Ukraine: Feed-in Tariff Mechanism For Renewables Restructured In Ukraine

On 21 July 2020, the long-awaited draft law No. 3658 "On the Amendments to Certain Laws of Ukraine on the Improvement of Support for the Production of Electricity from Alternative Energy Sources" (the "Draft Law") was adopted by the Parliament of Ukraine in the second reading. To a large extent, the Draft Law reflects the arrangements set forth in the Memorandum signed between the Government and the market participants. The Draft Law introduces a reduction of the feed-in tariff (the "FiT") and certain other changes in the renewable energy regulatory framework.

Despite some worsened conditions for the renewable energy market as compared with the current legislative regime, the Draft Law may be considered as a positive development for new renewables projects, which have secured signing of the so-called "pre-PPAs" (preliminary power purchase agreements) and may be further completed on the terms introduced by the Draft Law. Moreover, although perhaps still not ideal, compared with the initial arrangements reflected in the Memorandum and the first reading of the Draft Law, the second reading contains somewhat improved conditions for solar power projects. The Draft Law has to be signed by the President of Ukraine, and will become effective on the day following its official publication. Certain changes to the text of the Draft Law are still possible during its finalisation and preparation for the signing.

The key changes introduced by the Draft Law are as follows.

Reduction of the FiT. A reduction of the FiT will be carried out by the National Energy and Utilities Regulatory Commission (the "NEURC") using the decreasing coefficients stipulated in the Draft Law.

The following adjusted rates of the FiT (EURc/kWh) will apply after the Draft Law becomes effective.

* The FIT is no longer available after two years from the signing of pre-PPA for solar of over 1 MW. The FiT for solar with capacity equalling 1 MW will be 4.2 EURc/kWh.

For all power produced from renewable energy sources under the FiT commissioned on or before June 30, 2015, the FIT should be capped at 24.55 EURc/kWh. 

Local content bonus. The Draft Law increases the local content bonus to 20%, payable as an increment to the FiT or the auction price where a producer uses more than 70% of locally produced equipment.

This is in addition to the existing local content bonuses, namely: 5% for projects using at least 30% (and less than 50%) of local equipment; and 10% for projects using at least 50% of local equipment.

For auction winners, a 20% local content bonus will only be available for the first five years from the commissioning of a project, following which the local content bonus should be capped at 10%.

Balancing responsibility. The balancing responsibility of producers with capacity exceeding 1 MW will be introduced as follows:

• 50% from 1 January 2021; and
• 100% from 1 January 2022.

Where capacity is less than, or equal to, 1 MW, the balancing responsibility will be introduced gradually, as envisaged by current legislation (namely, 10% starting from 1 January 2021 and increasing by 10% annually until it reaches 100% by 1 January 2030).

The balancing responsibility should apply subject to tolerance margins of 10% for wind and 5% for solar.

Curtailment. In accordance with the approved amendments, the transmission system operator (TSO) is entitled to order the renewable energy producers (under the FiT or the auction price) to decrease their load (output) based on the so-called "load decrease" services.

The cost of such "load decrease" services should be compensated by the TSO to the relevant producer at the level of the relevant FiT or the auction price, except where system constraints are caused by force majeure. Alternatively, the renewable energy producers should provide similar services on the balancing market; however, at a price which could be lower than the FiT. The methodology for the calculation of curtailed electricity and the compensation procedure should be adopted by the energy regulator within one month following the enactment of the law.

Sources of financing the FiT payments. The Draft Law introduces certain additional sources of funding the offtakerˈs payments to producers under the FiT. The state budget can include costs required to provide financial support to the offtaker, covering at least 20% of the offtaker's payments to the renewable energy producers based on the forecasted volumes of renewable power production in the relevant year. Part of the TSO's income received as at 1 July 2020 for the allocation of cross-border capacities can be temporarily used to finance an offtaker's payments to producers under the FiT. Domestic state bonds can also be issued to help settle the offtakerˈs indebtedness to renewable energy producers.

Stabilisation clause. The express stabilisation clause is included in the Law of Ukraine "On the Regime of Foreign Investment" to guarantee that rights and obligations of parties to PPAs will be governed by legislation effective as of the date of enactment of the Law. The carve-outs are made for changes in law, save for changes in law relating to defence, national security, tax legislation, public order or environmental protection.

The state guarantees that, until 31 December 2029, the FiT rates will not be changed or cancelled, and the decreasing coefficients will not be changed or applied in a way that causes losses and/or non-receipt of legitimately expected revenues by producers.

Renewable energy auctions. The Government will approve the annual quota and the schedule of renewable energy auctions for each year as well as the preliminary annual quotas for the four years following the year for which the annual quota is adopted. The Government will also be entitled to determine specific regions, the maximum capacity of projects and put up certain specific land plots or roofs/facades for auction.

The minimum mandatory shares of annual quota for each of (i) solar, (ii) wind and, cumulatively, (iii) other types of renewable energy sources have been reduced from 15% to 10%.

The Draft Law contemplates the introduction of maximum auction price caps for solar and wind projects as follows:

• 9 EURc/kWh for auctions carried out before 31 December 2024; and
• 8 EURc/kWh for auctions carried out from 1 January 2025.

For all other types of renewable energy sources, the price cap is established at the rate of 12 EURc/kWh.

In order to obtain support through the auction mechanism, a project has to be not only commissioned, but also connected to the grid, as certified by an act on the provision of the grid connection services signed by the producer and the grid company. There is no similar requirement for connecting a project to the grid for obtaining the FiT, and so the commissioning confirmed by a commissioning certificate (or declaration) is sufficient.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.