Energy Efficiency
Alexander BURTOVOY
Partner, Antika Law Firm. Deputy Chairman of the Ukrainian Bar Association Energy, Oil and Gas Committee, Member of the Public Council of the State Agency on Energy Efficiency and Energy Saving of Ukraine
PROfile
ANTIKA
- Tel.:
- +380 44 390 0920
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- +380 44 390 0921
Antika Law Firm was founded in 2010. The firm provides legal services to national and international companies that do business in Ukraine and abroad.
Main areas of practice are: antitrust; dispute resolution and arbitration; criminal defense for business; construction & real estate; subsoil use; energy & energy efficiency; project financing; corporate/M&A; legal expertise.
The firm has been recognized by authoritative international and Ukrainian guides such as The Legal 500 EMEA, Chambers Global, Chambers Europe, IFLR1000 Energy and Infrastructure, Best Lawyers, Ukrainian Law Firms, 50 Top Law Firms of Ukraine, Client Choice: The Top 100 Best Lawyers of Ukraine, and is recommended in the area of antitrust, dispute resolution, corporate / M&A, banking, finance and capital markets, real estate, land, subsoil use, energy, energy efficiency and energy savings.
Antika’s team includes 15 lawyers, who have significant experience in various fields of legal practice.
The firm’s main principles are high quality and timely legal services, strict confidentiality and a bespoke approach to every client’s project.
Antika serves Ukrainian and international companies doing business in telecommunications, heavy machinery, chemical and food industries, automotive, complex development, construction and real estate, subsoil use, wholesale and retail, media and sports, banks and financial services market, energy efficiency and energy conservation. The firm’s representative clients are as follows: AWT Bavaria, Alfa-Bank, ViDi Group, Kyiv Electrical Carriage-Repair Plant, Ibis Group of Companies, MF Telecom, Nadra Ukrayny, Nasosenergomash, Henkel Ukraine, Henkel Bautechnik Ukraine, Chernomorneftegaz, Cargill, Dyckerhoff, Enesa a.s., Esan Eczacıbaşı Industrial Raw Materials, Ghelamco, Heitman International, Imperial Tobacco, International Resources Group (USAID project “Municipal Heating Reform in Ukraine”).
The firm also advises the World Bank, the European Bank for Reconstruction and Development, NEFCO, USAID on energy and utility efficiency projects implementation in Ukraine.
The firm is a member of the Ukrainian Chamber of Commerce and Industry, the American Chamber of Commerce in Ukraine, the Canada-Ukraine Chamber of Commerce, the European Business Association, and the International Turkish Ukrainian Businessmen Association.
The firm’s partners are members of: the Judicial Reform Council; the Scientific and Advisory Council of the Higher Economic Court of Ukraine; the Public Council of the Antimonopoly Committee of Ukraine, the International Bar Association; the Ukrainian Bar Association.
Today for Ukraine as well as for its energy consumers issues related to energy efficiency and energy savings are topical as never before.
From the perspective of Ukrainian legislation, the ease of any mechanism to implement an energy efficiency project depends on a number of factors and, first of all, on the sector where such a project is being implemented. Unofficial classification shows that today the main directions are renewable sources of energy usage and energy sources optimization in the industrial, housing and utility sectors and in budgetary organizations (government buildings).
Projects on renewable sources of energy are developing relatively successfully because they are supported by organizations and people of influence. The industrial sector does not suffer any legislative or any other barriers to implement energy efficiency projects. But the top-management of Ukrainian companies is trying not to attract external resources but to use their own ones, usually without giving advantage to such issues.
The public sector is dealing with a more difficult situation. It requires investments that amount to billions of US dollars. Moreover, the eternal problem of the public field, namely, lack of money, has not been solved yet. The system is built according to the principle of “laundering” allocated funds, but not to implement investment projects. Also, in order to create an energy service market and to attract private funds it is necessary to make serious and complex changes to legislative regulation. In particular, it is necessary to remove the barrier that prohibits budgetary organizations from entering into energy service contracts for a period of more than one business year. Energy efficiency projects are usually medium-term or long-term ones. In order to minimize risks of corruption it is necessary to determine clearly the essence of energy service contracts as well as criteria and terms of procurement. Also, it is necessary to define the terms of energy services and energy efficiency services in order to perform procurement and to register budget responsibilities.
One of the problems that have to be solved while implementing energy efficiency projects is attracting financing. The positive thing belongs to the projects of state support that provide recovery of a part of the principal amount of the loan attracted by the owners of the residence to implement energy savings projects. But, usually such costs are not enough to provide financing for solving all the problems that currently exist.
There are a lot of mechanisms to implement energy efficiency projects and their varieties in global and Ukrainian practice. We would like to distinguish a few related to the energy efficiency projects financing implemented abroad but that could be implemented successfully in Ukraine (of course, if certain amendments to legislation are made).
The first mechanism is a direct loan under the government guarantees, or municipal guarantees of International Financial Organizations. It is no secret that this is the most effective way for the public sector, because the Budget Code practically prohibits attracting the resources of commercial banks to implement investment projects.
Another scheme is to issue securities and their sale on the market. There are some examples of projects implemented according to such a scheme in Ukraine, but it is not very widespread. It is a difficult one because it requires a certain level of knowledge and skills. In practice, it can be used only in big cities. That is, in cities that have human resources as well as a rather high rating that can provide a certain demand level for issued securities and attracting resources on the most favorable terms. The mechanism that enables to incite the development of the capital market of the territorial community may be establishing a specialized fund, including a fund with participation of the state, territorial communities, International Financial Organizations and private investors. But, certain amendments to legislation in the field of financial service market regulation shall be required too. Also, certain amendments should be performed to legislative acts in the field of budget relations regulation, responsibilities of the state authorities and local authorities to allow the government to take part in establishing such funds.
The third scheme is the credit line. The negative feature of this is that it includes specific loan terms in banks. For instance, responsibility for procurement, supply and priority of certain equipment or goods. A variety of such a scheme is a scheme with a syndicated loan, etc. But, in each mechanism that provides the enlisting of credit resources, it is necessary to remember that such resources shall be secured by negotiable security and that’s why they are not available for all borrowers that are potential users of energy efficiency projects.
Also, special funds can be established in order to implement small projects according to their amount of finance. Such funds can be called revolving funds. They grant loans to finance measures and are refilled at the expense of a refund and additional payment for provided resource. Such a scheme is more likely to be effective, first of all, in projects that are implemented in residential houses, including apartment blocks where condominiums are established that are able to manage the house efficiently, explain the necessity to implement projects to each resident.
Another possible way to implement energy savings projects is to attract ESCO (energy service company, or energy savings company). It is a specialized energy service company, the main activity of which is to provide services related to reducing consumption of energy resources or increasing energy efficiency at the enterprise or in the company. ESCO shall have an opportunity to attract project financing by third parties, including banks and banking institutions. Moreover, ESCO either totally or partially takes risks for unsuccessful implementation of the project, both financial and technical ones. It is possible to say, that this scheme is a common one and that may be used in private as well as in the public sectors.
First of all, it is an engineering company that is aware of the procedure related to carrying out research and has enough experience and knowledge to offer a technical decision to perform different tasks. Secondly, ESCO shall have certain resources in order to attract external financing. Thirdly, it shall have resources and possibilities to perform constant monitoring of results and operating of implemented projects results. So, bearing responsibility for a proposed project and attracting financing, ESCO is ready to take risks for the Client either totally or partially. This also handles the legal risks.
At the stage of attracting financing and performing works, the energy efficiency project requires the drafting of a proper and reasonable contract scheme, conducting due diligence of the potential client as well as a duly executed agreement with the client. When the project is implemented the problems related to fulfilling responsibilities as well as necessity to appeal to court institutions for due performance of the agreements appear. There are a lot of ESCOs operating in Ukraine as well as associations and forums but, unfortunately, nowadays there are practically no “real” ESCO projects with guaranteed savings and/or shared savings where ESCO bears all technical risks, or technical ones with partial investment risks coverage.
Usually, according to the results of the due diligence, ESCO provides offers related to implementation of a project with a certain effect, repayment period and method of financing. If the project is adopted the agreement is signed. Ukrainian legislation does not include requirements of such types of agreements, so that is why they are typical, such as Energy Performance Contract (EPC) or Energy Saving Services Agreement (ESSA). The ESSA includes only providing services, EPC includes the provisions that ESCO shall operate according to the typical model, namely, dealing with the project development, attracting finance and sharing risks. The peculiarity of ESCO projects is return of investments at the expense of increasing efficiency or consumption of energy resources, and that is why such agreements are long-term ones. It should be mentioned that in practice one shall face limitation of term for EPC. For instance, there is a 25-year limitation term for public projects that ESCOs implement in the USA. In our country, as we already mentioned, budgetary organizations are unable to conclude agreements for a term that is more than one year.
As an example of a possible way to implement energy efficiency projects we may present one of the projects on which we are currently working on. It is that of introducing energy savings solutions in municipal buildings (for about 200 buildings, mainly schools) in the city of Dnipropetrovsk. The project is financed at the expense of loan funds from the EBRD (20 million Euros). The loan is given to the municipal company established especially for this project. Such a mechanism is very close to implementing the Super-ESCO scheme. This scheme stipulates the establishing of any additional structure that performs the functions of a building contractor and is, at the same time, responsible for financing and achieving the required level of economy or increasing energy efficiency as well as attracting other ESCOs to perform certain actions. It deals with the peculiarities of regulating long-term contractual legal relations in the public sector as well as with the peculiarities of attracting third party financing, including from international financial organizations on the basis of municipal guarantees.
Another project in which we also took part at the stage of developing the concept and document drafting is being implemented in the city of Kiev and is supported by the Kiev City State Administration and international organization NEFCO. Compared to the project implemented in Dnepropetrovsk, in this project the municipal company performs the function of the ESCO and bears responsibility for the results that shall be achieved, developing technical measures at its own risk as well as hiring an organization that performs works under the terms and conditions of the contractor. In addition to this the income of ESCO depends on achieving a result and is paid as a payment for municipal services provided.
Nevertheless, these two projects are more likely to be a compromise with the existing legislative regulation system rather than an example of implementation of the traditional ESCO project. It is possible to say that without amendments to legislation the search for “useful” ways to implement energy efficiency projects shall remain the major part of work under a project.