On 26 April 2019, the National Energy and Utilities Regulatory Commission (the "NEURC") adopted regulation No. 641 "On the Approval of the Normative Acts Governing the Activity of the Guaranteed Buyer and the Electricity Offtake under the Feed-in Tariff" (the "Regulation"). This Regulation was developed to implement the necessary steps of the electricity market reform contemplated by the Electricity Market Law of Ukraine adopted in 2017.
It provides the regulatory framework for the electricity offtake under the feed-in tariff (the "FiT") and associated aspects of the functioning of the new electricity market. Namely, the Regulation sets out the following:
- the procedure of concluding a power purchase agreement (the "PPA") with producers of electricity from renewable energy sources and electricity offtake;
- the new standard (mandatory) form of PPA to be concluded between the offtaker and renewable energy producers;
- 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, as well as the procedure of concluding such agreements;
- the procedure of the offtaker’s cost estimate formation;
- the procedure of forecasting the offtake volumes by producers and forecasting the electricity volumes to be sold on the day-ahead and intraday markets by the offtaker;
- the procedure of electricity sale and purchase by the offtaker in the above markets; and
- the rules governing the functioning of the balancing group.
The Regulation sets out the new standard form of PPA (the "April 2019 PPA"). Unlike the previous contract forms of a PPA, which were exemplary and not mandatory by their legal nature, the April 2019 PPA is set to be standard and mandatory. The April 2019 PPA is largely based on the model form of a PPA adopted by the NEURC in September 2017, which was used by the current offtaker (State Enterprise "Energorynok"), notwithstanding the adoption of the more recent model form of PPA by NEURC in 2018.
Key provisions of the Regulation relative to the PPA and the offtake under the FiT include the following:
1. New standard form of PPA. The procedure of its conclusion and assignment
(a) Pre-PPA. As with the previous templates of the PPA, the Regulation allows the signing of PPAs at early stages of a project (the so-called "pre-PPA"). Under the previous legislation, a pre-PPA entered into effect upon the occurrence of certain conditions, and not upon its signing. The pre-PPA signed under the new procedure will take effect on the date of its signing, except for certain provisions regulating settlements, determination of the volume of electricity sold under the PPA, as well as the rights and obligations of the parties. Those other provisions 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 FiT, as well as makes arrangements on imbalance settlement.
(b) The conclusion procedure. The Regulation sets out in detail the procedure of signing PPAs. The list of documents to be submitted by an applicant depends on whether it has obtained the FiT and has become a market participant.
If an applicant has obtained the FiT, it is sufficient to provide a certified copy of the producer’s charter, a copy of an order on the appointment of a director or other documents certifying the powers of an authorised person to conclude a PPA, and a specimen signature of the director or other authorised person. If, however, an applicant has not obtained the FiT and/or has not yet become a market participant, it will have to submit, apart from the above, certified copies of documents confirming (i) its land rights, (ii) a construction permit (or a notification on the commencement of construction works, as the case may be), as well as (iii) a grid connection agreement.
The offtaker should sign a PPA within 15 working days following the submission by an applicant of all documents required.
(c) Term of validity of PPA. As previously, under the Regulation, PPAs will be concluded for the entire period of validity of the FiT, namely, until 1 January 2030. However, a PPA will terminate if a power plant (or a stage of its construction, as the case may be), 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 submission of a notification on the commencement of construction works). This replicates the relevant provision of the Electricity Market Law, but may need to be amended should draft law No. 8449-д – on renewable energy auctions – be enacted so as to reflect the difference between solar power projects which are allowed two (2) years for commissioning and other types of renewable energy projects which are allowed three (3) years for commissioning.
(d) Changes in law. In the event of further changes in law or changes to the standard form of PPA, the offtaker should publish the relevant amendments on its website and send an amendment agreement to the producer so as to bring the PPA into compliance with the changes. It is expressly stated that changes should be without prejudice to the rights of a producer under the FiT. The producer should sign the amendment agreement within 15 working days upon receipt. If it does not provide the signed counterparty to the offtaker within one month from the date of sending by the offtaker, the producer is deemed to have initiated termination of PPA.
(e) Replacement of the offtaker and updating existing agreements. To ensure the smooth transfer of existing PPAs to the new electricity market, a producer should sign an amendment agreement with Energorynok and the guaranteed buyer (the new offtaker which will replace Energorynok) to assign the PPA from Energorynok to the guaranteed buyer and bring it into compliance with the April 2019 PPA. This needs to be completed by 1 July 2019.
To amend existing pre-PPAs, it will be necessary to provide the documents listed in item (b) above. The producer should commence the amendment procedure, and submit the relevant application to the guaranteed buyer together with all supporting documents. Within two (2) working days upon the receipt of the submission from the producer, the guaranteed buyer should then apply to Energorynok. Energorynok, within ten (10) working days following the receipt of the submission from the guaranteed buyer, should sign the amendment agreement and return it to the producer for signing. The producer, and then the guaranteed buyer, each has three (3) working days for the consecutive signing of the amendment agreement.
Notably, Energorynok will not be liable to the producer for any obligations of the guaranteed buyer under the PPA concluded in accordance with the new standard form. Also, both Energorynok and the guaranteed buyer will not be liable for any obligations of the producer to any investors or creditors of that producer. The above conditions are material, and must be included in that amendment agreement for that to be deemed concluded. This departs from the provisions of the previous model forms of PPA, which required Enegorynok to undertake secondary liability to the producer for the proper performance by the guaranteed buyer of its obligations under PPA.
(f) Assignment. Direct Agreements. Assignment under a PPA requires the agreement of both parties. The new standard form of PPA does not provide for the possibility of concluding direct agreements between the offtaker and the creditor. Thus, the new standard form of PPA essentially follows the previous form used by the offtaker, which was approved by the NEURC in 2017. It does not encompass the provisions on direct agreements and assignment without the consent of the offtaker, which were included in the form approved by the NEURC in 2018 with the aim of improving the protection of creditors' rights.
(g) Arbitration. The standard form of PPA provides parties with the option to refer disputes either to the commercial courts of Ukraine or to arbitration under the ICC Rules of Arbitration with the place of arbitration in Paris. However, the relevant arbitration clause is not perfect. For example, where the offtaker would first submit a claim with the local Ukrainian court, and then the producer commences the arbitration proceeding, termination of the local court proceeding would require application by both parties, as well as identity of the subject matters of claims in both proceedings.
(h) The new register of producers. The Regulation provides for the establishment of a new register of producers of electricity under the FiT (the "Register"). Registration should be performed by the offtaker within two (2) days following the signing of a PPA. However, the Regulation does not provide detailed guidance on the establishment and maintenance of the Register.
2. Offtaker's cost estimate
The Regulation, for the first time, sets out the structure and methods of forming the cost estimate (budget) 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 the NEURC for approval by 15 September of the year preceding the reported period. The NEURC can further 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 the NEURC for an adjustment of the cost estimate, but not more often than once a quarter.
3. Balancing group and responsibility of producers for imbalances
The Regulation further details the rules governing the functioning of the balancing group led by the guaranteed buyer and responsibility of producers for imbalances, which are set out in the Electricity Market Law and the Market Rules adopted by the NEURC in March 2018. All participants in the Ukrainian electricity market should be responsible for their imbalances (except for consumers who purchase electricity under a supply contract). To this end, each producer of electricity from renewable energy sources under the FiT must become a participant in 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 based on the calculation algorithms set out in the Regulation.
The Regulation will take effect from 1 July 2019, except for the provisions governing the new standard form of PPA and the procedure of its conclusion, as well as certain other provisions on the offtaker's services relating to the increase of the share of renewables. These took effect from 15 May 2019, on the next day following the official publication of the Regulation.