How effective will be the revision of FIT: legal aspects and consequences

The legal nuances of the revision of FIT for renewable energy in Ukraine.  Lawyers Yulia Atamanova, Doctor of Law, partner of the LCF Law Group, and Ivan Bondarchuk, adviser, head of energy practice, LCF Law Group answered .

There is a rule: the state has sovereignty to make any decisions on its territory. However, if such decisions violate the legitimate and legitimate expectations of the investor, the state may be forced to pay compensation. It is these principles that discussions are taking place in international investment arbitrations.

If we talk about the support mechanism for renewable energy projects, known as FIT, then it consists of several components in Ukraine.

1) Fixed tariff – the state guarantees the purchase of electric energy produced by renewables until 2030 at a fixed tariff tied to the euro exchange rate, the calculation formula and rates of which are defined by the law.

2) Guaranteed redemption of electric energy – the state guaranteed the redemption of all electric energy produced by renewables until 2030. The law also contains a provision that the cost of electric energy supplied to the grid as a result of a dispatcher command (for example, if there are technical limitations) must also be compensated.

3) The gradual introduction of liability for imbalances – the current version of the Law of Ukraine “On the Electricity Market” provides for the gradual onset of responsibility for the accuracy of forecasts for the generation of solar and wind power plants. Every year since 2021, the share of liability (compensation) will increase by 10% and reach 100% in 2030.

4) Pre-PPA - investors who entered into an agreement with Guaranteed Buyer SE in 2019 received 2-3 years for commissioning solar and wind power plants with the right to sell electricity at FIT, and not participate in auctions. Investors use this mechanism to ensure that they will not lose the right to support the project during the order of equipment, construction of the station and regulatory procedures.

The first two guarantees are directly defined in the Law of Ukraine “On Alternative Energy Sources” with the words “the state guarantees from the moment the electric power facility is commissioned and for the entire duration of FIT”.

 The other two elements of the support mechanism for renewable energy projects (regarding liability for imbalances and the Pre-PPA mechanism) are expressly provided in the law, but do not contain the wording "the state guarantees for a specified period."

Now the industry is facing two main problems:

1) State-owned enterprises do not have enough funds to pay for FIT. Additional funds can be raised by increasing the tariff of NPC Ukrenergo for the transmission of electricity and by replacing the support system for vulnerable consumers: the introduction of a system of targeted subsidies under art. No.61 of the Law of Ukraine “On the Electricity Market”, instead of reduced tariffs financed by state nuclear and hydroelectric power stations.

2) Electric gids physically cannot accept all the “expensive” electric energy produced from renewable energy sources. And it is still necessary to pay compensation.

In such a situation, the government began discussions about reducing FIT. Negotiations with investors on possible solutions to the crisis in the renewable energy sector of Ukraine have reached a serious level. Industry-specific associations contacted the Center for Dispute Resolution and Mediation under the Energy Community Secretariat to mediate between representatives of the renewable energy sector and the state in developing the optimal solution for the renewable energy sector.

According to available data, the government is considering several major possible changes:

  • reduction of FIT (with or without extension of FIT) both for existing projects and for new ones;
  • cancellation of Pre-PPA for projects that will not be built until a certain point in 2020;
  • introduction of 100% responsibility for unbalances of electric energy;

determination of a certain amount of restrictions on the generation of power plants, for which compensation for the cost of not supplied electricity will not be paid.

During the negotiations, investors are invited to sign a Memorandum, which plans to determine compromise agreements for each proposed change. If the alternative energy producers together with the state find mutual understanding regarding possible compromises on these issues and sign a memorandum, then we can count on the industry voluntarily reducing the rates guaranteed by FIT and other certain changes in the existing legal regime.

If negotiations with the state do not end with a consensus on mutually acceptable ways to overcome the crisis, then, respectively, one of the following scenarios can be expected:

the state will unilaterally change the legal regime for regulating renewablesector; or

Guaranteed Buyer SE will increase its debt to electricity producers, and NPC Ukrenergo will systematically limit the generation of power plants due to the lack of a clear methodology for compensating the cost of electricity.

Therefore, the main issue is what changes are expected and what impact will they have on already invested in this sector?

If the state chooses a radical path – unilaterally changing the size of FIT for alternative power plants already operating – then this can be regarded by investors as a violation by the state of its guarantees regarding the stable, transparent and unchanged business conditions that were given to them at the beginning of the introduction investment.

Bilateral investment protection agreements and the Energy Charter Treaty to which Ukraine is a party provide for the obligation of the state to adhere to a fair and equitable investment regime. In international arbitration practice, this principle is also considered as such, which contains a guarantee of stability and invariability of the conditions for carrying out investment activities.

Of course, this guarantee is not an unconditional protection against any regulatory changes, and the state always reserves the sovereign right to independently determine the necessary legislation and the nature of the regulation of relations on its territory. But they must take into account existing obligations under investment agreements. This means that the state must ensure investors the stability of the principles of the regulatory regime so as not to deprive the investment of their value.

Ukraine is not the first state to initiate a review of the legal regime of renewable energy. The experience of Spain shows that retrospective changes to the existing legal regime for renewable energy can lead to significant budget losses. More than 40 international investment disputes related to changes in the field of renewable energy have been initiated against Spain, of which 12 have already been resolved in favor of investors for approximately $1 billion.

The dispute in the case of Eiser and Energía Solar v. Spain (2013), for example, which was considered at the International Center for the Settlement of Investment Disputes in an Investor Claim. The Tribunal recognized the actions of the state to amend the legislation that regulates renewable electricity in violation of Article 10 (1) of the Energy Charter Treaty, since the state fundamentally changed the regulatory regime under which investments were made, as a result of which the price of investments fell dramatically, thereby violating legal applicants' expectations.

At the same time, it can be assumed that a retrospective reduction in the size of the green tariff, the introduction of other changes that violate the reasonable expectations of investors and significantly reduce the cost of projects, will lead to potential risks of initiating multimillion-dollar investment disputes against Ukraine.

In turn, the government’s balanced position on the restructuring of the mechanism for supporting alternative energy producers, taking into account the interests of investors and the public interests of the state, will help to achieve a compromise and sustainable development of the industry.

Tags: legislation, electricity, feed-in tariff, renewables, investments, investors

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