New Opportunities for High-Growth Investment
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 recently adopted changes in 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.
By way of background, this brief report 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 must 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.
In 2012, more than 90 companies generating electricity from renewable energy sources (“RES”) in Ukraine were already applying the green tariff.
The National Energy Regulatory Commission of Ukraine (the “NERC”), the regulatory authority in Ukraine, establishes green tariffs for each company that generates electricity from RES and for each type of RES.
The following types of RES are eligible for the green tariff:
Small hydroelectric power plants (i.e., having a generating capacity not exceeding 10 MW).
2 Green Energy in Ukraine: New Opportunities for High-Growth Investment
Green tariffs are established until 1 January 2030 and are reviewed by the NERC on a monthly basis with a guaranteed “minimum floor” set in EUR.
Green tariffs are applied to new construction projects as well as existing renewable energy plants.
Below is a table of the fixed minimum green tariffs depending on the type of RES.
Table – Green Tariffs in Ukraine
Types of RES
Green Tariff, EUR/MWh (exclusive of VAT)
Electricity produced from Wind
Generating units with installed capacity below 600 kW (inclusive)
Generating units with installed capacity above 600 kW but below 2000 kW (inclusive)
Generating units with installed capacity above 2 MW
Electricity produced from Solar sources
Ground-mounted generating units
Rooftop units with installed capacity above 100 kW
Rooftop units with installed capacity below 100 kW (inclusive) and units installed on the front of buildings (irrespective of generating capacity)
Electricity produced by small hydroelectric power plants
Green tariffs will be decreased for RES units commissioned or substantially modernized in 2014, 2019 and 2024, by 10%, 20% and 30%, respectively, from the current rates specified above.
New Rules of the Game
Starting from 1 April 2013, new rules for the application of the green “feed-in” tariff will apply to RES producers:
- biogas-based generating facilities commissioned from 1 April 2013 will be eligible for the green tariff;
3 Green Energy in Ukraine: New Opportunities for High-Growth Investment
- generating facilities based on the components of solid waste that are bio-degraded will be eligible for the green tariff;
- green tariffs for hydroelectric based generating facilities will be differentiated depending on generating capacity and increased;
- green tariffs for solar-based generating facilities commissioned from 1 April 2013 will substantially decrease;
- on their licensed territory electricity suppliers will be obliged to buy at the green tariff the electricity produced by private households using solar panels with a capacity of 10 KW or less the volume exceeding the monthly consumption of electricity by such households. Private households generating electricity using solar panels with a capacity of 10 KW or less will not require a license for generation of electricity;
- green tariffs will apply for separate units of a generating facility.
Local Content Requirement
To benefit from the green tariff, companies generating electricity from RES are required to meet an additional eligibility requirement relating to “local content”. The RES producers must ensure that for RES generating units the construction of which commenced after 1 January 2012 the local content requirement (i.e., the aggregate amount of raw materials, equipment, works and services of Ukrainian origin) should be not less than:
for RES generating units commissioned prior to 1 January 2013: 15%;
for RES generating units commissioned between 1 January 2013 and 1 January 2014: 30%; and
for RES generating units commissioned after 1 January 2014: 50%.
New Local Content Requirements
Starting from 1 July 2013, RES producers will need to observe the fixed proportions of local content for individual components. Such fixed proportions are established for wind, solar, biomass and biogas generating facilities. For example, for wind-based electricity producers the fixed proportion of local content in the production of blades should constitute 15%, for construction-related works it will be 20%.
Wind, solar and biomass-based electricity producers must ensure that, in relation to the relevant RES generating units the construction of which commenced after 1 January 2012, the local content requirement (i.e., the aggregate amount of raw materials, equipment, works and services of Ukrainian origin) should be not less than:
for RES generating units commissioned after 1 July 2013: 30%; and
for RES generating units commissioned after 1 July 2014: 50%.
Biogas-based electricity producers must ensure that, in relation to RES generating unit the construction of which commenced after 1 January 2012, the local content should be not less than:
for RES generating units commissioned after 1 January 2014: 30%; and
4 Green Energy in Ukraine: New Opportunities for High-Growth Investment
for RES generating units commissioned after 1 January 2015: 50%.
The local content requirements will not apply to the solar panels used by households and to hydropower facilities.
An additional local content requirement that is now in place for solar modules to ensure 30% of local content for generating units commissioned after 1 January 2013, and 50% of local content for units commissioned after 1 January 2014, will no longer be applicable.
Currently, the local content is calculated based on two existing procedures for calculation of the local content (the “LC Procedure”). The LC Procedure which was approved by NERC on 15 June 2012 and became effective on 19 November applies to all licensed RES producers and co-generation producers that intend to sell electricity at “green” tariff and that commenced construction of RES projects after 1 January 2012 evidenced by the construction permit or declaration of commencement of construction (the “LC Procedure 2012”).
To calculate the local content share of an RES project under LC Procedure 2012 an applicant should approach an expert organization once the construction of the RES project is complete. The Ministry of Regional Development, Construction and Housing of Ukraine (the “Ministry”) established criteria which expert organizations should satisfy to be able to calculate the local content share of an RES project. The list of such expert organizations is provided on the web-site of the Ministry.
The conclusion given by the expert organization would serve as a basis for the applicant to apply to NERC for approval of the green tariff for the RES project.
The LC Procedure which was approved by NERC on 27 July 2013 and became effective on 9 August 2013 applies to all licensed RES producers and co-generation producers that intend to sell electricity at “green” tariff and that commenced construction of RES projects after 1 July 2012 and were commissioned after 1 July 2013 (the “LC Procedure 2013”).
As under the LC Procedure 2012, the commencement of construction of RES projects needs to be evidenced by the construction permit or declaration of commencement of construction. To confirm the commissioning of the RES object, the applicant should provide the certificate confirming compliance of the constructed RES object to the project documentation or declaration on operational readiness of RES object.
Under the LC Procedure 2013, the applicant should calculate the local content amount and apply to NERC requesting it to confirm the calculated amount of the local content with the required by law local content amount for the relevant RES object. The NERC considers the application within 30 calendar days from the date of submission of the required documents and takes a decision which will serve as a basis for approval of “green” tariff for the RES project.
The Ukrainian origin of local content proportions is currently confirmed by the certificate of Ukrainian origin which is issued by theUkrainian Chamber of Commerce and Industry.
Having the LC Procedure in place should bring certainty to investors who will now be able to assess the new RES project’s eligibility for the green tariff.
5 Green Energy in Ukraine: New Opportunities for High-Growth Investment
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 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.
Corporate Income Tax Exemption
For the period until 1 January 2021 the profit obtained from the main activity of an electricity generating company that generates electricity only from RES is exempt from corporate income tax (the “CIT”);
80% of the profit of a company obtained from the sale of raw materials, equipment and components which were produced by such company and which will be used for the production of electricity from RES is exempt from CIT. The funds so exempted must be used by the company to increase its production.
For the period until 1 January 2020 the following profit is exempted from CIT:
profit of the producers of biofuels obtained from the sale of biofuels;
profit of companies obtained from simultaneous generation with use of biofuels of (i) electricity and heat, and/or (ii) of heat;
profit of the producers of RES equipment obtained from the sale of RES equipment and facilities that were produced on the territory of Ukraine.
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
6 Green Energy in Ukraine: New Opportunities for High-Growth Investment
such products are not produced in Ukraine and there are no similar products, equipment or facilities in Ukraine.
RES producers pay only 25% of the land tax;
the aggregate amount of the annual lease payment for land plots where an RES generating unit is located, including its technological infrastructure, should not exceed 3% of the appraised monetary value.
Funding the connection of RES facility to electricity networks
Starting from 1 January 2013 connection of the RES producers to the electricity networks would be financed through 50% of the funds included in the transmission tariffs and the other 50% as the refundable financial aid provided by the RES producer to the electricity transmission company. The NERC will establish the term of return of such financial aid which may not exceed ten (10) years.
The electricity transmission company would be obliged to prepare the project and cost estimate documentation for connecting the RES generating facility to the electricity networks.
Challenges and Risks relating to RES projects
Despite the guarantees and incentives described above there are a number of potential risks and challenges that the prospective investor may face when implementing an RES project in Ukraine.
the procedure for obtaining a license and green tariff is complicated;
the power purchase agreement is signed and green tariff is applied only after the RES unit has been commissioned;
land allocation for RES projects may be problematic and time consuming;
connection to the grid is a real challenge for RES producers because of absence of clear guidelines regarding the level of capacity to be absorbed by the grid;
recent legislative developments relating to transition from the existing single buyer model to the model of direct bilateral contracts may bring uncertainly in whether the guarantees will apply to RES producers any longer;
the “local content requirement” may be an obstacle for potential foreign investors; and
recent legislative initiatives indicate that the green tariff may be subject to change in the future.
With numerous green energy projects now launched and operating in Ukraine, it looks like there are still numerous opportunities open for high-growth
For further information please contact
Ihor Olekhov, Partner +380 44 590 0101 Ihor.Olekhov@bakermckenzie.com
Victoria Ischenko, Associate
+380 44 590 0101
Baker & McKenzie – CIS, Limited
Renaissance Business Center 24 Vorovskoho Street Kyiv 01054 Ukraine
7 Green Energy in Ukraine: New Opportunities for High-Growth Investment
investment into the green energy sector of Ukraine with the tariff guaranteed until 2030. In spite of the risks and challenges that investors may face with a RES project in Ukraine, 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. Obviously careful study and preparation are required before undertaking a new RES project in Ukraine to make it a success.
This Newsletter is for information purposes only. Its contents do not constitute legal advice and should not be regarded as detailed advice in individual cases.
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Green energy in Ukraine: new opportunities for high-growth investment
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