Publication

Ukraine Announced Cuts to Feed-In Tariff

22/06/2020

Tetiana Revutska

Senior Associate, Attorney-at-Law

Energy and Natural Resources,
PPP and Procurement,
Real Estate and Construction,
Construction and Development,
Renewables

Alexander Borodkin

Partner, Attorney-at-Law

Real Estate and Construction,
Tax,
Trade and Commercial,
Renewables,
Transport and Infrastructure

On 15 June 2020, the Ukrainian government has formalised the concept of reducing the feed-in tariff in the draft law No. 3658 (the "Draft Law"). The Draft Law was prepared following the extensive discussions between the Ukrainian government and the producers of energy from renewable sources (the "RES producers"), which resulted in a memorandum (the "Memorandum") signed by the Cabinet of Ministers and certain, but not all, NGOs representing the green investors in Ukraine.

If adopted by the Parliament, the Draft Law will amend certain laws of Ukraine and introduce the additional reduction coefficients to the feed-in tariff formulae designated for the wind power plants and solar power plants (the "WPPs" and the "SPPs" respectively). Apart from the feed-in tariff, the Draft Law changes the upcoming green auctions procedures, tightens the timeline for full imbalance responsibility and introduces regulations for compensating the RES producers for mandatory curtailments. 

The changes differ based on the type of the energy source and commissioning date of the power plant as follows.

Power plants commissioned before 30 June 2015

The Draft Law introduces a maximum feed-in tariff for all RES producers whose plants or stages have been commissioned before 30 June 2015. The maximum tariff will be equal to 85% of the feed-in tariff for the on-land SPPs exceeding 10 MW capacity commissioned on or before 31 March 2013. All power plants which tariff is equal or less than this maximum feed-in tariff will retain their current rate; others will have their rates reduced to that maximum feed-in tariff.

Power plants commissioned between 01 July 2015 and 31 December 2019

The Draft Law adds reduction coefficients to feed-in tariffs as follows:

  • for the WPPs having 2 MW or larger capacity turbines the rate will be reduced by 7.5%; 
  • for the SPPs having 1 MW or larger capacity the rate will be reduced by 15%; and
  • for the SPPs having less than 1 MW capacity the rate will be reduced by 10%.

The WPPs having less than 2 MW capacity turbines will not be affected.

Power plants commissioned after 01 January 2020

The changes will affect those RES producers who have entered into the preliminary power purchase agreements with the guaranteed buyer (the "pre-PPA"). Under the pre-PPAs, the RES producers qualify to obtain the feed-in tariff if they commission their SPPs within two years, and their WPPs – within three years upon executing the pre-PPAs. This principle will remain unchanged; however, the feed-in tariff for those RES producers will be reduced as well. 

The WPPs will have their rate reduced by 2.5% regardless of their turbine capacity.

The SPPs having less than 1 MW capacity will have their rate reduced by 2.5% as well. The same reduction by 2.5% will apply to SPPs having 1MW or larger capacity, however, only if they are commissioned on or before 31 July 2020. All SPPs having 1MW or larger capacity commissioned on and after 01 August 2020 will have their feed-in tariff reduced by 60%.

Changes to auction procedure

Some RES producers who signed the pre-PPA and are yet to commission their plants may opt for competing at the auctions instead of obtaining the reduced feed-in tariff. Specifically, this may apply to solar RES producers who plan to commission their plants after 01 August 2020 and thus face the 60% reduction of their feed-in tariff. The auction procedure will change as follows.

Price caps. Presently, the initially submitted auction price shall not exceed the feed-in tariff rate for the relevant source type on the day of the auction. Changing that approach, the Draft Law introduces the maximum bid prices. Until the end of 2024, the bid price cap for the WPPs and the SPPs will be 9 eurocents per 1 kWh, and it shall be reduced to 8 eurocents per 1 kWh for all auctions in 2025 and later. 

To compare, below are the maximum bid prices in eurocents per 1 kWh for auctions if they were held under the current regulation.

Plant type/year 2020 2021 2022 2023 - 2024 2025 - 2029
Wind with 2 MW+ capacity 9.05 7.92
Wind with 600 kW – 2 MW 6.03 5.92 5.82 5.71 5.28
Wind below 600 kW capacity 5.17  5.06  4.95  4.90  4.52
On-land solar  11.26  10.88  10.50  10.12  9.75

This illustrates that the new price caps will mostly affect the solar plants, cutting the maximum bid price by up to 20% for the earliest auctions which was quite high if compared to the other renewables cost-wise. Large capacity wind plants are almost not affected, and smaller wind plants having less than 2 MW capacity turbines will in fact benefit from the change since for them the maximum bid price is significantly increased.

For all other RES producers, the price cap will be 12 eurocents per 1 kWh. This also reduces the current bidding maximum, which for example is 12.39 eurocents per 1 kWh for biomass and biogas, and 13.52 eurocents per 1 kWh for geothermal energy.

Auctions schedule. The Draft Law redefines how the auctions are scheduled. The requirement for the auctions to happen twice a year is removed. Instead, the Cabinet of Misters will approve annual auctions schedules. This may potentially result in a positive scenario where the auctions are held more often than twice a year, or in an alternative one when they are held less frequently.

Quota specifics. The quotas may now be supplemented with additional requirement as to placement of the plants in certain regions of Ukraine or their maximum capacity. This is aimed at drawing attention to those regions of the country that require more energy production and not the southern regions that already have energy surplus. Also, the quotas may offer the rooftops and building facades for construction of the SPPs. In the same way how the land plots are offered at the auctions at the current procedure, the rooftops will be suitable for the SPPs construction and will have the technical requirements for grid connection.

Quota sectioning. Per the new quota sectioning, the annual quota must reserve at least 10% of capacity for each of the following types of alternative energy sources: the wind energy, the solar energy and all other sources combined. The minimum thresholds were decreased to 10% from 15%. This will allow more flexibility in defining the quotas, most probably to fit in all solar RES producers opting for auctions instead of 60% feed-in tariff reduction.

Beneficiary threshold increased. Per the Draft Law, the RES producer together with other RES producers having the same beneficiary may not obtain more than 35% of the annual quota. The current limit is 25% and was increased in line with the threshold for market dominance in Ukraine, which is 35% per the Law of Ukraine "On Protection of Economic Competition".

Compensation for curtailment

The Draft Law introduces a mechanism to ensure that the RES producers receive compensation for cutting generation when requested by the system operator. For this, a special curtailment service is designated in the relevant laws. The service will be deemed provided by the RES producers to the transmission system operator in the same volume of energy, that the RES producers would have generated if the operator did not order the curtailment.

This will resolve the existing issue of RES producers not receiving compensation for curtailment, since the laws only allow to pay for the energy delivered into the system. Also, making the transmission system operator and not the guaranteed buyer responsible for payments for curtailments may relieve the financial pressure from the latter, potentially avoiding late payments for the service.

Balancing charges

The new balancing compensation rules will apply to all RES producers' stations of more than 1MW capacity. Starting from 01 January 2021, they will have to compensate 50% of the imbalance costs and starting from 01 January 2022 – all imbalance costs caused to the guaranteed buyer. The RES producers operating stations of 1MW and less capacity will keep the current balancing charges increase timeline, which will start with 10% in 2021 and will reach 100% in 2030 by increasing by 10% each year.

The tolerance margin will be also reviewed and will be 10% for the WPPs and 5% for the SPPs, instead of current 15% and 10% respectively. In 2030, the tolerance margins will be abolished. The Draft Law does not specify any tolerance margin for all other green plants which means that they will not have any as soon as the Draft Law is adopted. Yet the comments to the Draft Law mention that the other green stations were meant to have the 5% tolerance margin as well; potentially, this may be corrected in the future readings of the Draft Law.

Strengthening investment protection

On the positive note, the Draft Law introduces additional state guarantees for the afflicted RES producers by adding relevant clauses to the Law of Ukraine "On Alternative Energy Sources" and "On Foreign Investment Regime". The new stabilization clause stipulates that the legislation applicable to the RES producers having feed-in tariff will be fixed on the date of adopting the Draft Law; further legislation will be applied only if it is favourable for the RES producers. The Draft Law will also fix that until end 2029 the feed-in tariff will not be cancelled or reduced, and the reduction coefficients will not be changed to adversely affect the RES producers.

Impact on investors' legitimate expectations and possible claims

Per the current laws, Ukraine guarantees stability of the support regime to the green investors effective at the date of commissioning of their plants. This effectively means that Ukraine created legitimate expectations for the investors by adopting a special regime of benefits and incentives, including the size of compensation under the feed-in tariff. Consequently, the investors relied at certain feed-in tariff rates while planning and making their investments. 

The feed-in tariff cuts are not voluntary for the RES producers and will lead to the RES producers losing their profit. This enables them to revert to the investment arbitration claiming for damages for lost profit based on the Ukrainian laws, relevant bilateral investment treaties and the Energy Charter Treaty. With some RES producers we are already looking into options to question the above feed-in tariff cuts in arbitration. 

The signed memorandum shall not preclude any RES producer from reverting to arbitration. Furthermore, execution of the Memorandum by the RES producers may even be regarded as coerced, since they are compelled to sign it in exchange for receiving the long overdue payments for energy produced by them earlier in 2020.

To compare, in the second half of 2019, the government and the investors have worked out a version of the memorandum which was far more favourable to the RES producers. It did not concern the plants commissioned before 2017. For the plants commissioned before end 2019, it offered a voluntary reduction of the feed-in tariff by 5% for the WPPs and 10% for the SPPs with simultaneous prolongation of the feed-in tariff duration up to five years depending on the commissioning date. For the pre-PPAs, the previous approach also expedited the commissioning deadlines yet offered lesser cuts to the rates.

The change in the government's approach is explained to be driven by the economic reasons. Now in 2020, the guaranteed buyer delays more than 70% of payments to the RES producers. Yet at the same time, it is the government's duty to ensure that the compensation is paid in due time and amount. Therefore, underpayments may be regarded as an additional way to coerce the investors to agree to more unfavourable feed-in tariff cuts.  

Impact assessment 

The changes will enter into effect from 01 July 2020 and last until 31 December 2029, that is until the end of the feed-in tariff support program. The changes will be effective provided that the Draft Law is adopted by the Parliament.

Although the concept of reducing the feed-in tariff was published as a Draft Law, it is not final and may be altered upon readings in the Parliament. The Memorandum and the Draft Law both impose changes that are far less favourable towards the SPPs than the WPPs, and certain investors who participated in the negotiations intend to continue mediation by addressing the NGOs and members of the Parliament. Some of them are already looking into claiming damages for losses in arbitration. 

For the RES producers intending to opt for the auctions, we may recommend keeping a closer eye on the quotas, particularly the volumes and types of energy to be auctioned. We may expect the government to approve quotas and start auctions in the nearest future, since this duty is mentioned in the Memorandum. 

The new auction price caps will not greatly influence large WPPs having 2 MW or larger capacity turbines but will give a chance for the smaller WPPs to obtain a much higher auction price than under the current procedure. For the SPPs, the RES producers who have signed the pre-PPAs shall watch the quotas and decide whether participating in the auctions would be more beneficial than agreeing to the feed-in tariff cut by 60%. 

Published: Lexology, 22 June 2020
 

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