Draft Law No. 2386: main ideas and consequences for the renewables market
Andriy Olenyuk, Partner at Everlegal, gave his comments for Ukrainian Journal of Business Law on the newly adopted law on debt repayment measures on the Ukrainian wholesale electricity market.
The operation of the electricity market has recently created significant debts to be repaid by the majority of market participants, including SE Energorynok. As of 31 August 2019, the total debt owed by Energorynok came to UAH 28.1 billion, and the total debt owed to Energorynok was UAH 30.9 billion. Although the rules of the energy market’s operation have already changed, outstanding indebtedness has been rising and this is creating challenges for the new electricity market.
On 17 June 2020 the Verkhovna Rada of Ukraine adopted Draft Law No. 2386 On Debt Repayment Measures on the Wholesale Electricity Market, the aim of which was to resolve the current situation with settlements on the wholesale electricity market. Taking into account the fact that the majority of debts are reciprocal between energy market participants, Law No.2386 sets out, among other mechanisms, a set-off procedure to regulate indebtedness.
Accounts with a special mode of use
For the purposes of debt recovery, current accounts with a special mode of use will be used. The distribution system operators, electricity suppliers with functions of the universal service provider and “last resort” providers will repay their indebtedness from such accounts to the wholesale electricity supplier’s current account with a special mode of use. The payments will be made until full recovery of indebtedness is made.
The wholesale electricity supplier shall distribute the funds from its current account with a special mode of use to electricity producers and PJSC NPC Ukrenergo in accordance with the procedure set out by the National Commission for the Regulation of Energy and Utilities.
In the event of no debt owing to the wholesale electricity supplier, the funds from the current accounts with a special mode of use will be transferred to the distribution system’s operators, which are electricity suppliers with functions of a universal service provider and “last resort” providers’ current accounts.
According to comments made by the Main Legal Department of the Verkhovna Rada, the discussed provision of Law No. 2386 does not comply with current Ukrainian legislation, given that the procedure for opening bank accounts and their modes of use shall be determined by the National Bank of Ukraine and not by Parliament.
Assignment of rights
Article 5 of Law No. 2386 provides for a debt assignment procedure. It should be noted that Article 5 will enter into force on 1 July 2021, which means that only after that date will a debt assignment procedure be implemented. In particular, according to Article 5 within 1 month from the date of the said Article’s coming into force, the distribution system operators, electricity suppliers having the functions of universal service provider and “last resort” providers, electricity producers and Ukrenergo will confirm the amounts of their indebtedness. Furthermore, within 2 (two) months the said participant of the wholesale electricity market will have to assign their debts.
Accordingly, Energorynok shall determine the sum of debt owed by each debtor to the wholesale electricity supplier. Such debt shall be paid to each creditor of the wholesale electricity supplier. With respect to outstanding indebtedness after such repayment has been made, Energorynok shall assign its rights as a creditor.
Within one month after an assignment procedure has been completed, Energorynok will confirm the outstanding accounts payable and accounts receivable, which shall be charged off within 2 months.
An indebtedness charge-off
According to Article 4 of Law No. 2386, the following indebtedness shall be charged off:
— debts of enterprises of the coal industry owed to SE Regional Electric Networks and the SFTC Ukrinterenergo;
— debts of SE Regional Electric Networks and SFTC Ukrinterenergo owed to Energorynok; and
— debts of Energorynok owed to state-owned electricity producers and Ukrenergo.
Law No. 2386 stipulates that additional capitalisation of SE NNEGC Energoatom and PJSC Ukrhydroenergo will be performed for charging off a sum of debt, as described above. Such additional capitalisation will be performed by the emission of state bonds.
The Parliamentary Budget Committee emphasizes in its conclusion that emission of state bonds will increase the level of state debt. In addition, the Ministry of Finance says in its expert opinion on Law No. 2386 that the proposed provisions of Law No. 2386 will create fiscal risks for the state budget coming to UAH 28.1 billion in the event of implementation of Law No. 2386.
Law No. 2386 will be part of the major goal of effective operation of a new energy market model, which requires settling down the challenges of the previous model. The current situation with settlement of payments on the energy market requires imminent measures. Moreover, effective operation of the Ukrainian energy market is one of the important requirements necessary for further cooperation with European partners and investors.