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Feature

Ukraine looking to renewable future


Maksym Sysoiev

Albeit from a small starting point, Ukraine could quickly become a renewable energy market to be reckoned with if certain policy uncertainties are overcome, according to Maksym Sysoiev at the law firm PARITET.

In 2010 Ukraine generated just 0.8% of its energy from renewables – mostly in the form of energy from small hydropower systems. But new feed-in tariff laws – which came into effect in April 2009 – and a series of new tax incentives, have lifted the prospects for renewable energy, and in particular solar energy. Growth figures show that Ukraine is now making up ground fast, allbeit from a slow start:

In 2011, Ukraine saw the commissioning of a 100 MW solar photovoltaic (PV) plant. And the country's solar installed capacity is forecast to double in 2012, according to the Association of Alternative Future Energy and Fuel Market Participants. Indeed the country's Government has set itself a target of installing 1 GW of solar by 2015.

Ukraine does have strong potential for solar energy, and the Ukrainian Government is aiming to tap these resources and diversify its energy mix to decrease the country's dependence on Russian natural gas and oil. To achieve this, the Government has planned a feed-in Tariff (FiT) scheme, as well as tax incentives and planned energy efficiency measures.

A green law

The new FiT was introduced in 2009 through the adoption of the Green Tariff Law (which came into effect on 22 April 2009). The Green Tariff Law introduced a guaranteed minimum FiT for electricity produced from solar – as well as other renewables – at the same time replacing a renewable incentive scheme that had been unsuccessful due to insufficient economic incentives, and legislative uncertainties: The new regime has attempted to fix these shortcomings, although the new legislation has its own issues.

The National Energy Regulatory Commission of Ukraine (NERC) has already approved 18 solar power plant projects as being eligible for the country's new FiT.

There are also a number of tax breaks for solar energy producers under the Tax Code of Ukraine, namely:

  • Exemption from import VAT and customs duties for solar energy equipment;
  • A 75% reduction in land tax for land used for solar energy power plants;
  • Limits on rental payments for land leased from state and municipal authorities;
  • An exemption from the tax duty in the form of a special mark-up on produced electricity (3% of produced electricity); and
  • An exemption from corporate profit tax on profit derived from a main activity of the company producing electricity solely from solar energy.

Framework and incentives

The FiT applies to electricity generated from any type of non-conventional energy source (including wind, solar, biomass and hydro and certain secondary energy sources), with the exception of electricity produced from coke gas and gas from blast furnaces. Hydroelectric power plants with a power capacity of more than 10 MW are also not eligible.

The Green Tariff is calculated by applying a certain coefficient (see table opposite) to the consumer retail tariff set as at 1 January 2009 (the latter being UAH584.6).

There are different coefficients used depending on the technology. NERC sets the tariff on a monthly basis to reflect the fluctuating UAH/€ exchange rate, but the tariff can never be less than the minimum tariff for the relevant technology.

The minimum Green Tariff rate protects investors from a steep drop in tariff rates should the UAH devalue against the Euro. Furthermore, the UAH/€ exchange rate applicable for setting the tariff on a monthly basis may not be less than the exchange rate as of 1 January 2009, further protecting investors.

The Green Tariff Law fixes this scheme until 2030 for plants commissioned while the law is in force. The coefficient will be reduced by 10% if plants are commissioned after 2014, by 20% if plants are commissioned after 2019 and by 30% if plants are commissioned after 2024.

The main buyer of electricity from renewables, including solar energy, is Ukraine's national wholesale electricity market operator, WEM, which is a union of suppliers and producers of electricity. It is represented by the State-owned energy company, Energorynok.

Eligibility

Generators of electricity from solar energy must be accredited by NERC to qualify for the FiT. This procedure is regulated by the Order on the Establishment, Revision and Termination of Green Tariffs for Business Entities (the Order).

Electricity producers that wish to be accredited by NERC in order to sell electricity at the FiT rates must first comply with various conditions, including:

  • Obtaining an electricity generation license;
  • Connecting to the grid;
  • The producer becoming a member of WEM;
  • The producer having agreed an electricity sales contract; and
  • Demonstrating compliance with the Ukrainian construction component.

“Made in Ukraine”

To qualify for the guaranteed minimum FiT, the Green Tariff Law prescribes that for power plants whose construction commenced after 2011 and/or commissioned in 2012, at least 15% of the power plant's raw materials, fixed assets, works and services must be “of Ukrainian origin”. For plants commissioned after 2012, the minimum Ukrainian component must be at least 30%, and for those commissioned in 2013 it must be over 50%.

In addition, for solar power plants that are commissioned after 2012, the Ukrainian component involved in producing the solar panels must be at least 30% and those commissioned after 2013 must demonstrate at least 50% Ukrainian origin.

NERC has yet to adopt a procedure that power generators can use to define the Ukrainian component used in the construction of power plants. Only a draft procedure is available, and should it be adopted, the calculation of the Ukrainian component may turn out to be an onerous process and/or disadvantage foreign investors. These criteria would also be difficult to satisfy in practice as there is currently only one large Ukrainian producer of solar PV.

Grid connection

There are several procedures for grid connection across Ukraine. The procedure varies according to the type of generation and, in some cases, the part of Ukraine in which the generation takes place. There is no official grid connection procedure for wind farms of 100 MW or less. Small wind farm generators tend to use the recommended (but not mandatory) procedures set out by the Ministry of Fuel and Energy.

For solar energy and other types of renewable energy sources, there is no official guidance available. However, electricity producers are required to clearly specify the connection procedure they intend to follow in the contract they enter into with the owner of power grids. Owners of power grids, however are often reluctant to assist.

Producers of electricity from renewable sources frequently have to build or upgrade power lines or other existing facilities themselves in order to connect to the Ukrainian grid. The Law on the Electrical Power Industry states that electricity producers must be compensated for the costs incurred when constructing or upgrading power lines and assorted facilities.

The relevant state agencies are currently working out how to implement these substantive rights. To avoid ownership disputes, NERC recommends that generators retain the ownership of these investments until the Ukrainian Government adopts its new procedure. The European Bank of Reconstruction and Development (EBRD) is also currently funding some improvements to the grid in Southern Ukraine.

Conclusion

Despite the Green Tariff Law establishing a viable support scheme for the production of electricity from solar energy, there are still important provisions needed. Several key regulations necessary for the implementation of FiT projects have not yet been adopted, such as the establishment of a uniform procedure for the connection to power grids, the compensation of expenses related to such connection, and the determination procedure for the amount of Ukrainian material, equipment, services and labour that must be used during the construction of power plants.

About the author: Maksym Sysoiev LL.M. is an Attorney-at-law, Senior Associate at PARITET law firm.

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Bioenergy  •  Other marine energy and hydropower  •  Policy, investment and markets  •  Solar electricity  •  Solar heating and cooling  •  Wind power

 

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