of tariff auctions and adoption of current draft laws to ensure competitive conditions for generation of electric power from alternative sources. The market and the regulator have yet to establish a balance between the need for state support of a "green" investor and the interests of consumers, and to address the problem of balancing the Ukrainian energy system due to the rapid increase in the share of RES generation in recent years. On September 17, 2018, the National Energy and Utilities Regulatory Commission of Ukraine (NEURCU) published draft regulations developed on the basis of the Law of Ukraine "On the Electric Power Market" governing the activities of a guaranteed buyer and the purchase of electric power at a "green tariff". According to the regulator, in July – September 2018, new RES generating facilities with a total installed capacity of 160.1 MW were commissioned in Ukraine, which is 2.4 times higher than in the same period in 2017. In 2018 alone, about 1,300 households installed solar panels on the roofs of their houses. Among recent large-scale renewable energy projects in Ukraine, we can mention the implementation by NBT AS, a Norwegian company, of a wind power plant project in Kherson Region, by DTEK Renewables — a wind power project in Zaporizhzhya region (Primorskaya WEP), by Tokmak Solar Energy — a solar power plant project in Zaporizhzhya Region, etc.
— What recent changes in legislation will, in your opinion, determine the further development of the electric power industry in Ukraine?
— Certainly, legislation in the electric power area in recent years has undergone significant changes, which established the framework for its development. Thus, in the gas production industry, within the framework of the concept approved by the Cabinet of Ministers of Ukraine No. 1079-p, dated December 28, 2016, it became possible to reduce rental rates for the period until 2023, decentralize the rent and implement measures for deregulation in the oil and gas area at legislative level. On October 24, 2018, the government introduced changes to this concept related to the transition to electronic auctions for issuing exploration licenses and to ease access to geological information. Despite some problems with implementation, the amendments to the Gas Pipeline System Code regarding the introduction of daily balancing, introduced by the resolution of the NEURCU No. 1437, dated December 27, 2017, significantly changed the rules of the game on the natural gas market. The codes of the transmission system, distribution, commercial metering of electric power and other regulatory documents adopted by the regulator on the basis of the Law of Ukraine "On the Electric Power Market", continue to implement the energy strategy of Ukraine for the period until 2035 and consolidate the architecture of the market model as the basis for European power space (ENTSO-E).