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

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.

Presentation on renewables at USELF workshop

Alexey Romanov, Director of IMEPOWER, made a presentation about current status and prospects of the renewable energy sector in Ukraine at the workshop organized in the framework of EBRD’s USELF program for representatives of local banks and leasing companies.

File with the presentation in Russian is available here. English version can be downloaded here

Latest Ukraine Renewable Energy Newsletter (#26) 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

Development of renewable energy projects in Ukraine continues at active pace. Despite complications caused by new local content rules that were introduced by the Parliament in late 2012 via amendments to the Electricity Law, we see more renewable capacities added by developers every month – several small and middle size solar power plants have been commissioned recently, DTEK has given 105 MW order to Vestas for wind turbines, while newly introduced green tariff for electricity produced biogas sparked interest from agricultural holdings to the development of biogas projects.

The EBRD has financed its first small hydro power project in Ukraine and is in the process of finalizing several other loans to renewable developers under USELF program. It also considers, jointly with the IFC, providing debt financing for the first stage (126 MW) of the Western Crimean Wind Power Plant that became the first large renewable project in Ukraine developed by foreign owners (Guris from Turkey and Greenworx from Belgium) that secured the construction permit.

At the same time, there is still lack of clarity regarding ability of majority of developers to comply with the new local content rules after the requirement for “fixed shares” comes in force starting 01 July 2013. We expect that it will delay implementation of many projects before the authorities come up with clear guidelines how new regime should be applied and it will become clear who from equipment suppliers and/or EPC contractors is willing to undertake efforts to comply with it.

In This Issue
I. Legal and Regulatory Developments

1.1. Rules for connection of power units to networks came into force

1.2. Methodology of payment calculation for connection of power units came into force

1.3. NERC approved green tariffs for renewable energy producers for March 2013

1.4. NERC proposed new amendments to the secondary legislation regulating renewable projects

II. Investment News

2.1. Vestas receives 105 MW wind turbine order from DTEK

2.2. EBRD and IFC consider loan provision to the Western Crimean Wind Power Project

2.3. EBRD finances the first hydro power project in Ukraine

2.4. Vindkraft Ukraine plans to expand wind power capacities on the Black Sea coast in 2013

2.5. Ekotechnik Praha launches the first stage of solar power plant in Khmelnytsky oblast

2.6. Smart Holding launches the first stage of pellet production plant

2.7. Eco-Optima revises the construction design of wind power plant due to bankruptcy of Fuhrlander

2.8. Ukreximbank provided UAH 50 million for Ivankiv TPP construction

2.9. Rengy Development plans to construct solar power plants with capacity of 20-25 MW in 2013

2.10. 10 MW solar power plant launched in Kherson region

EBRD and IFC consider loan provision to West Crimean Wind Project

According to the information published at the EBRD web site, the West-Crimean Windplant LLC (WCW LLC) is in the process of developing a 126 MW wind farm in Chernomorske district, West Crimea, Ukraine. This project is the first phase of a larger 250MW power plant to be implemented by 2015.

The project received the final construction permit in December 2012. The project’s land plots are secured through a 49 year lease agreement with local municipalities. Construction of the first 63MW tranche is expected to begin in the first quarter of 2013 and to be completed by the second quarter of 2014, while the whole 126 MW project may be completed by the fourth quarter of 2014.

The 126MW project will be implemented in two tranches with one EPC contract per tranche signed with Guris LLC, a subsidiary of Turkish company Guris. As for the turbines supplier, Guris LLC shortlisted the following equipment type: Gamesa G10x and Fuehrlander FL-2500. O&M services will be provided by the turbine supplier under a 10-year agreement, on an all-inclusive basis. On the basis of the 2.7 year wind measurements at two masts done before April 2011, Wind Prospect and Garrad Hassan independently completed energy yield assessments of the site covering three types of wind turbine (Gamesa G128, Fuehrlander FL-2500 and Vestas V112).

Guris and Greenworx from Belgium have indirect ownereship of the WCW LLC according to recent article by Platts Energy in East Europe.

The European Bank for Reconstruction and Development together with the IFC are considering providing loan to finance the project. The EBRD has announced the tender for engagement of a lender’s engineer. More information is available at http://www.ebrd.com/pages/workingwithus/procurement/notices/csu/39472.shtml

Observations from EWEA 2013 conference

Overall mood of the participants of annual EWEA conference who gathered in Vienna this week was far from being optimistic. While substantial number of projects is underway and technologies are being constantly improved, the threat of unpredictable tax and regulatory changes has created a new dimension of risks that can be hardly tolerated by major finance providers. With large utilities currently focused on reducing debt and strengthening their balance sheets that leads to less appetite of new projects, infrastructure funds, pension funds and insurance companies are generally considered as major potential providers of needed capital for wind projects in the European region. Looking for stable project cash flows over 20-25 years they are naturally deeply concerned about recent track record of politicians from different European countries reviewing support schemes for renewable projects along the way. While it is realistic to expect that cost of wind energy will reach grid parity with the cost of electricity produced from conventional sources in 3-5 years from now, in the opinion of most market participants it will take longer to prove reliability of new technologies for banks and investors, thus, feed-in tariffs and other support mechanism will still play crucial role in determining the future of the industry at least during next 10 years.

Considering that emerging economies have better growth prospects than those of EU countries, many speakers called upon the wind “supply chain” participants to pursue actively projects in new markets, in particular, Asia and Africa, utilizing more ECA financing and building on available know-how and significant experience gained in Europe during past decade. As sample of the country with huge demand for new wind installations, Hasan Murat Mercan, Deputy Minister of Energy and Natural Resources of Turkey, has confirmed the plans of expanding country’s wind capacities from current 2,261 MW to 20,000 MW during next 10 years. According to him, transmission system operator is working in parallel on the program to increase capacity of the grid to be able accepting this new capacity. Francesco Starace, CEO of Enel Green Power, shared his view that very soon evolving wind park technologies will remove the concerns about negative impact of wind farms on grid capacity, thus, addressing one key barriers on the way of more active growth of wind sector in Europe.

In terms of technology, most of wind turbine producers are enhancing their model portfolios with new onshore turbines which are either more efficient or are able to capture lower-speed winds, developing new offshore turbines and targeting turbines with higher capacity – as example, Siemens has just launched its new 4.0 MW offshore wind turbine with a rotor diameter of 130 meters, while Nordex unveiled its new Generation Delta platform comprising new 3.0 MW turbine for medium wind speeds and 3.3 MW turbine for high wind speeds. As financing of new projects remains challenging, in addition to expanding to new markers, turbine producers are looking to engage more into development, construction and operation of wind farms to be “one stop” technology partner for financial investors willing to invest funds in wind projects. In particular, it was confirmed as one of the main Gamesa’s priorities by David Mesonero, Director of Corporate Development. Additional income may come from re-powering of old European wind farms commissioned 10-15 years ago since as projects have good economic background since most of old wind farms enjoy excellent locations with high wind speeds.

Talking about CEE and SEE region, there has been consensus from representatives of financial institutions that Turkey, Poland and Romania remain the most rapidly developing wind power markets attracting major attention from investors. According to Richard Koenig, Associate Director from Raiffeisen Centrobank, wind projects in Romania currently provide for the highest returns in the region close to 15%. In general, all countries from the region still rely on major international utility companies to provide financing for wind projects, while private equity and infrastructure funds become more active and, like everywhere in Europe, should play bigger role in the coming years. Stable regulatory environment remains number one risk when it comes to emerging CEE markets, while grid constraints and associated problems have also been mentioned by market players. With arrival of financial investors to the scene, inflation-linked feed-in tariffs or support schemes will be increasingly important to ensure long-term predictability of returns and cash flows. There are quite positive market expectations about Polish market once the new legislation will come in force offering more incentives for offshore wind and solar projects (2 and 2.5 certificates respectively vs. current 1 and future 0.9 certificate for onshore wind). It is also expected that purchase obligation will be limited to 15 years, while compensation will be introduced for curtailment of wind farms below 60% of nominal capacity.

Newly presented EWEA’s report focusing on emerging Europe wind markets mentions that according to National Renewable Energy Action Plans of the newer Members States, additional 10 GW of wind energy capacity should be connected to the grid before 2020 to reach 16 GW. Reaching such targets in real life currently looks challenging due to unstable legislation and resulting delays with financing, while clearly the industry players hope that growth in CEE and SEE region will offset expected near term declines in some more mature European markets. Croatia and Ukraine has been mentioned among the “second wave” markets that provide for good future opportunities if the countries stay on current trajectories and deal with some present problems limiting the growth such as local content requirement in Ukraine.

(Prepared specially for Platts Energy in East Europe)