Investing in renewable energy Projects in Ukraine

Based on Dentons’ Guide 2020 “Investing in renewable energy projects in Europe” and the company’s analytics.

Approximately 2.8 GW of RES power plants were awarded the green tariff in the first 10 months of 2019, with total capacity expected to reach 5 GW. The pace of further growth will be impacted by anticipated changes in the support scheme and the expected implementing auctions in 2020. Necessary implementing regulations were adopted on December 27, 2019, except for capacity quotas for auctions. Capacity quotas for auctions are expected to be approved during the first quarter of 2020. The legislative framework for green tariff and auctions for RES power plants is still developing. The share of renewables in gross final energy consumption is more than 5 percent, including large hydro, and the share of renewables in overall electricity production is approximately 9 percent.

In 2019, attractive feed-in tariffs incentivized many foreign investors to acquire projects or develop their own sites. Market players consist of a mix of local players and foreign investors, with foreign investors increasing their share in the wind sector. 2019 also witnessed a rush to commission RES facilities by year-end to achieve the higher tariff, as tariff s will reduce substantially from 2020. The dynamic growth of the market in 2019 has put financial pressure on the continued viability of the existing support scheme. Despite the pending legislative uncertainties, market players believe an acceptable solution will be reached to stabilize the market and further incentivize new projects beyond 2020. Technical solutions (new generating facilities, energy storage capabilities, etc.) need to be implemented to enable the Ukrainian power grid to balance the rapidly increasing output of RES facilities as well as tolerate possible challenges to the system during its operation in isolated mode (before integration with ENTSO-E).

Drivers

• High feed-in tariffs for electricity from solar and wind in 2019, but reductions start in 2020.
• Fixed (EUR-linked) feed-in tariffs, with a state guarantee to purchase power from the date of commissioning to the end of 2029, but pending amendments might extend the tariff until 2034 or even longer.
• Auction tariffs will be fixed in EUR from the date of commissioning for 20 years.
• Positive history of awarding feed-in tariffs and payments, with some delays and disruption caused by the new electricity market and rapid growth in output of RES facilities.
• Stimulating tariff for heat from renewables at the level of 90 percent of current heat production from gas for respective categories of consumers or 90 percent of average heat production tariffs from gas in the respective region.
• Auctions are expected to be implemented starting in spring of 2020.

Constraints and risk factors

• Lack of funds in the electricity market for renewables due to price caps, subsidies for households and cross-subsidies in the industry as well as increasing import of electricity.
• According to the TSO, 11 GW of offers for grid connection were issued but due to expected changes in law many of these projects will not be able to be implemented under feed-in tariffs and there may not be enough capacity quotas to enable them to participate in auctions.
• Electricity market reforms and lack of necessary implementing regulations resulted in there being no incentives to develop/operate balancing facilities or facilities for auxiliary services needed to balance variable RES.
• Uncertainty over the timing for implementation of RES auctions due to delays in adopting necessary regulations and implementing technical solutions for auctions.

The Ukrainian Law on “Green” Tariff Restructuring

After months of discussions on potential retroactive and future feed-in tariff (FIT) reductions, the government signed a memorandum of understanding with certain RES associations, which became the basis of a draft law submitted to parliament in June 2020. In July 2020 parliament adopted the draft law in the second reading. Subject to possible changes, the FIT established in 2015-2019 would be reduced:

• by 7.5 to 15 percent for solar power plants depending on their capacity, and
• by 7.5 percent for wind farms.

A FIT cap of 24.6 euro cents per kWh would be established for solar power plants commissioned before July 1, 2015 and FIT for RES power plants commissioned in 2020 and afterwards would be reduced by 2.5 percent, except for solar power plants with capacity of 1-75 MW commissioned from April 1, 2021 and solar power plants with capacity of more than 75 MW commissioned from November 1, 2020, which would face a 60 percent FIT reduction. No extension of FIT beyond 2029 (the current term) is envisaged in the draft law. Both new solar and wind projects will be incentivized to participate in the RES auctions, which might result in lower tariffs due to longer PPAs (20 years after commissioning). It is expected that quotas for RES auctions will be announced and the first RES auctions themselves will take place this year or early 2021. Within this timeframe the government also plans to launch contests for balancing facilities (<2 GW) and implement legislation for energy storage in Ukraine, and run the first contest for battery storage projects (<200 MW).

On 31 July 2020 the Law No. 810-IX  dated 21 July 2020 (based on the Draft Law No. 3658 dated 15 June 2020)  On Introduction of Amendments to Certain Laws of Ukraine as to Improvement of Conditions of Support for Production of Electricity from Alternative Energy Sources  (the “Law”) was signed by the President of Ukraine and officially published (information about publication is available at http://www.golos.com.ua/article/334019?fbclid=IwAR195wN6orS7U3OLWVQ3MzVqP9DedLMqNN_QKjxv8RRE9Q952vzE1fX7iXE and the text of the law is available at https://zakon.rada.gov.ua/laws/show/810-IX#Text).

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