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Legislative prior conditions for the solar energy market to grow

In 2017 new Ukrainian law regulating On Electricity Market, become effective, which made better perspective for the national renewable energy industry and added more stability to the legal system, having formalized all core components to implement electricity generation from renewable energy sources (RES) in 2015, namely:

  • A feed-in tariff (FIT), which is quite high, compared to that in other countries; for example, now for terrain-mounted solar power plants entered into operation during 2017 2019, the FIT equals ca. €15.02 per kWh, or ca. €10.18 per 1 kWh for wind power facilities composed of modules over 2MW, its rate can’t be changed until 2030 and it’s pegged to Euro currency;
  • “Bonus” payments for local-made component parts make 5% or 10% extra to basic FIT rates, depending on share of such domestic component in total equipment parts of a power plant; and
  • The legislative obligation of the single offtaker (namely Energorynok) to purchase back from manufacturers all electrical energy generated at energy facilities which received the FIT during the entire term of the tariff’s validity.

This motivational system and legally ensured methods to sold electricity provide more security and safety against market risks related to consumers and sale markets, as well as currency exchange rates and/or price volatilities.

Aссordingly to the information published by the state regulator, at the beginning of 2018 the total installed capacity of RES facilities under the FIT conditions (not including temporary occupied ARC) equaled 1,374.7 MW with solar power stations share ca. 55% (741.9 MW), and wind power plants ca. 33.8% (465.1 MW) correspondingly.

Just in 2017 annual period 257 MW of such facilities were working, which is over two times the operational capacity in 2016, and approximately eight times the powers in 2015. The photovoltaic capacities put into functioning under FIT terms in 2017 generated ca. 82% of the total RES capacity, while wind power facilities accounted for ca. 10.6% respectively.

Normative support and other solutions (FIT conditions include small private PV-energy makers with stations up to 30 kW) made enormous boost to private interest in PV energy investments.




New Energy Market brings New Rules

Under new act of law, the role of renewables was recognized and incorporated in the structure of the new generation market with intention to build a flexible, open and free market in Ukraine according with the TEP guidelines. According to this new system, a single-buyer wholesale market strategy will be abandoned, and a multi-segmented free market will be created instead, following European strategies, as well as a bilateral agreements system, in accordance with usual practice in many European markets.

There are intentions to open the energy market to foreign trade contracts; and to continue accordance with European markets and integration of national energy system into multi-national setting.


Recent legislative innovations around PPAs

Power purchase agreements (PPAs) are based on regulator-approved template form. Although the law does not impose inevitable obligations for it, in real-life practice the offtaker (now it’s Energorynok) sticks to it very carefully.

The main critical point about the template PPA form always resided in its poor bankability and insurance applicability. In 2017, tectonic statutory changes aimed at coping this problem were initiated.

The regulator validated amendments in order to improve PPA form. According to the innovations, the PPA should be valid until January 1, 2030, which follows to the term of FIT validity.

This became really the most long-awaited amendments to current legislative base. Previously, typical PPAs term was one-year period with further annual prolongations. This practice for obvious reasons could not provide sufficient security and trust to energy sellers as well as long-term PPAs.

The new updated form explicitly allowed PPAs to be signed before construction works or putting a facility into operation are completed. However, some prior conditions must be fulfilled before PPAs will be effective (i.e., to obtain a license for electrical power generation; obtaining the FIT to a producer, and the latter to enter WEM; receiving technical assignments and projects documentation etc.).

Not all of these preconditions depend just upon the developer, but may also need actions of the regulator or other parties. Certain risks still remain, traditionally associated with ambiguity and insufficient guarantee for a producer even under new regulations.

According the new regulations, creditors received additional securities associated with a PPA, such as step-in rights.

The law enables parties into solving PPA disputes at international court, and also includes further clarified extrajudicial ways to solve a dispute, including mediation. It has been clearly stated that parties can apply their disputes for mediation process to international institutions. Previous disputes emerging out of, or associated with the PPA could be filed only to Ukrainian judicial system bodies.

A capital problem still remains open: how could offtaker reformation and new shapes and horizons of electrical energy market improve PPAs? According to legislative updates, parties agree that Energorynok obligations to buy electric energy amounts is annulled on the new market; and that the new PPA must be signed between a producer and guaranteed buyer.

Such new PPA will be based on the updated form, with regulator’s approval following consultations with the Energy Community Secretariat.

In real life, it could be problematic to implement such provisions whereby parties are obliged to enter into a future agreement without prior knowing of all the conditions; plus the FIT and its validity period are strictly formalized by the law.

The assignment should be finished no later than the new electricity market starts for operation. Energorynok will stay jointly liable to fulfill its obligations by the new offtaker.

At the early 2018 the state regulator made several updates to the template PPA form in order to improve the bankability and insurance perspectives of PPAs and optimize producers’ and creditors’ rights in spite of further reformation of the energy market.

Most of the risks connected with legislative changes or events beyond parties control are clearly vested in the offtaker. Bilateral contracts are enabled, whereby creditors can be a party of a PPA without any mandatory consent of the offtaker in case of a producer’s non-payment. Producers will have more rights to agreement termination and compensation from the offtaker.

The compensation amount is calculated in a quite extended way to include the nominal amount plus interest. It is not yet very understandable whether the offtaker will have the ability to undertake and perform under such mandatory conditions.

Some of legislative innovations may raise competition or provide various interpretations due to the lack of clear and precise legal norms on these points (e.g. calculations of producer’s profits, extended description of direct agreements, negotiation protocols, arbitration regulation etc.).

It remains unclear whether the innovative approach, particularly in terms of risk management and damages compensation, would prove its feasibility and predictability, and what benefits it will bring to the entire national electrical energy system.

After various amendments being adopted, new form of the PPA was updated considerably to enhance its banking and insurance attractiveness.

The main question is about the perspective further developments after electrical energy market rebuild and new offtake, and what effects on the RES-initiatives it will bring. The main understanding is that it is crucially important to provide the stability and integrity of offtake of electricity generated from RES under the FIT conditions, as the new law guarantees.

There are also other limits for renewable energy industry to expand. They include low chances to raise funds and extremely high cost of capital, too much bureaucratic regulations and overcomplicated land allocation mechanism, insufficient grid infrastructure, and institutional problems with grid quality.


RES in front of competitiveness and diversity

Europe clearly trends towards the progressive “balancing” of the legal status of various energy sources, the minimization or even complete abolishment of governmental support plans and grants for RES-based energy generation, and the implementation of terms for fair and less regulated competition for makers of electricity from different sources.

Such strategy can be considered as particularly reasonable in those states where RES-based energy generation already consists a large share of total energy amount.

Market-oriented instruments become more and more popular in European countries, such as, i.e., “contracts for difference”. A CfD stands for long-term finance tool forming a contract price where parties agree to sell/buy power during the contract validity term.

Such tool guarantees stable, foreseeable profits for energy makers, as it secures them against the risks connected with volatile market prices by the fixed price. It also facilitates to optimize the cost of capital and improves competition among various energy generation technologies and sources, as the contracts are usually signed after an auction.

After market-oriented instruments for renewable power generation have emerged, more sophisticated, multiplex and versatile approaches are being introduced in the use of such instruments. For instance, microgeneration distributes electric power under some FIT conditions, whereas other types of electricity generation are auction competitors for CfDs. These auctions can follow the principle of “technological neutrality”, and not make any privileges for some bidders or provide any additional profits according to the type of electricity generation technology or the source of the latter.

 At Ukrainian energy market we have proposals to implement new approaches to RES-generated electrical power, such as electricity sale auctions, which are gradually becoming more popular. It is quite easy to predict that instruments for RES-based electricity generation will continue its further diversification in Ukraine in nearest future, and will not be exclusively limited to some FIT agreements.

Everybody on the market agrees that auctions or other innovational instruments, notwithstanding their progressive role, and following realistic world trends in RES-industry development, should be implemented by little steps in order not to disintegrate the stable, integral and perspective legislative framework in Ukraine, and to prevent any harmful effects on long-term projects.


To each according to his work - the best investment window for photovoltaic power plants

There is growing global interest to diversify investment in photovoltaic industry through "green" enterprises’ shares and stocks. The gap in investment capabilities of large and small investors is thus removed, that makes this instrument especially attractive. For instance, Fig. 4 demonstrates how "green" stocks have risen, and recently they grow mostly due to small and medium investors, who may consider too problematic (and/or adventurously) to become a share proprietor in a separate photovoltaic project, but they have the possibility to make investments in solar generation as a whole. According to Rentechno group data, it is planned to invite at least triple more investments into new solar projects due to public financing than in 2017.

According to January BNEF report, in first 1,5 years after being placed on public markets Clean200™ Index of shares of 200 "pure" enterprises increased by 32.1% (see figure below). This is two times as much as 15.7% profits raise of fossil fuels energy generating companies (Global Energy Index S&P 1200). For comparison, S&P index for "clean energy" is also provided.



The profitability of the package of "green" shares Clean200™ compared to the profitability of the Index of "traditional" energy companies S&P Global 1200 Energy and the S&P Global Clean Energy Index. Source: BNEF, Jan. 2018 


Over the last 6 years, Paris Club members, which manage more than $6 trillion of funds, partly relocated their money from fossil generation with further plans to take all investments from there with RES reinvestment in the next 5 years.

Nowadays the share of RES-resources (not including large hydropower stations) in general energy balance of the country is ~1.6%, but this also means the huge potential to grow it's time to invest in promising technologies with breakthrough perspectives. Catch your chance to be involved in PV-tech which is doomed to win.

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