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How to choose a contractor in the alternative energy field. Victor Shulga

picture_904f55c09448b8b9f_1047508_s5Alternative energy power plants have long been flooding Europe. This is no less promising business in Ukraine as well and, at a first glance, a tidbit for Ukrainian businessmen.

This market share is empty so far in our country because it is not easy to make a breakthrough in the future of domestic energy systems.

Situation on the Ukrainian market

The increased interest of companies in producing electricity from renewable sources at green tariffs is confirmed by the information on the website of the National Energy and Utilities Regulatory Commission (NEURC).

Solar energy has ¾ of all alternative energy market share. One of the reasons is low initial investments compared to other forms of energy, such as wind power or biomass. Liberalization of the legislation in solar energy field stirs up production boom. For example, more recently an electricity purchase and sale agreement may be concluded even before the completion of a power plant’s construction, and it can be used as a pledge or encumber rights to it in other ways.

Encumbrance may be considered as some restrictions of the owner’s freedom to dispose of his/her property, prescribed by law. They may be imposed on the property both by the will of the owner and without it. To encumber means to limit the right of property use. There are several types of them.

To put into practice. But are we really ready to meet the innovation challenges and follow through? The rules of the game in this market are very unstable. To attract a cautious investor in alternative energy field is not easy, but it will be much more difficult to implement the project in full and not let the money go down the ‘sun’.

Construction of solar power plants is a specific business, it is relatively new and subjected to legislative changes. Actions without speculation, preliminary information gathering, risk consideration, and quality legal support are doomed to fail.

What threats may the businessmen face? Depending on their sources, they may be different: technical (connecting stations to the networks, continuous supply availability), political (government changes the rules of green tariffs, no proper implementation of industry development strategy), legal ones. Each of them will have different risk appetite. For proper consideration of all potential threats in practice, you need to map risks and their subsequent audit.

Let’s consider the key legal risks.

The monopoly of regional power distribution companies. You have to knock at their doors too hard, using all the intricacies of the legislation combined with communication skills. No one will gladly give away a market share, so the electric energy purchase and sale agreements are not always signed by the other party, the energy market, or they get coordinated on unacceptable terms and conditions.

The probability that the situation on the wholesale electricity market will remain challenging in the next few years is rather big. After all, 2015 also was to become a reformatory year in the natural gas market and attract foreign investors. But, in fact, the monopoly has remained despite the fact that formal legal requirements have been met.

Choosing a contractor. How to define a reliable one? What kind of work will it be able to perform? To develop a project and to help with materials and components procurement or to implement the “turnkey” order, from designing to commissioning. We need to know what to consider first. A good contractor is not the one who talks smoothly, and not the one with bigger advertising billboards.

The story of the company’s activities and feedback from its customers who previously used its services is going to tell a lot. After communication with several employees, you’ll learn much more valuable and relevant information about the contractor, than dry figures may tell. If you open public registers, you will make it clear how many years the company has been officially operating on the market, what are its main activities and whether it has the appropriate licenses.

Additionally, with the help of specialized legal resources, we may check the connections of the founders with other businesses related to contractors. Such data will help to determine whether the company is fictitious or not, whether there is a potential connection with organizations in sanctions lists or which cooperate with a contractor operating on the territory of Lugansk and Donetsk People’s Republics. Monitoring the unified register of court decisions will give you an understanding of whether the company is respectable in part of its commitments fulfillment, and whether it is subject to criminal risks.

A little harder it will be to get feedback from those who were among the contractor’s clients. But, on the other hand, if the contractor is “clean”, he will gladly provide such information. This practice exists in Ukraine.

Presence of facilities and assets also indirectly indicates serious intentions in a potential collaboration. Unfortunately, even the large number of registers will not be able to witness the presence of offices, necessary equipment, techniques, number of employees or warehouses with finished products. Therefore, it is essential to implement an actual visit for the examination of enterprise location and to pay attention to the specific features we have already discussed in the article.

Choosing your contractor, analyze not only the key parameters. Combine data with actual facts. Consider the term of company’s operation in the market, the availability and validity of licenses, litigations the company is listed in, financial performance of economic activities over the past few years and visit the company at its actual address – all this will provide you the most objective information.

Commissioning. It is a very specific and time-consuming process that includes several separate procedures: registration of rights to a land plot, obtaining construction permits, preparation of project documentation, obtaining generation license, signing a networks connection agreement.

Fulfillment of technical specifications and commissioning of facilities requires skills and experience in the legal field with inspection authorities (environmental, mining supervision and industrial safety).

Legal model for the alternative energy market has been in a dynamic state. The regulatory framework has not been completely developed and smartened by practice as well.  Therefore, the implementation of ambitious projects will require considerable effort and resources. Be ready for it!

Victor Shulga, Juscutum JSC’s business security practice lawyer