Glib Bondar, Partner, AVELLUM

Dmytro Symbiryov, Associate, AVELLUM

Ukraine has huge potential and capacity for growth in renewable energy sector. In view of the Government’s efforts to attract foreign capital flow into the economy, Ukraine continues to support the “green” energy sector.

Despite a number of positive steps and regulatory attempts to remove key obstacles for implementation of the renewables projects in summer of 2015, investors remain quite cautious in their assessments and forecasts of investment potential of the sector. One of the main reasons for that is that the “rules of the game” in the energy sector are not yet fully set in stone and, thus, lack certainty.

Below, we briefly outline some key regulatory developments on the market in 2017. These changes were subject to intense discussions among the market players and will clearly have a substantial impact on the development of Ukrainian renewable energy sector.

“Green” tariff reduction for solar power plants

In early 2017, Ukraine reduced “green” tariff index for electricity that was produced by greenfield solar power plants with installed capacity over 10 MW commissioned up to 30 June 2015.

Although the rationale behind this was to decrease an unreasonably high tariff set for certain large solar power plants, the measure might have rather negative implications for the investment climate of Ukraine in general. In particular, the tariff cut might be viewed as a violation of Ukraine’s “green” tariff obligations and existing guarantees to apply fair and equal treatment to foreign investors. Those guarantees are provided for by the Ukrainian national legislation, as well as by the Energy Charter Treaty ratified by the Ukrainian state.

New regulatory framework for electricity market

A very long awaited draft law on the electricity market was adopted by the Ukrainian Parliament in April 2017 and is due to be signed by the President of Ukraine. The draft law provides for a new model of liberalised electricity market. The newly established electricity market will be in compliance with the requirements of the relevant Directives and Regulations that constitute the European Union’s Third Energy Package.

With respect to renewables, the draft law provides for the following key novelties:

1. New possibility for investors

The draft law allows investors to enter into electricity sale agreement with the guaranteed buyer (a state enterprise) prior to construction of the power plant and obtaining a “green” tariff.

To use such possibility, the investor must provide a guaranteed buyer with (1) title document for the land plot designated for the construction of the power plant, (2) copy of the registered declaration or permit on commencement of construction works, and (3) copy of the executed agreement on connection to the grid.

2. Financial liability of renewable energy producers

Those producers of renewable energy that are selling electricity at “green” tariff and are also members of balancing groups will be subject to financial liability for hourly imbalances (deviation from established value of electricity supply) on “day ahead” market.

Such imbalances must be settled by the guaranteed buyer. The costs of such buyer are then subject to reimbursement by renewable energy producers under the rates provided for in the draft law.

Since the draft law only establishes a general framework of Ukrainian electricity market, its effective implementation will depend on the adoption of numerous secondary legislation.

Promotion of heat energy production from alternative energy sources

In April 2017, Ukraine made yet another important step to promote the use of alternative energy sources. In particular, the new tariff for production of heat from alternative energy sources for the needs of population and organisations financed by the state and municipal budgets was introduced. It is set at the level of 90% of the existing tariff for heat that was produced from natural gas. Hopefully, this move will contribute to the decrease of the dependency on expensive imported natural gas in favour of alternative fuels.

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The recent steps taken by the Ukrainian authorities show that there is a strong intention to improve the regulation of the Ukrainian renewable energy sector in compliance with the EU standards. We hope that Ukraine will continue pursuing this route and expect that some of the recent regulatory steps will substantially increase the investment potential of the sector.