Further amendments to the template power purchase agreement to enhance its bankability

On 9 January 2018, the National Energy and Utilities Regulatory Commission (the "Regulator") adopted Resolution No.1, further amending the template form of the power purchase agreement (the "PPA") between the State Enterprise “Energorynok” and producers of electricity from alternative energy sources ("AES"). The Resolution will become effective on the day following its official publication.

The amendments are aimed at enhancing the bankability and insurability of the PPAs, spurring investment in the industry and strengthening protection of producers’ (and creditors’) rights in the context of the ongoing reform of the electricity market. Most of the risks associated with changes in law or events beyond parties’ control are expressly vested in the off-taker. AES producers will have broad powers to seek reimbursement in case of termination of the PPA they initiate, including by triggering the change of law clause.

Some of the amendments may raise competition concerns or provide different interpretations as to their exact scope or enforceability due to the lack of clarity and precision (e.g., references to producer’s profits, direct agreements, procedures of negotiation or “challenging” arbitral awards, etc.). It remains to be seen whether the new approach to risk allocation and payment of damages would prove feasible and sustainable.

Key changes relate to the following:

Force majeure clause is further extended and refined

The force majeure clause is further extended, following the amendments adopted by the Regulator on 14 September 2017, to expressly include – without limitation – sanctions, nationalisation, radioactive pollution etc.

At the same time, a shortage of funds, for whatever commercial, economic or financial reason, or a change of market conditions, will not constitute a force majeure event.

An event can constitute force majeure if it affects the ability of a party to perform its obligations under an agreement. Previously, the clause referred to the objective impossibility of performance, thus limiting the scope of its application.

Creditors can enter into direct agreements with the off-taker, with limits set on the off-taker’s right to terminate the PPA

For the purposes of financing, creditors and the off-taker can enter into a direct agreement. Under this agreement, the off-taker’s right to terminate the PPA will be restricted by certain time limits. In particular, the off-taker will not be able to terminate the PPA during the 120 days following written notification to the creditors (or their agents) 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 term before the PPA terminates.

However, the amendments do not provide detailed guidance as to the definition of a direct agreement, or any other terms and conditions that it should contain, or the form. Hence, the question of how the entire mechanism would work remains open.

Consent of the off-taker no longer required for a producer to assign the PPA to creditors

The consent of the off-taker will no longer be required should the PPA be assigned to third parties providing financing. This is to further reinforce the security of creditors who provide financing to renewable energy producers, and to facilitate their step-in rights.

Changes in law are defined, entitling parties to amend the PPA or withdraw, including for changes in the feed-in tariff

The term “change in law” is defined to mean any event occurring on or after the date of the agreement and which affects the AES facility and/or the financial condition of the producer.

In the event of changes in the law, parties will correspondingly amend the PPA in order to eliminate discrepancies. In relation to items (2) and (3) below, the obligation of parties to amend the PPA will arise provided that changes in law increase losses of a producer by more than 5% of the producer’s profit raised from alternative energy sales during the preceding 12 months.

Such changes in law include the following:

(1) reduction, cancellation or suspension of the “feed-in” tariff or any change in the mechanism of its use or the payment procedure;

(2) cancellation or refusal of extension, or other substantial adverse change in the terms applicable to any permits, licences, approvals or other regulatory instruments previously granted to the alternative energy sources, other than due to the producer’s breach; or

(3) adoption, enactment, cancellation (in full or in part) or amendment of any laws or regulations governing the electricity sector including, without limitation, tax rules, if this affects the design, construction, operation or maintenance of alternative energy production facilities and/or the financial condition of a producer,

The major legal consequence is that if there is a change in law and the parties fail to agree on acceptable terms to reflect these changes in the PPA, the producer shall have the right to terminate the PPA and become entitled to the recovery of losses, as discussed below.

Producers will have broad rights to terminate PPAs

A producer shall have the right to terminate the PPA for any legal cause, or on the following grounds:

(a) insolvency or termination of the off-taker or appointment of a receiver. This relates both to the current off-taker – State Enterprise “Energorynok”, before it is replaced by the guaranteed buyer – and to the guaranteed buyer after it becomes operational and undertakes the off-taker’s role;

(b) if the off-taker delays any payment during the 90 calendar days following the receipt of a payment notice from a producer, or otherwise breaches substantial obligations;

(c) if an arbitration award in favour of a producer is not recognised or enforced in Ukraine, where a producer is an enterprise with foreign investment;

(d) a force majeure event which relieves any party from performance of its obligations under the PPA for a continuous period of 180 days or longer, or during a total period of 365 days or longer; or

(e) there is one or more change in law which increases the losses of a producer in the amount of 10% or more of the producer’s profit raised from alternative energy sales for the preceding 12 months; and the parties fail to agree on acceptable terms to reflect these changes in the PPA.

The off-taker should indemnify producers for damages if a PPA is terminated

A new clause is added that gives AES producers quite broad powers to seek reimbursement in case of termination of the PPA they initiate.

If the PPA is terminated upon the AES producer’s initiative, such AES producer shall be entitled to the payment of damages caused by the termination (the “Termination Amount”). The Termination Amount shall be paid by the off-taker (currently State Enterprise “Energorynok”) in four equal instalments, on a quarterly basis, in UAH converted from EUR according to the EUR/UAH exchange rate of the National Bank of Ukraine as of the date of the respective payment. The first instalment should be paid within 90 days following the termination notice of the producer.

The Termination Amount shall be not less than, but not limited to, the principal of, as well as interest accrued on, any loan due for payment by the AES producer to an international financial institution or a fund, credit export agency, or international development bank or institution. The Termination Amount should also include hedging amounts due for payment as well as all other costs and expenses incurred by creditors and hedge providers in connection with the termination of the PPA.

The Termination Amount should be adjusted by any compensation paid by state authorities to the AES producer as a result of nationalisation/expropriation or other indemnification of losses.

Following this amendment, international financial institutions and certain other types of creditors of and investors in renewable energy projects may be better protected and have competitive advantages vis-à-vis other types of creditors and raising competition (as well as state aid) concerns.

It remains to be seen whether the off-taker will undertake obligations under the new form of the PPA and raise the resources required to meet them, and how this would impact the operation and sustainability of the power system.

Amendments to the dispute resolution clauses

Following the amendments, two dispute resolution options are provided: ICC arbitration by three arbitrators or litigation before a commercial court of Ukraine.

If a dispute fails to be resolved within 30 days by negotiations, it should be settled under the relevant procedure. At the same time, longer periods of negotiation (namely, three months, with no option of agreeing to a shorter period) are envisaged under the Procedural Act of the EnC 2016/3/ECS on the Establishment of a Dispute Resolution and Negotiation Centre, to which disputes can be referred according to the template form of the PPA.

Amended clause 7.3 provides for that an arbitral award may be “challenged” pursuant to the requirements of the Convention on the Recognition and Enforcement of Foreign Arbitral Awards dated 10 June 1958. Most likely the wording concerned refers to setting aside of arbitral awards, which does not fall within the ambit of the Convention. Perhaps, this wording reflects the intent of the drafters to limit potential grounds for challenges to any subsequent arbitral awards to those which are internationally recognised.

In the light of clauses 2 and 3 of Article 22 of the Commercial Procedure Code of Ukraine (effective of 15 December 2017), the amended dispute resolution clause should be enforceable under Ukrainian law.

Cancellation of a licence for electricity production will not automatically entail termination of the PPA

Previously, cancellation of a licence for electricity production automatically entailed termination of the PPA as from the cancellation of that licence. Under the amendments, the PPA will be cancelled by the parties to it after completion of all legal procedures appealing the non-compliance of a producer with the licencing terms. The PPA terminates as of the date when a licence is finally cancelled, provided that the parties perform their outstanding obligations under the PPA.

The template grid connection agreement is cancelled

The amendments provide for the invalidation of the current template grid connection agreement as non-compliant with the provisions of the new Law “On the Electricity Market”.

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