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Bio Power Plant: Specific Aspects of Construction and Operation

Briefings
Typography

The global trends to the reduction of the volumes of traditional fuels used in the electrical energy industry are explained not only by their limited reserves, but also by the enactment of new international regulations on the reduction of greenhouse gas emissions.

Today, the use of the renewable energy sources is one of the most promising lines of development of the global energy industry. The most developed nations satisfy a significant share of their requirements in the electric energy by renewable energy. And Ukraine is not an exception, although the share of the renewable energy sources used for the generation of the electric energy in this country is much less than that observed in the EU countries. 

Wind and solar energies are the most common and affordable for Ukraine, although, as an agrarian state, Ukraine is in possession of large reserves of biomass. It is the biomass that became the focus of attention of the investors as the source of the electric energy lately.

Up to 2015, Ukrainian legislation treated biomass as wastes, which resulted in numerous arguments and contradicted the definition stipulated by the legislation of the EU.

Today, biomass is defined as non-extractable biologically renewable substance of organic origin, capable to biological decomposition, represented by products, wastes and residues of forestry sector and agricultural production (plant production and cattle breeding), fish farming and other industries technologically related to them, as well as a component of industrial or household wastes, capable to biological decomposition.

Biomass includes such sources of fuel as firewood, pallets, granules, residues of agricultural production, saw-dust, corn silage, and energy generating plants. 

Taking into account the value of the biomass as a source of alternative energy, Ukraine has seen the trend toward an increase of the number of bio power plants construction projects. 

Below we will discuss what we believe to be the key stages of implementation of the project of construction and operation of a bio power plant in Ukraine in their chronological order. 

Establishment of Business Entity

Any enterprise commences with registration of the business entity that will manage the business. Ukrainian legislation allows generation and distribution of electric energy both to private entrepreneurs and legal entities. Given the extreme complexity of the process of the project implementation and significant advantages of managing the business via a legal entity, in practice it is advisable to use for such purposes a limited liability company.

Please, note that according to art. 13 of the Law of Ukraine "On Electric Energy Industry", the activity in the areas of generation, transmission, distribution and supply of the electric energy is carried based on relevant licenses with a number of exceptions stated below. This means that already at the stage of registration of the business entity one should take into account the requirements established in the Conditions and Rules of conduct of business activity in the area of generation of electric energy, approved by Resolution No. 3 of the National Commission for Regulation of the Electric Energy Industry of Ukraine dated 8 February 1996, including the following basic requirements:

1.the business entity should have the title to or the right to use the electric energy generation equipment with installed capacity of at least 10 mW;

2.the list of the lines of business of the legal entity should specify activity in the area of "generation of electric energy"

3.the employees of the legal entity that will support the production processes should meet the following requirements:

  • special education of energy profile;
  • completed special training on technical operation of energy facilities and labor safety;
  • completed training in special education establishments of Ukraine (persons who did not complete such training are not admitted for screening);
  • the level of knowledge of the employees should be verified with the testing results registered in the protocol on verification and issue of the evaluation certificate (permission to work without evaluation certificate is prohibited).
Selection of and Obtaining the Title to the Land Plot for Construction of the Power Plant

After registration of the entity in compliance with the current legislative requirements, the project manager should take steps to obtain the title to or the right to use a land plot to accommodate the power plant. Please, note that the land plot can be either purchased or leased by the entity.

Noteworthy, the Land Code of Ukraine contains a provision explicitly ordering organizations to construct and operate energy generating enterprises only on the energy sector lands.

Nevertheless, the Ukrainian Classifier of special purpose lands does not specify such purpose as "energy sector lands". Instead, the allocation, construction and operation of a biomass plant may be performed on the lands of one of the following purposes defined in the Classifier:

  • for allocation, construction, operation and maintenance of buildings and facilities of electric energy generating enterprises and organizations;
  • for allocation, construction, operation and maintenance of buildings and facilities of distribution of electric and heat energy;
  • for the purposes specified in subsections 14.01-14.02 and for preservation and use of natural parks;

Special attention should be paid to the process of acquisition of the title to the land plot, where two situations may arise:

  • acquisition of the title to/ execution of agreement on lease of the land plot of appropriate purpose (as specified above);
  • acquisition of the title to/ execution of agreement on lease of the land plot of another purpose (e.g., agricultural lands) with further independent modification of the purpose for the required one (as specified above). 

One should take into account that the procedure of the modification of the purpose of a land plot is rather complicated and time consuming and it may be carried out only based on respective resolution of the local self government, which, naturally, does not fully guarantee that your application for modification of the land plot purpose will be sustained.

Given the above, it is advisable to acquire the title to or lease a land plot only after its purpose has been properly modified.

Construction of Bio Power Plant

Having selected the land plot and obtained the required rights to such plot, you may enter into the most complicated and the longest stage, i.e. to the plant construction process.

Taking into account current legislation of Ukraine, the whole construction stage (from the legal perspective) may be theoretically divided into the following steps: 

1) collection of input data (including terms of reference);

To prepare the construction project documentation (see also the next stage below), one should obtain the input data required for such documentation. The main components of the input data are:

  • city planning conditions and limitations;
  • terms of reference that include: Technical conditions of connection to the electric mains of the power units; Technical conditions of effluent disposal; Technical conditions of water supply; Technical conditions of  household water disposal; Technical conditions of connection to the telephone lines and the Internet; Technical conditions of energy efficiency; Technical conditions of fire safety and technotronic security. As a rule, these technical conditions may be obtained from utilities and state-owned or private companies that are responsible for or control respective engineering systems (drainage systems, water and heat supply systems, telecommunications, etc.);
  • project terms of reference outlining grounded requirements to the planning, architectural, engineering and technological solutions and properties of the city planning object, its main parameters, cost and organization of its construction, prepared considering city planning conditions and limitations and applicable technical conditions.
2) preparation of the project documentation;

Construction project documentation is prepared considering the construction documentation and input information considering the requirements of the legislation, state construction norms, standards and rules. The project documentation must undergo ecological expert evaluation resulting in extra time and costs. Moreover, ecological expert evaluation of facilities of levels IV-V of complexity entails conduct of respective public hearings.

Furthermore, project documentation of facilities of levels IV-V of complexity is subject to mandatory expert assessment for compliance with requirements to the sanitary and epidemiological welfare of the community, ecology, labor safety, energy efficiency, fire safety, technical and radiation security, durability, reliability and required term of operation.

Project documentation preparation services are provided by project organizations and normally the fees for such services are quite significant, therefore, respective costs should be planned as early as on the stage of preparation of the project estimate.

3) approval of the project documentation;
4) performance of preparatory and construction works, which, as the case may be, may include:
  • registration of the statement of commencement of preparatory works. The above statement is required to perform removal of any existing engineering networks and landscape items;
  • registration of the statement of commencement of the construction works. The above statement is required for the construction of the facilities of categories I-III of complexity, and connection of the facility to the engineering networks and facilities. Performance of the construction works or connection of the objects under construction to the engineering networks and facilities without such registration is prohibited.
  • obtaining permit to perform the construction works. The permit is required to perform the construction and assembly works at the facilities belonging to categories IV-V of complexity. Performance of the construction and assembly works at the facilities belonging to categories IV-V of complexity without such permit is treated as uncontrolled construction and may represent the basis for demolition of the erected facility based on a court award.
5) commissioning of the finished facility, which may take the form of:
  • registration of the statement of readiness of the completed facility to operation for  facilities of categories I-III of complexity; or
  • obtaining respective certificate based on the statement of readiness of the completed facility to operation for facilities of categories IV-V of complexity.

To guarantee commercial feasibility of the business activity discussed in this article, as early as on the stage of construction of the bio power plant we would recommend to take into consideration requirements established for the entities charging "green" tariff. As an example, we may point out that the legislation stipulates mark-ups to the "green" tariff in case of utilization of the Ukrainian equipment for the construction purposes:

  • if the share of the Ukrainian equipment is 30%, the mark-up will comprise 5%;
  • if the share of the Ukrainian equipment is 50%, the mark-up will comprise 10%.

The procedure for assessment of the degree of utilization of the equipment of Ukrainian origin and adding respective mark-up to the "green" tariff is approved by the National Commission for Regulation of Energy and Utilities.

Obtaining of License

According to current legislation, the activity in the area of generation of electric energy is subject to licensing. However, it is allowed to generate electric energy without license, if the indicator of the installed capacities or the volumes of supplies of the electric energy are below the thresholds specified in the Conditions and Rules of conduct of business activity in the area of generation of electric energy.

According to the Conditions and Rules of conduct of business activity in the area of generation of electric energy, the license to generation of electric energy is mandatory for the entities that:

1) own or use equipment with capacity at least 5 mW;

2) own or use equipment for generation of the electric energy from alternative sources (excluding coke gas and blast furnace gas) with installed capacity at least 10 mW, or intend to distribute the generated electric energy to the wholesale market of electric energy irrespective of the installed capacity.

Furthermore, if the operator intends to charge "green" tariff, the obtaining of the license will be obligatory.

Establishment of the "green" rate and sale of the electric energy at the "green" rate

As of today, the vast majority of the electric power stations and energy generating facilities operating in Ukraine and using the renewable energy sources were started as commercial projects. Accordingly, the main goal of such projects is to generate profits. Ukraine has all required conditions for implementation of such projects; in particular, the national legislation provides the business entities operating in the areas of generation and distribution of the electric energy using renewable energy sources with the option of charging the "green" tariffs.

The economic benefit of the "green" tariff is that the sales of the electric energy sold at the "green" tariff are much profitable than the sales applying standard rates.

The "green" tariff is approved by the National Commission for Regulation of Energy and Utilities free of charge individually for each of electric energy generator within 30 calendar days after the date of submission of the package of statutory documents.

The electric energy may be sold at "green" tariffs both via the wholesale market and based on agreements made directly with the consumers.

It is advisable to attract to the procedure on establishment of the "green" tariff qualified lawyers, since the National Commission for Regulation of Energy and Utilities may reject the application for the "green" tariff referring to a wide range of various reasons, and the delay in its approval, naturally, will have an adverse impact on the financial indicators of the project as a whole.

Conclusions

The legal support to the implementation of the project of construction and operation of the bio power plant in Ukraine is a highly tailored area in law, and by far not all law firms can boast required practical experience in this area. Such project is characterized by a great deal of surprises and extremely challenging issues, therefore, the experience of your legal advisor in charge of the project support will be critical for the financial efficiency, compliance with deadlines and ultimate success of the project.

By Taras Lytovchenko, Associate, GOLAW