Over the last few months before January
2018, when the latest changes to the power purchase agreements (PPAs) between
State Enterprise “Energorynok” and producers of energy from alternative sources
were adopted, more than ten agreements were signed with upgraded conditions set
earlier in 2017. In the mentioned agreements, the changes to the PPAs were
applied and helped bring Ukraine’s PPAs closer to international standards.
Nevertheless, the revised PPAs still have a lot of issues that need to be
clarified and further elaborated to make them perfectly bankable, and to make
them properly executable.
More options for producers
The changes primarily affected the procedure for terminating a PPA. Previously,
PPAs could only be terminated by the mutual, written consent of the parties, or
by a putting into effect a court decision. The latest amendments imply that
producers have the right to terminate a PPA at their own initiative under
certain circumstances, while also having the possibility to seek compensation from
State Enterprise “Energorynok” in such cases.
Among such circumstances are: the
insolvency or liquidation of State Enterprise “Energorynok” or the appointment
of a liquidator for it; delays in payments of more than 90 calendar days; any
other breach of substantial obligations by the purchaser for more than 120
calendar days; the impossibility to recognize or enforce in Ukraine an
international arbitration decision in the producer’s favor; or the failure of
the parties to introduce changes to a PPA due to changes in the applicable law.
Direct agreements with creditors
The producer’s right to terminate a PPA does not quite correlate with another
amendment – the right of State Enterprise “Energorynok” to enter into direct
agreements with creditors to finance a producer’s projects. In this case, the
producer’s consent for the conclusion of such direct contracts is not required.
A clause that should be obligatory for inclusion in each agreement with
creditors is that State Enterprise “Energorynok” is obliged not to terminate a
PPA for 120 days after written notification from creditors (or their agents) of
the purchaser’s intent to terminate the PPA due to a breach by the producer of
its obligations under the PPA. This does not give a clear view of how a PPA should
be terminated if a producer breaches its obligations: according to the clause
on termination, the agreement shall be terminated only by mutual written
consent of parties or under a court ruling. At the same time, according to
clause on direct agreements with creditors, it can also be terminated at the
initiative of State Enterprise “Energorynok”.
Not everyone can be a creditor
Another interesting issue is how amendments define the meaning of term
“creditors” for the purposes of a PPA. According to the definition, the EBRD,
IFC, World Bank, OPIC and other similar international financial institutions
are considered to be the only possible creditors who can enter into direct
agreements with purchasers. This clause excludes not only all potential
national creditors, but also leaves producers without the opportunity to pay
back debts to national creditors in the case of the termination of a PPA at the
producer’s initiative.
Hard-to-get compensation
The new version of a PPA provides producers with the right to seek compensation
if the agreement is terminated at their initiative. The amount of compensation
shall include, among other things, the principal amount of the loan, as well as
interest accrued on it, to all creditors as they are defined in the PPA. However,
the sum of debt to national creditors cannot be compensated for under such a
clause. Another important issue regarding the producer’s right to seek
compensation is that such compensation can be considered as state aid according
to the Law of Ukraine “On State Aid for the Business Entities.” For providers,
this means that chance of getting compensation provided by the PPA depends
entirely on the will of the Antimonopoly Committee of Ukraine as the state body
authorized to approve and monitor all kinds of state aid. The process of
approval by the AMCU takes from three to six months, which significantly slows
down and complicates the whole procedure of getting compensation paid. Besides
that, the AMCU has the right to cancel a previously issued approval at any
moment, and to issue a conclusion on the inadmissibility of paying
compensation, so producers can never be sure if they will get the compensation
in full – even if approval has already been issued.
Disputes can be different
The new version of PPA sets out different approaches to the dispute resolution
procedure depending on the type of the producer. Thus, if a producer is an
enterprise with foreign investments as defined under Ukrainian law, any dispute
shall be resolved at the discretion of the producer, within the jurisdiction of
ICC arbitration by three arbitrators, or in a commercial court of Ukraine. If
producer is not an enterprise with foreign investments – the only possible
method of dispute resolution is a court trial in the corresponding commercial
court of Ukraine. Such a provision severely limits litigation options for
enterprises without foreign investment, and could even be considered
discriminatory. As mentioned above, in such a case the producer has the right
to terminate a PPA at his own initiative, but does not yet have the right to
apply to a Ukrainian court on this issue – which is quite a deadlocked
situation that the regulator has not managed to settle.
The government has taken an important
step forward in upgrading PPAs, along with guiding the implementation of
legislation, and by inviting public comment on the framework. Adapting
Ukrainian PPAs to international market standards to ensure bankability and
clarifying the scope for a government guarantee of Energorynok’s obligations as
a purchaser is a major breakthrough.
While in 2017 foreign investors were
just looking at Ukrainian projects and waiting for the amendments to PPAs, in
2018 we are already witnessing the more active implementation of such projects.
Sergiy Oberkovych,
Senior Partner at GOLAW
Attorney at law
Max Lebedev,
Partner at GOLAW
Attorney at law