Auctions for Renewables in Ukraine: What do Investors Expect from the New Stimulation Scheme
Over the last few years the importance of renewable energy sources (“RES”) has grown sufficiently due to climate change and problems with energy security. In order to decrease the negative impact on the climate, many countries are introducing policies to support renewable deployment. According to IRENA research by the end of 2016, at least 176 countries had targets for renewable energy. By 2017, 126 countries had implemented special policies and regulations.
Countries use different supportive schemes for renewable energy deployment and to increase investment in renewables. In previous years, one of the main drivers for investments in RES was feed-in tariff (“FiT”). Pursuant to surveys and the opinions of experts, FiT look like the most efficient regulatory measure for the development of RES. At the same time, many experts predict a decrease in the application of FiTs in next few years and development of other forms of support for RES producers.
Moreover, recent research confirms the increased application of auctions for RES around the globe. For instance, in 2017 48 countries had adopted auction-based approaches to stimulate RES and 27 countries are seriously considering this idea. EU countries will also rely on auctions as a cost-effective mechanism for deployment of RES till 2030.
Taking into account global tendencies, Ukraine is also on the path towards implementing the auction scheme instead of FiT. On 20 December 2018, the Verkhovna Rada of Ukraine passed in the first reading the Law On Amendments to Some Laws of Ukraine on Ensuring Competitive Conditions for the Production of Electricity from Alternative Energy Sources No. 8449-д (Law on Auctions) for holding an auction scheme for renewable energy producers.
The Law On Auctions aims to introduce an auction scheme for the implementation of future projects based on RES in Ukraine. The main conditions for the Law were drafted and revised within the last 6 months based on the results of numerous meetings and round tables about a potential auction scheme with investors, developers, renewable producers, renewables associations and other stakeholders.
Current scheme of support
The current support scheme of the RES in Ukraine is based on the FiT that is regulated by the Law On Alternative Sources of Energy and the Law On the Energy Market of Ukraine. The National Commission for State Regulation in the Energy and Utilities (“NKREKP”) approves the FiT for each RES producer at the level of retail tariff for consumers of second class of voltage in January 2009, multiplied by the ratio of FiT for each RES producer. According to Article 91 of the Law On Alternative Energy Sources, the FiT is established for RES producers till 2030.
The FiT in Ukraine is quite high and does not satisfy the current approaches to stimulation based on competition and cost-effectiveness. Notwithstanding the high FiT and decrease in the costs for realization of RES projects around the world, over the last three years Ukraine has seen very slow RES growth. For instance, during last three years — from 2015 till 2017, just 408 MW of RES generators were put into operation.
According to the Decision of Ministerial Council of the Energy Community D/2012/04/MC-EnC, Ukraine shall reach the 11% target for RES in the energy balance by 2020. However, as stated in the key finding of the Second Progress Report, Ukraine will fail to reach its 2020 RES target and it will be required to submit a revised National Renewable Energy Action Plan (NREAP). Moreover, pursuant to the analysis of the State Agency on Energy Efficiency and Energy Saving in Ukraine, the size of the RES in the energy balance of Ukraine in 2017 increased to just 6.7%.
Taking into account such results of RES deployment and global trends in supportive policies, the current support scheme for RES in Ukraine is subject to revision.
Proposed scheme of support
The Law On Auctions is aimed at introducing an auction scheme for future RES producers. The main benefit of auctions is a sufficient cut in costs for RES projects. The process of competitive procurement is one of the key cost reduction mechanisms, encouraging RES producers and producers of RES equipment to reduce costs for RES projects. The use of auctions leads to the expectation that RES electricity will soon be cheaper than most fossil fuels.
The Law On Auctions as per the scheme is planned for introduction from 1 January 2020. The Law On Auctions includes a support scheme for 20 years for future RES producers that have received the right to support via auctions. Support for future RES producers will be in the form of guaranteed purchases of the total amount of electricity generated by such RES producers at prices determined by the results of an auction.
According to the Law On Auctions, all RES technologies that reached 15% in total volume of RES generation are obliged to participate in auctions on the condition that power plants have the following capacity:
In 2020 — 20 MW of Wind and10 MW of Solar and more;
From 2021 till 2022 — 20 MW of Wind and 5 MW of Solar and more;
From 2023 — 3 MW of Wind and 1 MW of Solar and more.
The predictability of this support scheme for investors will be achieved through approval of annual support quotas for the next 5 years of RES auctions held by the Cabinet of Ministers of Ukraine.
The annual quota will be subject to division on shares for solar, wind and other renewable projects. However, responsibility for organizing and holding auctions will lie with the guaranteed buyer.
It should be noted that the Law On Auctions proposes to hold auctions twice a year, but not later than 1 April and 1 October of the respective year. Auctions shall be also held by 31 December 2029 and for participation in auction the future RES producers will provide:
- confirmed ownership/lease rights to the land plot;
- concluded grid connection agreement;
- bank guarantee of EUR 5,000 per 1 MW;
- information about the ultimate beneficial owner.
In order to receive support under the terms of the auction, participants must submit closed offers that contain a technical proposal (the amount of capacity that the participant intends to put into operation) and a price offer (price per 1 kilowatt hour of electricity). Winners shall be determined on the basis of simultaneous disclosure of technical and price proposals. The only criterion for selecting the winner is the price. The auction price will be determined for each participant — the winner of the auction at the level of the bid offer of each participant of the auction. The most important guarantee for investors in the RES is that the auction price is fixed by transfer in euro according to the official exchange rate of the National Bank of Ukraine on the specified date.
It should be noted that an important condition for the auction is the presence of competition. The amount of capacity for which auction participants are entitled on state support cannot be more than 80% of the aggregate value proposed by all participants in the auction.
Notwithstanding the auctions, FiT will be available until the end of 2029 for the following RES producers:
- RES producers that put into operation power plants before 1 January 2020;
- RES producers that put into operation power plants after 1 January 2020 and these power plants are not subject to the auction scheme;
- RES producers that intend to produce electricity and satisfy the following requirements:
- concluded the preliminary power purchase agreement (the “pre-PPA”) according to Article 71 of the Law On the Electricity Market before 31 December 2019; and
- put into operation the solar power plant within 2 years after conclusion of the pre-PPA and the other power plants within 3 years of conclusion of the pre-PPA; and
- electricity consumers, including private households generating installations which produce electricity from solar, wind and for which an FiT is established.
Future investments in RES projects
One of the main issues for the realization of RES projects is the attraction of investments. For this reason, the support scheme for RES producers is one of the most important issues for financial institutions and investors. According to European Commission guidance for renewable support schemes, unexpected or non-transparent changes of regulation in the energy sector can have a negative impact on the work of the whole market and the further participation of investors. From this perspective, the Law On Auctions provides expected and transparent changes in regulations from January 2020.
The Law On Auctions has so far only passed the first reading in the Verkhovna Rada and remains subject to additional discussion before the second reading at the beginning of 2019. However, renewable associations, investors and developers do not expect sufficient changes to this Law. One of the main concerns of experts regarding the Law is the application of auctions only to large RES producers. The Law On Auctions does not pay attention to pilot auctions to study the auction scheme. The proposed single pilot auction may not be enough to check the auction scheme.
Notwithstanding concerns about the effectiveness of the proposed auction scheme, FiT will be available until 2030 and is subject to decrease from 2020:
- for Solar at 25% with a further decrease of 2.5% each year for 3 years; and
- for Wind at 10% with a further decrease of 1.5% each year for 3 years.
At the same time, the auction price will be restricted by the amount of FiT. However, the auction price will be provided for 20 years. In comparison with the FiT until 2030, this is more attractive for investing in RES.
For further realization of RES projects, future RES producers should take into account the rules for the transition period between FiT and auctions. In particular, the Law On Auctions contains restrictions for future RES producers regarding FiT in case of conclusion of a pre-PPA. If a power plant is not put into operation within 2 years for solar and 3 years for other power plants after the conclusion of a pre-PPA, then these future RES projects are subject to participation in the auction scheme.
Therefore, for effective realization of RES projects in the transition period, it is important to understand which supportive scheme the RES project can rely on: FiT or auction. On the grounds of this, future RES producers can plan execution of projects and mitigation of any possible risks.