The Ukrainian government’s conference rooms have been stuffier than usual lately, as policymakers and renewable energy industry representatives attempted to thrash out a compromise to reduce the financial burden left on the administration by a feed-in tariff incentive regime which drove almost 2 GW of generation capacity. The resulting retroactive cuts to payments, outlined below by Ukraine-based lawyer Svitlana Teush, have at least had input from both sides.
Draft Law No. 3658 “On the Amendments to Certain Laws of Ukraine on the Improvement of Support for the Production of Electricity from Alternative Energy Sources” (Law 3658) was submitted by the government of Ukraine and registered with the parliament.
Law 3658 has been elaborated to implement provisions of a memorandum of understanding (MoU) signed last week after lengthy negotiations between policymakers and renewable energy representatives in a bid to “restructure” feed-in tariff (FIT) payments made for clean energy generation.
There follows a summary of the key issues of Law 3658, based on the information published on Ukraine’s parliamentary website, following the negotiation process mediated by the Energy Community Secretariat.
- a) Reduction of the FIT. Law 3658 implements the reduction of the FIT through the relevant decisions of the energy regulator, with regard to the following reduction factors (decreasing coefficients), depending on the source of energy, commissioning date and installed capacity, as the case may be. It essentially replicates the values found in the version of the MoU signed by the government with RES [renewable energy sources] industry associations (based on the text available and shared by the above associations).
For all RES under the FIT commissioned on or before June 30, 2015, the FIT should be capped at (not exceed) the maximum rate of the FIT established for ground-mounted solar with an installed generation capacity of more than 10 MW, and for those commissioned before March 31, 2013, multiplied by a decreasing coefficient of 0.85. If lower than or equal to the above maximum cap, the FIT is multiplied by a coefficient of 1.
The same coefficient – one – applies to all other RES not mentioned above.
Notably, the cut-off date for the commissioning of projects which are under construction to be eligible for the FIT – one of the most intensely-debated topics – has been removed from Law 3658 and replaced with a considerably lower reduction factor for solar plants commissioned from 1 August 2020.
The above reduction of the FIT is meant to apply on a forward-looking basis, following enactment of the law. It appears a producer cannot opt out of reduction of the FIT, as had previously been suggested within the framework of discussions about a voluntary restructuring of the FIT.
- b) The term of the FIT. Law 3658 does not provide for the extension of the term of the FIT, although this option has been previously discussed for restructured Hence, the FIT will continue to apply until 31 December 2029, as contemplated by current legislation. However, it cannot be excluded that the term of the PPA might be extended in the final draft of this law, following the continued efforts of investors.
- c) Balancing responsibility. The current law provides for a gradual introduction of the balancing responsibility which should apply to projects under the FIT or the auction price from 2021; it is set at 10% in 2021 and increases by 10% annually until it reaches 100% in 2030, with tolerance margins set at 20% for wind, 10% for solar and 5% for hydro. Law 3658 accelerates the balancing responsibility for plants with a capacity of more than 1 MW as follows:
- 50% from 1 January, 2021; and
- 100% from 1 January, 2022,
subject to tolerance margins of 10% for wind and 5% for solar and other RES.
The government should, within three months of enactment of the law, submit the draft law entitling RES producers to quit the offtaker’s balancing group (in which group, RES producers under the FIT or auction price must currently participate) and to freely sell electricity and be compensated for the difference between the FIT or the auction price and the market price, but not lower than the price in the day-ahead market.
- d) Compensation for curtailment. The current law does not provide any detailed guidance as to curtailment-related procedures, including compensation for curtailment and the designated body responsible for any payment.
Law 3658 suggests employing the mechanism of the provision by RES producers of load decrease services to the TSO [transmission system operator]. The cost of such services should amount to the FIT or auction price, as the case may be, due for payment to RES producers for the volumes of under-supplied electricity following TSO commands. The relevant costs of the TSO payable to RES producers should be included in the transmission tariff. So it should be the TSO (not the off-taker, as previously discussed) who will be responsible for payment of curtailment compensation to RES producers at the FIT or auction price.
The procedure of provision of such services (including the priority order in acceptance of offers for load decrease services), as well as the methodology of calculation of electricity volumes under-supplied by RES producers following TSO commands, should be approved by the energy regulator and included in the market rules within a month of enactment of the law.
As with the current law, Law 3658 stipulates compensation for curtailment (the cost of the relevant services of RES producers) is not payable in the event of curtailment commands issued by the TSO due to power system constraints caused by force majeure.
- e) Stabilization clause. Law 3658 contemplates certain changes to the law of Ukraine “On the Regime of Foreign Investment” with respect to the state guarantee and stabilization (or “grandfathering”) clauses. It is maintained that the rights and obligations of parties to PPAs under the FIT should be governed by legislation effective as of the date of enactment of the relevant law, save for the changes in law relating to defense, national security, public order or environmental protection. The State guarantees that from 1 July 2020 until 31 December 2029, the FIT will not be changed or canceled and decreasing coefficients will not be changed or applied in a way entailing losses or damages or loss of legitimately expected revenues by undertakings which have obtained or will obtain the FIT pursuant to this new law. A fair argument can be made that, subject to certain streamlining of the wording, the state guarantee would apply to not only projects operational under the FIT, but also development projects eligible to the FIT under the pre-PPA.
It is further, expressly maintained that the state guarantee of foreign investment related to the FIT shall apply for the entire period of the FIT.
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- f) Changes to the regulatory framework on renewable energy auctions
Increased role of government
Law 3658 broadens the powers of the government regarding the auction process, with the aim of achieving greater flexibility. It is proposed to delete the schedule from the law which currently provides for biannual auctions – before April a and October 1 – and to instead let the government decide on the schedule of auctions for each subsequent year. In addition, the government will be able to establish quotas with reference to the needs of different regions, cap maximum quotas offered for auction and auction plots of land or rooftops with available grid connection specifications.
Technology-specific shares of quotas reduced
Under the current law, no less than 15% of the annual quota should be apportioned to each of (i) solar, (ii) wind and, cumulatively, (iii) other RES, while the remaining quota should be allocated among different energy sources by the government. Law 3658 reduces that minimum figure to 10%. This would allow greater discretion to the government in the allocation of the remaining quota among different sources of energy.
The government can also decide to hold technology-neutral auctions.
To promote competition and accommodate technology-neutral auctions, Law 3658 requires state support be provided only for capacity not exceeding 80% of the aggregate capacity offered by all participants in an auction (irrespective of the renewable energy source, as contemplated by the current legislation).
Auction price caps
Under the current law, the auction price cannot exceed the FIT for the relevant source of energy. Law 3658 contemplates the auction price for wind and solar not exceed €o.o9/kWh for auctions before December 31, 2024, and €0.08/kWh for procurement rounds from January 1, 2025. Hence, the price caps could become lower compared with those established under the current law.
For other types of RES, it is proposed the auction price be capped at no more than €0.12/kWh.
Rooftop solar eligible
The current law does not provide for rooftop solar to participate in auctions. The amendments proposed under Law 3658 allow the opportunity for rooftop systems and specify necessary documents for such installations to participate in auctions.
Maximum threshold to be increased for projects of affiliated persons
Draft Law No. 3658 increases the threshold for the maximum quota which can be awarded single bidders (together with affiliates having the same ultimate beneficial owner), from 25% to 35% of the total annual quota.
Timely grid connection required
Under the current law, a producer should commission a project within two years of signing a solar PPA, and three years for other RES projects. Commissioning does not include grid connection and is certified by a commissioning certificate for mechanical completion of power plants.
Law 3658 requires a project to be grid-connected within the above term to be eligible for auction support. This does not apply to projects under the FIT, for which a commissioning certificate continues to suffice as evidence of commissioning.
The MoU signed between the government and industry stakeholders states the relevant law should be adopted before August 1, 2020. It remains to be seen what amendments will be proposed by concerned stakeholders to Draft Law No. 3658, and whether any alternative draft laws will be registered – a likely scenario. It is also unclear whether any of the versions will manage to successfully pass the parliamentary energy committee and hearing in parliament. Other changes in law are also expected to implement the provisions of the MoU, including on the schedule of payments to RES producers by the off-taker, and measures to further improve the off-taker’s liquidity.
Yesterday, another draft law – No. 3657 “On the Amendments to the Electricity Market Law” – was also registered with the parliament, identifying certain measures aimed at achieving such improvements, including diversification of the market segments for selling electricity by the off-taker. This draft law, among other things, improves the procurement framework for the construction of generation capacities and implementation of demand-response management measures as may be required to ensure the operational safety of power systems, including reduction of the timeline and simplification of the procedures involved. Tenders for the development of such capacities will be launched based on the regulations adopted by the government last year. Incentives for investors in such capacities will be specified by the government in its tender announcement.
The changes amount to promising signs of a more integrated and complex approach toward more balanced and sustainable development of Ukraine’s power system and addressing the challenges currently faced.
By Svitlana Teush, Counsel, Redcliffe Partners