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Ukrainian Renewables Sector – Liquidity Crisis

Ukrainian Renewables Sector – Liquidity Crisis

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In recent years, international and local investors have been extremely active in the Ukrainian renewables sector – particularly in solar and wind projects – resulting in a significant amount of project finance and M&A activity in this sector.

As of April 30, 2020, the total installed capacity of renewable energy facilities amounted to 7.1 GW, of which 4.7 GW were installed in 2019. According to rough estimates, the share of foreign investors in installed renewable projects reached approximately 30%. The investment growth led to an increase of up to 5.5% in the share of renewable energy in Ukraine’s total energy generation. Moreover, the number of producers of renewable energy (“RES Producers”) continues to grow. According to the state company that performs the statutory obligation to off-take all electricity from the RES Producers under a “green tariff” (the “Guaranteed Buyer”), the capacity reserved under executed pre-PPAs amounts to 12 GW, of which 4 GW is expected to become operational in 2020.

Financial Sustainability of the Guaranteed Buyer

An unprecedented surge of RES projects along with the launch of a new model of electricity market, which turned out to have some flaws, triggered liquidity problems for the Guaranteed Buyer.

Initially, the new electricity market model required the Guaranteed Buyer to purchase electricity under a green tariff at the cost of the compensation it received from the transmission system operator (TSO). The TSO, in turn, compensated the Guaranteed Buyer from funds it received to provide transmission services to electricity market participants. Eventually, the proceeds from electricity market participants proved to be unstable and insufficient to cover the payments under the green tariff.

As a result, the Ukrainian Government imposed additional temporary public service obligations (PSOs) on electricity market participants to help the Guaranteed Buyer during the transition period. These PSOs required the Guaranteed Buyer to purchase cheap electricity from Energoatom (nuclear electricity) and Ukrhydroenergo (hydroelectricity) at threshold prices and re-sell most of it on the DAM/IDM at higher prices. Any profit the Guaranteed Buyer generates through PSO performance must be used to make payments under the green tariff.

However, the imposition of PSOs has been insufficient to resolve the liquidity problems. As of April 30, 2020, the Guaranteed Buyer has approximately USD 451.2 million in outstanding debt to the RES Producers.

Proposed Solutions

Eventually, the Ukrainian authorities concluded that amending the current green tariff support system would be necessary to stabilize the sector. To avoid imposing a unilateral solution, which could affect the confidence of investors in the stability of Ukraine and lead to potential investment arbitrations, Ukrainian authorities and RES investors agreed to develop a balanced solution with the mediation of the Energy Community Secretariat’s Dispute Resolution and Negotiation Centre.

The mediation process is designed to elaborate a Memorandum between Ukraine and the RES Producers. According to the Ministry of Energy, the Memorandum will allow for the voluntary restructuring of the green tariff system (e.g., a reduction of the green tariff with or without extending its term) and provide a new framework on liability for imbalances and curtailment compensation. In addition, the Memorandum is expected to provide that solar and wind projects commissioned after the execution of the Memorandum would no longer be able to benefit from the green tariff system but instead would have to participate in an auction system. For reference, the applicable laws provide that the green tariff may still be granted to those projects which have pre-PPAs that were executed prior to December 31, 2019, provided that they are commissioned within two years (for solar projects) and three years (for wind projects) after execution of the pre-PPA. The Memorandum is in the final stages of discussion and is expected to be signed in May 2020. The Memorandum would constitute a basis for a draft law, which would then be presented to Parliament for consideration.

If Parliament adopts the law based on the Memorandum, this will both break the deadlock in the liquidity issue and may help Ukraine remain attractive for investors in the renewable energy sector. Some international market players have already expressed their readiness to continue investing in renewable projects in Ukraine once the uncertainty in the regulatory framework is resolved and the auction system is launched. Given the previous strong support of private developers such as Sctatec, VR Capital, NBT, Vindkraft group, GreenWorx, and Akuo Energy, and IFIs such as the EBRD, NEFCO, Swedfund, and BSTDB, there is much hope that they will remain active in Ukrainian renewable projects in the future.

By Glib Bondar, Senior Partner, and Anna Mykhalova, Associate, Avellum

This Article was originally published in Issue 7.6 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

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