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April 6, 2016

Renewable Energy In Russia: Recent Developments


Renewable Energy In Russia: Recent Developments

Russia recently introduced procedures for the transfer of a power generating companys rights and obligations under long-term capacity agreements for future projects that use capacity payments to secure a return on investment, including renewable power projects.

The new procedures come into force in May 2016. Prior to the introduction of these procedures, the transfer of rights and obligations was regulated only with respect to the long-term capacity agreements for generating facilities that are already commissioned and in operation; there were no provisions for future projects, i.e., the projects for renewable energy generating facilities that are yet to be constructed or are under construction. Without such provisions, the ability to transfer interest in power projects prior to commissioning was greatly hindered due to the potential loss of the long-term capacity agreement securing the return on the underlying investment.

The right to transfer long-term capacity agreements is particularly relevant in light of the latest renewable energy auction that took place in December 2015. The renewable energy auctions represent a process for competitive selection of renewable energy investment projects conducted by the competent authorities for each of solar, wind and small hydropower types of renewable energy.

In total, Russia has conducted three renewable energy auctions. The first two auctions took place in 2013 and 2014 (for more information please refer to our earlier article "Russia's Second Renewable Energy Auction Gives Both Glimmer of Hope and Cause for Concern" by B. Rice, A. Blomfield and A.Rotar, July 2014, King & Spalding Energy Newsletter). [1]

The latest renewable energy auction, conducted in December 2015, was for the total of 365 MW of design capacity. The December 2015 auction resulted in 280 MW capacity awarded to solar projects, while only two bids were made for hydro and one bid was made for wind projects.

The lack of interest in small hydro and wind projects is reported to be due to the high local content requirements and absence of relevant equipment produced or otherwise localized in Russia (while the local content requirements for solar projects are also high, there have been locally produced solar panels used in a number of solar projects in Russia).

The participants were hesitant to pursue the projects due to the higher costs related to changes in the Ruble exchange rate and thus increased costs for non-Russian equipment. To address that concern, the regulator allowed bidders to amend their bids, while the auction was already in process, and the selected bids supposedly take into account the challenges arising out of the weaker, less stable Ruble.

The Russian Wholesale Power and Capacity Market

The main rules for the wholesale power and capacity market are contained in Resolution of the Government of the Russian Federation No. 1172, "On approval of the rules for the wholesale market for electric power and capacity and on amendments to certain legislative acts of the Government of the Russian Federation with respect to the matters pertaining to the functioning of the wholesale market for electric power and capacity," dated 27 December 2010. In addition, market participants must enter into an agreement with the regulatory authorities called the "Agreement on Connection to the Trading System of the Wholesale Market". This agreement (together with its schedules) sets out detailed procedures for trading on the market, as well as requiring the participant to enter into other mandatory standard form agreements governing specific relationships.

The Russian wholesale market includes a market for generating capacity, which operates in parallel to that of the power market. The capacity market is intended to stimulate investment in capacity by providing some assurance of the recovery of fixed costs, and thereby ensuring that there is a sufficient reserve of capacity to meet prospective demand. The act of purchasing capacity entitles the buyer to demand that the corresponding generation assets be available to supply the corresponding quantity of power. Conversely, in order to fulfil an obligation to supply capacity, the relevant generator must maintain its generating equipment in readiness to supply.

Capacity Supply Agreements

During the period of 2009 to 2013, Russia introduced legislation supporting the development of renewable energy projects by allowing renewable generators to bid, [2] through a competitive selection process, for the opportunity to enter into long-term contracts for supply of capacity which is traded as a separate commodity independent from trade in power (" Capacity Supply Agreements ").

The Capacity Supply Agreements, in essence, allow investors to secure a return on their investment into renewable energy projects through guaranteed capacity payments payable over a term of 15 years.

The Capacity Supply Agreements are concluded pursuant to a standard form between an eligible renewable energy generator and wholesale power market consumers through an intermediary of a regulator, the Center for Financial Settlements. The other regulating bodies, namely the Market Counsel, the Administrator of the Trading System and the System Administrator are also involved in the process on the basis of regulations governing the functioning of the wholesale power market in Russia. [3]

In order to become eligible for entering into the Capacity Supply Agreements, a generator must undergo a competitive selection process through a renewable energy auction.

Transfer of Rights Under the Capacity Supply Agreements

The Capacity Supply Agreements are concluded with the company that participated in the renewable energy auction with respect to the relevant renewable energy generating facility as its owner (the " Transferor "). Therefore, in the case of a subsequent sale or other transfer of the renewable energy generating facility, the new owner of the renewable energy generating facility (the " Investor ") will need to comply with a special procedure to step in as a supplier under the relevant Capacity Supply Agreements and to receive capacity payments.

The abovementioned procedure, however, only applies to projects already in operation; and, until recently, there has been no procedure for the transfer of future rights, i.e., transfer of supplier's rights under the Capacity Supply Agreements that have future capacity supply rights, usually based on the construction and commissioning schedules for the applicable facility.

The Market Council initiated relevant amendments to the regulations, and, once they come into force in May 2016, they will allow and regulate such transfer of future rights (the " Amendments "). [4] The Amendments are particularly relevant for the renewable energy projects selected through the December 2015 renewable energy auction where long term capacity payments were allocated to renewable energy projects with a commencement of capacity supplies in 2017 - 2019.

According to the Amendments, the transfer of an owners rights under the Capacity Supply Agreements can be made subject to the approval of the regulator, and is subject to compliance with the following conditions:

*the Investor is admitted to the wholesale power market and has registered a point of delivery with respect to the relevant generating facility;

*the Investor has provided security with respect to its performance of the Capacity Supply Agreements; and

*the agreement on transfer of rights under the Capacity Supply Agreements has been duly approved by the regulator and executed by all parties. The procedure for admittance to the wholesale power market can be time consuming and must be completed in advance of the envisaged transfer of rights under the Capacity Supply Agreements.

In order to be admitted to the wholesale power market an applicant must:

*demonstrate that the volume of planned electricity generation is high enough to be eligible for the wholesale market;

*enter into an agreement on accession to the trading system of the wholesale market and complete certain conditions in the agreement;

*enter into a number of other agreements required for the functioning of the wholesale market, including agreements for transmission and dispatch services; and

*become a member of the Market Council. The Amendments further require the Investor to provide security for its performance of the Capacity Supply Agreements by way of:

*a guarantee issued by a generator admitted to the wholesale power market; or

a letter of credit with respect to payment of penalties envisaged by the Capacity Supply Agreements. The transfer of rights and obligations under the Capacity Supply Agreements is done on the basis of an agreement on transfer of rights and obligations under the Capacity Supply Agreements (the " **Transfer Agreement* ") that must provide for the following:

*the subject matter of the Transfer Agreement, being the transfer by the Transferor under the Capacity Supply Agreements to the Investor of all of its rights and obligations under the Capacity Supply Agreements, without any modification or reserve;

*the date of the transfer of rights and obligations cannot be later than the date of commencement of capacity supply envisaged by the Capacity Supply Agreements;

*description of the renewable energy generating facility; and

*procedure for payments between the parties under the Transfer Agreement. The draft of the Transfer Agreement is to be sent to the regulating authorities for their approval, and can be executed only upon such approval. The Transfer Agreement is executed in four copies (one to each party and one to be deposited with the Center for Financial Settlements) by the Transferor under the Capacity Supply Agreements, the Investor and the Administrator of the Trading System.

The actual transfer of rights and obligations under the Capacity Supply Agreements is subject to the admittance of the Investor to the wholesale power market and, therefore, is not effective until the required admittance procedures are completed.

Qualification of an Eligible Generating Object

In addition, the Investor should keep in mind that upon winning a capacity auction, the renewable energy generator that entered into the Capacity Supply Agreements is required to undergo the procedure for "qualification" whereby the authorities confirm its compliance with the requirements submitted in auction and established by law, including the local content requirements. The Capacity Supply Agreements require the renewable energy generator to undergo such qualification as a prerequisite for commencement of performance of the Capacity Supply Agreements.

The qualification is conducted through the certification process in compliance with the Qualification Rules for Renewable Operators, [5] and is confirmed by a qualification certificate. The qualification certificate is issued with respect to a particular renewable energy generator for an unlimited term and does not need to be reissued in case of a sale or other transfer of the qualified renewable energy generator to a different entity. [6] However, the validity of the qualification is subject to satisfactory regular reviews by the Market Council that conducts such verifications of compliance with the established requirements at least once every three years, but not more often than once in three months. [7]

In order to successfully pass verification by the Market Council and confirm its qualification, a renewable energy generator will need to confirm its compliance with the requirements applicable to it, including technical and operational standards and localization requirements.

Since certain factors influencing the qualification depend on the Transferor that designed and, at least partly, built the generating facilities, the Investor should consider obtaining guarantees and indemnities in respect of the qualification of the renewable energy generating facility from the Transferor upon the conclusion of the Transfer Agreement.

[1] http://www.kslaw.com/library/newsletters/EnergyNewsletter/2014/July/article1.html.

[2] Decree of the Government of the Russian Federation No. 1715-r dated 13 November 2009; Decree of the Government of the Russian Federation No. 499 dated 28 May 2013.

[3] Resolution of the Government of the Russian Federation No. 1172 "On approval of the rules for the wholesale market for electric power and capacity and on amendments to certain legislative acts of the Government of the Russian Federation with respect to the matters pertaining to the functioning of the wholesale market for electric power and capacity" dated 27 December 2010.

[4] Decision of the Center for Financial Settlements of 16 February 2016, available at: http://cfrenergo.ru/strategy/changes_contract/zasedanie-nablyudatelnogo-soveta-assotsiatsii-np-sovet-rynka-ot-19-02-2016-g/.

[5] Resolution of the Government of the Russian Federation No. 426 "Rules for qualification of a generating facility operating on renewable sources of energy" dated 3 June 2008 (the " Qualification Rules for Renewable Operators ").

[6] Article 13 of the Qualification Rules for Renewable Operators.

[7] Article 8 of the Qualification Rules for Renewable Operators.

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