Category: Ukraine

The energy market in Ukraine has always been in the limelight of both government and investors looking for investment opportunities.

Unfortunately, brutal and unjustified large-scale warfare of the Russian federation against Ukraine affected all the aspects of the Ukrainian economy, including the energy sector.

In this article, I would like to briefly outline the most crucial events as well as challenges the Ukrainian energy market faced in 2021, the current situation in the Ukrainian energy sector as well as contemplated top priorities for the Ukrainian energy sector once the war is over.

Top events of 2021

PSAs

For the first time since 2013, Ukraine conducted a dozen of production sharing agreements (PSA) tenders and selected the winners which are both international and domestic prominent oil&gas investors. The process of PSAs negotiation took more than a year and finally the energy market was marked by the successful execution of ten PSAs. The relevant PSAs were supposed to attract at least circa USD 0,5 billion in gas production, and the PSAs were concluded for the duration of 50 years.

One PSA is yet to be signed.

Historical indebtedness before RES producers was mainly repaid

Over the last five years or so Ukraine has become a lucrative market for large-scale construction of “green” energy power stations, which was marked by the influx of more than USD 10 billion of investment into the industry.

However, such extensive and expedient growth encountered several obstacles preventing the market from further development and moreover casting a shadow on the viability and sustainability of market operation at its current modus operandi. In March-July 2020 as well as partially (but not so severely) in 2021 Ukrainian RES producers felt the adverse effect of the payment deficit of the Guaranteed Buyer[1], whereas the indebtedness of Guaranteed Buyer before the RES producers remained largely unpaid despite the government promises manifested in the Memorandum of Understanding signed by and between RES associations and Government of Ukraine.

Finally, in November 2021 Ukrenergo, state-owned TSO (which serves as a cash donor for the Guaranteed Buyer) issued a debut 5-year Green and Sustainability-linked Eurobonds and attracted USD 825 million on international markets to cover the historical indebtedness before RES producers. Quite rapidly the monies were transferred to their intended recipients.

Switch from the “green” tariff to “green” auctions has not occurred

To have the lower price for RES-produced electricity the Parliament of Ukraine decided to introduce the “green” auctions as a substitute of the existing “green” tariff support scheme. The auctions are aimed at a fair distribution of the state support (via auction prices) based on the quotas determined by the Cabinet of Ministers of Ukraine.

Despite the changes had been passed almost two years ago, no auctions have yet been conducted.

Additionally to the problem with “green” auctions, there are issues related to lack of legislation (and thus inability to enter into) on corporate PPAs and absence of green energy certificates of origin, which together restrained the development of “green” energy in Ukraine.

Constitutional proceeding against the “green” tariff is still pending

The Constitutional Court of Ukraine (CCU) has been considering a constitutional proceeding on the constitutionality of some provisions of the Alternative Energy Sources Law and Electricity Market Law.

The main arguments to declare the “green” tariff as unconstitutional are the following:

• The Parliament of Ukraine (Verkhovna Rada of Ukraine) acted ultra vires and had no power to set up the “green” tariff value, as this power is vested into executive authority (Cabinet of Ministers of Ukraine)
• The mere “green” tariff is too high, and thus:
• the title of the Ukrainian people to its resources is infringed
• the “green” tariff is not aimed at social justice
• the “green” tariff does not meet the requirement of the state budget to be balanced (i.e., the reimbursement for green energy constituted 7.9% of total produced energy value, while the share of RE in total energy production was only 1.9%)
• the protection of competition is not respected due to a favorable “green” tariff regime.

Most of the commentators state that CCU has no legal basis to declare the “green” tariff in Ukraine as unconstitutional.

Inter alia, the following arguments are in place:

• The Alternative Energy Sources Law does not set the size of the “green” tariff, but only the main criteria for calculating the “green” tariff to be used by the National Energy and Utilities Regulatory Commission of Ukraine (NEURC) when setting a “green” tariff for electricity producers from alternative energy sources. The establishment of the size of the “green” tariff is attributed to the NEURC discretionary powers, as it is authorized to decide whether or not to provide a “green” tariff for a particular producer, as well as whether or not to provide increment for the use of Ukrainian components and other powers. Therefore, Verkhovna Rada of Ukraine, adopting the main criteria for calculating the “green” tariff, acted within its constitutional powers and in no way took over the powers of other state bodies.
• The “green” tariff is not financed by the State Budget of Ukraine, and therefore in no way affects the balance of the state budget. The “green” tariff is paid by the Guaranteed Buyer at the expense of funds received from the sale of electricity on the market, as well as from funds received from Ukrenergo, Ukrainian TSO
• the Energy Strategy of Ukraine for the period up to 2035 “Security, Energy Efficiency, Competitiveness”, approved by the Cabinet of Ministers of Ukraine in 2017, focuses on expanding the use of all types of renewable energy as one of the instruments for guaranteeing the energy security of the state, etc.

The CCU’s consideration of the case has been put on hold due to the dismissal of a presiding judge from his post and his litigious challenge of such a dismissal.

Therefore, there is still pending the Sword of Damocles hanging over the Ukrainian RES sector.

After 24^th February 2022

Many power generation objects were captured, shelled, or destroyed

The biggest nuclear power plant in Europe, Zaporizhzhia Nuclear Power Plant, Kakhovka Hydroelectric Power Plant, Luhansk and Zaporizhzhia thermal power stations were captured by russian occupant forces, and we do not know whether these facilities will operate after presumable Ukrainian Victory. Okhtyrska combined heat and power plant was destroyed, Chernihiv combined heat and power plant was damaged. Many oil products bases, refinery plants, separate parts of gas transmission systems, and gas storages were seized.

Circa 40% of the installed RES capacity is occupied or affected by hostilities.

At the same time, on 31 March 2022 the Chornobyl Nuclear Power Plant was liberated from the russian occupants. As of today, the plant is controlled by Ukrainian nuclear specialists and secured by the National Guard of Ukraine.

“Green” tariff payments were dramatically decreased

In March-May 2022 Guaranteed Buyer paid less than 25% of “green” tariff to RES producers. In conjunction with the significant damage and seizure of numerous generation objects, it put Ukrainian RES industry on the brink of the bankruptcy.

Ukrainian power system is fully synchronised with ENTSO-E

The power systems of Ukraine and Moldova are fully synchronised with the Continental European network. The relevant decision was approved by the association of system operators ENTSO-E on 11 March 2022. Physical operations to interconnect the power systems were performed on 16 March 2022.

Ukraine resumed export of electricity to Poland and Moldova

The first auction for the allocation of interstate interconnections on electricity export to Poland was conducted on 28 March 2022. The auctioned profile volume was 210 MW (per hour)[4]. On 12 May 2022 Ukraine started exporting electricity to Moldova. The auctioned profile volume was 135 MW (hourly).

Amendments of the rules of rent rates for gas production

From 1 March 2022 the approaches to the calculation of the relevant rent rates were updated.

Firstly, to calculate the natural gas sale price the arithmetic mean of gas prices for the reporting month on the Dutch gas hub (TTF) should also be considered. The natural gas sale price is used for rent rate calculation purposes.

Secondly, the gas sale price for the respective period affects the rent rate for gas production: the higher the gas sale price, the higher the rent rate is.

Thirdly, Ukraine preserved reduced rent rates for the new wells. For example, if the gas was produced from the new wells deeper than 5,000 meters, the rent rate will comprise three percent (gas price is 150 US dollars per 1000 m³ or less), six percent (gas price is higher than 150 US dollars and not higher than 400 US dollars) and if the price is higher than 400 US dollars – six percent of the existing gas price of 400 US dollars and 18 percent of the existing sale price of gas exceeding 400 US dollars per 1000 m³.

The abovementioned rent rates regulation will be valid only during the period of the martial law. I suppose that after the war is ended rent rates, specified by the relevant regulation, will be decreased.

Finally, from 1 April 2022 and until martial law termination, gas producers should not pay the rent related to the natural gas:

• produced but not alienated, and
• injected in Ukrainian gas storage facilities.

Gas production volumes remain stable

According to the information of Energy Suppliers Association, in January 2022 public and private companies increased production of natural gas to more than 1,7 billion m³, which is 10% more than in January 2021. In February, the positive trend continued until the beginning of russia’s military aggression: Ukrainian companies produced more than 1.5 billion m³ and improve the result by almost 9% compared to the February 2021.

After the Russian invasion, production declined in March and April, but not as much as experts expected, by 1% and 3% compared to the March and April 2021, respectively.

Ukrainian energy after the war is ended

We do believe that Ukraine will win the war and restore its control over temporary occupied territories.

We do not know when exactly the war will end. Notwithstanding that, Ukrainian State should already update the national energy policy and prepare rigorous and comprehensive step-plan on reconstruction the Ukrainian energy infrastructure.

The updated energy policy should include the answers to some of the most challenging questions, inter alia:

1) whether the damaged energy infrastructure should be rebuilt as status quo ante or built from scratch using new (renewable) technologies and approaches

2) how to attract private capital to reconstruction of Ukrainian energy sector and which stimuli should be used

3) which legislation and approaches from the US/EU law should be transposed to Ukrainian law, etc.

The good news is that Ukrainian government starts elaborating such vision. Inter alia, in a “roadmap” for Ukraine’s economic recovery presented by the Ministry of Economy of Ukraine, the following principles are enumerated:

• Self-sufficiency. It will be gained via increasing domestic gas production and developing nuclear energy
• Energy independence in three-five years
• Energy efficiency
• Application of “green economy” principles.

Some of the aspects raised are debatable (for example, a number of renewable energy generation technologies are already more cost-effective than nuclear energy generation facilities: therefore, there is a dilemma whether Ukraine should keep a focus on nuclear energy).

Nonetheless, the general direction of the vision is correct. In addition, the subsequent postulates should be treated as fundamentals of recovery of Ukrainian energy sector:

• Development of the regulation to facilitate “green” energy development: launch of the “green” auctions, introduction of corporate PPAs, green energy certificates of origin and feed-in premium mechanisms, etc.
• Further implementation of Acquis Communautaire in respect of the energy regulation: REMIT, etc.
• Providing of the maximum legal, tax and regulatory stimuli for gas production
• Repayment of the debts under the “green” tariffs.
• Launch of bilateral cross-border capacity allocation auctions to facilitate import-export operations between Ukraine and ENTSO-E countries, etc.

Ukraine has many challenging tasks on the table. In spite of it, we believe Ukraine will recover its economy (including energy sector), will gain promising pace of economic and social reforms and will be an upstanding member of European and Euro Atlantic communities. 

By Dmytro Melnik, Associate, Arzinger

CMS has advised FAS Energy on the acquisition of a solar power plant being developed in the Kyiv region, with an expected capacity of 112 megawatts, from an unidentified Ukrainian developer. 

Established in 2013, FAS Energy is the renewable energy subsidiary of Fawaz AlHokair Group and provides renewable energy solutions across the Middle East and internationally.

CMS’ team included Managing Partner Vitaliy Radchenko, Partners Natalia Kushniruk and Olga Belyakova, Counsel Maryna Ilchuk, Senior Associates Mariana Saienko and Mykola Heletiy, Associates Ihor Pavliukov, Anatolii Doludenko, and Maksym Morozov, Associate Lawyer Yevhen Chornyi, and Trainee Bohdan Krivuts.

As reported by CEE Legal Matters on May 24, 2022, CMS Cameron McKenna Nabarro Olswang announced that the firm has appointed Vitaliy Radchenko as a new Managing Partner in Kyiv, replacing Graham Conlon who held the role for five years. CEELM sat down with Radchenko and CMS CMNO CEE Managing Director Dora Petranyi to discuss the appointment and the firm’s outlook for the future of the Kyiv office.

CEELM: To start with the basics, Dora, what brought on the change?

Petranyi: The change happened very naturally. Graham has been leading the firm for five years with a focus on our international practice. We started discussions about him switching positions long before the war started but, with the invasion, that conversation was put on hold. Now, as we’re in what is frequently referred to as phase three of the war, with Russia’s failed military activities in Ukraine’s major cities and the substantial battles taking place only in the Donbas region, we thought that it is the right time to announce the changes.

Graham has been very successful in his activities in Europe, where he was splitting his time between the Warsaw and Kyiv offices and engaging in international transactions across CEE and beyond. It is fair to say that under his management our firm has seen fantastic growth. He will now expand his activities to the Middle East. In the meantime, we wanted to choose someone for our Kyiv office who has been with the firm for a long time and who is a recognized market leader. We were confident that Vitaliy had all these skills.

CEELM: Vitaliy, what is the current state of the office in Kyiv?

Radchenko: As you might know, very few men are allowed to leave Ukraine at the moment. Personally, I am staying in Ukraine with my wife and kid. Most of us are based in the western regional centers of the country. When missiles started hitting Kyiv, our plan was to evacuate our people away from big cities and major targets, such as cities with special infrastructure, military bases, airports, etc. Some of our employees stayed in Kyiv for personal reasons but, irrespective of that, we are still fully operational.

As a firm, we are very well established in agile working and have a robust infrastructure and systems in place to support remote working. Starting from COVID-19 times, our employees could work from their home offices without mandatory working hours. Our people could decide their location and we didn’t require their physical presence as long as work was done. This approach remains the same nowadays. In addition, we are proud that the firm didn’t let anybody go, quite the opposite – our employees’ salaries and future with us remain safe.

CEELM: As much as one can make plans in the current setting, what can you tell us about your future plans for the office?

Radchenko: We are lucky to have been advising on a significant variety of long-term projects, ranging from infrastructure to IT and financing. This wide spectrum of projects still keeps us afloat. We still have a lot of work, whether on relocations from one part of the country to another or even on investments in Ukraine – just a few days ago, we closed a deal on the acquisition of a solar power plant in Ukraine. On top of that, Ukraine was one of the leading countries in terms of IT companies and software development in Europe and, even today, tens of thousands of specialists in these fields are developing software for international clients.

There is also a need for the reconstruction of infrastructure, residential property, ports, airports, etc. Once we win the war, we will need to rebuild everything, requiring a significant international effort. We already see the EU and G7 countries mobilizing funds for post-war reconstruction.

Petranyi: Six weeks into the war, we had already appointed a new Partner – Olga Shenk – who specializes in disputes. This is quite symbolic, as her plan is to focus on claiming damages in the future and helping clients to protect their investments. Second, we have a strong international network, working on a variety of multinational projects. Many of our Ukrainian members are now working on international projects, which is keeping them busy for the time being. We all hope that the terrible invasion of Ukraine will soon come to an end and we will be stronger than ever to support clients, in particular, on the initiative to rebuild Ukraine.

Baker McKenzie and Integrites have contributed to the completion of the European Commission questionnaire regarding Ukraine’s application for European Union membership. Baker McKenzie contributed to the completion of Parts I and II of the questionnaire. ​​Integrites worked pro bono to contribute to the submission of the Ukrainian Government’s response. 

“On February 28, 2022, the President of Ukraine, Volodymyr Zelenskyy, signed Ukraine’s application for membership in the European Union,” Baker McKenzie informed. “During her visit to Kyiv on April 8, 2022, the President of the European Commission, Ursula von der Leyen, handed an EU candidacy questionnaire, an important document commencing the membership application review process, to the President of Ukraine. Ukraine expects to obtain the status of an EU candidate country in June 2022, when the European Council is scheduled to meet.”

“Our team is proud of contributing to the finalization of the documents purporting to achieve the EU candidate status for our country,” Baker McKenzie Managing Partner Serhiy Chorny commented. “Ukraine is regaining its membership in the European family by overcoming many challenges, including the Russian invasion. We have no doubt that Ukraine will become a very central and influential member of the European community.”

“It’s a once in a lifetime opportunity for our team to make an input into a historic public cause of Ukraine’s stride towards the European family,” Integrites Partner Oleh Zahnitko said. “We strongly believe that the accession negotiations with the EU acknowledge the role of the Ukrainian people in the security and welfare of the continent reflected in the war ongoing since 2014.”

The Baker McKenzie team was led by Chorny and included Partners Hennadiy Voytsitskyi and Ihor Siusel, and Associates Bogdan Dyakovych, Hanna Smyrnova, Olga Gavrylyuk, Oleksandr Savvi, Mykyta Stebliuk, Tetyana Zhuravska, Anna Boyko, Olha Sviatenka, Polina Korotka, and Veronika Kalyta.

​​The Integrites team was led by Zahnitko and included Senior Associate Yurii Korchev, Paralegal Yuliia Kovalchuk, and Practice Assistant Nataliia Ptashnyk.

Queritius has opened for business in Kyiv, with the hire of Sergiy Gryshko as Partner.

Queritius is a dispute resolution boutique established in March of 2020 (as reported by CEE Legal Matters on September 8, 2020), focused on international matters involving primarily Central and Eastern Europe. 

Before joining Queritius, Gryshko spent six and a half years with Redcliffe Partners. Earlier to that, he was a Senior Associate with Clifford Chance for three months and a Dispute Resolution Coordinator with CMS for almost eight years. 

Gryshko has an LLB from the Yaroslav the Wise National Law Academy of Ukraine and an LLM from the Queen Mary University of London.

“As counterintuitive as it may seem, the timing could not have been better for Queritius to go East and gain more visibility in Central and Eastern Europe,” commented Gryshko. “I am thrilled to be part of the endeavor.”

“We are elated that Sergiy is joining Queritius in Kyiv,” added Founding Partner Wojciech Sadowski. “We have known Sergiy for some time and he is one of the brightest stars in the Ukrainian arbitration market. We believe this is the best moment and a unique opportunity to expand our capabilities by bringing on a Kyiv-based Ukrainian team which will enable us to handle Ukraine-related work.”

Redcliffe Partners has advised the EBRD on providing risk-sharing instruments to ProCredit Bank, OTP Bank, and OTP Leasing in Ukraine in a food security guarantee program worth up to EUR 30 million.

“Under the instruments, which are relatively new for the Ukrainian market, EBRD will cover more than half of the credit risk of newly originated financing provided by the partner financing institutions,” Redcliffe Partners informed. “The share of risk the EBRD takes on will be up to EUR 30 million. The program will facilitate access to finance for eligible Ukrainian companies operating in critical agri-related industries, such as farming, food processing, transport, and imports. Ensuring food security is one of the top priorities in the EBRD support plan for Ukraine’s economy amid Russia’s invasion of Ukraine.”

The Redcliffe Partners team included Managing Partner Olexiy Soshenko and Senior Associate Evgeniy Vazhynskiy.

CMS Cameron McKenna Nabarro Olswang has appointed Vitaliy Radchenko as the new Managing Partner of its Kyiv office, taking over from Graham Conlon who oversaw the firm’s operations in Ukraine for the past five years.

According to CMS, Radchenko “joined the firm in 2007 and focuses his practice on M&A, financing, commercial law, and regulatory advice across oil and gas, mineral resources, conventional & renewable power generation, and carbon emissions reduction projects. Since 2013, he has led CMS’s Energy & Projects practice in Kyiv.”

Conlon, according to the firm, is moving to “a revised CMS role after five years as Kyiv Managing Partner.” He will remain the Head of International Private Equity for CEE/CIS at CMS. He will also “continue to advise clients in relation to big-ticket transactions, with a particular focus on the Middle East region which continues to offer significant opportunities for M&A and inbound investment into CEE.”

“We are very committed to our Ukraine business and have great confidence in its future success,” CMS Managing Partner Stephen Millar commented. “Vitaliy is an accomplished and devoted lawyer and brings tremendous skills to his new leadership role. I look forward to working alongside Vitaliy who will be instrumental in building on the strengths of our Ukraine offering and supporting colleagues and clients through this difficult period and thereafter.”

“We have no doubt that Vitaliy will do a standout job leading our superb Kyiv team,” CMS CEE Managing Director Dora Petranyi added. “I’d also like to thank Graham for his leadership of the Kyiv office over the past five years, during which period the office has grown significantly.”

“I look forward to leading the talented Kyiv team who, over the last months in particular, have shown incredible resilience, strength, and commitment to the firm and our clients during what are extremely challenging and unprecedented times,” Radchenko said. “We have every confidence that we can and will play an important role in supporting our clients as we look to the future and begin the rebuilding phase.”

Integrites has advised Wartsila’s France-based Special Applications division on the bidding process and the agreement with Energoatom for the procurement of replacements for the safety backup of the nuclear power plant worth over EUR 2 million.

The National Nuclear Energy Generating Company Energoatom is a Ukrainian state enterprise. According to Integrites, “the equipment produced, delivered, and commissioned will enable the safe functioning of the critical infrastructure in Ukraine.”

Wartsila is a Finnish company manufacturing and servicing power sources and other equipment for the marine and energy industry.

The Integrites team was led by Partner Oleh Zahnitko and included Senior Associates Yurii Korchev and Daryna Vasylieva as well as lawyers from the firm’s Antitrust and Competition practice.

On 14 April 2022, the Civil Cassation Court of the Supreme Court issued its judgement in case No. 308/9708/19 (“Judgement”). The Judgement establishes that national courts have jurisdiction over claims for compensation of damage caused to individuals by military actions of the Russian Federation.

The claim in this case was filed by a Ukrainian citizen and her minor children, who sought compensation of moral damage amounting to nearly UAH5 million. The moral damage was claimed to be caused by the death of claimants’ husband and father, who passed away because of Russian illegal military actions in the temporarily occupied territory of Luhansk region.

The courts of lower instances in this case applied Article 79(1) of Law of Ukraine “On Private International Law”, which establishes foreign states’ jurisdictional immunity and prohibits adjudicating claims against foreign states without their consent. The Supreme Court, however, narrowed down the application of jurisdictional immunity in tort claims.

The Supreme Court substantiated its position by relying on the developments in international law, including tort exceptions to jurisdictional immunity set out in international treaties (although Ukraine is not party to these treaties), which allow courts to ignore sovereign immunity with respect to claims for compensation of damage caused by a foreign state on the territory of the forum state.

The Supreme Court, when applying this exception to the merits of the case, took into account that the Verkhovna Rada recognized Russia as an aggressor state and its actions in the Ukrainian territory since 24 February 2022 as a genocide of the Ukrainian nation. The court concluded that Russian military aggression does not constitute an exercise of its sovereign powers, but, instead, amounts to a gross violation of international law, which must not be covered by state immunity.

Judgement’s influence on further court practice

The Supreme Court stated that “after the start of the war in Ukraine in 2014 the Ukrainian court when examining the case against the Russian Federation, is entitled to ignore its state immunity and continue considering the action for compensation of damage, incurred by an individual in the result of the Russian military aggression, filed against this foreign state”.

Thus, the Judgement provides a legal opportunity for individuals, who suffered damage due to Russian aggression, to file claims for compensation of damage with Ukrainian courts. However, it must be noted that the Judgement arose out of the claim for compensation of moral damage, caused by the death of a person. It remains to be seen, whether the Supreme Court applies the same approach in claims for compensation of other types of damage, suffered by an individual, as well as claims for compensation of damage to property, owned by legal entities or individuals. In view of the provided reasoning, we expect the Supreme Court to make similar conclusions in such other cases.

Note. At the date of publication of this legal alert, the full text of the Judgement has not been made available. We base our legal alert and conclusions on the description of the Judgement, published by the Supreme Court. 

By Oleksii Maslov, Counsel, and Valeriia Ustiuhova, Associate, Avellum

Avellum has advised the Ministry of Finance of Ukraine on a CAD 500 million 10-year loan from Canada. Sayenko Kharenko and Borden Ladner Gervais reportedly advised the lender.

Export Development Canada was the administrative agent. According to the firm, the loan will be used in a manner consistent with macroeconomic parameters and policy commitments made by Ukraine under its current International Monetary Fund Program or subsequent programs.

Export Development Canada is Canada’s export credit agency, facilitating Canadian companies to enter new markets, reduce financial risk, and grow internationally.

“This financial support from international partners makes a vital contribution in maintaining the financial system stability and responding to social and economic consequences of Russia’s invasion of Ukraine,” Avellum Senior Partner Glib Bondar commented.

The Avellum team was led by Bondar and included Senior Associate Oleg Krainskyi and Associates Anastasiia Zhebel, Oleksandra Mohylna, and Yaroslav Pavliuk.