Kinstellar Energy Digest: Ukraine, June 2018

01/ 06/ 2018

RENEWABLE ENERGY: Competitive draft laws set out the basics for future auction schemes On 7 June 2018, the draft law “On Ensuring Competitive Terms of Production of Electricity from Renewable Sources” No. 8449 (“Draft Law 8449”) was registered with Ukraine’s parliament. As of 4 July 2018, seven alternative draft laws (Nos. 8449-1 – 8449-7) have also been registered with parliament (“Alternative Drafts”). Five of the seven Alternative Drafts differ only in part and incorporate a slightly modified auction scheme than outlined in Draft Law 8449. All above-mentioned draft laws suggest changes beyond the scope of competitive procedures, such as the incorporation of sliding-scale feed-in premiums, changes to the feed-in tariffs for solar and wind energy and the promotion of small-scale renewable energy generation. Auctions: general outline under Draft Law 8449 Draft Law 8449 creates a support scheme for renewable energy (“RE”) by introducing the obligation to bid for state support for projects exceeding 10 MW for solar energy and 20 MW for wind energy starting from 1 July 2019. This obligation does not cover projects commissioned prior to 1 July 2019, or where a power purchase agreement (“PPA”) was entered into prior to this date. RE generation capacity to be sold via e-auction will be determined by the Ukrainian government on an annual basis and for a five-year term, with specification of the type of generation, territory and available capacity. The government, however, is supposed to take into consideration Ukraine’s international obligations in relation to the increase of the share of RE in the country’s energy mix, its energy strategy and the development plan of Ukrenergo, the national transmission system operator. The auctions will be held semi-annually until 31 December 2029, not later than 1 May and 1 October each year. Each lot will consist of up to 1 MW of capacity, and the eligible participant should ensure an irrevocable bank guarantee of USD 50,000 per 1 MW (or alternatively, under draft law No. 8449-3, EUR 5,000 per 1 MW, which would increase to EUR 10,000 following a successful bid). The auction will start with a price per 1 kWh determined by the government. Within equal time intervals, the price will rise by the minimum bid, until it is accepted by a participant or hits the ceiling price, i.e., the current feed-in tariff (“FIT”) for a particular type of generation. The government will determine the buyer’s premium and terms of the auctions. The design of the auction promotes multiple winners; the amount of capacity allocated to one participant and its affiliated persons cannot exceed one-fourth of all capacity sold via auction. After 1 January 2030: extended obligation to purchase electricity for off-takers Perhaps the most popular innovation of the auction scheme is that long-term state support may go far beyond 1 January 2030, the expiry date of the FIT support scheme. Under Draft Law 8449, state support for a successful bidder will last for 20 years (or 15 years under alternative draft law No. 8449-3) commencing from the date of the submission of the document certifying commissioning of the RE plant. FITs for wind and solar will be decreased Ukraine is currently known for having reportedly the highest FITs in Europe; the decrease of FITs is the most sensitive change envisioned by Draft Law 8449. Two of the seven Alternative Drafts deal primarily with the reinstatement of current FITs. The remaining five and Draft Law 8449 provide for a decrease in FITs by 20%-50% for solar projects and 20%-30% for wind. From FIT to FIP: moving to sliding-scale feed-in premiums Under the new auction model, the RE producer does not exactly obtain a feed-in tariff. Instead, the winner of the auction will conclude two contracts based on model agreements yet to be developed by the Regulator: a (pre)-PPA with a successful bidder and a contract-for-difference. The Guaranteed Buyer, as a party to the contracts, will purchase all RE based on the prices of the day-ahead market, and on the fifth day of the month following the billing month, the Guaranteed Buyer will compensate the difference between the strike price (the price with which the successful bidder was awarded) and the reference price (the market price for electricity). In other jurisdictions the compensation model similar to the one envisioned by Draft Law 8449 is referred as a sliding-scale feed-in premium (FIP). If Draft Law 8449 is approved in its current wording, Ukraine’s support scheme will be a mix of FITs mostly for earlier and small-scale projects and FIPs for state support distributed via auctions. Local component bonus can provide an additional 15% to FITs and strike prices Currently, the use of local equipment that exceeds the thresholds of 30% and 50%, allows the RE producer to claim a local component bonus (5% and 10% respectively) on top of the FIT. Under Draft Law 8449, the local component bonus allows a 5%-15% mark-up for projects that use 30%-70% of local equipment (or maximum bonus amounting to 20%, under alternative draft law No. 8449-1). Preventing “dormant” projects with stringent timelines A successful bidder is obliged to commission the RE plant within three years from the day of signing the required contracts — the (pre)-PPA and the contract-for-difference. The three-year term can be prolonged for an additional year subject to a renewed bank guarantee that is doubled in value. Failure to meet the deadline results in losing the right for state support. Regarding the timeline of RE projects employing FIT, the planned abolishment of the procedure for public hearings on the granting of FIT envisaged by Draft Law 8449 will decrease the project duration and allow the FIT to be obtained faster. Attracting investors to small-scale generation Aside from households capable of benefitting from a special FIT for wind and solar generation of under 30 kW, Draft Law 8449 provides that legal entities and individual entrepreneurs may use the benefits of support for small-scale generation. The limit for small-scale generation eligible for the FIT is raised to 500 kW. Dates and pilot project The Alternative Drafts treat differently questions on when to start the competitive auction procedure. The new support scheme is scheduled to start on 1 January 2019 (draft law No. 8449-5), 1 July 2019 (Draft Law 8449 and draft law No. 8449-6), or from 1 January 2025 (draft laws Nos. 8449-1, 8449-2). The pilot project for the Chernobyl area is scheduled for the second half of 2019, with a diminishing coefficient of 0.7 to the effective FIT. NEW FIELDS: four hydrocarbons licences to be sold on 25 October 2018 Ukraine’s State Service of Geology and Mineral Resources (Derzhgeonadra) has invited interested persons to apply for special permits for subsoil use (licences) for four hydrocarbons fields — Lypovetska, Chernytska and Yavorivska in western Ukraine, and the Surmachivska field located in the Sumy region in the north-east of the country. The deadline for submitting the required documentation is 27 August 2018. The licences will be granted for five years of exploration, pilot production and, in the case of the Surmachivska and Yavorivska fields, for an additional fifteen years of production. According to the Head of Derzhgeonadra, a further 44 fields with an estimated 1 trillion cubic metres of hydrocarbons will be offered soon. OIL AND GAS: changes to auction procedures At the beginning of June 2018, a government resolution amending subsoil auction regulations was published and partially came into effect (Resolution No. 333 dated 25 April 2018 on amending the procedures approved by the Resolutions of the Cabinet of Ministers of Ukraine dated 30 May 2011 No. 594 and 615). Under the above-mentioned resolution, the key changes include: for oil and gas fields: abolishment of the approbation procedure used to cut corners and avoid the necessity to obtain a special permit (licence) via competitive procedures, effective from 1 January 2019; the ability to enter purchase and sale agreements with a successful bidder that would take effect upon completion of the environmental impact assessment that allows a planned activity; clearly stating that the granting of offshore licences is not subject to preliminary approval by regional councils; providing for a tacit consent rule for certain approvals and further clarifying payment procedures. By adopting this decree, the government has addressed the often-mentioned deficiencies in granting licences for oil and gas-related activities that have previously hindered planned increases in gas production. _________ For further information please contact: Olena Kuchynska, Partner, at [email protected], Viktoriia Pysmenna, Associate, at [email protected], Mariana Antonovych, Associate, at [email protected], or visit our website.

RENEWABLE ENERGY: Competitive draft laws set out the basics for future auction schemes

On 7 June 2018, the draft law “On Ensuring Competitive Terms of Production of Electricity from Renewable Sources” No. 8449 (“Draft Law 8449”) was registered with Ukraine’s parliament. As of 4 July 2018, seven alternative draft laws (Nos. 8449-1 – 8449-7) have also been registered with parliament (“Alternative Drafts”). Five of the seven Alternative Drafts differ only in part and incorporate a slightly modified auction scheme than outlined in Draft Law 8449.

All above-mentioned draft laws suggest changes beyond the scope of competitive procedures, such as the incorporation of sliding-scale feed-in premiums, changes to the feed-in tariffs for solar and wind energy and the promotion of small-scale renewable energy generation.

Auctions: general outline under Draft Law 8449

Draft Law 8449 creates a support scheme for renewable energy (“RE”) by introducing the obligation to bid for state support for projects exceeding 10 MW for solar energy and 20 MW for wind energy starting from 1 July 2019. This obligation does not cover projects commissioned prior to 1 July 2019, or where a power purchase agreement (“PPA”) was entered into prior to this date.

RE generation capacity to be sold via e-auction will be determined by the Ukrainian government on an annual basis and for a five-year term, with specification of the type of generation, territory and available capacity. The government, however, is supposed to take into consideration Ukraine’s international obligations in relation to the increase of the share of RE in the country’s energy mix, its energy strategy and the development plan of Ukrenergo, the national transmission system operator.

The auctions will be held semi-annually until 31 December 2029, not later than 1 May and 1 October each year. Each lot will consist of up to 1 MW of capacity, and the eligible participant should ensure an irrevocable bank guarantee of USD 50,000 per 1 MW (or alternatively, under draft law No. 8449-3, EUR 5,000 per 1 MW, which would increase to EUR 10,000 following a successful bid).

The auction will start with a price per 1 kWh determined by the government. Within equal time intervals, the price will rise by the minimum bid, until it is accepted by a participant or hits the ceiling price, i.e., the current feed-in tariff (“FIT”) for a particular type of generation. The government will determine the buyer’s premium and terms of the auctions.

The design of the auction promotes multiple winners; the amount of capacity allocated to one participant and its affiliated persons cannot exceed one-fourth of all capacity sold via auction.

After 1 January 2030: extended obligation to purchase electricity for off-takers

Perhaps the most popular innovation of the auction scheme is that long-term state support may go far beyond 1 January 2030, the expiry date of the FIT support scheme.

Under Draft Law 8449, state support for a successful bidder will last for 20 years (or 15 years under alternative draft law No. 8449-3) commencing from the date of the submission of the document certifying commissioning of the RE plant.

FITs for wind and solar will be decreased

Ukraine is currently known for having reportedly the highest FITs in Europe; the decrease of FITs is the most sensitive change envisioned by Draft Law 8449. Two of the seven Alternative Drafts deal primarily with the reinstatement of current FITs. The remaining five and Draft Law 8449 provide for a decrease in FITs by 20%-50% for solar projects and 20%-30% for wind.

From FIT to FIP: moving to sliding-scale feed-in premiums

Under the new auction model, the RE producer does not exactly obtain a feed-in tariff. Instead, the winner of the auction will conclude two contracts based on model agreements yet to be developed by the Regulator: a (pre)-PPA with a successful bidder and a contract-for-difference.

The Guaranteed Buyer, as a party to the contracts, will purchase all RE based on the prices of the day-ahead market, and on the fifth day of the month following the billing month, the Guaranteed Buyer will compensate the difference between the strike price (the price with which the successful bidder was awarded) and the reference price (the market price for electricity).

In other jurisdictions the compensation model similar to the one envisioned by Draft Law 8449 is referred as a sliding-scale feed-in premium (FIP). If Draft Law 8449 is approved in its current wording, Ukraine’s support scheme will be a mix of FITs mostly for earlier and small-scale projects and FIPs for state support distributed via auctions.

Local component bonus can provide an additional 15% to FITs and strike prices

Currently, the use of local equipment that exceeds the thresholds of 30% and 50%, allows the RE producer to claim a local component bonus (5% and 10% respectively) on top of the FIT. Under Draft Law 8449, the local component bonus allows a 5%-15% mark-up for projects that use 30%-70% of local equipment (or maximum bonus amounting to 20%, under alternative draft law No. 8449-1).

Preventing “dormant” projects with stringent timelines

A successful bidder is obliged to commission the RE plant within three years from the day of signing the required contracts — the (pre)-PPA and the contract-for-difference. The three-year term can be prolonged for an additional year subject to a renewed bank guarantee that is doubled in value. Failure to meet the deadline results in losing the right for state support.

Regarding the timeline of RE projects employing FIT, the planned abolishment of the procedure for public hearings on the granting of FIT envisaged by Draft Law 8449 will decrease the project duration and allow the FIT to be obtained faster.

Attracting investors to small-scale generation

Aside from households capable of benefitting from a special FIT for wind and solar generation of under 30 kW, Draft Law 8449 provides that legal entities and individual entrepreneurs may use the benefits of support for small-scale generation.

The limit for small-scale generation eligible for the FIT is raised to 500 kW.

Dates and pilot project

The Alternative Drafts treat differently questions on when to start the competitive auction procedure. The new support scheme is scheduled to start on 1 January 2019 (draft law No. 8449-5), 1 July 2019 (Draft Law 8449 and draft law No. 8449-6), or from 1 January 2025 (draft laws Nos. 8449-1, 8449-2).

The pilot project for the Chernobyl area is scheduled for the second half of 2019, with a diminishing coefficient of 0.7 to the effective FIT.

NEW FIELDS: four hydrocarbons licences to be sold on 25 October 2018

Ukraine’s State Service of Geology and Mineral Resources (Derzhgeonadra) has invited interested persons to apply for special permits for subsoil use (licences) for four hydrocarbons fields — Lypovetska, Chernytska and Yavorivska in western Ukraine, and the Surmachivska field located in the Sumy region in the north-east of the country.

The deadline for submitting the required documentation is 27 August 2018.

The licences will be granted for five years of exploration, pilot production and, in the case of the Surmachivska and Yavorivska fields, for an additional fifteen years of production.

According to the Head of Derzhgeonadra, a further 44 fields with an estimated 1 trillion cubic metres of hydrocarbons will be offered soon.

OIL AND GAS: changes to auction procedures

At the beginning of June 2018, a government resolution amending subsoil auction regulations was published and partially came into effect (Resolution No. 333 dated 25 April 2018 on amending the procedures approved by the Resolutions of the Cabinet of Ministers of Ukraine dated 30 May 2011 No. 594 and 615).

Under the above-mentioned resolution, the key changes include:

for oil and gas fields: abolishment of the approbation procedure used to cut corners and avoid the necessity to obtain a special permit (licence) via competitive procedures, effective from 1 January 2019;
the ability to enter purchase and sale agreements with a successful bidder that would take effect upon completion of the environmental impact assessment that allows a planned activity;
clearly stating that the granting of offshore licences is not subject to preliminary approval by regional councils;
providing for a tacit consent rule for certain approvals and further clarifying payment procedures.

By adopting this decree, the government has addressed the often-mentioned deficiencies in granting licences for oil and gas-related activities that have previously hindered planned increases in gas production.

_________

For further information please contact:

Olena Kuchynska, Partner, at [email protected],

Viktoriia Pysmenna, Associate, at [email protected],

Mariana Antonovych, Associate, at [email protected],

or visit our website.