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Partner, Head of Alternative
Energy Practice, Eterna Law
Dispatching Control Services for RES in Ukraine. Pros and Cons
“Nature repairs everything.”
— Montesquieu, The Spirit of the Laws
The electricity market in Ukraine is still regulated. Without digging deep into all the authorization procedures involved in forming and running a RES business in Ukraine, which have become the subject of overviews at various occasions, there are certain matters that have merited separate consideration, which should be properly addressed, in such a narrow scope as in this article.
According to Ukrainian legislation, businesses owning RES power plants are power producers and participants of the Electricity Market of Ukraine. This status calls for their operating in accordance with a series of rules set out in numerous legal acts. Furthermore, given the fact that the participants of corresponding legal relations are businesses, there are plenty of obligations arising from agreements peculiar for the market. The list of such agreements contains at least 18 of them, including compulsory agreements, such as greed connection agreements (GCA) and power purchase agreements (PPA), and certain agreements that are to be concluded under specific circumstances1. The latter may be referred to as conditionally optional, since they are compulsory for certain types of power producers that exclude the discretion of the producers regarding their conclusion.
Hence, although implementation of “green” auctions in Ukraine has been hanging in the air for quite a while, there is almost no room for arguing as to whether the coming changes may and shall discharge valid agreements concluded between market participants prior to such implementation. Neither shall they cause the irrelevance of circumstances determinant for conclusion of conditionally optional agreements mentioned above.
Therefore, contractual matters that certain RES power producers are most likely to experience in Ukraine take center stage in the chapter.
Unlimited Discretion to Impose Restrictions
According to the Code of Power Transmission System approved by Regulation No.309 of the National Energy and Utilities Regulatory Commission of Ukraine of 14 March 2018 (Code), power producers using these types of generating units:
— B — with coupling points below 110 kW for projects of 1 MW up to 20 MW;
— C — coupling points below 110 kW for projects of 20 MW to 75 MW;
— D — coupling points of at least 110 kW, including such points for projects reaching/exceeding 75 MW, are obliged to conclude a Dispatcher (Operational and Technological) Control Services Agreement (DSA) with the operator of the power transmission system, UKRENERGO NPC SE (OPS) in order to operate on the electricity market2. Moreover, operating in certain hubs of the Unified Energy System of Ukraine (UES), such as Burshtyn Island (Burshtynska TPP, which is synchronized with the united European energy system ENTSO-E) may trigger an obligation for a power producer to conclude a DSA.
The template for a DSA is approved by the Code and is provided in Annex 5 of the Code. The fundamental condition in the DSA, namely the cost of services to be rendered by OPS, depends on the special tariff fixed by the Regulator — the rate applicable to the volume of the power produced. Pursuant to DSA, OPS is committed to ensure safe and efficient functioning of the UES, including uninterrupted power delivery to consumers in compliance with operational security requirements.
Other participants that are obliged to conclude a DSA are the operators of the power distribution system (ODS) and electric consumers, whose equipment is under the management of OPS.
Let us take a closer look at an indicative DSA to be concluded by and between the OPS and a power producer using a RES power plant.
Generally, OPS would require the inclusion of provisions obliging the producer to conclude DSA into GCA if the producer met the criterion referred to above as the condition precedent for the approval of GCA and Technical conditions for grid connection.
The main source of the producer’s concerns is the right of OPS to limit or cut the power for RES power plants, provided for by the Code3. Instruments via which the OPS should take such measures include obligatory subordination of a producer’s operational personnel to the OPS and remote switching.
Poor Sufficiency of Reactive Measures
Even though, according to the Code, RES power plants enjoy certain priorities and there is an exhaustive list of reasons (operational security breaches, emergencies, etc.) for limiting/cutting the power provided by OPS for RES power plants, the producer is most likely to suffer damages due to the fact that there are no efficient preventive mechanisms available for the producer when it comes to imposing the said limitations. For instance, the right of the producer to obtain information from OPS as well as the right to question the acts/decisions of OPS do not constitute the producer’s ability to prevent limiting/cutting the power, whereas in contrast not abiding by OPS’s decision is most likely to be recognized as a breach of the producer’s contractual obligations.
In consideration of the foregoing, the clear statement of the template for PPA, according to which ENERGORYNOK SE may not be held liable for the damages incurred by the producer because of measures taken in the circumstances stipulated above, the producer shall probably face a rather poor toolkit for safeguarding its legitimate interests.
This is related to the fact that the template for a DSA provides for specific conditions for recognition of limiting/cutting the power for RES power plants as causing damages to a power producer4.
These conditions are the change of the equipment outage schedule based on a decision taken by OPS, accompanied with an absence of corresponding written representations from OPS.
Therefore, given the wording of the Code, including the template for a DSA which does not bode well for proving the presence of enough reasoning for damages on the issue of compensation from OPS, the producer may not be certain whether it has a strong case to contest such a decision by OPS either before the National Energy and Utilities Regulatory Commission of Ukraine or in a court of law (since, unlike the template for a PPA5, there is no arbitration clause in the template for a DSA).
Involuntary Replacement of Planned Debtor Indebtedness with Contingent Asset
In view of the foregoing, if the producer is eventually awarded damages, the usual debtor indebtedness is to be replaced with a contingent asset in the form of a tort claim, which may potentially raise bookkeeping-related issues.
Thus, from the economic perspective, such an asset is not the most desirable one, especially given that in order for damages in question to be awarded the producer has to bear legal costs. The latter is most likely to raise another practical issue related to efficient reimbursement of legal costs.
Taking into account the specificity of a RES business, which normally does not require a large staff, including in-house legal staff, a DSA may be considered as a source of significant complications, briefly mentioned above along with non-contentious expenses in the form of payments to OPS for its services.
Conclusion: Control the Controls
Although the need for dispatcher services for keeping the United Energy System safe and efficient is unobjectionable, the search for aurea mediocritas (or ‘golden mean’) remains a good and legitimate idea.
Since relatively efficacious prevention is possible mainly prior to the conclusion and execution of a DSA, one may not argue that a RES’s business (self-)estimation on the basis of a certain criterion can mitigate the risks mentioned above by pre-planning.
For instance, an investor may base its choice between different projects on such an estimation and avoid the potentially problematic area of construction and commissioning of the project. On the other hand, the focus may be shifted to the employment of highly-skilled operational personnel and their training and education.
We can now see that the preparatory stage is the most suitable for a power producer to determine the most appropriate way to exercise its rights both granted by the law and a DSA, which is to boost the success of the entire undertaking. Hence, the described approach is aimed at keeping as close as possible to the balance of public and private interests and potentially results in the more stable and predictable economic activity of an investor in such a fascinating area as Renewable Energy.
1 Article 4 (1) of the Law of Ukraine No.2019-VIII On the Electricity Market of 13 April 2017
2 Section XI Clause 6 (6.2) of the Code of Power Transmission System approved by the Regulation No.309 of the National Energy and Utilities Regulatory Commission of Ukraine of 14 March 2018
3 Section VII Clause 6 (6.3) of the Code of Power Transmission System approved by the Regulation No.309 of the National Energy and Utilities Regulatory Commission of Ukraine of 14 March 2018
4 Clause 3.4 (3.4.1) of Article 3 of the template Dispatcher (Operational and Technological) Control Services Agreement approved by Annex No.5to the Code of Power Transmission System approved by Regulation No.309 of the National Energy and Utilities Regulatory Commission of Ukraine of 14 March 2018
5 Article 7 (7.3) of the template Power Purchase Agreement between ENERGORYNOK SE and Business Entity that Produces Electricity From Alternative approved by the Regulation of the National Energy and Utilities Regulatory Commission of Ukraine No.1314 of 11 October 2012