Changes to Feed-in-Tariff. Treat with Caution

Changes to Feed-in-Tariff. Treat with Caution

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Since mid-2019 Ukrainian authorities have been bringing to public fora various suggested amendments to Ukrainian “green” (feed-in) tariff framework. The most recent proposal from the Ministry of Energy and Environmental Protection mentioned creating an option with voluntary 5-25% reductions to the existing tariffs simultaneously with prolongation of their lifespan.

These moves by the Ukrainian government could repeat the questionable policy of other states where governments scratched generous incentives to develop clean energy (including feed-in-tariffs) after having realised that they constituted too heavy burden on state budgets.

The same justifications are aired by Ukrainian officials, who state that the Guaranteed Buyer does not have enough funds to buy electricity generated by renewable energy plants under the existing green tariff. These talks coincided with the steep rise in the number of renewable energy producers using green tariff. According to recent statistics, the total capacity of electricity produced within the current green tariff framework more than tripled from 1.97 GW in 2018 to 6.33 GW in 2019.

Ukrainian government should be wary though. Changes to renewable energy incentive schemes, including, specifically, retrospective reductions of feed-in-tariffs, have triggered around 100 investment arbitration cases against Italy, Spain, the Czech Republic, and other states so far. Reportedly, out of 40 cases initiated against Spain alone nearly 15 resulted in awards finding Spain liable and ordering it to pay compensation.

Since Ukraine is the party to the Energy Charter Treaty and more than 60 bilateral investment treaties, which protect foreign investments and provide for dispute settlement through arbitration, these investor-state disputes may become very relevant for Ukraine and investors into its renewable energy sector.

Obviously, each dispute is unique. There are, however, several important general takeaways for investors into Ukrainian renewable energy sector:

·       in most cases (e.g., Eiser v. Kingdom of Spain and Novenergia v. Kingdom of Spain) investors claimed that changes to the feed-in-tariff violated their right to fair and equitable treatment (FET). FET is a standard investment protection found in the majority of investment treaties;

·       specifically, investors tended to complain that states violated their legitimate expectations to stable regulatory framework by drastically changing the incentive schemes, which induced relevant investments in the first place;

·       the practice of the arbitral tribunals shows that whether investor indeed had (and could rely on) legitimate expectations would depend heavily on the facts of the case pertaining to such investor’s investment. The different cases have common ground though. Direct commitments expressed by states to induce investments are strong hints that investors could have protected legitimate expectations; and

·       arbitral tribunals were also unanimous that investors, whose legitimate expectations were breached, were entitled to full reparation for the losses suffered. Tribunals usually assess the investor’s actual financial situation and compare it with the one that would have prevailed had the regulatory measures not been changed by the state. In Eiser v. Kingdom of Spain, the tribunal awarded investor the compensation based on the reduction of the fair market value of its investment by calculating the value of cash flows, which were lost as a result of the disputed state measures.

Given that Ukrainian legislator has provided a direct guarantee of stable “green” tariff in the Law of Ukraine “On Electricity Market”, drastic retrospective changes would surely make investors feel that their legitimate expectations were violated and might lead to investment arbitrations against Ukraine.

It seems that Ukrainian authorities understand this and consider possible ways to reduce burden on state budget from green tariff with caution.

By Oleksii Maslov, Senior Associate and Dmytro Izotov, Associate, Avellum