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