IN UKRAINE'S GREEN ENERGY
Why has investing in renewable energy become popular in Ukraine and what an investor should be aware of when planning such an investment?
Over the last four years, renewable energy projects, such as solar, wind, hydro and others, have developed very quickly in Ukraine, irrespective of the investor climate or other concerns. The sector has witnessed significant growth from small- scale to large- scale renewable projects, most remarkably wind and solar projects. Notwithstanding the complicated permission process, developers have generally been successful in bringing the renewable energy projects to completion.
Since the green tariff was introduced in 2009, the legal framework applicable to renewables in Ukraine has evolved significantly and now forms an attractive foundation for investing in this sector. The following summarizes certain key elements of the current regulatory regime.
1. The green tariff's "minimum floor" is set out in a EUR equivalent and is guaranteed by law. The actual value of the green tariff (which cannot be lower than the "minimum floor") is subject to the regulator's quarterly review. The producer will benefit from the green tariff granted at the time of commissioning the relevant production facilities (e. g., a wind farm or a solar plant) until 1 January 2030.
However, a new support system for green tariff payments, based on auctions, is being explored by the regulator and discussed by the market participants. Such new auction- based system will apply to solar power plants having an installed capacity exceeding 10 MW and to wind power plants having an installed capacity exceeding 20 MW. Subject to the adoption of the relevant legislation, auctions are expected to be introduced in 2020. 2. Possibility of concluding a "pre- construc-
tion" power purchase
agreement ("PPA") encourages the development and supports the financing of the project.
The pre- construction PPA provides a number of conditions that must be satisfied to ensure its effectiveness. Such conditions include obtaining an electricity generation license and green tariff; becoming a member of the wholesale electricity market; and taking the necessary steps to install and operate the commercial metering equipment.
To be eligible for green tariff, the developer has to commission the project within three years from the date of registering a declaration on commencement of the construction works or obtaining a permit for carrying out the construction works (as applicable). Should the developer fail to do so, the pre- PPA will cease to be effective (the provisions referred to in this paragraph will be effective from 19 July 2019). 3. The model PPA has been recently im
proved to enable international markets standard security arrangements as well as settlement of disputes by international arbitration. In addition, the model PPA contains protection clauses against changes in the law. A PPA would remain in effect for the period of effectiveness of the green tariff, i.e., until 1 January 2030.
Such improvements of the model PPA help to increase the "bankability" of the PPA, meaning that the PPA satisfies certain criteria enabling the banks-lenders to finance the project. 4. Since 2015 there is no local content requirement.
A premium added to the green tariff encourages developers to use equipment of Ukrainian origin, provided that the renewable energy production facilities are commissioned between 1 July 2015 and 31 December 2024.
If at least 30% of the equipment used is of Ukrainian origin, the premium added to the green tariff will be 5%. If at least 50% of the equipment used is of Ukrainian origin, the premium will be 10%. The premium added to the green tariff is effective for the same period as the green tariff itself.
Enhanced legal framework for investing in the green energy projects in Ukraine opens lucrative opportunities for domestic and foreign businesses. With a proper legal support and guidance, such opportunities will surely turn into successful and profitable undertakings.
Victoria Ischenko, Associate
Ihor Olekhov, Partner
Serhiy Chorny, Managing Partner