Recent developments in the Ukrainian energy sector open up new opportunities for strategic international investors. First is “green” auctions – starting 2020, new projects in power generation for renewable sources will develop under the price formed through an open auction system. The new law on auctions adopted in 2019 will allow investors to make long-term plans in the sector and attract project financing. Second is the launch of the open electricity market on July 1, 2019.
“Green” auctions
Ukrainian renewables sector has been booming. Over the past 5 years it has attracted over € 2,5 billion of investment. In the first half of 2019, the volume of installed capacities exceeded that installed during the whole 2018. The momentum maintained on the market finds reflection in INTEGRITES portfolio – the firm has supported around 80% of the wind and 40% of the solar power projects of international developers in Ukraine. Over the last year we helped investors to close over € 1 billion project financing. The demand is still growing: business requires complex legal advice on a number of matters – land, construction, feed-in tariff, permits, connection to the grid, tax, banking and finance.
Investors demonstrate increasing appetite mainly because of two reasons.
First is due to the fixed feed-in tariff which still remains one of the highest in Europe. Starting from 2009 when we supported to support our first clients in renewables industry, the quite lucrative feed-in tariff attracted many international players. However, in 2010 they left because the market turned into Ukrainian oligarchs’ monopoly. After the Revolution of Dignity and in particular after 2015 when the Parliament of Ukraine abolished the so called “local content” – the regulation requiring developers to use equipment made in Ukraine for development of renewable energy facilities, the general framework for developing renewables was again in place. This move together with the new law on the electricity market played an essential role for international players to start coming back in 2017.
The second reason is the new law on the auctions passed in April 2019. The first auctions shall be held from 2020. There is a transition period for companies that will sign a Pre-Purchase Agreement with a Guaranteed Buyer by the end of 2019. Their projects will be eligible for the feed-in tariff, provided that the capacity is put into operation within the next 2-3 years.
In 2020, new projects will have to use the auctions mechanism. Then we will see the real price for 1 kW of electricity produced from renewable sources, being formed by the market. As a result of auctions, the tariff that the producer would offer will be fixed for 20 years. It will ensure predictability that every investor is seeking while looking into long-term opportunities in renewables.
Additionally, the auctions will be maintained by the public procurement e-system Prozorro that will go in line with investors’ requirements to the transparency of the bid process.
Open electricity market
Along with renewables, investors are likely to start exploring opportunities in the classic power generation, namely power distribution systems and regional energy producers (oblenergos). Earlier, despite possible interest in the sector, international players used to hold back due to the oftentimes non-transparent transmission tariff design.
Now it might be the time to reconsider options, especially in light of the open electricity market which came into force in July 2019. Open competition-based market will serve as a key incentive for foreign investors (This was the case with the oil&gas upstream industry in Ukraine where earlier there had been only one supplier and now there are tens of traders. The online upstream concession rounds held by the Government in 2019 became a game-changer for the industry bringing 7 large international players into the Ukrainian upstream).
The next step will be integration of Ukraine’s electric power grid with that of the EU. It will ensure more accessible electricity prices for consumers and enable further market mechanisms that form investors’ positive expectations.
By Oleksiy Feliv, Managing Partner Integrites