Ukraine: draft law proposing the new renewables generation support scheme approved in the first reading by Ukrainian Parliament

Ukraine

On 20 December 2018, Ukrainian parliament approved in the first reading 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-д (the “Draft Law”), which if ultimately adopted is expected to have huge implications on the renewable energy market in Ukraine. The Draft Law calls for the implementation of a quota auction system – instead of a green tariff – starting from 2020.

The following are the main provisions of the Draft Law:

Issue

Provisions of the Draft Law

New Auction Scheme

1. Date for introduction of the new renewables generation support system:

1 January 2020

2. Model of support:

State support will be provided under the auction support scheme through guaranteed purchase of all electricity produced by the renewable energy source (the “RES”) project within the limits of the quota purchased at the auction at the established fixed tariff

3. Duration of fixed tariff support for the auction winner:

20 years

4. Size of the quota:

Size of the yearly quota is adopted by the Cabinet of Ministers (the “CMU”) decision. The draft of this decision is prepared by the Ministry of Energy and Coal Industry of Ukraine based on a proposal from the Transmission system operator and the State Agency on Energy Efficiency and Energy Saving

5. Principles for yearly quota formation:

Yearly quota shall be split into 3 categories:

  • wind;
  • solar;
  • ·other types of renewable energy technologies (the “RES technologies”).

Share of the quota of a category that was not allocated during auction can be (by a decision of the CMU transferred to another category for allocation during the next auction

6. Quota forward planning:

The quotas will be established yearly for the next five years

7. Auction model (design):

Single stage static sealed bid auction. Bidders will submit sealed bids that should contain a technical proposal (size of the capacity sought) and price proposal (price the bidder is ready to accept for 1 kWh of the generated electricity). The sealed bids will be opened simultaneously with the winning bids. The only criteria for selection of the winner is the lowest price

8. Auctions will be mandatory for:

RES technology projects that (according to the Regulator) reached 15% in the total amount of electricity from RES sold during previous year (e.g., as of today only solar and wind technologies have reached the 15% threshold) with the following capacity:

  • in 2020 – for wind above 20MW, and for other types of RES technologies above 10 MW;
  • in 2021 and 2022 – for wind above 20MW, and for other types of RES technologies above 5 MW;
  • from 2023 – for wind above 3MW or 1 wind turbine, for other RES technologies above 1MW

9. Eligible renewable energy technologies that can opt-in for auctions support scheme voluntarily:

All types of RES technologies

10. Pilot auctions:

CMU to conduct pilot auction(s) within six months from the date the law becomes effective.

11. Platform for auctions:

Ukraine’s public procurement platform Prozorro

12. Auction price:

Auction price is fixed in EUR as of the date of the auction in accordance with the official exchange rate of national bank of Ukraine

13. Ensuring the competition at the auction:

Competition is the mandatory requirement for the auction. The total capacity to be awarded to the winners as of the result of the auction cannot exceed 80% of the total capacity that all the bidders have requested in their bids for the auction

14. Restrictions to prevent monopolisation of the market:

The maximum share of the yearly quota that can be awarded to a single bidder (including related parties) cannot exceed 25% of the yearly quota (i.e., in total as per two yearly auctions)

15. Ceiling price for the auction:

The rate of the feed-in-tariff (the “FIT”) for the respective technology at the date of the auction

16. Bank guarantee to participate in the auction:

EUR 15,000 per 1 MW of capacity, which includes:

  • EUR 5,000 per 1 MW as a bid bond to participate in the auction;
  • EUR 10,000 per 1 MW to be provided on top in the case of winning the auction as the performance bond (to ensure construction of the project)

17. Pre-qualification requirements to the bidders in the auction:

  • proof of the land ownership / use rights;
  • grid connection agreement

18. Contract set-up:

Power purchase agreement (the “PPA”) with the guaranteed buyer (offtaker), whereby the latter is obliged to buy the electricity from the winner of the auctions at the auction price. Payment terms – full settlement for the month of delivery (M) by the twentieth day of the month following the month of delivery (M+1)

19. Dispute resolution under PPA:

Upon the application of the auction winner which is a company with foreign investments (foreign shareholding in charter capital of such company are equal or above 10%), the disputes under the PPA shall be resolved in international commercial arbitration court.

However, it is not clear whether such international commercial arbitration court would be a domestic one (e.g., International Commercial Arbitration Court under Ukrainian Chamber of Commerce and Industry), or a foreign one

Effects on FIT

20. FIT support for already commissioned projects should continue until:

1 January 2030

21. FIT support system can be still used by:

  • Projects of any capacity and type of RES technology that have been commissioned before 2020.
  • Projects of any capacity and any type of RES technology that have executed pre-PPA by 31 December 2019, provided the project company has:
    • land lease or land purchase agreement;
    • agreement for grid connection;
    • permit for construction of the power plant for CC2-CC3 projects, or declaration for CC1 projects.
  • Conditions for obtaining the FIT in such case – commissioning of the power plant within two years from the date of a pre-PPA for solar power plants, three years – for other types of RES.
  • The FIT rate should be determined per the date of commissioning.
  • Any projects for which auctions are not mandatory

22. Decrease of the FIT for new solar and wind projects:

  • Solar tariff to be decreased for projects commissioned in 2020 by 25% with further yearly decreases of approximately 3.5% for projects commissioned each next year for the next three years (i.e. by 2023 inclusively).
  • Wind tariff to be decreased for projects commissioned in 2020 by 10% (as had been planned in the current law) with a further decrease of approximately 1.9% for projects commissioned each year for the next three years (i.e. by 2023 inclusively)

23. FIT for other new RES technology projects (biomass, biogas, HPP, geothermal):

As planned in the current law – for projects commissioned after 2020 a decrease by 10% and another decrease of 10% for projects commissioned after 2025

24. Simplified FIT granting procedure (without generation licence):

Applies in the following cases:

  • For small wind and solar installations of up to 50 kW (currently 30 kW). PPA of those projects will be with the supplier of Universal Services (currently a special company that was created during unbundling of the regional distribution system operator).
  • For solar installations from 50kW and up to 500 kW, provided they are installed on rooftops, facades of capital buildings or structures. Single tariff for all generators of this kind. PPA for this projects will be with the guaranteed buyer

25. FIT bonus for local content:

Allow local content bonus to apply to the auction price for power plants commissioned before 2025. Rate of the bonus 5-10% as per the current version of the law

Other Changes

26. Responsibility for imbalances:

Full balancing responsibility will apply to RES projects that:

  • obtained support through auctions that will be performed after the intraday market will have been considered liquid (but no later than 2024); and
  • RES projects that have FIT support and will be commissioned starting 1 January 2024

27. Technical conditions for grid connection:

The technical conditions (the “TCs”) for grid connection will now have expiry terms:

  • TCs held by the winners of the auction are valid for the period those winners are required to build the projects. By default - two years (solar) and three years (all other types of RES technologies), with the potential right to extend them (and commissioning deadline) up to one year, provided that the bank guarantee of EUR 30,000 per 1MW is provided by the winner.
  • TCs issued more than two years before this law becomes effective will remain valid if the project has a construction permit (for CC2-CC3 projects) or a registered declaration on commencement of construction works (for CC1 projects):
    • for solar - one year;
    • for all other types of RES technologies – two years from the effective date of the Draft law.

      Otherwise, such “old” TCs will be automatically terminated on the effective date of the Draft Law.

  • TCs issued less than two years before the Draft Law becomes effective will remain valid:
    • for solar - two years from the effective date of this law
    • for all other types of RES technologies – three years from the effective date of this law.

The renewable energy support scheme proposed by the Draft Law will significantly change the regulatory framework of the renewables sector in Ukraine. These changes will affect all market players and could reshape the sector.

In the best-case scenario, the Draft Law will be adopted in the first half of 2019. However, we expect that the Draft Law still could be significantly changed before its final adoption in the second reading. CMS experts in Ukraine will closely monitor all related developments.

For more information on this draft law and the changing face of Ukraine's renewable energy sector, please contact authors of this publication.