Ukraine launches renewable auction system
Authors: Maria Orlyk, Partner and Sergiy Datsiv, Associate, CMS Reich-Rohrwig Hainz,Kyiv
Starting 1 January 2020, Ukraine launches a new state support mechanism for renewables. Power generating facilities seeking state support must take part in e-auctions and compete for the right to sell power to Ukraine at the lowest possible price.
In the first half of 2019 Ukraine generated 4% of its electricity from renewable sources. The Energy Strategy of Ukraine aims at achieving 25% of its overall power generation through renewable energy by 2035. Such an ambitious goal in combination with state support for renewable power generation provides unlimited market opportunities to investors.
Ukraine has been supporting the renewable energy production through the feed-in-tariff (or “green tariff”), which is currently one of the highest in Europe (e.g. for solar generation – EUR 150.2501 per 1 MW; for wind generation – EUR 101.7823 per 1 MW (indicated for wind power plants with >2MW turbines). Even though the green tariff is a very efficient instrument, it appears burdensome for the state budget. According to the Ministry of Energy and Environmental Protection of Ukraine, the annual state payments under the green tariff will amount to approximately EUR 1.8 billion over the next 10 years. Consequently, introducing new instruments to enhance development of the renewables sector has become a pressing issue.
The Law of Ukraine “On promotion of competitive conditions for producing electric power from alternative energy sources” (the “Auction Law“) of 22 May 2019 introduces the new auction support mechanism to replace the green tariff. The new support mechanism is expected to become fully operational on 1 January 2020.
State support will be provided by means of guaranteed purchase by the state through the specially designated and licensed state owned company (the “Guaranteed Buyer“) of all electricity produced from the renewable energy source (the “RES“) within the quota acquired at the auction at the established fixed tariff.
How the Auction Law changes the Ukrainian renewables sector
The new state support mechanism introduces mandatory participation in auctions for power producers starting from 1 January 2020. Producers will be exempt from participation in auctions and may obtain and/or retain the green tariff only if they meet at least one of the following criteria:
- the power plant was commissioned before 1 January 2020;
- the power plant was commissioned after 1 January 2020 and has an installed capacity below 1 MW for a solar power plant (the “SPP“) or 5MW for a wind power plant (the “WPP“);
- the WPP was commissioned after 1 January 2020 and consists of up to 3 turbines;
- the power plant obtained the construction permit before 31 December 2019 and executed a power purchase agreement with the Guaranteed Buyer (the “PPA“).
The green tariff rate per 1 MW for the newly commissioned power generating facilities, which would still be eligible for the green tariff after 1 January 2020, will gradually decrease in line with the schedule in the Chart below.
The Auction Law provides that any power plant that has not been granted the green tariff may also take part in the auction on its own initiative.
Facilities producing power from biomass are exempted from obligatory auctions and remain supported by the green tariff. The green tariff for this type of power generation is set at the level of EUR 123.855 per 1 MW until 31 December 2029, thus making bio generation attractive for investors.
The Auction Law foresees the model of sealed-bid reverse auction to be organised by the Guaranteed Buyer.
No later than on 1 December of each calendar year, the Cabinet of Ministers of Ukraine (“CMU“) will determine the amount of state support in the form of annual quotas for a 5-year period. Quotas will be split into three categories: wind, solar and other RES. Each category will be no less than 15% of the entire quota.
The first pilot auction should be held before 31 December 2019. Subsequent auctions should be held twice a year – no later than 1 April and 1 October. Auctions will be held until 31 December 2029. The state support granted on the basis of auctions will be provided for a period of 20 years after a power generating facility is commissioned.
The auction bid may not exceed the green tariff rate established for facilities of relevant type of power generation as at the date of the auction (see Chart above). The green tariff rate applicable at the time will be the starting point of the auction.
According to the Auction Law, competition is a priority of the new state support mechanism. Therefore, the total capacity to be awarded to the auction winners cannot exceed 80% of the total capacity requested by all the auction bidders jointly. A single bidder (including related parties) may not be awarded more than 25% of the yearly quota (i.e. in total as per the two half-yearly auctions).
Different quota categories (solar, wind and other) will be auctioned in separate lots. Such auction lots will be sold to investors in RES who, (1) hold rights to use land plots of designated purpose suitable for development and maintenance of power generating facilities, (2) have entered into grid connection agreements and obtained grid connection technical conditions.
Investors who do not hold rights to use the land plot and have not obtained technical conditions for grid connection will also be allowed to take part in auctions. The CMU may offer for auction a designated project for constructing a power generating facility, which includes the land plot. Such a land plot will be designated for the purposes of developing a power plant. The designated project would in this case also contain technical conditions for grid connection, defining the installed capacity of the power plant, connection point and other technical characteristics of the power plant, approved according to Ukrainian legislation. Therefore, while bidding for the right to develop a power plant on the land plot offered by the Cabinet of Ministers of Ukraine, an investor will be spared the trouble of going through land allocation and obtaining the technical conditions for grid connection. Consequently, the investor will be able to obtain a land plot that, from a legal perspective, will be ready for development.
However, in such a “take it or leave it” scenario, the investor will not be in position to negotiate the land plot acquisition terms, or grid connection terms. Furthermore, the winning bidder will be obliged to compensate the relevant local authority (entitled to dispose of this land plot) with the expenses borne by the latter in connection with allocating the land plot, changing its designated purpose as well as other related expenses.
In order to be able to take part in the auction, a potential bidder will need to provide an irrevocable bank guarantee in the amount of EUR 5,000 per 1MW (the “Participation Guarantee“). The Participation Guarantee will be reimbursed to the unsuccessful bidders after the auction is complete, and to the auction winners after the PPA is executed.
The exact procedure for holding the auctions has not yet been finally approved and officially published. However, a description of the expected procedure may be found in the Draft Order on performance of auctions for distribution of support quota (the “Draft Order“) prepared by the working group on implementation of the “green auction” at the Ministry of Energy and Environmental Protection of Ukraine.
According to the Draft Order, the auctions will be held online. Interface with the system should be in Ukrainian and English. All communication with the Guaranteed Buyer, including requests for clarifications as well as documentary submissions must be performed through the electronic trading system; it is very likely that Ukrainian national e-auctions platform ProZorro will be used for this purpose.
The price will be the main award criterion.
After the auction is complete and before the PPA is executed, the winning bidder will have to provide another bank guarantee (as a performance security) in the amount of EUR 15,000 per 1MW (the “Performance Guarantee“) while the power generating facility is developed and commissioned.
The PPA must be concluded within 15 days after the results of the auction are announced. While concluding the PPA, the winning bidder undertakes to complete the development and commission of a power generating facility within two years for SPPs, and within three years for other renewables.
If necessary, the investor may also request from the Guaranteed Buyer an extension of this term for one year and provide an additional Performance Guarantee in the amount of EUR 30,000 per 1MW. The Performance Guarantee (including an additional Performance Guarantee) will be reimbursed after a document confirming that the power generation facility has been commissioned has been submitted to the Guaranteed Buyer and after the power plant begins to supply power to the network.
The price for purchase of the produced power agreed in the PPA will be fixed in EUR as of the date of the auction in accordance with the official exchange rate of the National Bank of Ukraine. The Guaranteed Buyer will pay for supplied power on monthly basis.
While negotiating the PPA, the winning bidder with foreign investments (i.e. with at least 10% foreign shareholding) may insist that an arbitration clause be included in the PPA referring the disputes under the PPA for resolution under the Rules of Arbitration of the International Chamber of Commerce in Paris.
Thus, the new regulation for state support of renewables appears to be not only clear, straightforward and transparent, but also foreign-investor friendly. In addition to enjoying the benefit of dispute resolution under the ICC Paris Rules, they will also be better placed to submit more competitive bids. The gradual decrease of the green tariff and respective decrease of capped auction bids will put the bidders with access to low interest rate financing (traditionally available abroad) in a much better position compared to Ukrainian bidders with limited access to affordable financing.