Draft law contemplating the renewable energy auctions has been registered with the Ukrainian parliament

On 7 June 2018, draft law No. 8449 "On amendments to certain laws of Ukraine to ensure competitive conditions of production of electricity from renewable energy sources" was registered. Effectively, the draft law is aimed at introducing renewable energy (RES) auctions in Ukraine. According to the members of parliament, this draft is expected to be passed into law by the end of this year. The presented draft law is only the initial version. Further amendments to this draft law may be introduced following public consultations and further consideration by the Ukrainian parliament. Following the adoption of the law, the government should detail the procedure of carrying out auctions and adopt other secondary legislation required to bring the auction system into effect.

Key changes relate to the following:

1. General framework for auctions

1.1. Quotas. Auctions will be based on the quota approach. The general annual state quota will be established by the Cabinet of Ministers (the government), and will be based on a mixture of factors driven by the Energy Strategy of Ukraine, Ukraine's international undertakings and the 10-year development plan of the electricity transmission system, as well as the generation adequacy (sufficiency) assessment report prepared by the transmission system operator (TSO).

The government may also introduce special auctions which could be based on the regional quotas, be technologically neutral, or subject to any other criteria or terms as may be set down as appropriate by the government.

One business entity (together with related business entities owned by the same beneficial owner) should not obtain more than 25% of the total amount of all Ukraine's quota put for an auction.

1.2. Timing. The first annual state quota will be introduced for 2020. Hence, auctions will be carried out beginning from 2020. This will be in parallel with the introduction of the new state support mechanism – contracts for difference (CfDs) – as discussed below. The first pilot auction is planned to be held in the second half of 2019 for the construction of power plants in the exclusion (Chornobyl) zone. Auctions will be held until the end of 2029. Following auctions, power purchase agreements (PPA) will be signed for the term of 20 years. Accordingly, the state support mechanism could be potentially maintained for a much longer term of state support than the current term – until 2030 – during which the feed-in tariff (FiT) applies.

1.3. Eligibility and exemptions. Auctions will be required for wind power plants with 20MW or more, and for solar power plants with 10MW or more, of installed capacity. Auctions will be optional for power plants of smaller installed capacity; these can opt for either the FiT or auctions. Auctions will not be required for renewable energy sources other than solar and wind.

Changes will not have a retroactive effect on ongoing projects. If a pre-PPA is signed before 1 July 2019, this plant would still qualify for the FiT under the law effective as at the signing date, regardless of any further changes in law (and it would not be subject to auctions).

2. Auction procedure highlights

2.1. Auction lots. The lots, each with an installed capacity not exceeding 1MW, will be offered via auction. The starting price and the bid increment will be determined under a procedure to be established by the government. Auctions will be held by the offtaker (the guaranteed buyer) in an electronic trading system.

2.2. Evaluation criteria. The only evaluation criterion in an auction will be the lowest price offered by a bidder at which it agrees to sell power to the offtaker. The maximum price cannot exceed the FiT rate.

2.3. Bank guarantee. To be admitted to an auction, a participant must provide an irrevocable bank guarantee in an amount of USD 50,000 per 1MW. The bank guarantee will be returned if a bid is not successful. In the event of a successful bid, the bank guarantee will be returned provided that a project is commissioned on time, namely within three years from the PPA signing date. This term can be extended for one year subject to the producer providing an additional irrevocable bank guarantee of double the amount. If a producer refuses to sign a PPA following an auction, or fails to achieve timely commissioning, the bank guarantee is called upon in favour of the offtaker (the guaranteed buyer). A relevant obligation of a producer to ensure timely commissioning should be included in a PPA concluded following an auction.

3. Changes to the state support mechanism

3.1. PPA. Based on the outcome of an auction, a PPA will be signed with a successful bidder for a term of 20 years counted from the date of the plant's commissioning. The offtaker will be under a statutory obligation to sign a PPA with a winner; it cannot refuse to sign a PPA.

3.2. CfDs. The state support will take the form of contracts for difference (CfDs), on which basis a producer will be compensated for the difference between the auction price and the market price at the day-ahead market (DAM). Both the auction price and payment under the CfD will be referenced to Euro to help manage FX risks. A producer should commission a power plant during three years from the date of PPA signing, failing which a PPA and CfD will cease to be effective.

3.3. Forms of contract. The standard (mandatory) forms of a PPA concluded following an auction and CfDs will be adopted by the energy regulator following the approval of Ukraine's antitrust authority (the Antimonopoly Committee of Ukraine) and consultations with the Energy Community Secretariat.

3.4. Improved procedure for awarding the FiT. Notably, a separate decision of the energy regulator will no longer be required in order to establish the FiT for a producer, as is currently the case. This will avoid the need for a producer to formally apply to the energy regulator for its decision on establishing the FiT for such producer. Instead, the offtaker will include the FiT upon the signing of the PPA based on the calculation algorithms already set out in law.

3.5. Bonus for local equipment. An additional bonus (15% surcharge on top of the FiT or auction price) will be introduced for projects where a producer uses at least 70% of local equipment. This is in addition to the existing bonuses: 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.

3.6. A further FiT reduction for solar power. A FiT for new solar power plants will be reduced by 30% as from 1 January 2020; a 10% reduction is already foreseen by the laws currently in force. No further changes are foreseen for wind power plants, other than that it remains subject to a 10% adjustment of the FiT from 1 January 2020 as is already provided for by law.

4. Responsibility for imbalances

The full responsibility for imbalances of renewable energy producers which obtain state support in the form of CfDs based on the auction procedure will be introduced from 1 January following the year in which the intraday market is considered fully liquid. The decision on whether the market is fully liquid will be taken by the energy regulator following the approval of Ukraine's antitrust authority. Until then, the existing provisions should apply which contemplate the gradual introduction of producers' responsibility for imbalances.

If you would like to know more about the subject covered in this publication, or our services, please contact Dmytro Fedoruk and Svitlana Teush.