CLIENT ALERT FOR THE TURKISH COMPANIES ON RENEWABLE ENERGY SECTOR AND CURRENT ISSUES RELATED TO RENEWABLE ENERGY SECTOR IN UKRAINE 22 December 2020

Renewable energy sources which include photovoltaic (PV), as well as other solar, thermal and wind technologies are becoming a sector that is more and more preferable day by day due to its environmental benefits, as it should.  However, the sector still faces difficulties because it simply cannot compete with traditional electricity generation resources in terms of cost and prevalence. States that want to overcome this problem and expand the production and use of renewable energy resources find the solution in granting various forms of subsidies, mostly "feed in tariffs" to sector investors. ¹ In order to promote the development of renewable energy, the Government of Ukraine has introduced two different mechanisms called “the feed-in (the green) tariff” and “green auctions”. However, this solution brought other problems that Ukraine is currently facing and Spain² and the Czech Republic³ had similarly faced before. ⁴

Green Tariff

Ukraine’s promotion of renewable energy started by the introduction of a feed-in tariff in 2008⁵. This green tariff (as referred under Ukrainian Law) is currently the main incentive offered to foreign investors want to operate in the renewable energy sector. Current regulations regarding the green tariff⁶ give the renewable energy producers “the right to sell the energy to the state at the green tariff rate for the period from 2009 to the end of 2029”. ⁷

In order to benefit from the green tariff, producers must enter the electricity market and then enter into contracts with state enterprises that buys/sells electricity (the Guaranteed Buyer). Afterwards, the Guaranteed Buyer sells this electrical power at market price. Moreover, most of the price difference between the market price and the price of the green tariff is compensated by another state entity, the Transmission System Operator (Ukrenergo) with the electricity transmission tariff paid by the citizens / businesses using the transmission system.⁸

Green Auctions

Green auctions, the second main mechanism promoting renewable energy sector in Ukraine, are for the producers of renewable energy that have not entered into a contract with the Guaranteed Buyer. Therefore, the state cannot purchase the energy produced by them at the green tariff rate, however, the state aims to support these enterprises in the form of a quota to the winners of the auctions, which means the state gives a guarantee to the producers for buying electrical power from them at the winning price - which should not exceed the relevant green tariff rate. As of now, the green auctions have been postponed for an indefinite period of time, even though they were planned to start as of April 1, 2020.⁹

Current Issues

In 2019, The Government of Ukraine announced that the green tariff rates could be potentially decreased as the current tariff had become too burdensome.¹⁰ The disruption of the industrial sector due to Covid-19 negatively affected the use of electricity in Ukraine, as in other countries. For this reason, although there were problems regarding the issue previously as mentioned, Ukraine had difficulty in paying the green tariffs it promised to investors, as electricity usage is much lower than expected in 2020.¹¹ According to Guaranteed Buyer’s official website, as of August 20, 2020, approximately 70% of these promised fees remain unpaid.¹²

In order to discuss the problems, under the supervision of Energy Charter Treaty (“ECT”) Secretariat, mediation proceedings started particularly between large investors and the Government and afterwards, a Memorandum of Understanding on the Settlement of Problematic Issues in the Renewable Energy Sector (“the MoU”) was signed on June 10, 2020 as a basis for the potential legislative changes in the future for the reduction of green tariff rates, to ban the construction of new wind and solar power plants and to make relevant changes to the green auction system.¹³ In order for the commitments of the parties’ mentioned in the MoU to be come into force legally, the State has amended the Law No 810-?? “On the Amendments to Certain Laws of Ukraine on Improving the Conditions of Support for Electricity Production from Alternative Energy Sources”. ¹⁴

Although the situation with the State's payments to investors has improved slightly, we cannot mention a significant change as the total debt of the State to investors is reported as UAH 26.2 billion as of November 26, 2020.¹⁵ Therefore, Ukraine's inability to pay its debts to investors eventually resulted in the increase of the tariff on electricity transmission by Ukrainian national power company (“Ukrenergo”), by the adjustment of the National Commission for State Regulation of Energy and Public Utilities (“NKREKP”). According to this adjustment, starting from December 1 2020, the new tariff, rising by 30.2 percent, was fixed at UAH 312.76/MWh.¹⁶

Even though it was expected that Ukraine will increase the tariff further by 2021 in order to make the necessary payments owed to RES producers¹⁷, upon the criticism regarding the increase in the tariff, at the meeting held on December 9, 2020, NKREKP decided to reduce the tariff by 6%, effective from January 1, 2021. As we have mentioned, the tariff for electricity transmission was fixed at the level of UAH 312.76 per MWh effective from 1 December 2020, and with the recent decision of NKREKP, it will be reduced by 6% and will be fixed at the level of UAH 293.93 per MWh effective from January 1, 2021.¹⁸ It is possible to say that these changes regarding tariff on electricity transmission have two different results.

First of all, as we mentioned, this tariff directly contributes to the payment of the debt to the RES investors, and even though the first increase was not sufficient enough to provide an effective payment plant for the debts in a short time, the aforementioned decrease on the tariff again raises the concerns about the time of the full payment of the debt to the investors. As a result of the fact that there is still no clear solution to the problems related to payment, it is highly likely that the issue will be brought to arbitral tribunals by the investors as international investment arbitration claims against Ukraine based on the bilateral investment treaties signed with the countries of the investor companies and the Energy Charter Treaty, of which Ukraine is a party.¹⁹

Secondly, the increase in the tariff naturally increases the cost of electricity use by citizens and businesses, bringing along other problems. It is believed that such an increase in the cost of use will affect the economy of Ukraine negatively and will bring along a huge unemployment problem, and all sector enterprises that use electricity effectively, from transportation to metal industry, will be highly affected to the extend where it may lead the closure of enterprises.²⁰

As we conclude this post, we would like to remind our readers that there is a bilateral investment treaty re-signed between Turkey and Ukraine in 2017²¹ and that Turkish investor companies that were adversely affected by these actions of Ukraine, may try to resolve their disputes and compensate their damages by bringing an investment arbitration claim according to this treaty.

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1} Reed Smith LLP & Sayenko Kharenko, Green tariff in Ukraine: lessons from Spain and the Czech Republic, p. 2, 25 June 2020, retrieved from: https://www.reedsmith.com/en/perspectives/2020/06/green-tariff-in-ukraine-lessons-from-spain-and-the-czech-republic
² Some of the relevant cases: Novenergia II - Energy & Environment (SCA), SICAR v. Kingdom of Spain, SCC Case No. 2015/063; Masdar Solar & Wind Cooperatief U.A. v. Kingdom of Spain, ICSID Case No. ARB/14/1; Antin Infrastructure Services Luxembourg S.à.r.l. and Antin Energia Termosolar B.V. v. Kingdom of Spain, ICSID Case No. ARB/13/31; SolEs Badajoz GmbH v. Kingdom of Spain, ICSID Case No. ARB/15/38.
³ Some of the relevant cases: WA Investments-Europa Nova Limited v. The Czech Republic, PCA Case No. 2014-19; Voltaic Network GmbH v. The Czech Republic, PCA Case No. 2014-20; Photovoltaik Knopf Betriebs-GmbH v. The Czech Republic, PCA Case No. 2014-21; I.C.W. Europe Investments Limited v. The Czech Republic, PCA Case No. 2014-22.
⁴ I. Dykunskyy & Y. Anikevv, The legal framework for renewable energy in Ukraine, 22 July 2020, retrieved from: https://www.lexology.com/library/detail.aspx?g=e7ab9123-2512-413e-906f-84fd8a2e9cc6
⁵ 2008 Amendment to the 1997 Law of Ukraine on the Electric Power Industry.
⁶ “2003 Law of Ukraine on Alternative Sources of Energy” and “2017 Law of Ukraine on the Energy Market”.
⁷ Reed Smith LLP & Sayenko Kharenko, p. 2.
⁸ Reed Smith LLP & Sayenko Kharenko, p. 3.
⁹ Reed Smith LLP & Sayenko Kharenko, p. 3-4.
¹⁰ Id.
¹¹ Id.
¹² T. Lyctovchenko, Is There Still Any Future for Renewable Energy in Ukraine? September 29, 2020, retrieved from: https://golaw.ua/insights/publication/chy-zalyshylys-u-vidnovliuvalnoi-enerhetyky-v-ukraini-perspektyvy-rozvytku/
¹³ Reed Smith LLP & Sayenko Kharenko, p. 4-5; Government Signs Memorandum with Green Energy Producers, Communications Department of the Secretariat of the CMU, June 10, 2020 – official government portal at https://www.kmu.gov.ua/en/news/uryad-pidpisav-memorandum-zvirobnikami-zelenoyi-elektroenergiyi
¹⁴ O. Kurdydyk & D. Pshenychniuk, Ukrainian Parliament adopted law aimed at feed-in tariff reduction, August 6, 2020, retrieved from: https://www.lexology.com/library/detail.aspx?g=d4e63efe-93ad-443f-bef9-a263fbecd65b; Volodymyr Zelensky signs into law bill amending some Ukrainian laws to improve conditions for promoting electricity generation from renewable sources, The President Of Ukraine, July 31, 2020 – official government portal at https://www.president.gov.ua/en/news/volodimir-zelenskij-pidpisav-zakon-pro-vnesennya-zmin-do-dey-62541
¹⁵ Tetiana Mylenka, The renewable electricity market in Ukraine: answers to the key questions, December 7, 2020, retrieved from: https://energypost.eu/the-renewable-electricity-market-in-ukraine-answers-to-the-key-questions/
¹⁶ Id.
¹⁷ O. Holubeva, Return debts at consumers' expense: Why electricity tariffs are rising again?, November 12, 2020, retrieved from: https://112.international/finance/return-debts-at-consumers-expense-why-electricity-tariffs-are-rising-again-56407.html;
¹⁸ Metallurgprom, Electricity transmission tariffs from January 1, 2021 reduced by 6%, December 9, 2020, retrieved from: https://metallurgprom.org/en/news/ukraine/6172-tarify-na-peredachu-jelektrojenergii-s-1-janvarja-2021-goda-snizheny-na-6.html
¹⁹ Reed Smith LLP & Sayenko Kharenko, p. 6; T. Lyctovchenko, Is There Still Any Future for Renewable Energy in Ukraine? September 29, 2020, retrieved from: https://golaw.ua/insights/publication/chy-zalyshylys-u-vidnovliuvalnoi-enerhetyky-v-ukraini-perspektyvy-rozvytku/; O. Kuchynska, Ukrainian government and renewable energy associations sign pivotal Memorandum of Understanding to stabilise the renewables market, June 2020, retrieved from: https://www.kinstellar.com/insights/detail/1171/
²⁰ O. Holubeva; Metallurgprom.
²¹ Turkey - Ukraine BIT (2017) - Agreement Between the Government of Ukraine and the Government of the Republic of Turkey Concerning the Reciprocal Promotion and Protection of Investments at https://jusmundi.com/en/document/treaty/en-turkey-ukraine-bit-2017-turkey-ukraine-bit-2017-monday-9th-october-2017