This overview provides a brief introduction to the legal and regulatory framework for investment opportunities in green energy projects in Ukraine. In particular, we focus on the rules for operation of green energy projects in Ukraine and the measures aimed at stimulating the operation and development of green energy in Ukraine.
The overview outlines the existing rules, requirements and incentives available for developing green energy projects in Ukraine as well as those soon to become effective and of which an investor should be aware when planning a business strategy in this high-growth sector.
Application of Green (Feed-In) Tariff in Ukraine
To stimulate the operation and development of renewable energy sources in Ukraine, a "green" tariff, or special feed-in tariff as this may be known in other jurisdictions, was introduced in 2009. The feed-in tariff for green projects in Ukraine is one of the highest in the world, which makes investment into this sector very attractive.
On 1 January 2017, the capacity of units generating electricity from renewable energy sources (the RES) in Ukraine and applying the green tariff was 1,118 MW.
The following types of RES are eligible for the green tariff:
- Biomass (originating from wastes, as well as remains of agriculture and forestry sectors);
- Micro-/mini-/small hydroelectric power plants (i.e., having a generating capacity not exceeding 10 MW); and
- Geothermal energy.
Green tariffs apply to:
(i) legal entities generating energy from all types of eligible RES (the RES Producers); and
(ii) private households generating wind and solar energy (the PH).
Both new construction projects and existing renewable energy objects are eligible for green tariffs.
The National Energy and Utilities Regulatory Commission of Ukraine (the NEURC), the regulatory authority in Ukraine, establishes green tariffs separately for each RES Producer, for each energy unit and for each type of RES, as well as a single green tariff for all PH generating wind energy and a single green tariff for all PH generating solar energy.
Green tariffs are established until 1 January 2030. The green tariff amount is defined in each case by multiplying the retail tariff for consumers of the second class of voltage as of January 2009 (UAH 0.5846) by the green tariff coefficient. The amount of the green tariff coefficient varies depending on the type of RES, the commission date of the electricity generation unit and the particular characteristics of the unit (i.e., its power capacity). At the same time, the green tariff amount cannot be below a guaranteed "minimum floor" set by the NEURC on a quarterly basis by exchanging the green tariff calculated as of 1 January 2009 (using the average exchange rate of the National Bank of Ukraine for the last 30 days) into euros.
The RES producer willing to benefit from the green tariff should apply to the NEURC providing the documents confirming its eligibility for the green tariff. The NEURC considers the application within 30 calendar days from the date of submission of the required documents and takes a decision on establishing the green tariff for the respective RES producer.
Local Equipment Use
To benefit from the green tariff, the RES Producers are no longer required to use a certain amount of raw materials, equipment, works and services of Ukrainian origin. The use of equipment of Ukrainian origin by RES Producers, however, is stimulated by the premium added to the green tariff, provided the respective RES units are commissioned between 1 July 2015 and 31 December 2024.
The Ukrainian origin of equipment shall be confirmed by the appropriate certificate issued by the Ukrainian Chamber of Commerce. If equipment of Ukrainian origin is used at the level of at least 30%, the premium added to the green tariff will be 5%. If equipment of Ukrainian origin is used at the level of at least 50%, the premium will be 10%. The level of use of equipment of Ukrainian origin at the RES units is defined as the sum of specific percentages of respective items of equipment. The list of equipment for each type of RES that qualifies for the green tariff premium and its specific percentages are prescribed by law, i.e., for blades and towers such indicator is established at the rate of 30%; and at 20% for gondolas and main frames. Thus, by using blades of Ukrainian origin the RES Producer can expect a premium added to the green tariff of 5%, as the specific percentage for blades is 30%.
To calculate the level of use of equipment of Ukrainian origin, the RES Producer should apply to the NEURC requesting it to confirm the calculated amount of the equipment of Ukrainian origin with the required amount for the relevant RES object. The NEURC considers the application within 30 calendar days from the date of submission of the required documents and takes a decision on adding a premium to the green tariff established for such RES Producer.
Guarantees Provided to RES producers
The state provides RES producers with certain guarantees if they do not manage to sell the electricity produced from RES directly to customers or to the electricity supply companies:
- the Wholesale Electricity Market Operator is obliged to purchase the electricity produced from RES at the green tariff established for the relevant RES Producer; and
- the Wholesale Electricity Market Operator is obliged to pay the full price for such electricity produced from RES when due and in money.
The electricity suppliers will be obliged to buy at the green tariff the electricity produced by the PH using solar panels with a capacity of 10 KW or less in the amount exceeding the monthly consumption of electricity by the PH itself.
New Rules of the Game
To stimulate the on-going reforms of the electricity market, in April 2017 Verkhovna Rada of Ukraine adopted the Law of Ukraine "On the Electricity Market" (the Law). The Law will become effective once signed by the President of Ukraine and officially published.
The Law envisages that the RES Producers are entitled to sell the electricity generated from the RES under the bilateral agreements either directly on the electricity market (directly to customers or to electricity supply companies) 4 or to a guaranteed purchaser to be specifically designated by the Government of Ukraine. The guaranteed purchaser is obliged to purchase the electricity from the RES Producers who participate in a specially created balancing group at the green tariff established for such RES Producer plus the premium added to the green tariff as the case might be. The guaranteed purchaser then resells the electricity generated from the RES on the day-ahead and intraday markets.
The RES Producers can sign an agreement with the guaranteed purchaser even before the RES unit has been commissioned at the presence of land title documents for the RES project, a construction permit (or an equivalent document) and a signed grid connection agreement with the system operator. If the RES unit is not commissioned within three years after obtaining a respective construction permit, the agreement with the guaranteed purchaser is deemed terminated.
The guaranteed purchaser is entitled to compensation for the difference between the price paid to the RES Producers and the price of electricity resold on the day-ahead and intraday markets as payment for its services for the increase of the share of electricity generated from the RES. The amount of such compensation is to be approved by the NEURC. The compensation to the guaranteed purchaser shall be made by the nuclear power plants until 1 July 2020 and, afterwards, by transmission system operator (currently the National JSC Ukrenergo) until 1 January 2030.
Starting from 2020, the industrial plants generating solar, wind and hydro electricity and applying the green tariff must compensate the guaranteed purchaser up to 100% of such difference provided that:
(i) the respective RES units are commissioned after the new law comes into effect; and
(ii) the hourly imbalances of the RES Producers (the difference between the actual and scheduled production) exceed 10% for wind energy units or 5% for solar energy units. No imbalances are tolerable for hydroelectric energy units.
The part of compensation to the guaranteed purchaser covered by the RES Producers will be increasing by 10% annually reaching 100% in 2030. The other rules for the application of the green tariff, including the guarantees applicable to RES producers, as mentioned herein, remain the same. Please note that even after the Law becomes effective, the new electricity market segments will become fully operational in Ukraine no earlier than 1 July 2019.
VAT/Customs Duties Exemption
Importation of the following equipment to Ukraine is exempted from Ukrainian customs duties and VAT:
- equipment and materials that will be used for the production of electricity from RES;
- raw materials, equipment and components that will be used in the production of electricity from RES.
Temporarily until 1 January 2019 the following operations will not be subject to VAT:
- supply of RES equipment and facilities on the territory of Ukraine;
- import of RES equipment and facilities to Ukraine that will be used for the reconstruction of existing and construction of new facilities that would produce biofuels as well as for production and reconstruction of technical and transportation means for biofuel consumption provided such products are not produced in Ukraine and there are no similar products, equipment or facilities in Ukraine.
The importation of electricity generated by RES facilities is not subject to excise tax.
With numerous green energy projects now launched and operating in Ukraine, there are many opportunities open for high-growth investment into the green energy sector of Ukraine with the tariff guaranteed until 2030. The current legal and regulatory framework provides investors with sufficient incentives and mechanisms to ensure successful implementation and development of a green energy project in Ukraine.