Ukraine's parliament to consider the draft law on auctions

On 4 December 2018, Parliament's Committee on Energy and Fuel Complex, Nuclear Policy and Nuclear Safety considered and approved the key provisions of the revised draft law No. 8449-д, which contemplates the introduction of renewable energy auctions in Ukraine (the "Draft Law"). The Draft Law is expected to be considered by Parliament at first reading already in December 2018. The text of the Draft Law may be subject to change during further hearings at Parliament.

(a) Timing. Auctions are scheduled to be launched from January 2020, and 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.

(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 years following the signing of the "pre-PPA" for solar power projects, or within three years following the signing of the "pre-PPA" for wind power projects.

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. Notably, the cut-off date has been extended by six months compared with the previous (main) draft law. 

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 on 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 Electricity Market", and marks a shift from the current approach, where a producer needs 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 continue to be in effect until 2030, as contemplated by current legislation. However, the Draft Law incorporates a more frequent and aggressive step-down of the FiT for new projects, depending on the date of the commissioning of a project, as set out in the below table.

Reduction of the FiT rates based on Draft Law 8449-д (for the years 2019-2023):

Year

2019

2020

2021

2022

2023

Wind

€c/kWh

10.18

9.05

8.89

8.72

8.56

%, yoy*

 

-11.1%

-1.8%

-1.9%

-1.8%

Solar

€c/kWh

15.02

11.26

10.88

10.50

10.12

%, yoy*

 

-25%

-3.4%

-3.5%

3.6%

*Percentage of the FiT rate reduction compared with the relevant previous year (beginning from 2019).

Compared with the FiT in 2019 taken as the general reference basis, the FiT for solar will be reduced by 25% in 2020 (instead of a 11% reduction contemplated by current legislation), and then by 2,5% annually during the subsequent three-year period. The FIT for wind will be reduced by ca.11 % from 2020 (as contemplated by current legislation), and then by ca. 1,6% annually during the subsequent three-year period.

The reduction of the FiT for biogas, biomass and hydro power projects will stay as contemplated by current legislation.

No retroactive changes of the FiT will apply to projects already operating under the FiT or those which subsequently obtain the FiT. The FiT rates will remain intact and continue to apply until 2030 at the relevant rates initially established upon commissioning of the project. For example, if a wind power plant is commissioned by the end of 2019 and obtains the FiT at the rate of 10.18 eurocents, this rate will apply until 2030.

(d) Quotas. The annual quotas to be offered at auctions will be approved by the Cabinet Ministers of Ukraine (the government) for a term of five years. 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).

One business entity (together with its affiliates owned by the same beneficial owner) cannot obtain more than 25% of the total amount of all Ukrainian quota auctioned in the relevant year.

(e) Eligibility, capacity thresholds and exemptions from auctions. Auctions will be required for all types of renewable energy technologies which have achieved a 15% share in the total volume of power production from renewable energy sources (the "RES"). To date, only wind power projects and solar projects have reached such a share.

Auctions will be required dependent on the type of a renewable energy source and the project capacity as set out in the below table. Projects with the capacity below the established thresholds will be exempt from auctions.

Year

Source of energy

Capacity, MW

 

2020

Wind

> 20MW

Other types of RES

> 10MW

2021 and 2022

Wind

> 20MW

Other types of RES

> 5MW 

2023

Wind

> 3MW (including projects with one wind turbine)

Other types of RES

> 1MW

Auctions will be optional for all other power producers.

(f) Prequalification requirements. To be admitted to an auction, a participant should submit the documents confirming its rights to the land plots and the grid connection agreement.

(g) Bank guarantee. To be admitted to an auction, a participant should provide an irrevocable bank guarantee in the amount of EUR 5,000 per MW. The winner of an auction should provide an additional irrevocable bank guarantee of EUR 10,000 per MW, which will be returned to the producer upon commissioning of the project and commencement of electricity sales.

(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 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 state support can be granted for not more than 80 per cent of the total capacity offered by all participants of an auction.

The Draft Law makes express reference to the right of сompanies with at least 10 per cent of foreign investment to opt for international commercial arbitration when entering into the PPA.

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 years following the signing of the PPA for other types of RES projects.

(i) 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 rate.

The winner of an auction will be eligible for a bonus for using local content, as envisaged by current legislation (a 5% increment to the FiT where the local content is at the level of 30% - 50%, or a 10% increment, where higher).

(j) Responsibility for imbalances. Responsibility for imbalances will be introduced gradually as envisaged by current legislation (namely, starting from 1 January 2021 and increasing by 10% annually until it reaches 100% by 1 January 2030) for those renewable energy producers which commission projects under the FIT until 31 December 2023. Following the introduction of auctions, the same approach will apply to responsibility of those producers which will be awarded contracts for the state support in an auction procedure in respect of the projects commissioned before 31 December of the year in which the fully liquid intraday market will be established, but not later than 31 December 2023.

The full responsibility for imbalances will apply to (i) projects commissioned under the FiT since 1 January 2024, and (ii) projects which will be awarded contracts for the state support in an auction procedure in the year following establishment of the fully liquid intraday market, but not later than 1 January 2024. A decision on whether the intraday market is fully liquid will be taken by the Ukraine's energy regulator.

(k) Term of validity of technical conditions. The technical conditions ("TU") for grid connection issued after the enactment of the Draft Law will have a limited term of validity, namely, two years for solar power plants, and three years for other types of RES projects (while currently TU are issued for an unlimited term). It will be necessary to commission (put into operation) a project during the relevant TU term of validity. The term of TU validity will be extended during the transition period, depending on the date of TU issuance and the source of energy.

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