“Green” Auctions: The Risks of Holding Land Plot Auctions

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For several months now, alternative energy market players have been involved in heated discussions regarding legislative changes in this industry. The key topics for discussion have been and still are feed-in tariff restructuring and introducing support quota distribution auctions aimed at stimulating electricity producers to utilise alternative energy sources. At the same time, the holding of support quota distribution auctions and the matter of the size of the quotas directly depend on the decision concerning restructuring the feed-in tariff.

 As is known, on 31 January 2020 the Resolution of the Cabinet of Ministers of Ukraine dated 27 December 2019 No. 1175 On the Introduction of Competitive Conditions of Stimulating the Production of Electricity from Alternative Energy Sources (the “Resolution”) was officially published and took effect, which approved the following documents: 

1.      the Procedure for holding support quota distribution auctions (the “Procedure”); and

2.      the Procedure for selecting electronic platform operators to hold support quota distribution auctions.

 In addition, the Resolution appointed the state enterprise “Prozorro.Sales”, which is responsible for ensuring the functioning of the electronic procurement system, to be the administrator of the electronic procurement system.

 As of today, the size of annual support quotas to be distributed in 2020 has not yet been decided. One of the main reasons for the delay in setting the support quota sizes is the unresolved matter of the feed-in tariff restructuring.

 Analysing the approved Procedure for holding support quota distribution auctions, we can also conclude that some of its provisions require improvement. In what follows we discuss the risks of land plot auctions.

 Under the Procedure, a land plot auction is an auction at which land plots that meet certain technical parameters and technical conditions for grid connection are offered for the construction of renewable energy facilities. As an example, this year the government is planning to arrange an auction in the Chornobyl radioactive contamination area, which is indicated in Presidential Edict 837/2019. In addition, according to some sources it was the requirement to hold this auction by 30 June 2020 that urged the Ministry of Energy and Environmental Protection of Ukraine (the “Ministry”) and the Cabinet of Ministers of Ukraine to adopt the current version of the Procedure for holding support quota distribution auctions, including the parts that deal with arranging for and holding land plot auctions, which provide for a mechanism that, in fact, does not work.

 Why is the Resolution, to the extent of regulating the procedure for arranging for and holding land plot auctions, a non-functioning mechanism?

 1.      Selection of land plots. The Procedure for holding support quota distribution auctions contains the following provisions regarding the selection of land plots in state and municipal ownership for land plot auctions.  

“The authorised body shall address the state authorities and local self-government bodies with a proposal to allocate land for the construction of renewable energy facilities through a corresponding advertisement posted on its official website and/or via correspondence.

The selection of land plots in state or communal ownership shall be carried out by the state authorities and local self-government bodies, taking into account the relevant functional designation in the approved town-planning documentation at the local level and documentation on land management… … Where there is a need to allocate a land plot in kind or to change the land plot designation, the relevant state authority or local self-government body shall organise the development and approval of documentation on land management following the procedure established by the Land Code of Ukraine.”

 An advertisement posted on the Ministry’s official website proposing to allocate land plots for the construction of renewable energy projects will not work, as neither local authorities nor state authorities are required to monitor the Ministry’s website or comply with proposals published on it.

 Moreover, under applicable law, local authorities are not required to select land plots on request or proposals from the Ministry. In addition, Ukrainian law does not provide for any liability on the part of local authorities for failing to comply with any proposals the Ministry makes. In practice, this may result in controversies during cooperation between local authorities and the Ministry.

 2.      The list of land plots offered for auction. The Procedure provides that land plots offered by local authorities and state authorities are included on the list of land plots offered for auction. However, it is not clear who is going to maintain that list, how it will be formed, and whether it will be public.

 3.      Draft connection agreement. Under the Resolution, a land plot may be put up for auction where there is a draft connection agreement concerning such plot, including the technical conditions for connection to the grid, which contain in particular the transmission/distribution system operator that provided the said draft, the anticipated capacity (the permitted range of installed capacity) of the power facility proposed to be built on the relevant land plot, the connection point, key requirements for the customer’s power installations and those of the transmission/distribution system operator, and an estimate of the connection cost, which may be adjusted after the design and estimate documents are approved. In addition, this will mean that once the land plot auction winner has been chosen, the winner must sign a connection agreement with the transmission system operator and distribution system operator.

The said provision of the Procedure contains high risks as the law does not provide for any liability on the part of the transmission system operator or distribution system operator for failing to enter into a connection agreement with the auction winner. It is also a high risk for an auction winner to spend time and funds to participate in the auction and end up receiving a refusal from the transmission system operator or the distribution system operator to enter into the connection agreement.

 Therefore, we can conclude that, given the large number of defects in the Procedure for arranging for and holding land plot auctions, land plot auctions are unlikely to be held in the near future, except for the auction in the exclusion zone in the area affected by radioactive contamination as a result of the Chornobyl catastrophe. At the same time, a new draft Land Code of Ukraine is underway, which will, once it is adopted and implemented, allow the relevant foundation for bringing about land plot auctions to be developed. However, it is obvious that at this stage no amendments will be made to the Resolution and it will continue in effect as currently drafted until the first auctions are held and result in the development of further amendments to the Resolution.

 

Authors:

Vitaliy RadchenkoPartner at CMS
Kateryna KorneliukAssociate at CMS