Legal risks with changes to Ukraine’s renewable energy policies

By Wang Jihong and Yang Chenxi, Zhong Lun Law Firm
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Drawn by prospects of the Ukraine’s promising potential for wind and solar power production, Chinese companies have begun actively investing in the country’s renewable energy market. The Eastern European nation has set a target of generating 25% of its power from renewable sources by 2035, according to the Energy Strategy of Ukraine, from just over 13% as of May 2021.

Risks from policy changes

The Ukraine was an early adopter of both Pre-Power Purchase Agreements (Pre-PPAs) and feed-in tariffs (FITs, or “green tariffs”) for renewable energy

王霁虹,-Wang-Jihong,-Zhonglun
Wang Jihong
Partner
Zhong Lun Law Firm

projects, triggering an investment boom. However, the overzealous development of renewable energy posed a tremendous challenge to the stability and balance of the Ukrainian energy system.

Too-high FITs also placed considerable pressure on the country’s finances, and overdue payments for electricity charges caused significant losses to power producers. On 21 July 2020, the Ukrainian parliament passed Law No. 810-IX on the downward revision of green tariffs for solar and wind power plants, retroactively reducing the FIT for renewable energy projects and expanding the scope of so-called green auctions to introduce competition and reflect the falling market costs of alternative energy power generation. This has significantly affected the payback period and profitability of renewable energy enterprises, and increased the risks for Chinese companies investing in renewable energy in the Ukraine.

Protective terms and conditions

In view of the policy change risks, Chinese companies should conduct thorough research and due diligence before entering the Ukraine’s

杨晨曦,-Yang-Chenxi,-Zhonglun
Yang Chenxi
Paralegal
Zhong Lun Law Firm

renewable energy market to ensure they have a clear understanding of the legal environment and policy risks. Additionally, the authors recommend that Chinese enterprises add risk control terms to their relevant investment or acquisition agreements in anticipation of adverse policy changes. For greenfield investment, if the counterparty is the host country’s government, the Chinese company may request the inclusion of a “stabilisation clause” in the investment or franchise agreement, specifying how changes in laws, regulations or policies would affect the rights and obligations of the parties after the agreement takes effect. Common stabilisation clauses include:

  • Freeze clause. For a fixed period as specified in the agreement, the investment project will only be subject to the laws and regulations existing at the time the agreement becomes effective. Unless agreed in writing by the investors, any changes to the relevant laws, regulations or policies made by the host country’s government subsequent to the execution of the agreement will not apply to the project.
  • Economic equilibrium clause. Any changes in laws, regulations or policies after the execution of the agreement will apply to the investment project, but the host country’s government will be required to indemnify the foreign investor for the adverse impact of such changes.
  • Hybrid clause. In the event of changes in laws or regulations, the foreign investor will not automatically preclude the application of such changes, but the host country’s government should accord the foreign investor certain exemption conditions in the agreement. If such conditions were satisfied, the foreign investor will be exempted from some of the changes and receive compensation from the host country’s government for others.

It goes without saying that, depending on the nature of the project, the Chinese company may also flexibly opt for other risk control clauses, such as a “renegotiation clause”, under which the parties conduct separate negotiations to resolve issues arising out of any changes. With respect to other types of investment or acquisition projects, if the counterparty to the contract is a private company, the Chinese company should seek to add a “risk allocation clause”, providing that in the event of any subsequent changes in the laws or policies the counterparty is required to compensate for any increase in the Chinese company’s financial burden or an impairment to its anticipated benefits.

International arbitration

Another key option is to apply for international investment arbitration. The Ukraine is not the only country with a history of altering policies, and of defaults in the renewable energy market. To stimulate growth in the sector, a number of European countries rolled out clean energy FIT policies. After the global financial crisis in 2008, however, these became burdensome for their governments. As a result, Spain, Italy and the Czech Republic, among others, revised their renewable energy policies, triggering a large number of international investment arbitration cases.

To date, Spain’s policy of reducing photovoltaic FIT has given rise to 29 investor-host country arbitration cases, of which 13 have been decided. Of these 13 cases, the investors’ claims for compensation have been upheld in 10, meeting the investors’ “legitimate expectations” based on article 10(1) of the European Energy Charter Treaty (ECT). The Ukraine is a party to both the ECT and the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States (Washington Convention).

As China is not a party to the ECT, pursuant to the Agreement Concerning the Encouragement and Mutual Protection of Investments between China and the Ukraine, a Chinese investor may, in principle, apply for investment arbitration only in disputes concerning the amount of expropriation compensation. Chinese companies could get around such an unfavourable situation by structuring their investment in reference to the more supportive terms under the investment protection agreements between ECT parties, or between other countries and the Ukraine. Thus, upon policy changes, Chinese companies may apply for international investment arbitration by referring to the above-mentioned cases.

Wang Jihong is a partner and Yang Chenxi is a paralegal at Zhong Lun Law Firm

Zhong Lun Law Firm

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yangchenxi@zhonglun.com

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