Ukraine: Transformation Of Support System For Renewables Following Introduction Of Renewable Energy Auctions In Ukraine

Last Updated: 7 June 2019
Article by Svitlana Teush
Most Popular Article in Ukraine, June 2019

Following the adoption of the Law of Ukraine "On the Electricity Market" (the Electricity Market Law) in 2017, which set out the legal framework for the new electricity market design and the role of renewables within it, the renewable energy sector has been developing rapidly in Ukraine.

In 2018 alone, 742.5 MW was installed under the feed-in tariff (FIT) in Ukraine1, which is almost three times the capacity installed in 2017, and six times the capacity installed under the FIT in 2016, and twenty five times the capacity installed under the FIT in 2015. In the first two months of 2019 alone, 214 MW was commissioned, almost twice the capacity commissioned during the same period in 2018.

This has largely been due to the attractions of the FIT, which is referenced to the Euro and fixed until 2030. For example, the FIT pays ca. 15.02 euro cents/kWh for ground-mounted solar power plants, or ca. 10.18 euro cents/1 kWh for wind power plants2, in either case if commissioned during 2017-2019. Payments to power producers are made in Ukraine's national currency, the Hryvnia (UAH). However, the currency risk is limited, since the purchase price under the FIT is adjusted on a quarterly basis by the National Energy and Utilities Regulatory Commission (the Regulator) based on the EUR-UAH exchange rate of the National Bank of Ukraine to reflect the currency fluctuations.3

Although not being perfectly bankable by international standards, the model form of a power purchase agreement (PPA), which was considerably improved in 2017, has stood the bankability test with many international lenders and private equity investors, and has been found acceptable for financing the renewable energy projects in Ukraine, including those undertaken by the EBRD, NEFCO, Natixis, Total Eren, Scatec, AlGihaz and NBT. Following improvements to the model form of the PPA in recent years, it became possible to conclude PPAs at the early stages of project development, making it easier to raise much needed financing for projects. Such concluded PPAs are usually called "preliminary PPAs", or "pre-PPAs".4 The current single offtaker under all PPAs under the FIT – State Enterprise "Energorynok" – has had (so far) a fairly good track record in terms of the performance of its payment obligations under PPAs.

Renewables enjoy certain dispatch-related priorities. Under the Electricity Market Law there is a general obligation of the transmission and distribution grid operators to ensure renewables have priorities, which take the form of technical and/or organisational measures aimed at minimising restrictions on power plants operating under the FIT. With regard to the power transmission system, this is further specified in the transmission code and includes, for example, the priority inclusion of all submitted capacities in the daily load, priority dispatch and delayed curtailment (with regard to the system's operational security). In the events of force majeure, accidents or breaches of operational security, the transmission system operator (TSO), Ukrenergo, can, however, take necessary measures without regard to the priority dispatch rules. Furthermore, the Electricity Market Law provides – with effect from 1 July 2019 – that a producer should be compensated under the FIT for the cost of electricity not delivered as a result of the TSO's dispatch instructions ordering a reduction in output, except where these instructions are issued under the system constraints caused by force majeure.

By operation of law, the state guarantees the maintenance of the legislative requirements regarding the purchase obligation, including the full and timely payment of electricity by the offtaker under the FIT, taking account of any local content bonus where applicable. The state also guarantees maintenance of the support mechanism, applicable to a producer as of the date of commissioning of a power facility, for the entire term of validity of the FIT, i.e. until 2030.5

Core framework of the new auction system

Notwithstanding a certain step-down in the FIT for the power plants which will be commissioned in the future, as contemplated by the Electricity Market Law, the FIT appears fairly high, especially for solar power. As mentioned, this has been one of the main investment attractions of the Ukraine's renewable energy sector and, at the same time, a point of concern as to whether this can be sustained in the long term. As the share of renewables increases, so the related financial burden will have to be undertaken by consumers and other market participants, as required to pay the fairly high FIT to an increasing number of eligible producers until 2030. This may ultimately lead to different kinds of market distortions and price disparities, as well as an overall increase in the cost of electricity. On the other hand, as the FIT is scaled down as its expiry approaches in 2030, the existing support mechanism may be increasingly viewed by investors as providing insufficient incentive for launching new projects in the coming years.

The foregoing considerations, intensified by the message received from the international organisations and donors, led Ukraine to develop the new mechanism which would be economically sustainable and attractive for investors in the long term, reflective of market costs and the technology curve, economically tolerable by other market participants, as well as incentivizing competition and cost reduction. In many countries, the FIT has been, or is being replaced, with auctions, feed-in premiums or other competitive instruments or their combinations, and is often provided for small-scale generation, if at all.

On 25 April 2019, the Verkhovna Rada of Ukraine (the Ukrainian Parliament) adopted the Law "On Certain Amendments of the Laws of Ukraine on Ensuring Competitive Conditions for Electricity Production from Alternative Energy Sources" No. 8449-д (the New Law). The New Law was signed on 18 May 2019 by the then President of Ukraine Petro Poroshenko and entered into force on 22 May 2019 following its official publication. The New Law sets out the general framework and certain core elements of the auction system, leaving it up to the Cabinet of Ministers (the Ukrainian Government) to develop the detailed procedure of auctions and approve the annual quotas for auctions. Accordingly, the Government has the broad flexibility required to develop the appropriate solutions and meet the changing market demand in the long term, which cannot be currently foreseen by the legislature.

Importantly, the support system for renewables is being changed in a broader framework of the ongoing electricity market reform. From 1 July 2019, the new electricity market is scheduled to be launched in Ukraine under the Electricity Market Law.6 A competitive liberal and multi-segmented electricity market7 should ultimately replace the monopolistic, single-buyer wholesale market. Consequently, the industry faces a double stress test of the simultaneous transformation of the support system for renewables and the reform of the electricity market. On the other hand, with both processes running in parallel, it can be easier to align them and avoid the need for reassessing and revisiting certain decisions in the future.

Auction design: The new system will be based on one-stage, sealed bid auctions. Praised for its relative simplicity, this system, however, carries certain risks of abuses, as does any auction system unless it is properly designed. It is hoped that these risks will be managed by the Government when setting out the auction procedure. There should also be a role for energy and anti-trust regulators to supervise the proper functioning of the auction system and provide an adequate response to abuses.

Auctions will be conducted biannually until 31 December 2029, no later than 1 April and 1 October of each year. Pilot auctions are planned to be undertaken during 2019.

Capacity requirements: Under the New Law, auctions will be required for all wind power projects with a capacity exceeding 5 MW8, and for solar projects with a capacity exceeding 1 MW. Wind and solar projects with capacities below these thresholds, as well as other types of renewable energy projects, will not require auctions. However, they can opt to participate in auctions.

Allocation of quotas: The first annual quota should be established by the Government by 1 December 2019 for the year 2020. The quotas will be established for a five-year term. Certain minimum quotas are already set by the New Law, including in regard to solar and wind power. Namely, the minimum share of the annual quota for each of wind and solar will be 15%. Not less than 15% of the annual quota will be allocated, cumulatively, to other types of renewable energy sources, while the remaining quota will be allocated amongst different renewable energy sources by the Government.

The Government can decide on carrying out technology-neutral auctions, overriding the technology-specific allocation of the above minimum quotas established by law.

Within the established general or additional quotas9, the Government can put up for auction the land plots with certain technical parameters, as well as with technical conditions for the grid connection. With such a package offered, it may be easier to assess and implement the project. However, it remains to be seen how this would work, given that certain rights and permits are non-transferable in Ukraine. A possible solution could be to sell the shares of a company (a special purpose vehicle) having relevant rights and permits required for the project. However, the current wording of the New Law does not expressly suggest this solution, as it speaks rather of land plots than of company shares.

PPA and support mechanism: Under the New Law, the PPAs concluded in an auction procedure will be effective for 20 years following the date of commissioning of a power plant. As with the FIT, to manage the currency risk, the purchase price under the PPA awarded in an auction will be fixed for the entire term of the PPA and referenced to the Euro. The price will then be paid on a monthly basis in UAH at the average official EUR-UAH currency rate of the National Bank of Ukraine for the relevant settlement period.

The term of support available through competition will thus be extended beyond 2030 and after the FIT expires. The term of support can potentially extend to as far as 2050 or even beyond that, if the PPA following an auction procedure is concluded in 2029.

The Regulator has then to approve, within three months following the entry into force of the New Law, a model form of the PPA to be signed with the auction winners. This will be yet another form along with the new model form of the PPA under the FIT recently approved by the Regulator, as discussed below.

As with the producer under the FIT, the winner of an auction can obtain the local content bonus, namely a 5% increment to the auction price where the local content is at the level of 30%-50%, or a 10% increment where that content is higher. Local content is not mandatory. Rather, this is an incentive bonus payable in addition to the auction price.

Whether support is provided under the FIT or at auctions, a producer will likewise enjoy the benefit of the full offtake guarantee established by law, and will be compensated, at the FIT or auction price (as relevant) for the cost of electricity not delivered by a producer as a result of the TSO's dispatch instructions ordering a reduction in output, except where these instructions are issued under the system constraints caused by force majeure.

To be eligible for support, the winner of an auction should commission a power plant within the established term following the signing of the PPA, namely two years for solar power projects, or three years for other types of renewable energy projects, failing which the PPA terminates. It is possible to extend either period for one year, if the winner provides an additional bank guarantee of €30/ kW to the offtaker and signs the relevant addendum to the PPA.

To promote competition, state support will be provided only for that capacity not exceeding 80% of the aggregate capacity offered by all auction participants bidding for the quota for the relevant renewable energy source.

The maximum quota awarded to a single bidder (together with its affiliates having the same ultimate beneficial owner) cannot exceed 25% of the total annual quota in the relevant year.

Admission requirements, The bank guarantee: To be admitted to an auction a participant must submit documents confirming its land rights and the grid connection agreement, information on the ultimate beneficiary owners, its management bodies and affiliates, as well as the bank guarantee.

The amount of the bank guarantee was one of the most contentious topics during the drafting stage. Clearly, if the bank guarantee is too small, this could aggravate the risk of project failures where the lowest bid, not supported by a sufficient financial undertaking, is offered by a participant not capable of delivering on projects. If, on the other hand, the bank guarantee is too large, it could impair competition and prevent the market entry of new participants.

To be admitted to an auction a participant must provide an irrevocable bank guarantee in the amount of €5/kW of the capacity allocated at auction. The guarantee is returned to each participant following the completion of that auction (an exception being to the winner of an auction which refuses to sign the auction protocol and/or the PPA). Furthermore, the auction winner must provide an irrevocable bank guarantee of €15/kW to secure performance under the PPA; that is returned following the timely commissioning of a project and the supply of power into the grid.

Selection of a winner: The winner of an auction will be selected based on the lowest price bid. The ceiling price at an auction cannot exceed the relevant FIT rate effective as at the date of that auction. The new offtaker that is being established (the so-called "Guaranteed Buyer") cannot refuse to conclude the PPA with the auction winner.10

Implications of the new auction system for ongoing projects

Following the introduction of auctions, the FIT support mechanism will continue to apply to those projects already operational under the FIT. Also, it will be available for certain projects under development.

Eligibility of projects for the FIT will be determined depending on the date of commissioning of a power plant, the installed capacity and availability of the pre-PPA signed by a producer with the offtaker before the established deadline. Effectively, projects which will be commissioned before the end of 2019, will be eligible for the FIT, irrespective of their capacity. The projects commissioned in 2020 or later can obtain the FIT if their capacity is below the established thresholds requiring auctions, or, regardless of capacity, if they sign the pre-PPA before 31 December 2019 and commission a project (or a stage of its construction, as the case may be) within two years for solar power projects following the signing of the pre-PPA, or three years for other types of renewable energy projects. The "waiting time" available for signing the pre-PPA and completion is designed to ensure a smooth transfer to the auction system without affecting ongoing projects and undermining investor expectations.

Under the New Law, to sign the pre-PPA, an applicant which has not obtained the FIT11, will have to submit – in addition to the charter and documents confirming the signatory's powers – documents confirming its land rights, a construction permit (or a notification on the commencement of construction works, as the case may be), and a grid connection agreement. This way, a project will be required to reach a certain degree of maturity in order to qualify for the benefit of the pre-PPA, and, subsequently, to obtain the FIT. This is in line with the Electricity Market Law, and marks a shift from the previous approach. Under that it was sufficient for a producer to submit only its corporate documents (for example, its charter and the certificate of incorporation, and documents confirming the appointment of the management). Effectively, a producer could sign a pre-PPA with the offtaker even before acquiring land rights and obtaining a construction permit, potentially leading to a "bubble" situation in which numerous pre-PPAs are concluded but are not backed up by substance.

Whatever the scenario, it is important to remember that the FIT rate will be determined as at the date of commissioning of a project, and not as at the date of signing the PPA or the pre-PPA.

Recent developments relating to the approval of the new model form of the (pre)-PPA, entailing the need to re-execute the existing agreements before 1 July 2019, are discussed in further detail below.

Changes of the FIT for future projects

The FIT-based support mechanism continues to be in effect until 2030 for projects which have obtained the FIT, or are eligible for obtaining the FIT in the future.

The initial version of the Electricity Market Law adopted in 2017 already provided for the FIT reduction, depending on the date of commissioning of a power plant. The New Law does not change the existing step-down of the FIT for wind and small hydro power plants. For example, for wind power projects which will be commissioned in 2020-2024, the FIT will be reduced by 10%12 compared with the current FIT rate.13 The next reduction of the FIT, by another 10%, will apply to those wind power projects which will be commissioned in 2025 or later.

The New Law provides for a greater reduction of the FIT for solar power plants compared with the Electricity Market Law. With the current FIT taken as the general reference basis, the FIT is to be reduced by 25% for solar power projects which will be commissioned in 2020 (instead of a 10% reduction contemplated by current legislation). During the next three years 2021-2024, the FIT will be reduced by ca. 3.4 %-3.8 % annually – dependent on the year – compared with the FIT applicable in each preceding year. The solar power projects commissioned in 2025 will face a 4% reduction of the FIT compared with the FIT applicable in 2024.14

Under the New Law, the FIT for biomass and biogas will remain at the current level until 2030. It will not be reduced, although the reduction was initially contemplated by the Electricity Market Law.

Changes to the support mechanism for the small-scale generation – particularly, private households – contemplated by the New Law have sparkled a lot of criticism. On the one hand, the capacity of installations eligible for the FIT and not requiring the electricity production licence – whether wind or solar – has been increased from 30 kW to 50 kW. On the other hand, the support under the FIT has been limited to only roof- and façade-mounted photovoltaic (PV) installations; ground-mounted small-scale PV installations would only be able to obtain the FIT if combined with wind power generators. Previously, there had been no such limitation in place, and ground-mounted PV installations had been eligible for the FIT. The new requirements to the FIT eligibility will likewise apply to the new and already operational small-scale installations, as well as to those under development. Given the need for promoting the small-scale and distributed generation in Ukraine, the issue can be expected to be revisited, and relevant changes to the New Law can follow. There are also proposals to further address it within a broader and dedicated regulatory framework for supporting small-scale and distributed generation.

The New Law also introduces the framework for the so-called "energy cooperatives" (co-ops). The co-op can obtain the FIT provided that the installed capacity of its installations does not exceed 150 kW. The co-op will also be subject to a simplified procedure not requiring the electricity production license.

The new form of the PPA and the new procedures relating to the offtake under the FIT

Since 2017, the model form of the PPA has been changed with a view to improving its bankability. To ensure the long-term commitment of the offtaker, the term of the PPA was changed from one year (extended annually) to 1 January 2030, which corresponds to the term of validity of the FIT. Also, PPAs were permitted to be signed pre-completion to help raise financing at the early stages of renewable energy projects.15

To meet the requirements of the Electricity Market Law, on 26 April 2019, the Regulator approved a new model form of PPA by its regulation No. 641 "On the Approval of the Normative Acts Governing the Activity of the Guaranteed Buyer and the Electricity Offtaker under the Feed-in Tariff" (Regulation). By the same Regulation, the procedure for concluding PPAs was established, together with a framework on other aspects of the functioning of the new electricity market in regard to the offtake under the FIT, as discussed below.16

Long-term PPA: As previously, the PPA will be concluded pursuant to the new model form for the entire period of validity of the FIT, that is until 1 January 2030. However, under the new model form, the PPA will terminate if a power plant (or a stage of its construction, as the case may be) is not commissioned within three years following the obtaining of a construction permit (or submission of a notification on the commencement of construction works, where applicable). This replicates the relevant provision of the Electricity Market Law, but would need to be amended once the New Law is enacted so as to reflect the difference between solar power projects which are allowed by that law two years for commissioning and other types of renewable energy projects allowed three years for commissioning.

Pre-PPA: It continues to be possible to conclude pre-PPAs at the early stages of a project. However, unlike previously, a number of provisions of the pre-PPA will enter into effect upon signing (for example, the subject matter, the dispute resolution procedure, change of law, entry into force, assignment and termination of the agreement), while others (the offtake volumes and payments as well as the rights and obligations of the parties) will take effect upon the occurrence of certain conditions, and not immediately upon signing. This is a significant improvement in terms of the bankability of the pre-PPA. Previously, none of the provisions of the pre-PPA took effect upon signing. For its entire legal effect, the pre-PPA depended on the occurrence of all numerous conditions. That is to say, the pre-PPA did not have any legal force upon its signing, and could not be invoked as solid legal ground in the event of a dispute.

Another important development is that the new model form of PPA limits the conditions delaying the entry into force of the PPA. Namely, the following provisions will take effect on the first day of the month in which the latest of the following conditions occurs: the producer obtains the electricity production licence and the FIT, joins the balancing group led by the offtaker, which is a group balance responsible party to the TSO, and concludes an imbalance settlement agreement, as relevant.

Previously, the list of conditions was much broader, and included, in addition to the above, the approval of technical assignment and design of the metering facilities by Energorynok, appointment by the producer of the technical staff responsible for the technological information exchange, signing technical annexes to the PPA, amendment of the agreements between the offtaker and participants of the wholesale electricity market adjacent to the producer within the relevant territories, etc.

Other elements of the bankability test: The new model form of PPA is still not perfect, and is not entirely bankable by international standards. For example, it does not contemplate assignment of rights under the PPA without the offtaker's prior consent or the possibility of entering into direct agreements between the creditor and the offtaker, as would normally be expected by lenders wanting to ensure their step-in rights in the event of a borrower's default. Assignment is only possible upon agreement of the parties. As with the previous forms, the new model form of PPA does not implement the "take-or-pay" or "take-and-pay" (including "deemed delivery") approaches. Only the electricity actually delivered, and metered, should be paid for by the offtaker. The dispatch risk undertaken by the producer is to a certain extent balanced by the dispatch priorities, as well as compensation of a producer for the cost of underdelivered electricity in certain cases, as discussed above.

Change of law: Although present in the new form of PPA, the change of law clause is not clear, and not particularly beneficial for producers. If the model form of PPA is changed in the future, a producer which has already signed the PPA or the pre-PPA with the offtaker should either accept all such changes and enter into the relevant addendum with the offtaker,17 or the producer will be deemed to have initiated withdrawal from the agreement.

The parties to the PPA can refer disputes to international arbitration under the ICC Rules of Arbitration, with the place of arbitration in Paris, the language of arbitration being English. However, the arbitration clause contained in the model form of PPA is not clear and unambiguous. It does not address those situations where a party is precluded from exercising its right to arbitrate if the other party initiates local court proceedings first. The court proceeding can be difficult to terminate should the arbitration proceeding be commenced by the respondent, as this requires application to the court by both the claimant and the defendant and identity of the subject matters of claims in both proceedings.

Replacement of the offtaker and assignment, Other aspects of the procedures: Apart from the new model form of PPA, the Regulation sets out the new framework relating to different aspects of the offtake procedure, which had not been in place before. Namely, it sets out the detailed procedure of concluding the PPA and assignment of existing PPAs to the new offtaker; the model form of an agreement on the services relating to the increase of power production from renewable energy sources and the procedure of its conclusion18; the procedure of forecasting the offtake volumes by producers and forecasting the electricity volumes to be sold on the day-ahead and intraday markets by the offtaker; the procedure of electricity sale and purchase by the offtaker in the above markets; the structure and methods of formation of the offtaker's cost estimate, as well as the rules of functioning of the balancing group.

Taking account of the replacement of the offtaker contemplated by the institutional electricity market reform, the new procedure of concluding the PPAs addresses the issue of assignment of the PPAs and pre-PPAs from Energorynok to the new offtaker, the Guaranteed Buyer.

During the drafting stage, the importance of ensuring continuity and seamless operation under the existing PPAs when assigning the agreements from Energorynok to the Guaranteed Buyer was recognised by the Regulator following discussions with the industry. This was attempted to be addressed in the Regulation through the mechanism of signing a trilateral amendment agreement by the producer, Energorynok (the current offtaker) and the Guaranteed Buyer (the new offtaker).

The period allowed for the re-execution of existing agreements and assignment by way of signing such amendment agreements – by 1 July 2019 – appears ambiguous, particularly given that the assignee, the Guaranteed Buyer, is still being established. To this end, a producer has to submit documents similar to those required to sign a new PPA under the new model form (as discussed above), including – for a producer which has not obtained the FIT – documents confirming its land rights, a construction permit (or a notification, as relevant), and a grid connection agreement.

System integration and balancing responsibility

As the share of renewables increases, so Ukraine must face the common challenges relating to the system integration of renewables. Also, the supporting grid infrastructure is limited in Ukraine, and requires upgrading. Distribution grid capacity constraints are already discernible in some southern regions of Ukraine which have particularly good weather and climate conditions for implementing solar and wind power projects. These grid capacities are facing the increased need for the upgrading and extension to enable the undertaking of new projects in the relevant regions. The transmission power grid may also experience constraints in the future and require financial and technical solutions to be able to continue integrating renewables at the current pace of growth.

A contributing factor to the problem has been the technical conditions (specifications) for the grid connection (the so-called "TU") issued for an unlimited time. As a result, there is an increasing number of "idle" projects which have the TU in place, but are not being delivered. Once issued, the TU cannot be revoked or cancelled by the grid company, and cannot be re-issued to other developers willing to undertake, and capable of delivering, the projects. In these circumstances it can be difficult for the grid company to reliably forecast the potential new TU that can be issued to other project owners, as well as the related system load and system constraints. The New Law requires that the term of the TU should be limited, and should be two years for solar, and three years for other types of renewable energy projects.19 A project owner will have to commission a project and connect it to the grid during the term of validity of the TU.

Variable renewable energy (particularly, wind and solar) enhances the need for balancing of the system, and requires additional resources which translate into the financial responsibility of market participants for imbalances that they cause. In Ukraine, balancing responsibility of renewable energy producers is considered in the context of accuracy of the hourly production forecasts submitted by the producer to the offtaker. Hence, responsibility will be imposed for deviations of the actual hourly output from the anticipated schedules submitted. The principle introduced by the Electricity Market Law suggests that each participant of the Ukrainian electricity market (except for consumers which purchase electricity under supply contracts) should undertake balancing responsibility for its respective imbalances, either as a balance responsible party or as a participant of the relevant balancing group. In the latter case, the leader of the balancing group will be the balance responsible party which the TSO will look to for the aggregate imbalances of its members. Each producer under the FIT or the auction support mechanism is to join the balancing group led by the Guaranteed Buyer. The Guaranteed Buyer will undertake financial responsibility to the TSO for the settlement of imbalances of the entire balancing group.

The New Law marks a shift from the former approach to balancing responsibility enshrined in the initial version of the Electricity Market Law. Previously, it was contemplated that balancing responsibility should be introduced gradually, starting from 2021 and increasing by 10% annually until reaching 100% in 2030. Certain tolerance margins for wind and solar were established, releasing producers from responsibility for imbalances. The New Law, however, establishes the full balancing responsibility of renewable energy producers, applicable to projects under the FIT or the auction price which will be commissioned from 1 January of the year following that in which the intraday market is found fully liquid20, or from 1 January 2024 if the intraday market is not found liquid before then. If a project is commissioned earlier, it will be subject to the gradual balancing responsibility envisaged by the initial version of the Electricity Market Law.

Ukrainian law does not set any dedicated regulatory framework for storage. Under the New Law, the Government should develop, within six months following the enactment of the New Law, a draft law to incentivise energy storage. A working group has already been set up with the aim of elaborating the legal status of storage systems and balancing services, determining the appropriate level of payment for the relevant services, as well as developing the relevant metering and control procedures. Certain international organisations are in negotiations with Ukrainian authorities to provide technical assistance on these matters. The idea is to introduce a framework that would provide incentives for investment in the sector.

The works are at an early stage now, and it is not yet clear what regulatory and economic solutions, and technologies, are to be used. Currently, it is planned to consider different technologies available (including those based on hydrogen, bioenergy, pump-storage hydro, etc.). There are plans to launch pilot projects on storage during 2019.

Transformation of the support system for renewables toward a more competitive framework in Ukraine is inevitable to maintain the growth of its renewable energy sector and to increase the share of renewables in line with the renewable energy targets committed to by Ukraine as a contracting party of the Energy Community and an associate member of the EU. The New Law sets out the general framework for the new support mechanism on a competitive basis. The adoption of secondary legislation specifying the auction design, quotas and procedures, as well as practical implementation and supervision by the energy and anti-trust regulators, will be key to the success of this mechanism. If properly designed and implemented, auctions are hoped to help reduce the cost of renewable energy and alleviate the associated financial burden for the market, as well as incentivise the use of cost-effective technologies required by producers to stay competitive.

The common consensus is that it is necessary to ensure consistent support for ongoing projects, both those fully operational under the FIT and those under development; there should be no retroactive changes, and interruptions breaking the existing investment cycle should be avoided. Investors should, however, constantly remain wary of regulatory changes so as to be able to comply with the applicable procedures and deadlines. Recent regulatory developments entail the need to re-execute the existing (pre)-PPAs by 1 July 2019 in order to assign them to the new offtaker and comply with the new model form of PPA. Those project developers which want to be eligible to the FIT following the introduction of auctions would also need to enter into the pre-PPA before 31 December 2019.

Apart from the country-specific developments, Ukraine is no exception to different challenges faced by the industry globally. This includes, for example, the need to manage power system constraints and ensure the power system integration of renewables, implement the required system balancing, storage and demand response solutions as well as smart technologies across the sector, promote distributed power generation and the use of hybrid technologies. Even where the regulatory framework is not yet in place in Ukraine for certain activities, it can be expected to evolve rapidly, and Ukraine may soon be viewed as an investment destination for bringing a variety of products and technologies required to upgrade and develop its power sector.

Footnotes

1 According to the National Energy and Utilities Regulatory Commission.

2 Consisting of wind power units with a single installed capacity exceeding 2MW.

3 More information can be found in the article by Svitlana Teush titled "Ukraine's Renewable Energy Outlook under the New Electricity Market Design": https://www.pv-magazine.com/2018/02/20/ukraines-renewable-energy-outlook-under-the-new-electricity-market-design/

4 However, this term is not referenced in law. Nor is there a special form of the pre-PPA as distinct from that of the PPA. A pre-PPA follows the form of the PPA, subject to certain distinctions relating to its entry into force, as discussed in this article.

5 There are no known cases, however, where Ukraine provided a project-specific sovereign guarantee to support a renewable energy project in Ukraine.

6 Given that the full readiness for the new electricity market launch has not yet been achieved, there have been proposals to postpone it (for example, until 1 October 2019). The additional time is required to adopt certain regulatory acts and resolve technical issues, including, for example, to prepare the auction procedures and online platforms for concluding bilateral agreements, complete the software and align the settlement and data exchange procedures for the balancing market, improve the metering data collection and exchange as required for the efficient management of the commercial metering system, as well as appoint the last resort supplier and allocate other public service obligations. As of the writing of this article, no draft laws have been registered at the Parliament to amend the Electricity Market Law and postpone the new market launch; hence, this continues to be scheduled for 1 July 2019.

7 This will include a day-ahead market, an intra-day market, a balancing market and an ancillary services' market, as well as a market of bilateral contracts, in line with customary practice across many EU countries.

8 Save for those wind power plants involving three wind turbines regardless of their installed capacity.

9 The New Law does not provide further guidance on additional quotas. A fair reading only suggests that the Government can establish such quotas in addition to the general quotas.

10 As of the writing of this article, the Guaranteed Buyer is being established. This will be a state enterprise designated by the Government to perform the offtaker's duties in relation to the renewable energy producers under the FIT. The Guaranteed Buyer is to replace the current offtaker – State Enterprise "Energorynok" – under all PPAs with the producers under the FIT.

11 If an applicant has obtained the FiT, it is sufficient to provide only the charter and documents confirming the signatory's powers.

12 Here and below the reductions of the FIT which are expressed as percentages are approximate, and have been rounded for the ease of reference.

13 For wind power plants comprising wind turbines with a unit installed capacity of 2MW or higher.

14 When compared with the FIT applicable in 2019, the FIT will be further reduced by 2.5% annually during 2022 – 2024.

15More information can be found here: https://www.pv-magazine.com/2018/02/20/ukraines-renewable-energy-outlook-under-the-new-electricity-market-design/

16 The Regulation was officially published on 14 May 2019. It should take effect from 1 July 2019, save for certain provisions that should take effect earlier, on the day following the official publication, i.e. from 15 May 2019. These are the provisions approving the new form of the PPA and the procedure of concluding the PPAs and its assignment from Energorynok to the Guaranteed Buyer, as well as the new model form of an agreement on the increase of power production from renewable energy sources.

17 This should, however, be without prejudice to the producer's rights under the FIT.

18 This new mechanism is introduced to cover the costs of the Guaranteed Buyer relating to its performance of the special obligations on the offtake under the FIT, and is to provide one of the sources of its revenues. The Guaranteed Buyer will perform the relevant services relating to the increase of renewables share to the Ukrenergo, the TSO. The latter will pay to the Guaranteed Buyer for these services the difference between the FIT paid by the Guaranteed Buyer to producers under the FIT and the cost of electricity sold by the Guaranteed Buyer in the day-ahead and intraday markets, increased by the costs of the Guaranteed Buyer relating to settlement of imbalances of the balancing group as well as the costs foreseen by the approved cost estimate of the Guaranteed Buyer. During the transition period until 1 July 2020, these services will be temporarily provided to, and paid for by, Energoatom, the state enterprise operating all nuclear power plants in Ukraine, to avoid an increase in electricity prices that would otherwise follow should the services be paid for by the TSO.

19 The term of the existing TU will be counted from the effective date of the New Law.

20 When the market is fully liquid is to be determined by the Regulator.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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