Overview
In 2010 Ukraine generated just 0.8 per cent of its energy from renewables, mostly in the form of energy from small hydropower systems. But new feed-in tariff laws - which came into effect in April 2009 - and a series of new tax incentives have lifted the prospects for renewable energy development in this country considerably. Growth figures for this market show that, starting from a low base of installed renewable energy capacity, Ukraine is making up ground fast.
In 2011, Ukraine saw both the commissioning of an 80 MW solar power plant and the development of the country’s first three privately owned wind farms. More than half of the 400 MW renewable energy installed capacity in Ukraine was commissioned in 2011. Ukraine’s solar power capacity is forecast to double in 2012, according to the Association of Alternative Future Energy and Fuel Market Participants and the country’s government has set itself a target of having 1 GW of solar capacity by 2015.
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Key drivers
Ukraine has strong potential in wind, solar and biomass. The Ukrainian government is aiming to tap these and diversify its sources of energy, so as to decrease the country’s dependence on Russian natural gas and oil. The government is relying on the new feed-in tariff scheme, tax incentives and planned energy efficiency measures in order to achieve its goal.
Feed-in Tariff
The new feed-in tariff scheme was introduced in 2009 by the adoption of the Green Tariff Law, which came into effect on 22 April 2009. The Green Tariff Law introduces a guaranteed minimum feed-in tariff for electricity produced from wind, small hydro, biomass and solar energy (the Feed-in Tariff scheme). The Feed-in Tariff scheme replaced a renewable incentive scheme which had been unsuccessful due to insufficient economic incentives as well as legislative uncertainties. The new regime attempts to fix these shortcomings although the new legislation has its own problems.
The National Electricity Regulatory Commission of Ukraine (NERC), the Ukrainian energy regulator has already approved 61 companies as being eligible for the country’s new feed-in tariff. These companies operate 100 power plants in total (8 wind farms, 17 solar PV, 2 biomass plants and 73 small hydro plants).
Tax incentives
In addition, under the Tax Code of Ukraine, there are a number of tax breaks for producers of electricity from renewable energy sources, namely:
- exemption from import VAT and customs duties for renewable energy equipment;
- 75 per cent reduction in land tax for land used for renewable energy power plants;
- limits on rental payments for land leased from state and municipal authorities;
- exemption from the tax duty in the form of a special mark-up on produced electricity (3 per cent of produced electricity); and
- an exemption from corporation tax on profit derived from the sale of electricity produced from renewable sources.
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Policy and regulatory framework and incentives
Feed-in Tariff framework
The Feed-in Tariff scheme applies to electricity generated from any type of non-conventional energy source (including wind, solar, biomass and hydro and certain secondary energy sources), with the exception of electricity produced from coke gas and gas from blast furnaces. Hydroelectric power plants with a power capacity of more than 10 MW are not eligible.
The Green Tariff is calculated by applying a certain coefficient (see table below) to the consumer retail tariff set as at 1 January 2009, the latter being 584.6 Ukrainian hrywnja (UAH). There are different coefficients used depending on the technology. NERC sets the tariff on a monthly basis to reflect the fluctuating UAH/Euro exchange rate, but the tariff can never be less than the minimum tariff for the relevant technology (see table below). The minimum Green Tariff rate protects investors from a steep drop in tariff rates should the UAH devalue against the Euro.
Feed-in tariff rates
| Type of energy | Eligible power stations | Coefficient | Peaking coefficient | Minimum tariff
(€ / kWh) |
|---|
| Wind | Under 600 kW | 1.2 | n/a | 0.0646 |
| 600-2000 kW | 1.4 | n/a | 0.0754 |
| Over 2000 kW | 2.1 | n/a | 0.1131 |
| Solar energy | Power plants on the ground | 4.8 | 1.8 | 0.4653 |
| Rooftop capacity in excess of 100 kW | 4.6 | 1.8 | 0.4459 |
| Rooftop generating capacity up to 100 kW | 4.4 | 1.8 | 0.4265 |
| Biomass | All biomass (except biogas) | 2.3 | n/a | 0.1239 |
| Small hydropower plants | Up to 10 MW | 0.8 | n/a | 0.0775 |
The Green Tariff Law fixes this scheme until 2030 for plants commissioned while the law is in force. The coefficient will be reduced by 10 per cent if plants are commissioned after 2014, by 20 per cent if plants are commissioned after 2019 and by 30 per cent if plants are commissioned after 2024.
The main buyer of renewable energy is Ukraine’s national wholesale electricity market operator (WEM). WEM is the union of suppliers and producers of electricity and is represented by the government-owned energy company, Energorynok.
Eligibility
Generators must be accredited by NERC to qualify for the Feed-in Tariff. This procedure is regulated by the Order on the Establishment, Revision and Termination of Green Tariffs for Business Entities (the Order).
Electricity producers that wish to be accredited by NERC in order to sell electricity at the feed-in tariff rates must first comply with various conditions. The conditions include: 1) obtaining an electricity generation licence, 2) connecting to the grid, 3) the producer becoming a member of WEM, 4) the producer having agreed an electricity sales contract, and 5) demonstration of compliance with the Ukrainian construction component.
There is some controversy over two aspects of the Feed-in Tariff scheme. Firstly, the treatment under the Order of electricity producers that generate power from a combination of conventional and renewable sources, typically involving biomass, is contested. NERC argues that such producers are excluded from the ambit of the Order as no reference is made to them in the Green Tariff Law and as it is difficult for it to verify what proportion of electricity was generated from a conventional or a renewable source for each individual power station. Further controversy attaches to the fact that NERC refuses to approve a feed-in tariff for electricity produced from biomass by means of gasification. A draft law has been drawn up to introduce changes to the Green Tariff Law that will deal with these two issues. It was adopted by the Ukrainian parliament but at the end of October 2011 it was vetoed by the Ukrainian President. This draft law, with comments from the President, is still being considered by the parliamentary committee.
Ukrainian manufacturing component
To qualify for the guaranteed minimum feed-in tariff, the Green Tariff Law prescribes that for power plants whose construction commenced after 2011 and/or commissioned in 2012, at least 15 per cent of the power plant’s raw materials, fixed assets, works and services must be “of Ukrainian origin”. For plants commissioned after 2012, the minimum Ukrainian component must be at least 30 per cent, and for those commissioned in 2013 it must be over 50 per cent. In addition, for solar power plants that are commissioned after 2012, the Ukrainian component involved in producing the solar panels must be at least 30 per cent and those commissioned after 2013 must demonstrate at least 50 per cent Ukrainian origin.
NERC has yet to adopt a procedure that power generators can use to define the Ukrainian component used in the construction of power plants. Only a draft procedure is available and should it be adopted the calculation of the Ukrainian component may turn out to be an onerous process and/or disadvantage foreign investors. These criteria would also be difficult to satisfy in practice as there is currently only one large Ukrainian producer of PV film, one producer of materials for PV film, and no domestic producers of large wind turbines.
Grid connection
There are several procedures for grid connection across Ukraine. The procedure varies according to the type of generation and, in some cases, the part of Ukraine in which the generation takes place. There is no official grid connection procedure for wind farms of 100 MW or less. Small wind farm generators tend to use the recommended (but not mandatory) procedures set out by the Ministry of Fuel and Energy. For other types of renewable energy sources, there is no official guidance available. However, electricity producers are required to specify clearly the connection procedure they intend to follow in the contract they enter into with the owner of power grids. Owners of power grids are reluctant to assist.
Producers of electricity from renewable sources frequently have to build or upgrade power lines or other existing facilities themselves in order to connect to the Ukrainian grid. The Law on the Electrical Power Industry states that electricity producers must be compensated for the costs incurred when constructing or upgrading power lines and assorted facilities. The relevant state agencies are currently working out how to implement these substantive rights. To avoid ownership disputes, NERC recommends that generators retain the ownership of these investments until the Ukrainian government adopts its new procedure. The EBRD is currently funding some improvements to the grid in Southern Ukraine.
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Opportunities & challenges
The Green Tariff Law provides a major incentive for the development and production of electricity from renewable sources in Ukraine. Sizeable wind farm development projects have been reported in the press recently in Ukraine: Konkord Group (450 МW), Аlliance New Energy (400 МW), Windenergo (250 MW), Beten International (200 MW) and DTEK (1200 MW).
Under the new Green Tariff Law, WEM is obliged to buy electricity from renewable sources at the rates the Feed-in Tariff scheme prescribes. This electricity can, in theory, be sold directly to customers but the Feed-in Tariff rate and administration burden is unattractive to retail customers. The only real buyer at the feed-in tariff rate today is Energorynok. Although Ukraine is currently starting to move towards bilateral market contracts with a balancing electricity mechanism, the current scheme only allows for a single-buyer market of electricity, with some minor exceptions.
NERC has stated that it may in the future approve feed-in tariff rates for producers of electricity from other renewable energy sources, eg. geothermal, landfill gas, biogas and biomass of animal origin.
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Conclusion
The Green Tariff Law has established a viable support scheme for the production of electricity from renewable energy sources. However, there are still important provisions that need to be improved and/or elaborated on. Several key regulations necessary for the implementation of feed-in tariff projects have not yet been adopted, such as the establishment of a uniform procedure for the connection to power grids, the compensation of expenses related to such connection and the determination procedure for the amount of Ukrainian material and labour that must be used during the construction of power plants.
If Feed-in Tariff levels remain stable until 2030, in accordance with the Green Tariff Law, then this should motivate investors to overcome the obstacles to deployment which remain in this relatively immature market and allow the future development of some of the largest onshore wind farms in the European market. Such projects would benefit from economies of scale and a higher internal rate of return.
This briefing was prepared with Maksym Sysoiev, LLM, Senior Associate, Attorney-at-Law at PARITET law firm, Kyiv, Ukraine.
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