On 23 August 2018, the National Energy and Utilities Regulatory Commission (the "NEURC") adopted the new draft regulation "On the Approval of the Procedure of Power Purchase at the Feed-in Tariff and the Rules of Interaction of Subjects of Economic Activity during Performance of these Operations" (the "Draft Regulation"). This Draft Regulation was developed to further implement the electricity market reform based on the new Electricity Market Law of Ukraine adopted in 2017. It regulates certain issues relative to the electricity offtake under the feed-in tariff and associated aspects of the new electricity market functioning. Namely, the Draft Regulation:
- establishes the procedure of concluding a power purchase agreement (the "PPA") with producers of power from renewable energy sources and electricity offtake by the guaranteed buyer;
- sets out the new standard (mandatory) form of a PPA to be concluded between the offtake and energy producers;
- stipulates the procedure of the offtaker’s cost estimate formation;
- sets out the new standard form of an agreement on services on the increase of power production from renewable energy sources to be concluded between the guaranteed buyer and the electricity transmission system operator; and
- establishes certain rules of functioning for the balancing group.
The Draft Regulation sets out the new draft form of a PPA (the "August 2018 PPA"). Unlike the previous contract forms of a PPA which were exemplary and not mandatory by their legal nature, the August 2018 PPA is set to be standard and mandatory. The August 2018 PPA is largely based on the form of a PPA adopted by NEURC in September 2017, which is currently used by the offtaker (State Enterprise "Energorynok"). Several provisions are added from another form of a PPA adopted by NEURC in January 2018 (the "January 2018 PPA"). (Note that this latter form is not used by Energorynok, and remains "on paper").
Most importantly, as with the January 2018 PPA, the August 2018 PPA envisages the possibility of direct agreements between the offtaker and creditors of energy producers which provide financing of relevant projects. The offtaker will not be able to terminate a PPA during 120 days following written notification to the creditors of its intention to terminate the PPA for a breach by a producer of its obligations; the breach can be remedied within this 120-day period. However, the August 2018 PPA provides no further guidance as to other terms and conditions of such direct agreement, its form or implementation mechanism.
Key novelties of the Draft Regulation are the following:
1. Issues relating to PPAs and the electricity offtake under the feed-in tariff
(a) Pre-PPA. As with the previous templates of the PPA, the Draft Regulation allows signing PPAs at the early stages of a project (the so-called "pre-PPA"). A pre-PPA should enter into effect upon the occurrence of certain conditions, and not upon its signing. However, under the August 2018 PPA these conditions will be limited only to those expressly established in the Electricity Market Law (unlike the current list of conditions, which is much broader). Namely, a pre-PPA will take effect on the first day of the month in which the latest of the following conditions occurs: a producer obtains the electricity production licence and the feed-in tariff, and becomes a market participant.
(b) The signing procedure. The Draft Regulation sets out in detail the procedure of signing PPAs. It establishes the fixed term for the offtaker to sign a PPA, which is 15 сalendar days following the submission by an applicant of all documents required. To sign a pre-PPA it will be necessary to submit documents confirming the producer's land rights, a construction permit (or a declaration on commencement of construction works, as the case may be), as well as a grid connection agreement. This is in line with the Electricity Market Law, and marks a shift from the current approach based on which a producer should only submit its corporate documents and can enter into a pre-PPA even before acquiring land rights and obtaining a construction permit.
(c) Term of validity of a PPA. As previously, under the Draft Regulation, PPAs will be concluded for the entire period of validity of the feed-in tariff, namely, until 1 January 2030. However, a PPA will terminate if a power plant (or its stage) in respect of which a PPA is concluded, is not commissioned (put into operation) during the three (3) years following the obtaining of a construction permit (or registration of a declaration on commencement of construction works). This replicates the relevant provision of the Electricity Market Law.
(d) Subsequent changes of the PPA form. The August 2018 PPA provides that, in the event of further changes in law or changes to the standard form of a PPA, the offtaker should publish the relevant amendments on its website and send notice of this to the producer. Unless the producer initiates the cancellation of the PPA within one month following this amendment, it is deemed to have accepted these amendments. The Draft Regulation mentions that this will be without prejudice to producer's rights relating to the feed-in tariff; however, it does not further specify which particular rights are meant here.
(e) Impact of the new electricity market on existing PPAs. To ensure the smooth transfer of existing PPAs to the new electricity market, it is contemplated that trilateral agreements amongst Energorynok, the guaranteed buyer (the new offtaker which will replace Energorynok) and a producer will be signed. These trilateral agreements will provide for assignment of a PPA from Energorynok to the guaranteed buyer and amendment of a PPA with the aim of bringing it into compliance with the August 2018 PPA. Importantly, the August 2018 PPA does not provide for termination of existing PPAs, and aims to ensure continuity of existing PPAs once the new electricity market is launched. However, to amend existing pre-PPAs and sign trilateral agreements, it will be necessary to provide the documents listed in item (b) above.
(f) The new register of producers. The Draft Regulation provides for the establishment of a new register of producers of electricity under the feed-in tariff (the "Register"). If a producer has already obtained the electricity production licence and the feed-in tariff, a PPA concluded by this producer will take effect as from the date of registration of this producer in the Register. Registration should be performed by the offtaker within two (2) days following the signing of a PPA. However, the Draft Regulation does not provide a detailed guidance on the establishment and maintenance of the Register.
2. Offtaker's cost estimate
The Draft Regulation, for the first time, sets out the structure and methods of cost estimate formation of the guaranteed buyer. Revenues of the guaranteed buyer will comprise the following: (i) payment for its services on the increase of power production from renewable energy sources, (ii) payment for electricity sold in the market, and (iii) other revenues provided for by the cost estimate, including penalties for breaches by producers of PPAs.
The guaranteed buyer should prepare the draft cost estimate with a monthly itemisation of costs, and provide it to NEURC for approval by 15 September. NEURC can adjust the cost estimate of the guaranteed buyer following the quarterly analysis of its financial statements or other information. The guaranteed buyer can apply to NEURC for the adjustment of the cost estimate, but not more often than once a quarter.
3. Balancing group and responsibility of producers for imbalances
The Draft Regulation details the rules of functioning of the balancing group and responsibility of producers for imbalances, which are set out in the Electricity Market Law and the Market Rules adopted by NEURC in March 2018. All participants of the Ukrainian electricity market should be responsible for their imbalances (except for consumers who purchase electricity under a supply contract). To this end, each electricity producer from renewable energy sources under the feed-in tariff must become a participant of the balancing group led by the guaranteed buyer (the future offtaker). The guaranteed buyer will undertake financial responsibility to the electricity transmission system operator (Ukrenergo) for the settlement of imbalances of the balancing group.
If the electricity volumes actually produced deviate from the hourly forecasts submitted by a producer, a producer will have to reimburse the guaranteed buyer for a certain share of the imbalance settlement costs. The shares of reimbursement will be distributed pro rata amongst all participants of the balancing group in line with their contributing shares of imbalances.
According to the Draft Regulation, it should be enacted from 1 July 2019, except for the provisions governing the procedure of concluding PPAs, which are set to be put into effect from 1 April 2019.
Following the publication of the Draft Regulation on NEURC's website, the public consultation procedure will be opened which should last at least one month, as will be further specified by NEURC. During this procedure, all stakeholders concerned can provide their comments and suggestions on how to improve the Draft Regulation and enhance the bankability of the August 2018 PPA form.