Support scheme for renewables adjusted by the Parliament

The Parliament of Ukraine approved the Law 2010-D this week adjusting the support scheme for renewable power plants. After the President signs the Law, we will publish detailed analysis of the new legislation. The most important change, in our opinion, is abolishment of the local content requirement that used to be a major barrier for development of renewable projects in Ukraine. Below chart shows new feed-in tariffs for various types of renewables…

New Green Tariffs in Ukraine Law 2010-D

USELF program extended by the EBRD

EBRD pledges new funds to promote renewable energy projects in Ukraine

Additional €70 million support for the Ukraine Sustainable Energy Lending Facility

The European Bank for Reconstruction and Development (EBRD) has launched Phase II of the Ukraine Sustainable Energy Lending Facility(USELF) designed to promote renewable energy generation in Ukraine, which is increasingly important for the country’s energy security. Additional funds of €70 million from the EBRD and the Clean Technologies Fund (CTF) will bring total amount of the investment facility to €140 million.

Following strong market demand to the USELF funding, both the EBRD and the CTF have decided to double their original contributions of €70 million made in 2009. The Facility will continue providing loans for projects in small hydropower, wind, solar, biomass and biogas sectors to generate electricity to be sold to the national grid at the agreed “green” tariff. In addition to the financial support, the USELF will again provide free technical assistance, provided by the Swedish International Development Cooperation Agency (SIDA) towards projects’ development.

In the context of the Facility the first non-recourse finance for a small-scale renewable energy project in Ukraine took place.

The USELF has strengthened business environment for private sector renewable energy through policy dialogue, institutional capacity building, and projects preparation. As of today, eight renewable energy projects have been supported through USELF. These include biogas, biomass, small hydro, wind or solar energy projects. Three of the projects have already been commissioned.

USELF Phase II, which has a strong pipeline of projects and a life span of up to 3 years, will continue strengthening sustainability of the renewables sector in Ukraine. This is especially important due to the limited availability of funding for such projects from private banks.

The USELF replicates a well-established EBRD model, which already in place in other countries of Eastern Europe, Central Asia and the Caucasus.

USELF is implemented by Fichtner from Germany and IMEPOWER from Ukraine. Additional information on USELF can be obtained from its website: www.uself.com.ua

Impact of New Electricity Market Law on Renewable Energy Producers

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.

Conclusions:

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.

Latest Ukraine Renewable Energy Newsletter (#27) published

The latest issue of Ukraine Renewable Energy Newsletter was published. You can download full version here. Please see below introduction and the list of content.

IMEPOWER View

The European Bank for Reconstruction and Development has been a major newsmaker in the renewable sector of Ukraine during recent months approving several loans for renewable energy projects. In addition to 7 loans provided in the framework of USELF program to small and medium size projects (3 solar, 1 biogas, 1 wind, 1 small hydro and 1 biomass), the Bank has recently approved loan for larger 57.7 MW Novoazovskiy wind farm project.

New local content rules, applicable to the renewable power plants commissioned after 01 July 2013, as expected, brought uncertainty for the developers of renewable projects. In particular, majority of solar developers put their projects on hold to assess the options for solar PV modules and respective EPC packages, which comply with new local content requirement. While some relevant options are available, respective prices exceed the international level of solar PV installations that makes investors and banks cautious when making decision about new investments in such projects in Ukraine. We believe that acceptable solution can be found within several months that will allow bringing more solar projects to financial closing and construction in 2014.

Approval of new Energy Strategy until 2030 by the Government at the end of July led to certain confusion among market participants as it has not yet been published. According to various sources, the major reason for such delay is internal discussion within the Government concerning the share of renewables in perspective generation mix for 2020-2030. While the latest available draft of the Strategy envisaged 6 GW installed capacity of renewable power plants in 2030 (not counting large hydro power plants), many stakeholders considered this figure to be low, especially considering Ukraine’s commitment in the framework of the Energy Community Treaty to bring the share of electricity production from renewables up to 11% in 2020. We expect that the share of renewables envisaged by the Strategy will be increased and updated document will be published shortly.

Draft Law 0916 introducing new liberalized model of electricity market (bilateral contracts and balancing market) has been approved for the second reading by the Parliament Fuel and Energy Sector Committee earlier this week and will be put for the Parliament’s voting during the first week of November. Launch of the new market model is planned for 2017.

The Draft Law envisages that special Guaranteed Buyer will be established by the end of 2015 on the basis of the state enterprise Energorynok (that currently performs the function of the Wholesale Electricity Market Operator) and will ensure purchase of all electricity from renewable power plants at respective green tariffs. The Guaranteed Buyer will receive compensation (of the difference between market prices for electricity and green tariffs) from the special Fund of Regulation of Price Disbalance that will also be the source of compensation of imbalances caused by renewable power plants until 2030 (with exception of small hydro, biomass and biogas power plants that will be fully responsible for imbalances starting from the 3rd year after commissioning).

In This Issue

1. EBRD finances the first biomass project in Ukraine via USELF program

2. DTEK attracted EUR 138 million loan for wind power plant construction

3. EBRD finances Novoazovskiy wind park in Ukraine

4. Vestas received new order for 21 MW wind turbines

5. EBRD finances two more solar projects in Ukraine

6. KSG Agro plans to launch new pellet production facility

7. EBRD finances the first biogas project in Ukraine

8. Draft National Action Plan for renewable energy presented