On 26 August 2021, the Ministry of Energy of Ukraine posted on its website a draft law introducing a feed-in-premium (FIP) support scheme for renewable projects. This new policy instrument should help resolve the liquidity issues surrounding the Guaranteed Buyer (a state-owned offtaker) and reduce reliance of renewable energy producers on the Guaranteed Buyer, which by far, is their only source of cash flow.
This legislative initiative, in principle, follows the commitments of the state under a Memorandum of Understanding (MoU) between the Ministry of Energy of Ukraine and some major renewable energy associations of Ukraine on revision of the terms of feed-in tariff (FIT) support. The MoU, signed on 10 June 2020, was the result of a lengthy mediation process within the Energy Community Secretariat's Dispute Resolution and Negotiation Centre in connection with the offtaker’s financial incapability to continue support of renewables.
While FIT support is quite popular within Europe, the Ministry of Energy of Ukraine has emphasised Germany's success as an example for Ukraine. Currently, about 78% of renewable energy facilities in Germany operate on the FIT model, and the volume of “green” electricity generation in 2020 reached 50%.
Since the draft law has been awaited for more than a year, there is a great expectation that it will be passed into law. However, the bill has yet to be submitted to parliament and go through the legislative process: approval of the parliament`s committees and two votes at parliamentary sessions before being presented to the President for a final review.
At this stage, the draft law is undergoing public discussion and we encourage everyone with valuable comments or expertise to participate. The Ministry will accept comments from any interested persons until 26 September 2021 and CMS can support you in this process.
Draft law On Amendments to Certain Legislative Acts of Ukraine on Stimulating Production of Electricity from Renewable Energy Sources on a Market Basis and related materials (in Ukrainian).
Feed-in Premium support
Under the draft law, renewable energy producers will be able to freely sell electricity on the electricity markets at market prices rather than being tied only to the Guaranteed Buyer under the PPA (power purchase agreement). As the market price would usually be lower than the guaranteed feed-in (green) tariff or the auction price, the state will top up the difference under the FIP support.
According to the Draft Law, the FIP will apply to the following categories of renewable energy producers:
- feed-in (i.e. Green) tariff producers who decided voluntarily to leave the balancing group of the Guaranteed Buyer. (The exit procedure will be included in the Market Rules).
- all renewable energy auction winners.
Such renewable energy producers will be able to sell electricity on:
- the bilateral contracts market;
- the day-ahead market;
- the intraday market; and
- the balancing market.
The Guaranteed Buyer will pay the FIP by purchasing from renewable energy producers a "service on incentivising production of energy from renewable energy sources". The model agreement on provision of such service will be approved by the Regulator, similar to the PPA.
Since the proposal is for FIP payments to be calculated as the difference between the Green Tariff or auction price and the estimated market price, the Regulator will also have to establish a detailed mechanism for determining an estimated market price. So far, it is not clear whether the price would be fixed, sliding, technology-specific, or something else.
In presenting the FIP support scheme, the Ministry of Energy referred to several European approaches in defining the market price, such as:
- hourly price of electricity at the day-ahead market;
- average sale price of electricity at the day-ahead market – for a separate type of alternative source depending on the generation profile (German model) or the average price of the day-ahead market without weighing the types of renewable energy sources (Polish model);
- average annual price of electricity (Dutch model, future German model for new facilities).
The FIP would obviously not be paid if the estimated market price for the settlement period is equal to or exceeds the amount of the "green" tariff or the auction price.
Renewable auction system
The draft law also amends legislation on renewable auctions. In particular, the auction-awarded tariff will be granted for the period of 15 years instead of the current 20 years. While this change is unfavourable to renewable energy producers, currently none will be affected by it.
The draft law also simplifies the leasing of state or municipal property (such as roofs or facades of buildings and other capital constructions) for renewable auction winners by exempting them from property auctions.
“Green” tariff projects
As already noted, all Green Tariff projects will be able to switch to the FIP or remain under current FIT support. At the same time, FIT support will be available for new commercial-scale projects only until 31 December 2022, which include:
- wind projects with capacity up to 5 MW;
- solar projects with capacity up to 1 MW;
- other renewable technologies, irrespective of their capacity; and
- wind and solar projects of any capacity that must be completed on or before this deadline in accordance with the terms of their effective pre-PPAs.
Hence, according to the draft law, the Green Tariff support will be available only to electricity consumers. This support will, of course, also remain in effect for those projects, which have already received FIT support or were commissioned before 31 December 2022. After this cut-off date renewable energy producers will be able to obtain state support only through renewable auctions.
Lastly, by leaving the balancing group of the Guaranteed Buyer, projects that switched to the FIP will be much more exposed to imbalances and will either need to join other (as of yet non-existing) balancing groups or find a different solution to manage their balancing responsibility.
At the same time, the draft law suggests that the transmission system operator (TSO) will not curtail FIP-based projects. Green Tariff producers remaining within the Guaranteed Buyer`s balancing group will be subject to curtailment of the TSO and will receive compensation for such curtailments as usual, provided they have entered into a curtailment compensation agreement with the TSO.
For more information on this Law and Ukraine's energy sector, contact your CMS client partner or local CMS experts: Vitaliy Radchenko, Maria Orlyk.
Authors:
Vitaliy Radchenko, Partner, vitaliy.radchenko@cms-cmno.com
Volodymyr Kolvakh, Senior Associate, volodymyr.kolvakh@cms-cmno.com
Kateryna Korneliuk, Associate, kateryna.korneliuk@cms-cmno.com
Maria Orlyk, Partner, maria.orlyk@cms-rrh.com
Yuliia Pidlisna, Senior Associate, yuliia.pidlisna@cms-rrh.com
Taras Chernikov, Associate, taras.chernikov@cms-rrh.com
