Ukraine: proposal for the new renewables generation support scheme

On 7 June 2018, the draft law “On Introduction of Certain Changes to Laws of Ukraine regarding Ensuring Competitive Conditions for Generation of Electricity from Alternative Energy Sources” No. 8449 (the “Draft Law”), which could have immense implications for the renewable energy market in Ukraine, was registered in the Ukrainian Parliament. The Draft Law envisages the implementation of a quota auction system, instead of a green tariff, after 1 July 2019. The Draft Law is primarily aimed at providing mechanisms for controlling and balancing the construction of solar and wind power plants.

There are currently a lot of discussions in the business community regarding the Draft Law. Its authors, however, expect that it will be adopted in autumn 2018.

Below we capture the main changes that are proposed by the Draft Law.

1. Auction Support Scheme

In accordance with the Draft Law, auctions will be applied to the following power plants commissioned after 1 July 2019:

• solar power plants with an installed capacity exceeding 10 MW; and
• wind power plants with an installed capacity exceeding 20 MW.

The Draft Law established that the green tariff scheme will remain in relation to:

• solar and wind power plants commissioned before 1 July 2019;
• solar and wind power plants where the owners execute preliminary power purchase agreements (the “Pre-PPA”) before 1 July 2019*;
• solar power plants with an installed capacity below 10 MW;
• wind power plants with an installed capacity below 20 MW; and
• power plants producing electricity from other alternative sources.

* Please note that despite execution of Pre-PPA, the green tariff rate will be fixed at the corresponding level and granted only after a RPP (or its construction phase) is commissioned.

Participation of the solar and wind power plants with a capacity below 10 MW and 20 MW respectively, as well as of power plants (the “RPP”) producing electricity from other alternative sources, in the auction scheme will be voluntary.

Under the Law of Ukraine No. 2019-VIII On Electricity Market dated 13 April 2017 (the “Electricity Market Law”) a new liberalised electricity market is expected to be launched on 1 July 2019. Creation of the new entity (the guaranteed buyer) which will execute power purchase agreements (the “PPA”) and Pre-PPAs instead of SE “Energorynok” is among the measures aimed at achieving such market. The guaranteed buyer will execute PPAs and Pre-PPAs after 1 July 2019 in accordance with the new standard forms that will be adopted by the National Commission for State Regulation of the Energy and Public Utilities Sector (the “Regulator”).

Please follow the link to our earlier Law-Now to read more information about the concept of the new Ukrainian electricity market.

1.1 State support

The following state support will be provided for 20 years after the commissioning of the RPP under the auction support scheme:

• guaranteed purchase of all electricity produced by the RPP within the limits of the quota that was purchased at the auction; and
• reimbursement by the guaranteed buyer of the difference between the price of the electricity on the day-ahead-market (the “DAM”) and the price established during the course of the auction (as adjusted by the local content premium as explained in paragraph 1.2 below).

The guaranteed purchase of electricity and reimbursement of differences will be performed respectively on the basis of (1) the special PPA; and (2) the contract for differences (jointly the “Agreements”). According to the Draft Law, the Regulator will approve standard forms of the Agreements following approval by the Antimonopoly Committee of Ukraine and consultations with the Energy Community.

The RPP producer will lose state support if the power plant is not commissioned within the 3 years following the execution of the Agreements. This term may be extended by another year where the irrevocable bank guarantee is doubled (described in detail below).

1.2 Local content premium

The auction support scheme allows the price obtained during the auction to be increased by the local content premium. At the moment, RPP is able to receive a 5% or 10% premium if it can prove that the proportion of Ukrainian raw materials, consumables, fixed assets (the “Local Content”) in the total construction cost of the RPP exceeds 30% or 50% respectively. The Draft Law adds a 15% premium if the Local Content exceeds 70%. As a result, the local content premium scheme can be summarised as follows:

1.3 Small generation incentives

Currently, households that produce solar or wind energy are able to obtain a green tariff under a simplified procedure, if their generation capacity does not exceed 30 KW.

The Draft Law extends the household green tariff scheme and makes all legal entities and inpidual-entrepreneurs with a generation capacity of up to 500 KW eligible to participate in it.

Although household green tariff rates remain the same, the Draft Law sets a new category for solar generation with a capacity between 30 KW to 500 KW with the following specific green tariff rates:

2. Quotas and auction procedure

The RPP will be able to receive state support if it has acquired the respective quota at the auction.

2.1 Quotas

The Cabinet of Ministers of Ukraine (the “CMU”) will approve the quota for the next 5 years and will amend it each year before December, basing its decision on a proposal submitted by the Ministry of Energy and Coal Industry. Such proposal is prepared with consideration of the following matters: (1) the international obligations of Ukraine for the development of green energy; (2) the Energy Strategy of Ukraine; (3) the 10-year transmission system development plan; (4) the results of previous auctions; and (5) the status of the implementation of existing projects.

The quota amount to be sold at the auction next year, as well as the terms of the respective auctions, will be determined by a decision of the CMU (the “Annual Quota”) made no later than 1 December of the preceding year. The CMU will also establish the distribution of state support between different renewable energy sources for the next year. Special quotas in relation to the region and RPP capacity may be also envisaged within Annual Quotas.

2.2 Auction procedure

Quotas will be sold between 2020 and 2030 under the following auction procedure:

• Auctions will be performed on the electronic trading platform in the form of a reverse Dutch auction.
• They will be held twice a year, on dates no later than 1 May and 1 October.
• The Annual Quota will be pided into lots not exceeding 1 MW each, which will be sold separately.
• The auction price is fixed per 1 kW/h in Euro in accordance with the official exchange rate on the date of the auction. The auction price cannot exceed the level of the green tariff that would otherwise apply.
• Each participant will be required to provide an irrevocable bank guarantee of USD 50,000 per each 1 MW in order to participate in the auction. Where a participant fails to win at auction, their bank guarantee will be returned to them. The bank guarantee of the successful participant will only be returned after the power plant has been commissioned.
• One company or group of companies with the same ultimate beneficial owner cannot acquire at auction more than 25% of the Annual Quota that is being sold at that auction.
• The winner of the auction will be required to pay the participation fee (established by the CMU) and to execute the Agreements within 10 working days after the announcement of the results of the auction. Otherwise, it will lose its bank guarantee.

The CMU will approve the auction procedure (that will, among other things, define the way the starting price and auction steps are determined) by 1 March 2019.

It is expected that a pilot auction in relation to the development of a solar power plant at the site of the Chornobyl disaster will be performed in the second half of 2019. The Draft Law also establishes that the Annual Quota for 2020 will be approved by the CMU before December 2019 and the respective auctions will be held no later than 1 May 2020.

3. Other changes

The Draft Law also envisages several other important changes, namely:

• It establishes that RPPs receiving state support under the auction scheme will be responsible for 100% of any imbalances arising out of differences between the amounts of actual and planned hourly generation in the calendar year following recognition by the Regulator that the intra-day market is liquid. The effective version of the Electricity Market Law envisages the gradual introduction of responsibility for imbalances from 10% to 100% from 2021 to 2030.
• The green tariff for solar power plants commissioned after 1 January 2020 shall be reduced by 30% (currently, the Electricity Market Law provides for a 10% reduction). The green tariff reduction for wind power plants has not been changed and remains at the level established by the Electricity Market Law (around 11%). As a result, the green tariff rates will be as follows:

Implementation of the renewable energy support scheme proposed by the Draft Law will significantly change the regulatory framework of the renewables sector in Ukraine. The consequences of changes of such magnitude that they affect all market players require detailed consideration. Currently, the legislation is still in a draft and its authors have highlighted that they are ready to consider amendments to it on the basis of the feedback they receive from market participants. As a result, we urge everyone to provide their comments and input to the Draft Law. We will closely monitor any related developments.