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Case law on claims filed by green electricity producers

Contents

  1. Case law of national courts
  2. First shot
  3. Instead of conclusions

The Ukrainian renewable energy market is undergoing a crisis. One of the attempts to resolve the situation on market was signing the Memorandum of Understanding to settle the problems in the renewable energy sector between the State and alternative power producers on June 10, 2020. The agreements reached through the mediation procedure and set out in the Memorandum were also enshrined in legislative acts [1].

Thus, Ukraine was obliged to repay the existing debts to green electricity producers. In turn, investors agreed to reduce tariffs for produced electricity to lighten the financial burden of the State towards them.

However, the obligations undertaken by the State have not been performed.

As a result, this year the indicators of the development of solar energy in Ukraine have decreased by 2.5 times.

The regular non-performance by the State of its obligations, unpredictable legislation, and constant changes in the rules of the game undermine the trust of national and foreign investors in the renewable energy sector in Ukraine.

In view of the existing situation, investors have to apply to national courts and international investment arbitration to protect their rights.

Case law of national courts

According to publicly available information, the debt of Ukraine to the renewable energy sector amounted to about UAH 25 billion last year. This circumstance caused a real boom of claims of green electricity producers against State Enterprise “Guaranteed Buyer” (hereinafter – the Guaranteed Buyer, State Enterprise, Defendant) for recovery of debts for electricity supplied to the power grid.

We will further consider the main arguments of the parties and the position of the courts in this category of disputes.

The Guaranteed Buyer argues that it pays the sellers of electricity at the green tariff with funds received from Private Joint-Stock Company “National Power Company Ukrenergo” (hereinafter – PrJSC “NPC Ukrenergo”). However, the State Enterprise is unable to pay producers in a timely manner since PrJSC “NPC Ukrenergo” does not pay it in a timely manner.

The Defendant also refers to the provisions of the Law of Ukraine No. 810-IX dated July 21, 2020 [2], according to which monetary obligations of the Guaranteed Buyer to sellers of electricity must be performed in 2021-2022 by issuing domestic government bonds with 5 years maturity.

In turn, sellers of electricity argue that they have the right to receive in time full amounts of funds for electricity sold by them in accordance with the agreements entered into on the market. The obligation must be performed in a proper manner. The obligation may not be refused or changed unilaterally. According to the agreement and current legislation, the Defendant’s obligation to pay for the purchased electricity is not conditioned on payments to the Guaranteed Buyer by PrJSC “NPC Ukrenergo”.

The courts agree with this position of green electricity producers and collect debts from the Guaranteed Buyer for electricity supplied to it. According to the courts, it was the Guaranteed Buyer that assumed the obligation to buy all electricity sold by the seller at the green tariff and to pay for it. Failure of PrJSC “NPC Ukrenergo” to perform its obligations is not a ground for releasing the Defendant from its contractual obligations.

Similar conclusions are set forth, in particular, in the resolutions of the Supreme Court dated May 12, 2021, in case No. 910/11830/20, dated August 19, 2021, in case No. 910/11889/20, and dated September 1, 2021, in case No. 910/13034/20.

As to the recovery of debts to electricity producers by issuing domestic government bonds, the courts highlight the absence of any regulations on this matter. Therefore, the provision of the current legislation and agreements between the parties shall be applied to the legal relations between the parties.

Claims for fines, penalties, and 3% per annum are also held reasonable, however, the courts are reducing the amounts claimed by plaintiffs, taking into account the specifics of the relations existing in the electricity market.

According to the position of the Grand Chamber of the Supreme Court set forth in the resolution dated March 18, 2020, in case No. 902/417/18, the court may, under certain conditions, reduce the amount of penalties, fines, and annual interest for the period of payment delay in accordance with Article 625 of the Civil Code of Ukraine, since all of them are aimed at restoring the property status of the debtor.

Thus, given the fact that the Guaranteed Buyer is a state-owned enterprise that has a great amount of outstanding monetary obligations to electricity producers and the expenditures for its financial support are provided for in the state budget, the courts reduce the amount of penalties and interest per annum.

There are also some cases when the Guaranteed Buyer requests the court to suspend the proceedings in this category of cases until the consideration by the Constitutional Court of Ukraine of the request by 47 members of Parliament for recognition of certain provisions of the Law of Ukraine “On Alternative Energy Sources” and “On Electricity Market” to be unconstitutional. This request is justified by the fact that the establishment at the legislative level of the applicable rate of the green tariff for electricity produced in Ukraine with the use of its natural resources is economically unreasonable and imposes unreasonably high costs on the State, which is a gross violation of property rights of the Ukrainian people, contrary to the social focus of the economy, and detrimental to the interests of the society.

In turn, the courts are refusing to suspend the proceedings due to the lack of an objective impossibility to consider this category of cases until the consideration by the Constitutional Court of Ukraine of the above request.

Thus, the case law on claims of electricity producers against State Enterprise “Guaranteed Buyer” is customary and predictable. Courts are satisfying claims for recovery of debts for electricity sold at the green tariff. In addition to the recovery of the principal amount of the debt, the Guaranteed Buyer is also charged inflation costs, fines, penalties, and 3% per annum, the amounts of which are often reduced.

First shot

The significant indebtedness by the State for produced green electricity and retrospective reduction of the tariff are also grounds for foreign investors to apply to international arbitration.  It is known that some companies have already filed investment claims to the Ministry of Justice of Ukraine, which is a condition for further initiation of arbitration proceedings.

The first investor to initiate a full-scale arbitration proceeding against Ukraine was Modus Energy International, a member of Modus Grupe, Lithuania.  The amount of the claims is estimated at EUR 11.5 million.

Modus Energy International commissioned three solar power plants in Ukraine in 2019 and was granted the green tariff for the sale of electricity. However, this tariff, the amount of which had been guaranteed until the end of 2029, was reduced by 15% since August 1, 2020. According to the plaintiff, the said reduction violates its rights as an investor under the Agreement to the Energy Charter [3].

In particular, the plaintiff refers to the violation of paragraph 1 of Article 10 of the said Agreement ensuring investors with fair and equal conditions, constant protection and security, as well as preventing any unjustified or discriminatory measures regarding the management, use and disposal of investments of the plaintiff.

In turn, Ukraine objects to such arguments of the plaintiff. The State also does not agree with the jurisdiction of the Stockholm Arbitration Court to consider this dispute.

According to the Ministry of Justice of Ukraine, the detailed position of the defendant in the case will be provided in 2022 after the receipt of the full text of the claim from the plaintiff.

In any case, the initiation of this arbitration proceeding itself is a bad sign for Ukraine, which should encourage the government to take action to effectively resolve the problems in the renewable energy market.

Instead of conclusions

The violation of the guarantees given to investors, which they relied upon during the construction of generating assets in Ukraine, is contrary to the principle of fair expectation and may be a ground for recovery of multimillion losses from our country in the international arbitration. Moreover, constant changes in market conditions worsen the investment attractiveness of the country.

According to official data, in 2021, the commissioning of new renewable energy assets decreased by more than a quarter. And this is despite the fact that Ukraine was next to the last among European countries in terms of the share of consumption of green electricity even at the peak of development of green energy in 2019.

It follows from the above that in order to integrate with the European energy system and preserve and rationally use budget funds, Ukraine needs to develop clear rules and establish transparent and predictable conditions for doing business.


[1] Law of Ukraine “On Amendments to Certain Laws of Ukraine on Improving the Conditions for Promoting Electricity Generation from Renewable Energy Sources” dated July 21, 2020

[2] Law of Ukraine “On Amendments to Certain Laws of Ukraine on Improving the Conditions for Promoting Electricity Generation from Renewable Energy Sources”

[3] Agreement to the Energy Charter ratified by Ukraine on February 6, 1998

Anastasiia Nikolenko

Anastasiia Nikolenko

Associate, Attorney at law

551

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