Ukraine’s Emerging Renewables Market

Adriana Kryveshko

Renewable energy has, by now, become a household term in Ukraine. The capacity of renewable energy (“RES”) projects in Ukraine has grown by 3,968 MW between 2015 and Q3 2019. Total capacity growth in Q3 2019 alone was 2,661 MW. The total sum of investments to construct such 3,968 MW of power plants was approximately EUR 3.4 billion.

According to the Energy Action Plan approved by the government, Ukraine has set itself the goal of reaching 25% of its electricity supply from RES by 2035. To facilitate this, Ukraine has created a favourable framework for attracting billions of “green” euros and dollars in investment.

 

Current incentives for investors

Available incentives

The RES regulatory framework offers a range of incentives to investors, namely:

— guaranteed offtake of produced electricity;

— “green tariff” (also called “feed-in tariff” or “FIT”) (under certain conditions, as discussed in more detail below);

— local content premium;

— tax benefits (VAT exemption on imports of certain equipment for a certain period of time); and

— “grandfathering provisions” that ensure rules stay the same (including green tariff support) until 1 January 2030 for projects commissioned by 2020.

 

Guaranteed offtake of produced electricity

The state-owned “Guaranteed Buyer” enterprise has to conclude a power purchase agreement (“PPA”) with a RES power producer and is obliged to buy all electricity produced by the RES producers that (i) obtained a FIT, and/or (ii) won the relevant state support auction (to be introduced soon, as discussed in more detail below).

The law also requires that the Guaranteed Buyer buy the electricity at the FIT rates granted to the producer for the entire period of application of the FIT, and/or at the auction price as long as the winner of the auction retains the part of the balancing group of the Guaranteed Buyer.

Please note that the guaranteed offtake is applicable to hydropower electricity producers using only via micro, mini and small hydropower plants (i.e. with capacity not exceeding 10MW).

 

Feed-in tariff

The feed-in tariff (“FIT”) support scheme for electricity generated from RES was introduced in Ukraine in 2009 and is set to expire on 1 January 2030.

The sources eligible for the FIT include solar photovoltaic (“PV”) energy, wind energy, hydro energy (for power plants with capacity not exceeding 10MW) and biomass energy. The FIT scheme is currently managed by the National Commission for the Regulation of Energy and Utilities (“NEURC”), which awards the FIT rates to each energy generating facility/producer that met one of the following criteria:

The RES facility is commissioned by 1 January 2020;

The RES facility is commissioned after 1 January 2020 and is not obliged to take part in auctions (as discussed in more detail below);

The RES facility intends to produce electricity from RES and duly concluded a preliminary power purchase agreement (so-called “pre-PPA”) by 31 December 2019. Please note that under such pre-PPA solar PV facilities must be commissioned within two years, while other types of RES facilities — within three years from conclusion of the relevant pre-PPA; or

electricity consumers, including energy cooperatives, private households utilise electricity generating units from RES and for which the FIT was set.

The FIT rates vary depending on the technology and the type of facilities used. For instance, for solar PV and wind power facilities commissioned between 1 January 2017 and  31 December 2019 the statutory established minimum FIT rates are as follows:

— solar PV facilities:

for ground mounted facilities: approximately 0.1503 EUR/kWh;

rooftop/facade of buildings (commercial operations): approximately 0.1637 EUR/kWh; and

household operations: approximately 0.1809 EUR/kWh;

— wind power facilities:

wind turbines with an individual capacity of more than 2 MW: approximately 0.1018 EUR/kWh;

wind turbines with an individual capacity of 0.6 — 2 MW: approximately 0.0679 EUR/kWh; and

wind turbines with an individual capacity of less than 0.6 MW: approximately 0.0582 EUR/kWh.

Notably, current FIT rates in Ukraine are among the highest in Europe.

 

Local content premium

The local content premium, as added to the FIT rate, is available for those RES facilities commissioned between 1 July 2015 and 31 December 2024, and is calculated on a pro rata basis to the level of usage of Ukrainian equipment:

5% premium for 30% of local equipment used;

10% premium for 50% of local equipment used.

The level of local equipment is determined as a specific percentage of the equipment used in aggregate:

— for solar PV facilities:

PV modules — 40%;

mounting system for PV modules — 15%;

inverter equipment — 15%;

energy accumulation systems — 15%;

tracker systems — 15%;

together — 100%;

— for wind power facilities:

blades — 30%;

tower — 30%;

nacelle — 20%;

general frame — 20%.

 

Tax benefits

There are certain tax benefits for energy producers importing RES producing equipment into Ukraine. For example, the Law of Ukraine No. 2628-VIII On Amendments to the Tax Code and Some Other Legislative Acts Concerning the Improvement of Administration and Review of Some of the Tax and Duties Rates grants exemption from VAT on imported equipment for renewable energy facilities until 31 December 2022. VAT will not apply to the importing of:

wind power turbines;

PV and related elements; and

inverters with capacity exceeding 7.5 kVA.

 

FIT “Grandfathering Provisions”

The FIT rates effective as of the date of commencement of the energy generation by a facility will continue to apply for the entire lifespan of such facility up till 1 January 2030 (when the FIT scheme is expected to expire).

As noted above, the Guaranteed Buyer is obliged to buy produced electricity at the FIT rates granted to the entity for the entire period of application of the FIT.

 

Introduction of auctions vs fit scheme

Push for auctions

A notable change took place recently in the support scheme for electricity producers from RES. Among other stakeholders, the change was pushed by international financial institutions financing RES projects in Ukraine who expressed their concerns about the sustainability of the FIT mode long term, and the willingness to finance projects based solely on the auction scheme. Legislative amendments which came into force in May 2019 introduced the new auction-based support scheme for producers of power from RES. Secondary legislation still needs to be passed to bring auctions into life. The auctions will be launched in 2020 and the auction support scheme will be in force until 31 December 2029. It is expected that introduction of auctions in lieu of FIT will, for the majority of RES projects,   make the sector more sustainable, stable and predictable for investors.

 

Transition from the FIT scheme

Auctions will replace the FIT scheme and will be mandatory from 2020 subject to a few exceptions. For example, auctions will not be mandatory if a RES facility is intended to have a capacity:

below 1 MW for a solar PV facility; or

5 MW for a wind power facility (unless the project consists of 3 wind turbines or more).

The facilities which have already obtained the FIT or have not yet been awarded the FIT but have been commissioned or concluded a pre-PPA by 31 December 2019 (as discussed above), can still operate under the FIT scheme (through the FIT rates for projects commissioned in 2020 will be reduced compared to projects commissioned in 2019).

 

Challenges for RES investors

Any potential investor in the RES sector in Ukraine may come across certain challenges. The key ones being practical problems with land allocation, securing rights to land plots, procuring connection to the grid and certain other challenges, including certain regulatory volatility.

 

Land issues

RES developers may face issues with acquiring a land plot. This process can be complex and time consuming, as there can be difficulties with rezoning certain types of land. As a rule, large scale RES projects require rezoning of agricultural land, which enjoys special protection in Ukraine.

Moreover, securing rights to use land may turn out to be problematic as quite often RES developers cannot negotiate the lease terms set out by the local authorities.

 

3.2  Connection to the grid

When dealing with the connection to the grid, the majority of electricity producers will face the cumbersome process of concluding a grid connection agreement. Notably, the producers must first obtain the technical conditions for grid connection and, if required, pre-approve them with the transmission system operator. As practice shows, the volume of works and the cost of such works in technical conditions can be unreasonably inflated, thereby leading to additional expenses for the developers of a RES project.

 

3.3  Other potential issues

Other potential problems which investors may face include:

inability to secure FIT rates and long-term PPAs at the initial stages of the RES project;

the existing electricity transmission infrastructure in Ukraine, which requires upgrading;

connecting high-capacity generating facilities to the grid may be a challenge in certain regions of Ukraine;

general political uncertainty relating to current incentives offered for RES producers and ongoing government discussions about various measures which could result in reducing an already awarded FIT.

 

Conclusion and expectations

Despite the need for a long-term engagement in the development of RES projects and certain practical and regulatory challenges, the RES sector remains one of the fastest growing in Ukraine. Many steps have been made to facilitate the investment.

For instance, in addition to above-mentioned regulatory incentives, the State Agency of the Energy Efficiency is working on investor-friendly tools for the business operations of an investor in Ukraine’s RES arena. The interactive “UA MAP”(https://uamap.org.ua/) was created in unison with the German Government and the Danish Energy Agency, through which any investor can get acquainted with current and potential RES projects in Ukraine. The map currently has over 130 potential business projects.

The RES sector in Ukraine is likely to face a sustainable future once auctions become fully operational in 2020. It is uncertain whether the current incentives will be sufficient to encourage new investors, given the uncertainty in the political arena and the somewhat hasty introduction of regulatory developments.

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Adriana Kryveshko
is an associate at EVERLEGAL