Review of Regulatory Aspects Related to Renewable
Electricity Producers under the Law of Ukraine
“On the Principles of Functioning of the Electricity Market in Ukraine”
(approved by the Parliament on 24 October 2013)
During the transitional period (till the middle of 2017) the activity of “green” electricity producers shall be governed by the applicable provisions of the Law “On the Power Sector”. The changes related to such producers shall take place when the Cabinet of Ministers of Ukraine (hereinafter – the CMU) decides to implement the full-scale bilateral contracts market and balancing market, which is expected no later than 01 July 2017.
Pursuant to the Law “On the Principles of Functioning of the Electricity Market of Ukraine” (hereinafter – the Electricity Market Law or the Law) producers that generate electricity at alternative energy facilities (e.g. renewable electricity producers) under the new market model shall be able to sell electricity in two ways:
- electricity sale at the “green” tariff according to the procedure and taking into account the peculiarities of this type of electricity sale set by the law;
- electricity sale by the producers at the prices established at respective markets.
Electricity sale at the “green” tariff
If electricity is generated at alternative energy facilities and the “green” tariff is established for such producers, sale of electricity shall be carried out by the producers taking into account the following specific features.
In order to fulfill the state guarantees set by the Electricity Market Law to purchase all electricity generated at energy facilities that use alternative energy sources and to pay for the electricity at the “green” tariffs, the so called Guaranteed Buyer shall be established (it will be state enterprise designated by the CMU). It is expected that the Guaranteed Buyer will be established on the basis of the state enterprise Energorynok (current operator of the Wholesale Electricity market) till 31 December 2015.
Guaranteed electricity sale-purchase
The Electricity Market Law (article 22) sets forth that until 01 January 2030 electricity producers at the “green” tariff shall sell generated electricity to the Guaranteed Buyer. Also the Law specifies the unconditional commitment of the Guaranteed Buyer to purchase such electricity at the bilateral contracts market as well as the commitment to make settlements with the producers for purchased electricity at the “green” tariffs.
Sale of electricity at the “green” tariff to the Guaranteed Buyer shall be performed by the producers on condition that:
- access right to the electricity market is obtained under the procedure set by the law;
- electricity producer at the “green” tariff is included into the special balancing group of producers at the “green” tariff;
- electricity sale-purchase agreement is concluded with the Guaranteed Buyer based on the standard agreement approved by the regulatory authority (NERC);
- hourly schedules of electricity generation are submitted to the Guaranteed Buyer on daily basis. The Law envisages possibility for wind power plants and solar power plants to adjust electricity generation schedules submitted by such producers to the Guaranteed Buyer two hours prior to actual production of electricity.
The Guaranteed Buyer, in its turn, shall sell all purchased “green” electricity on the day-ahead market under the rules set by the Law for electricity sale on this market. The Law provides for the priority purchase of electricity from the Guaranteed Buyer on the day-ahead market that is ensured by indicating the minimum price for electricity (permitted by the day-ahead market rules) in the application submitted by the Guaranteed Buyer. Reimbursement of the difference between the value of electricity at the “green” tariff and the value of electricity sold at the prices of the day-ahead market shall be made to the Guaranteed Buyer at the expenses of the Cost Imbalance Allocation Fund (article 25).
Formation of the Cost Imbalance Allocation Fund (hereinafter – the Fund) that ensures compensation payments to the “green” producers shall be provided at the expense of the funds obtained from:
– producers of electricity generated at nuclear and hydro power plants (except for micro-, mini- and small HPP);
– suppliers that perform import of electricity;
– electricity transmission company.
The Fund shall be formed by means of income derived from the provision of the service on “adjustment of the competition conditions” on the market to above mentioned categories of market participants. The service shall be provided on the basis of the standard agreement approved by the NERC.
Ensuring payments for sold electricity
The Guaranteed Buyer shall pay for the electricity purchased at the bilateral contracts market from the producers at the “green” tariff for the actual amount of sold electricity in full in monetary form within the terms and according to the procedure specified by the contracts. However, the payment term shall not exceed 90 calendar days from the delivery date of relevant electricity volume by the producer.
Calculations with the producers at the “green” tariff shall be carried out under the algorithm approved by the NERC with the use of special accounts opened for the Cost Imbalance Allocation Fund and its donors as well as the Guaranteed Buyer. Special accounts are protected against forced withdrawal of funds, its arrest by analogy with the existing system of special accounts used for settlements for sold electricity. Opening of the special accounts for producers at the “green” tariff is not envisaged by the Law.
At the same time, it should be noted that the Law does not set the priority of allocation of the Fund’s funds among the recipients as well as types of payments for each of the recipients. This, in its turn, may lead to the insufficient receipt of funds by the producers for the electricity sold at the “green” tariff to the Guaranteed Buyer.
Participation of producers in the balancing market
Until 01 January 2030 the producers at the “green” tariff shall not take part on their own in the balancing market to settle imbalances. These producers are not the independent parties responsible for balance, but should enter the special balancing group of producers at the “green” tariff where the party responsible for balance on behalf of all such producers is the Guaranteed Buyer. The imbalances that emerge from such special balancing group shall be settled by the Guaranteed Buyer. The costs of the Guaranteed Buyer associated with the settlement of electricity imbalances of the balancing group shall be reimbursed from the funds of the Cost Imbalance Allocation Fund (article 25).
In order to gradually introduce the liability for the producers who obtained “green” tariff for the electricity imbalances caused as the result of their activity, the Law provides for the phased-in reimbursement by such producers (except for wind and solar power plants) of the cost of electricity imbalances created after the launch of the full-scale electricity market operation The amount of compensation shall be:
1st year – 0%;
2nd year – 50%;
3rd year – 100%.
Thus, provided that the full-scale market is implemented in 2017, the Law envisages full transition by the middle of 2019 of the producers at the “green” tariff, except for WPP and SPP, to reimburse the costs of electricity imbalances resulting from their fault. Wind and solar power plants till 2030 shall not pay compensation of electricity imbalances resulting from their operations.
Starting 2030 absolutely all producers at the “green” tariff shall take part in the balancing market on a general basis.
Sale of electricity at the prices set on respective markets
If electricity is generated at the alternative energy facilities and for such producer the “green” tariff is not approved or the producer takes a decision to sell electricity not at the approved “green” tariff, the sale of electricity shall be carried out according to the general procedure specified by the Law. In this case the Law suggests selling electricity by the producers on the bilateral contracts market, day-ahead market or balancing market.
For this purpose the producer shall obtain the right to access the market according to the procedure set by the Law. In order to settle possible imbalances during performance of its contractual obligations the producer shall:
– register on the balancing market as a party responsible for electricity balance or enter the balancing group;
– be held liable for imbalances resulting from its fault.
The sale of such electricity by the producers shall be carried out at the prices that are set on the respective segments of market (bilateral contracts market, day-ahead market or balancing market).
Amendments to the Law of Ukraine “On the Power Sector”
The final and transitional provisions of the Law shall introduce the list of amendments to the effective Law of Ukraine “On the Power Sector”, including the list of amendments related to regulation of the activity of producers at the “green” tariff.
1. For electricity producers at alternative energy facilities, the installed capacity of which exceeds 5 MW, additional requirement shall be established in order to obtain the “green” tariff (in addition to the local content requirement) – the construction design documents for such facilities shall correspond to the Development Plan of the United Energy System (hereinafter – the UES) of Ukraine for next 10 years (article 17-1 of the Law “On the Power Sector”).
The conclusion on compliance of the construction project of the alternative energy facility to the Development Plan shall be provided by the system operator according to the procedure stipulated by the Grid Code. The system operator shall provide the conclusion taking into account the needs in relevant generating capacity from respective energy source and in relevant region (all data should be contained in the Development Plan) as well as previously issued “technical conditions” and constructed facilities.
Main requirements to the content and procedure of the approval of the Development Plan are covered by the Electricity Market Law (article 17 “the system operator”). It is proposed to regulate the procedure for preparation of the Development plan at the level of the Ministry of Energy and Coal. The Development Plan of the UES of Ukraine shall be prepared by the system operator for 10 years and be subject to review on an annual basis. The Plan shall be agreed with Ministry of Energy and Coal, the NERC, the State Agency on Energy Efficiency and submitted by the system operator for the CMU approval. In case of disagreement by any of mentioned stakeholders, the system operator shall submit the Plan for the CMU approval together with respective explanations.
2. Certain amendments that are introduced to the article 17-2 of the Law “On the Power Sector” make the procedure of funding connection of the alternative energy facilities more complicated.
In case if the facility’s construction complies with the Development Plan of the UES of Ukraine, the current procedure of funding of the facility’s connection to the grid remains in force – 50% at the cost of electricity transmission tariffs and 50% at the cost of electricity producer via return financial assistance provided to the transmission company. In case if the facility’s construction is not envisaged by the Development Plan, the funding to connect such facility shall be carried out according to the general procedure as it is specified by the law for non-standard connection of the facilities.
3. The final and transitional provisions of the Law “On the Power Sector” include the provision according to which the requirement for the construction of alternative energy facility to comply with the Development Plan of the UES of Ukraine shall not extend to the facilities with respect to which grid connection agreements have been concluded prior to 01 July 2014.
Approval of the Development Plan of the UES of Ukraine for the first time is envisaged before 01 January 2015, therefore, conclusion on compliance of the projects related to construction of the alternative energy facilities shall not be required before the approval of the mentioned Plan (e.g. till 2015).
Amendments to the Law of Ukraine “On Alternative Energy Sources”
The final and transitional provisions of the Electricity Market Law amend the effective Law of Ukraine “On Alternative Energy Sources” (article 9) with regard to the issuance of the guarantee of electricity origin. It is proposed that the guarantee of electricity origin shall be provided upon the request of the producer at the “green” tariff by the authorized body according to the procedure prescribed by the CMU.
1. The Electricity Market Law to maximum possible extent takes into account the state guarantees provided by the Law “On the Power Sector” to purchase full amount of electricity generated at the alternative energy facilities and to ensure payment at the “green” tariffs.
There are certain risks in the mechanism that ensures the state guarantees to provide full payment to the producers at the “green” tariff (operation of the Cost Imbalance Allocation Fund) as timely and full payment by the Guaranteed Buyer to such producers at the “green” tariff shall depend on the funds allocation algorithm set by the NERC and payment discipline of the Fund’s donors.
2. Amendments to the Law “On the Power Sector” set additional requirement to the initiators of the constructions projects of alternative energy facilities – the need for compliance of such facilities with the Development Plan of the UES of Ukraine that in the future may be the limiting factor for the development of the projects in this area.
The provisions of the Law “On the Power Sector” related to the amount of the “green” tariff and the procedure of its establishment set by the NERC as well as the local content requirement have not been changed.
3. Amendments to the Law “On Alternative Energy Sources” regulate the issues related to the issuance of guarantees of origin for electricity generated at the alternative energy sources. The norm is of the dispositive nature and does not contain the obligation of the producers at the “green” tariff to obtain this guarantee of origin.