Publication

Genuine Value of The State Guarantees: How Does Ukraine Pay for The "Green" Energy Purchased from The Private Entities and What To Do, When The Guarantees Fail To Work As Supposed?

25/03/2020

Oleg Kachmar

Partner, Attorney-at-Law

Domestic Litigation,
Restructuring and Insolvency,
Agribusiness,
Insurance

Who is ‘Guaranteed buyer’?

A state enterprise ‘Guaranteed buyer’ emerged on June 2019 on the basis of the Cabinet of Ministers of Ukraine’s decree, dated on 17 April 2019. This enterprise, created in the pursuit of the ‘green energy’ market reform launched in April 2019, was established with the purpose of full and guaranteed obligatory buying out of electricity from those entities for whom a so-called ‘green’ tariff was accorded. For this reason, private producers are to be listed to a ‘balancing group’ of the ‘Guaranteed buyer’, which is constantly updated in order to achieve the needed balance between production and consumption of the said energy.

In order to supply produced energy and to join the balancing group, ‘Guaranteed buyer’ signs a purchase-selling contract the typical form of which is prescribed by the National Commission for State Regulation of Energy and Public Utilities (‘the Commission’). The same Commission adopts the Regulation concerning the purchase of ‘green’ energy by ‘Guaranteed buyer’ (‘the Regulation’).

Acceleration beyond control

In view of immense aspirations to enlarge the part of the ‘green’ energy in the general production of electricity in Ukraine, the government decided to economically encourage creation of new production facilities and expansion of the existing ones by setting of one of the highest ‘green’ tariff on the world for the energy produced.

This tariff formally exists since 2008, though it was only 2015 when the tariff was revised and reinforced by guarantees that it would not be reduced. Only then it started to stimulate rapid growth: during the years 2014-2019 the general output of the ‘green’ energy facilities (including solar, wind, hydro and bioenergy) increased by almost 5 times – from 957 to 4866 megawatt.

However, this pace turned to be too expeditious for Ukrainian energy market. In 2019, when the development rate should have already accelerated, this acceleration was amplified by the signals sent by the officials which started voicing proposals regarding revision of the ‘green’ tariff downwards.

Since the formal promises have been made to the existing investors, any changes in this direction could have taken effect from 1st January 2020, whereas any producer could have commenced construction of ‘green’ energy facilities before the end of 2019 and yet profited from abnormally high ‘green’ tariff. As a result, on the eve of 2020, ‘Guaranteed buyer’ diffused the statement (only in Ukrainian) by which it informed about enormous workload due to the large amount of application lodged by private entities willing to produce ‘green’ energy under the tariff. Even if the current level of output results in gross excess of the production over the consumption, which was made clear by the ‘Guaranteed buyer’ in its statement (only in Ukrainian) of February 2020, thus a launch of new facilities which are now on the projection or construction stages will only exacerbate the problem without undertaking effective structural measures.

The payment crisis 

In the third quarter of 2019, alongside the excessively speedy growth of ‘green’ energy production, ‘Guaranteed buyer’ began to experience problems of obtaining the payments from its major subcontractors – ‘Energoatom’ and ‘Ukrenergo’ state enterprises. As a result, in November 2019, ‘Guaranteed buyer’ started to delay payments for the purchased energy from the private producers. 

In accordance to the Chapter X of the Regulation (only in Ukrainian), the payment shall be made three times a month: for the first 10 days, for the first 20 days and for the whole month respectfully. Nevertheless, the deficit of floating funds led to the systemic payment crisis on the part of ‘Guaranteed buyer’. As at 3rd February 2020, ‘Guaranteed buyer’ fully paid off outstanding for the energy purchased in November (!) 2019 and partially relieved its debt for December 2019 (56% of the total debt).

The payments to the private producers directly depend on the payments to ‘Guaranteed buyer’ itself from its subcontractors, while the latter cannot be also named as diligent payers. The situation is aggravated by the uprising pressure on ‘Guaranteed buyer’ caused by the growth of ‘green’ energy production and by the absence of any profound decisions on the part of the Commission. 

As such, there is no room for an effective solution of the payment crisis in the nearest days and weeks.

The headache of the ‘green’ energy producers: how to protect the investments? 

In spite of the fact that ‘Guaranteed buyer’ gradually pays off its outstanding bills, which does not let talk about total collapse of the payments, the whole situation is still causing harm to the producers, especially the newcomers. 

‘Green’ energy is cheap in production, though it is spectacularly expensive in terms of initial investments, frequently made for loans, which makes timely revenue hugely important. 

Besides, some ‘green’ energy producers (especially the ones operating with bioenergy) run on pre-purchased commodities, which is why it is essential to pay it in order to keep the production chain uninterrupted. Any delays in the payments for produced energy will prevent entities from buying commodities and, as a consequence, will cause a decline of production that, in its turn, significantly decrease the self-sufficiency of the facilities and cause additional loss.  

Consequently, from the beginning of 2020, the producers started lodging lawsuits against ‘Guaranteed buyer’ claiming recovery of the debt. Apart from the sum of the principal debt, the producers are entitled for recovery of penalties: 0,1% penalty interest of the sum due for each day of delay plus 7% of the sum as a lump sum for over 30 days of the delay, not including inflationary increase and 3% per annum.

Moreover, if the delay of payment causes damages to the producers (for examples, additional expenditures made in relation to the forced termination of production; penalties paid by the producers to loaners; loss of the profit that could have been gained if the payment by ‘Guaranteed buyer’ had been made as agreed), these damages can be also recovered from ‘Guaranteed buyer’. Evidently, the causal link between the damages claimed and the failure to pay on the side of ‘Guaranteed buyer’ shall be established. 

Published: Lexology, 26 March 2020

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