Round table “Introduction of Competitive Instruments for Acquisition of Green” Energy in Ukraine”

On 13 March 2018 there was a round table “Introduction of Competitive Instruments for Acquisition of Green” Energy in Ukraine”. As a result of the round table a chairman of the Electricity Subcommittee of Committee of Issues of Fuel and Power Sector and Nuclear Policy and Safety Lev Pidlesetksky published the Concept of Introduction of Competitive Mechanisms of Price Formation for Electricity from RES in Form of Thesis (the “Concept”), available in Ukrainian at http://kompek.rada.gov.ua/print/73485.html. Proposals to the Concept are expected until 23 March 2018. The Concept and respective proposals shall be a ground for further discussion of respective legislative changes.

The key ideas of the Concept are as follows:

• Proposed legislative changes should not be retrospective;
• Preliminary PPA shall be entered into on conditions effective as of the date of entering into even if commissioning of the respective power plant occurs 3 years later.
• There will be annual sales of national quotas for solar and wind generation (not for other RES). Quotas are established by the Cabinet of Ministers of Ukraine upon submission from Ministry of Fuel and Energy of Ukraine after consultations with TSO (Ukrenergo);
• Thresholds for mandatory participation in auctions for wind farms is 10 MW and for solar farms – 5 MW. Auctions are organized by the guaranteed buyer (will exist until 2048);
• If the power capacity of the respective power plants is less, they may either obtain “green” tariff until 2030 or participate in the auction which will result in the reduction of the respective annual quotas;
• The price at the auction shall not be more than “green” tariff as of the date of the auction;
• Preliminary PPA for solar power plants shall be 2 years and for wind farms – 3 years;
• Term of support is 15 years from the date of PPA;
• Participation in the tender shall be secured by a bank guarantee (20% average value of planned output of electricity at the initial price of the auction). If the project has not been implemented, the funds covered by guarantee shall be collected;
• The Ukrainian Regulator will not establish “green” tariff. The respective agreements will be signed with the guaranteed buyer at the formula established by law.
• It is suggested to reduce “green” tariff for solar by 30% and for wind by 10% starting with 1 January 2019.
• It is also suggested to implement full liability for imbalances after establishment of liquid intraday market (after 1 year after its establishment).

Most of changes caused negative reaction of market players and stakeholders, in particular, early decrease in “green” tariff, introduction of full liability for imbalances, too short period for implementation of projects under PrePPAs, absence of specific lots for tenders as well as too low thresholds for auctions. Thus, the Concept does not appear to be accepted by stakeholders and its implementation as is quite doubtful.

Please note that on 19 March 2018 there were discussions of auction system for RES at the Ukrainian Regulator. The Regulator’s approach is expressed at its web-site in Ukrainian at http://www.nerc.gov.ua/?news=7371. The key differences in the Regulator’s approach with the Concept are:

• auctions at “one stop shopping” – there should be ready to build project provided as a lot for tender (there is a question who will be responsible for its development);
• qualification conditions, such as the amount of assets of the bidder, experience in similar projects, preliminary arrangements on financing by IFIs, term of exploitation, maximal level of the price (e.g. 10% less than “green” tariff);
• term for implementation of the project – 1 year for solar farms and 2 years from wind farms.

It appears that “one stop shopping” approach suggested by the Regulator looks better than one suggested in the Concept because investors will get ready to build or almost ready to build projects. However, it is unlikely that in the nearest future state authorities would become capable to develop high quality sites which would satisfy requirements of investors and financial institutions. Thus, the implementation of this approach will take a considerable amount of time

Market players agree that gradual transfer to auction system for RES support and reduction of “green” tariff are inevitable due to world trends. However, it should occur not earlier than 2020, thresholds for auctions shall be higher, there should be lots of ready to build sites and there should be high qualified state agency responsible for their development as well as all rights of current developers shall be protected. The Ukrainian government should abstain from any legislative changes which should negatively impact climate for RES in Ukraine, such as full implementation of liability for imbalances for RES.

By Maksym Sysoiev, Dentons