Law on renewable energy auctions in Ukraine is now in effect

On 22 May 2019, law No 2712-VIII “On Amendment of the Laws of Ukraine in Regard to Ensuring Competitive Terms of Electricity Production from Renewable Energy Sources“ (the “Law”) became effective, which contemplates the introduction of renewable energy auctions in Ukraine. The Law provides the general framework and certain core elements of the auction system as set out below.

(a) Timing and quotas. The first annual quota should be established by the Cabinet Ministers of Ukraine (the "Government") for the year 2020. The annual quota should be proposed by the Ministry of Energy and Coal Industry following consultations with the electricity transmission system operator (Ukrenergo) and the State Agency on Energy Efficiency and Energy Saving of Ukraine (SAEE).

The quotas should be established for a five-year term. Until 1 December 2019, the Government should approve the amount of the quota for the next five-year term. Not less than 15% of annual quota will be introduced for each of (i) solar, (ii) wind and, cumulatively, (iii) other types of renewable energy sources, while the remaining quota will be allocated amongst different sources by the Government.

State support can be granted for no more than 80% of the total capacity offered by all participants of the auction.

One business entity (individually or together with other business entities owned by the same beneficial owner) may not obtain more than 25% of the annual quota auctioned in the relevant year.

Auctions will be conducted twice a year, no later than 1 April and 1 October of each year. The auctions will be carried out until 31 December 2029. Pilot auctions are to be carried out in 2019 within six (6) months of the Law coming into effect i.e. 22 November 2019.

(b) The "cut-off" date for signing "pre-PPA" to obtain the feed-in tariff. The "cut-off" date for signing "pre-PPAs" (preliminary power purchase agreements) so as to be eligible for the feed-in tariff (the "FiT") is 31 December 2019. Producers will be exempt from auctions, provided that the commissioning (putting into operation) of a project occurs within two (2) years following the signing of the "pre-PPA" for solar power projects, or within three (3) years following the signing of the "pre-PPA" for all other sources of energy.

If a producer signs a "pre-PPA" before then, it will be entitled to the FiT and exempt from auctions, irrespective of the capacity of a project.

To sign the "pre-PPA", it will be necessary to submit several documents including confirmation of the producer's land rights, a construction permit (or a declaration of the commencement of construction works, as the case may be), as well as a grid connection agreement. This is in line with the Law of Ukraine "On the Electricity Market", and marks a shift from the current approach, where a producer need only submit its corporate documents, and can enter into a "pre-PPA" even before acquiring land rights and obtaining a construction permit.

(c) FiT. The FiT support mechanism, where applicable, will remain in effect until 2030, as contemplated by current legislation. The FiT for new wind projects commissioned in 2020 will be reduced by approximately 10%, and then further reduced for projects commissioned in 2025 as provided for by current legislation.  

The Law provides for a greater reduction of the FiT for solar power plants compared with the previous legislation. With the current 2019 FiT taken as the general reference basis, the FiT is to be reduced by 25% for solar power projects which will be commissioned in 2020 (instead of a 10% reduction previously contemplated).During the next four (4) years –  2021-2024 – the FiT will be reduced by 2.5% annually compared with the initial 2019 FiT reference basis, or by ca. 3.4 %-3.8 % annually (dependent on the year) compared with the FiT applicable in each preceding year. Solar power projects commissioned in 2025 will face a further 4% reduction of the FiT compared with the FiT applicable in 2024.

The FiT for biomass and biogas will remain at the current level until 2030, and not further reduced as previously contemplated.

(e) Eligibility, capacity thresholds and exemptions from auctions. Auctions will be required for all wind projects with a capacity exceeding 5MW, and for solar projects with a capacity exceeding 1MW. Projects with the capacity below the established thresholds will be exempt from auctions. All other types of RES may voluntarily decide whether to participate in the auctions.

(f) Pre-qualification requirements. To be admitted to an auction, a participant should submit the documents confirming its land rights and the grid connection agreement, information on its ultimate beneficial owners, management bodies and affiliated entities, as well as the bank guarantee as set out below.

(g) Bank guarantee. To be admitted to an auction, a participant should provide an irrevocable bank guarantee in the amount of EUR 5 per each kW of the capacity allocated at an auction. The guarantee should be returned to the participant within five (5) business days following the publication in the electronic trade system of the relevant agreement between the winner and the guaranteed buyer, but no later than thirty (30) days following the completion of an auction. The bank guarantee is not returned to the winner should the winner refuse to sign the auction protocol and/or the PPA.

The winner of an auction should further provide an irrevocable bank guarantee of EUR 15 per kW to the guaranteed buyer to secure the performance of its obligations. The bank guarantee should be returned to the winner following the timely commissioning of a project within the terms set out below and commencement of electricity supply. In the event of delay, the winner can extend the construction term for one more year if it provides an additional bank guarantee of EUR 30 per kW to the guaranteed buyer.

(h) Power purchase agreements and elements of state support. A power purchase agreement (the "PPA") concluded through an auction procedure will be valid for 20 years. The PPA will be concluded with the guaranteed buyer (offtaker). The guaranteed buyer cannot refuse to conclude the PPA with the winner of an auction and will be under an obligation to buy the entire volume of electricity from a producer at an auction price and pay the local content bonus to a producer.

The PPAs will stipulate the obligation of a producer to commission a project within two years following the signing of the PPA for solar power projects, or within three (3) years following the signing of the PPA for other types of RES projects.

(i) Arbitration. The Law makes express reference to the right of сompanies with at least 10% of foreign investment to opt for international commercial arbitration when entering into the PPA. A special fund should be established to cover potential arbitration costs of the guaranteed buyer. Producers which opt for international arbitration should pay contributions to this fund in the amount and periodically as determined by the National Energy and Utilities Regulation Committee (the "Regulator"); however, such payments will be not less than once a quarter and not exceed 1% of net profits obtained from activity on a relevant power plant in regard to which a PPA has been concluded.

(j) Pricing and the local content bonus. The winner of an auction will be selected based on the lowest price bid. The maximum price at an auction cannot exceed the relevant FiT.

As previously, the winner of an auction will be eligible for a bonus for using local content (a 5% increment to the FiT where the local content is between 30% - 50%, or a 10% increment where it is higher).

(k) Responsibility for imbalances. The full responsibility will apply to producers – supplying electricity at the FiT or the auction price – which commission projects in the year following the introduction of the fully liquid intraday market, but not later than 2024. If a project is commissioned before the year in which the full responsibility is introduced, but no later than 2024, the gradual responsibility will apply to such project from 2021; it is set at 10% in 2021 and increases by 10% annually until it reaches 100% in 2030. A decision on whether the intraday market is fully liquid will be taken by the Regulator. Projects which were commissioned before 11 June 2017 are relieved from balancing responsibility.  

(l) Term of validity of technical conditions. The term of validity of technical conditions ("TU") for the grid connection will be limited, and will be two (2) years for solar power projects, and three (3) years for other types of renewable energy projects. The term of the existing TU will be counted from the effective date of the Law.

(m) Secondary legislation. The Government should develop and adopt the procedure on conducting RES auctions as well as the procedure of determining the amount of the annual quotas within three (3) months following the effective date of the Law.

Notably, the Government should also prepare the draft law on incentivising energy storage within six (6) months following the enactment of the Law.

The Regulator should adopt a new template form of the PPA for projects under the FiT within two (2) months following the effective date of the Law, and, a new template form of the PPA to be concluded with an auction winner within three (3) months following the effective date of the  Law.

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