Ukraine

Introduction

Renewable energy generation is one of the key priorities for the Ukrainian energy sector and national economy. However, the current share of energy generated from renewable energy sources – wind, solar, biomass, biogas and small hydro (RES), as well as by big hydropower projects (greater than 10MW) – in Ukraine’s energy mix is still quite insignificant. By 1 July 2019, the share of renewables (including big hydro generation that exceeds 10MW) had reached only 8.8%. According to the “Energy Strategy of Ukraine until 2035”, the government anticipates that the renewable energy share of total energy consumption will exceed 11% by 2020 and reach 25% by 2035.

Ukrainian power generation structure in the first half of 2019

*Including big hydro generation (exceeding 10MW)

Achieving these targets is both desirable and necessary for the safe and gradual replacement of the worn-out capacities of conventional generation. More than 84% of all thermal power plants (TPP) and combined heat and power plants (CHP) have already exceeded their operating lifetime, and the lifetime of almost 70% of Ukraine’s nuclear power units would also require extension in the next ten years.

Fortunately, Ukraine has reasonably good generation potential in all renewable technologies, especially in biomass and biogas due to the country’s large agricultural sector and available workforce. It is estimated that bioenergy’s installed capacity could reach 15GW. However, under-developed infrastructure and an unstable supply of raw materials means that only a very small number of bioenergy projects have been implemented to date.

Wind energy has the potential to grow to around 15GW. But this would require a huge amount of investment – by private developers in generating facilities, and from the state infrastructure budget to ensure the availability of the grid’s off-taking capacity for wind parks.

1. Brief overview of the renewables sector

Key statistics

According to the national energy regulator, as of 1 July 2019 the total installed capacity of active renewable energy projects was around 3,824MW, close to 4% of the country’s total energy generation. Almost two-thirds of this capacity (69%) is from industrial solar (around 2,640MW), 20% from wind (around 777MW), 5% from household solar (around 190MW), 2.6% from small hydro (around 100MW) and the rest (3.4%) from biomass and biogas. That does not include big hydro generation (exceeding 10MW), which is not eligible for state support.

Growth of RES projects' installed capacity over the years

*Excluding big hydro generation (exceeding 10MW)

Structure of installed RES Projects

*Excluding big hydro generation (exceeding 10MW)

About 60% of all renewable generation is located in four regions – Odesska, Zaporizhska, Mykolaivska and Vinnytska – which, apart from the Crimea, have the best wind resources and highest insolation.

In light of the anticipated phasing out of the feed-in tariff support scheme for new projects by 1 January 2020 and transition to auctions, commissioning of renewable energy projects in Ukraine has increased significantly in 2018-2019. In just six months of 2019, the total capacity of commissioned power plants reached 1,336.363MW – significantly greater than during the whole of 2018 (848MW).

Subsidy schemes

The state provides various supports to renewable power producers (RPPs).

Green tariff

The feed-in tariff (known as the "Green Tariff" in Ukraine) will be the main state support mechanism for RPPs until 1 January 2020. The Green Tariff was introduced on 1 April 2009 as a special preferential price for electricity produced from RES, to be paid until 1 January 2030. It is set by the regulator separately for each RPP and for each technology.

The Green Tariff may not be lower than the minimum Green Tariff, which is fixed in EUR according to the UAH-EUR exchange rate as of 1 January 2009. Therefore, currency fluctuations of the Ukrainian hryvnia do not have an adverse effect on the payouts to RPPs.

The Green Tariff index decreases over time. However, the decrease applies to new projects only and does not affect power plants commissioned into operation before the decrease has taken effect. The latter will enjoy the same tariff rate until 2030.

Green tariff table

*Certain insignificant RES types were not included

On 22 May 2019 the “Auctions Law” – On Introduction of Certain Changes to Laws of Ukraine regarding Ensuring Competitive Conditions for Generation of Electricity from Alternative Energy Sources No. 2712-VIII dated 25 April 2019 – came into effect. The Auctions Law narrowed the scope of application of the Green Tariff support system and implemented a new quota auction support system (see below). As a result of these changes, only the following renewable projects may still benefit from the Green Tariff:

  • projects of any capacity and any RES technology commissioned before 31 December 2019
  • projects of any capacity and any technology that by 31 December 2019 have executed a power purchase agreement (PPA) with the offtaker. These projects must have: land use rights;  construction permitting documentation; and a grid-connection agreement
  • wind power plants with capacity below 5 MW and not more than two wind turbines
  • solar power plants with capacity below 1 MW
  • projects other than wind and solar power plants, irrespective of their capacity.

Quota auction support system

The Auction Law implemented a new quota auction support system for renewables. All RES projects are eligible for the quota auction support system.

Under the quota auction support system, the state will provide a 20-year support from the date of commissioning of the renewable project through the guaranteed offtake of electricity within the quota and at the tariff determined by auction. For 2020-2022, the yearly quota will be split into three categories – wind (no less than 30%); solar (no less than 30%); and other types of renewable energy sources (no less than 15%).

According to the law, the Cabinet of Ministers of Ukraine must conduct a pilot auction before 31 December 2019. Starting from 2020 auctions will be held regularly twice a year. In order to participate in the auction, applicants must secure land rights, grid connection and provide a bid bond (EUR 5 per 1kW). The auction winner is also required to provide a performance bond (EUR 15 per 1kW) to the offtaker to secure its obligations under the PPA.

The auctions model will be a single-stage static sealed-bid auction with winning bids based on the lowest offtake tariff offer. Tariffs will be fixed in EUR as of the date of the PPA, in accordance with the official exchange rate of the national bank of Ukraine.

Other incentives

RPPs may also receive a premium of 5% or 10% on top of the Green Tariff or auction tariff for using Ukrainian equipment (elements) of renewable energy plants, such as PV modules, trackers, rotor blades, nacelle, metal frames, boilers, anaerobic digestion reactors, pumps, etc. Ukrainian origin of these elements must be certified by the Ukrainian Chamber of Commerce and Industry.

The state also guarantees the mandatory offtake of all electricity from renewable energy producers, irrespective of whether they receive support through the Green Tariff or quota auction support system, and gives renewables priority in dispatch and settlement.

In addition, the Ukrainian Parliament exempted from Ukrainian VAT various types of renewable energy equipment until 31 December 2022. The equipment includes wind power generation units, PV cells and panels, and some types of transformers and invertors.

2. Recent developments in the renewables sector

New electricity market

On 1 July 2019, Ukraine launched a new liberalised electricity market compliant with the 3rd Energy Package of the European Union. The former electricity market, organised under the obsolete single-buyer model, was divided into several new submarkets: the bilateral contracts market; the day-ahead market; the intraday market; the balancing market; the market for ancillary services; and the retail market.

RPPs mainly operate on the bilateral contracts market, selling their output at the fixed tariff directly to the state’s offtaker – the so-called Guaranteed Buyer. The latter then re-sells the electricity on the day-ahead and intraday markets. The difference between the feed-in tariff and the price of electricity sold at the day-ahead and intraday markets is reimbursed to the Guaranteed Buyer by the transmission system operator (TSO), as a payment for the Guaranteed Buyer’s services for the increase of the share of electricity generated from RES.

RPPs selling electricity at the feed-in tariff must also enter the special balancing group where the Guaranteed Buyer (as the party responsible for balancing on behalf of all such RPPs) must settle imbalances emerging within the balancing group. In turn, RPPs must reimburse to the Guaranteed Buyer costs associated with the settlement of imbalances. The share of this compensation will gradually increase from 10% in 2021 to 100% from 2030.

3. Forthcoming developments/opportunities in the renewables sector

With the exponential increase of renewable generation from solar and wind resources in the last few years, the grid is becoming more and more in need of balancing capacities. In this respect the new market has opened opportunities for the evolution of a completely new segment of balancing services and auxiliary services.

According to the Ukrainian government, stability of the grid can be ensured by implementing the following measures: installing highly manoeuvrable “peak” generation, such as gas-fired power plants; implementing advanced demand management systems; and building energy storage. It is estimated that the grid would require around 2GW of new peak covering capacity and about 500MW of energy storage by 2025.

The switch to the auction system for solar and wind should attract more attention to other renewable technologies which will not be affected by the quotas. Bioenergy projects definitely top that list, given Ukraine’s huge potential in the agricultural sector, e.g. the production of biogas from animal manure, and solid biofuels from agricultural residues, and demand in the waste management industry.

Other opportunities can be seen in the continuously increasing microgeneration sector – a growing market for household PV systems (up to 150kV are eligible for the Green Tariff); decentralised off-grid generation; and the development of smart grids.

Picture of Vitaliy Radchenko
Vitaliy Radchenko
Partner
Kyiv (CMS CMNO)
Image of Maryna Ilchuk
Maryna Ilchuk
Senior Associate
Kyiv (CMS CMNO)
Image of Volodymyr Kolvakh
Volodymyr Kolvakh
Senior Associate
Kyiv (CMS CMNO)