Tetiana Mylenka at Hillmont Partners law firm (Kyiv, London) answers key questions about the prospects for renewable energy in Ukraine.

 

• Is there any hope that the renewable energy sector in Ukraine is coming out of its crisis?

As of today, it is too early to say that the renewable energy sector in Ukraine is coming out of its crisis. The adoption of the long-awaited Law No. 810-IX should resolve the situation and partially fulfill the terms of the Memorandum of Understanding between the Government of Ukraine and two associations in the RES sector, but the crisis in the renewable energy sector still remains. The key element for RES electricity producers is the issue of payments. Most projects in the RES sector are built with borrowed funds, and producers therefore have their own obligations towards banks. Moreover, a great amount of credit funds has been issued by Ukrainian banks, and the lack of payments towards RES producers creates a chain reaction. Investors in the RES sector have agreed to a retrospective reduction of the “green” tariffs, but the state should nevertheless fulfill its obligations.

Currently, the situation with the Guaranteed Buyer’s payments towards RES electricity producers has slightly improved, but has not changed significantly. As of 26 November 2020, the total debt of the Guaranteed Buyer to RES electricity producers amounted to UAH 26.2 billion. The Guaranteed Buyer managed to pay off the RES electricity producers in full in August 2020 (UAH 5.2 billion) and September (UAH 4.7 billion). This was facilitated by the implementation of the provision of Law No. 810-IX on the allocation of NPC “Ukrenergo” funds received from the distribution of capacity allocation of the cross-border interconnectors. Accordingly, NPC “Ukrenergo” transferred UAH 780 million to the Guaranteed Buyer. In October, the level of settlements was 37.5%, and only 12.8% in the first 20 days of November. According to the Memorandum, 40% of the Guaranteed Buyer’s debt towards RES producers must be repaid in the 4th quarter of 2020.

The current situation around payments has resulted in RES electricity producers being forced to file claims in national courts against the Guaranteed Buyer. As of October, the total amount of claims amounted to about UAH 600 million. There are already the first court decisions in favor of RES electricity producers. Currently, foreign investors are consulting with counsels on filing claims to arbitration and, if the situation with payments does not improve, they will apply to arbitration courts for protection of their violated rights.

• Did the adoption of Law No. 810-IX stabilize the situation on the electricity market?

Law No. 810-IX concerns only the renewable energy sector, not the entire electricity market. In order to stabilize the situation in the RES sector, it is necessary that the provisions of Law No. 810-IX are fully implemented. As of today, we observe that the situation remains tense and unstable.

According to Law No. 810-IX, the Cabinet of Ministers of Ukraine must provide in the state budget expenditures for the financial support of the Guaranteed Buyer to pay for electricity generated from RES in the amount of not less than 20 percent of the forecasted marketable products of electricity generation from RES for the relevant year. Such expenditures are formed in accordance with the budget requests of the Ministry of Energy on the basis of calculations provided by the NEURC.

On 28 November 2020, the Law of Ukraine “On amendments to the Law of Ukraine “On the State Budget of Ukraine for 2020” No. 1006-IX of 17 November 2020 (Draft Law No. 4119) came into force enabling the repayment of debts to RES electricity producers. In particular, it envisages the provision of state guarantees to NPC “Ukrenergo” (TSO) under the decision of the Cabinet of Ministers of Ukraine for ensuring the fulfilment of its debt obligations to the SE “Guaranteed Buyer”.

In accordance with the Memorandum, another mechanism for increasing the level of payments under the “green” tariffs is NEURC’s review of the NPC “Ukrenergo” tariff for the electricity transmission services. On 4 November, the NEURC approved resolution on increasing the tariff for electricity transmission services from UAH 240.23 / MWh to UAH 312.76 / MWh from 1 December 2020.

• Is there any threat that the Constitutional Court will support the claim of 47 MPs and will recognize the provisions of “green” tariffs as illegal? What will happen to the electricity market then?

In my opinion, the constitutional submission concerning recognizing the provisions of legislation on the “green” tariffs as unconstitutional is far-fetched and politically motivated. The “green” tariffs have been in force in Ukraine since 2009 and only now is the question of unconstitutionality being raised. It is worth noting that this constitutional submission of 47 MPs was registered in the Constitutional Court of Ukraine on 17 July 2020, just before the adoption of the Law No. 810-IX dated 21 July 2020. It is interesting to note that some MPs who are co-authors of the constitutional submission voted in favour of Law No. 810-IX in the second reading.

In the constitutional submission, the authors request to recognize as unconstitutional the provisions regarding “green” tariffs, which concern only commercial RES producers, although private households, energy cooperatives and consumers also operate under the “green” tariff.

The Constitutional Court of Ukraine may adopt one of two decisions: to recognize the relevant provisions of legislation concerning “green” tariffs as constitutional or unconstitutional. If it is recognized that the relevant provisions are constitutional, then all legislative norms remain in force and commercial RES producers continue to operate at the “green” tariff under the same rules. If it is recognized that the “green” tariffs are unconstitutional, then the relevant provisions on the “green” tariff lose their legal force from the day of adoption of the decision on their unconstitutionality by the Constitutional Court of Ukraine, unless other term is specified in the decision itself. In this case, RES electricity producers will not be able to operate at the “green” tariff and will be forced to switch to auctions (when / if they are launched), sell electricity to consumers directly under bilateral agreements or sell electricity on the organized segments of the electricity market. Undoubtedly, such a development will hurt the investment attractiveness of Ukraine.

• Do you have a plan for how to improve the situation of SE “Guaranteed Buyer“? How is it possible to clear the enterprise’s billions of debts?

One of the potential positive steps to improve the financial position of the Guaranteed Buyer is the right to sell electricity produced from RES under bilateral agreements at auctions. For the first time, such an auction took place on the Ukrainian Energy Exchange on 5 October 2020. This step should increase the liquidity of the Guaranteed Buyer.

However, in order to improve the situation substantially it is necessary to keep manipulation and anticompetitive concerted actions out of the electricity market. The current version of the Market Rules allows generation entities to sell electricity volumes that significantly exceed the forecast balance of its production at prices that are significantly lower than the cost price. Over the last six months, we have observed how one of the state-owned generation companies has repeatedly sold electricity under bilateral agreements at prices that are on average 10-20% lower than the price of electricity on the Day-Ahead Market (DAM). The volume of electricity sold by such state-owned companies was several times higher than the real volume of electricity output. Furthermore, the cost of electricity sold was significantly lower than its production cost. As a result, the excess supply of electricity, not supported by real generation, systematically leads to the impossibility for the Guaranteed Buyer and SE “Energoatom” to sell electricity at market prices and entails significant economic losses for the state-owned enterprises.

The main reason for this situation is the ability of generation entities and traders to sell on different market segments of the unlimited volume of electricity, which is not confirmed by the real generation and at reduced prices. As a result, 70% of the Guaranteed Buyer’s electricity is sold on the balancing market with a discount of 45%, which leads to the impossibility of settlements with RES producers.

Moreover, the current mechanism for sale of electricity by the state-owned generation entities allows its sale at a reduced cost in comparison with market prices.

And this is just one example of manipulation on the electricity market. To eliminate such violations, it is necessary to improve regulations by defining the concept of “manipulation of the electricity market”, to establish equal conditions for the purchase and sale of electricity under bilateral agreements for public and private companies with ensuring monitoring activities of electricity producers and traders regarding electricity volumes and prices; to ensure effective mechanisms in order to prevent the deliberate creation of electricity imbalances, etc.

• Do you support the proposal to conclude “green” generation agreements with consumers directly?

I support it, undoubtedly. The mechanism of corporate PPAs, when an RES electricity producer sells such electricity directly to a consumer under a bilateral agreement, works in many developed countries. In 2019, corporate PPAs were concluded for a total capacity of 19.5 GW, of which about 70% is accounted for by the USA. Corporate PPAs can play an important role in enabling industrial consumers to move towards decarbonization. For the buyer, the value of a corporate PPA can be determined by the implementation of corporate commitments to use “green” technologies. Given this, we expect the first such consumers in Ukraine to be international and Ukrainian companies that have corporate commitments to use “green” electricity. Currently, some RES producers are already interested in the possibility of implementing corporate PPAs, but there are issues with finding consumers who will be ready to pay the cost of such electricity. If electricity prices continue to rise, it will contribute to the development of this mechanism.

With regard to the legal regulation of corporate PPAs, we can say that conclusion of such agreements is not prohibited by the laws of Ukraine, but in order to develop this segment it is necessary to implement clear operation rules and amend certain regulations (e.g., regarding balancing group). According to the current legislation, the term of bilateral agreements to be concluded during 2020 should not exceed 1 year, and should not be less than 6 months. The key feature of corporate PPAs in other countries is their long-term nature.

• When will the “green” auctions be launched in Ukraine? Why haven’t their rules been developed yet?

“Green” auctions were introduced by Law No. 2712-VIII, which was adopted on 25 April 2019. According to the Law, the auctions should start working in 2020, however, as we can see, this did not happen. In fact, the state does not comply with the provisions of adopted laws, something which diminishes investor confidence in Ukraine. The issue of the size of quotas to be allocated by technology for sale at auctions remains unresolved. The size of quotas is an extremely important issue that worries investors. Acting Minister of Energy Olha Buslavets stated in September this year that the auctions will be launched in 2021. In order to do this, it would have been necessary to set quotas for such auctions by 1 December 2020, which did not happen. Current legislation stipulates that the term of support for auction winners will be 20 years. “Green” auctions have been functioning in many countries for a long time, which allows the state to reduce the cost of electricity, and for RES producers – to have a stable source of the generated electricity sale.

As for the rules of “green” auctions, they are partially developed and adopted. General conditions for “green” auctions are specified in the Laws “On Alternative Energy Sources”, “On the Electricity Market”. On 27 December 2019, the Cabinet of Ministers adopted Resolution No. 1175, which approved the Procedure for Holding Auctions on Allocation of Support Quota and the Procedure for Selecting Electronic Platform Operators for Holding Auctions on Allocation of Support Quota, as well as defined the SE “ProZorro.Sale” responsible for ensuring the functioning of the electronic trading system – the administrator of the electronic trading system. On 13 December 2019, by the Resolution No. 2803, the NEURC approved the Template Power Purchase Agreement between the Guaranteed Buyer and the economic entity, which acquired the right for state support under the auction results. It should be noted that the Law No. 810-IX has improved certain rules for holding “green” auctions, therefore the relevant amendments should be made to the Procedure for Holding Auctions on Allocation of Support Quota.

• Let’s talk about ESSs. Why do you think we don’t develop energy storage systems?

In my opinion, this is due to the absence of legal regulation of energy storage systems, as well as the absence of incentives to stimulate development of these systems. Installation of energy storage systems is still quite expensive.

According to the approved Transmission System Development Plan for 2020-2029, based on preliminary estimates of NPC “Ukrenergo”, the necessary primary frequency regulation capacity should constitute 200 MW, which is one of the requirements for integration of the IPS of Ukraine into ENTSO-E. This may done with the help of energy storage systems. The generating capacities of the IPS of Ukraine are basic and are not designed for frequent and rapid changes in operating modes, while the parts of the system which can change operating modes have already partly used up their resource. Accordingly, the IPS has insufficient flexibility, which is mainly supported by hydroelectric power plants, hydroelectric pumped storage power plants and a small number of coal-fired thermal power plants with a capacity of 150-300 MW. Hydroelectric power plants and hydroelectric pumped storage power plants have their own limitations: a shortage of water in reservoirs in summer and restrictions on the operating mode. As for thermal power plants, some of them have exhausted their resources and some have not, but they have a certain time lag in their reaction.

However, one of the main problems is excess volumes of generation. In order to balance the system in such periods, the cheap non-maneuverable generation of nuclear power plants is significantly limited, significantly increasing the production of more maneuverable, but expensive and non-ecological generation of thermal power plants. This situation worsens the financial position of the Guaranteed Buyer and leads to an increase in the cost of electricity on the market.

According to the target development scenario, system-wide measures to increase the maneuvering ability of the IPS of Ukraine should be implemented as soon as possible and provide for the introduction of 2 GW of highly maneuverable capacities with a quick start and up to 2 GW of capacities for power and frequency control systems. Given that, as well as taking into account the dynamics of “green” generation development, the introduction of energy storage systems is more than relevant and necessary.

It is worth noting that there is some progress in the development of energy storage systems. According to the approved Transmission System Development Plan for 2020-2029, by the end of 2020, it is envisaged to complete the development of a feasibility study within the framework of a joint project of NPC “Ukrenergo” and RTE International for the implementation of the first energy storage system in Ukraine. The creation of the necessary reserve of primary/secondary regulation with a capacity of 200 MW is planned. The financial costs of the project implementation at this stage are estimated at about EUR 154 million. In addition, at the end of October 2019, NPC “Ukrenergo” signed a Memorandum with the EBRD on the joint implementation of a project for the development of a network of energy storage units with a capacity of up to 220 MW and modernization of the 220 kV “Azovska” substation.

 

• It seems that there are two draft laws for consideration in the Verkhovna Rada to support them. What is their fate?

Two draft laws on energy storage systems were registered: No. 2496 dated 26 November 2019 and No. 2582 dated 12 December 2019. Draft Law No. 2496, authored by the MP Maksym Yefimov, was returned to him for revision on 04 February 2020 and there was no further movement on this Draft Law. The Draft Law No. 2582, submitted by the MP Yurii Kamelchuk, is planned for consideration by the Verkhovna Rada’s Committee on Energy, Housing and Utilities Services, but has not been considered yet.

It should be noted that Draft Law No. 2582 requires significant revising as well. The Draft Law should reflect such principles of EU regulation as technology neutrality, unbundling (in this case it is a separation of the functions of the energy storage systems operator from the functions of the distribution system operator and transmission system operator), opportunities for non-discriminatory network connection for owners-operators of storage systems, terminology and definitions should be consistent with those contained in the Directive (EU) 2019/944 of the European Parliament and of the Council of 5 June 2019 on common rules for the internal market for electricity and amending Directive 2012/27/EU. In order to comply with the principle of unbundling, the necessity to establish restrictions for the transmission system operator and distribution system operators regarding the ownership, construction and operation of energy storage systems (with certain clearly defined exceptions) deserves special attention.

I would like to note that according to Law No. 2712-VIII dated 25 April 2019, the Cabinet of Ministers had to develop and submit the Draft Law on the introduction of incentive mechanisms for installation of energy storage facilities at power plants to the Verkhovna Rada within six months, which was not done.

• There is currently no regulation of hydrogen technology development. In your opinion, why hasn’t a draft law been developed?

It worth noting that hydrogen energy began to develop not so long ago even in EU countries, and in Ukraine hydrogen energy began to be actively discussed only during the last six months. During this time, active negotiations began with EU countries, in particular with Germany, concerning the development of hydrogen energy in Ukraine. On 8 July 2020, the European Commission presented the document “Hydrogen Strategy for a Climate Neutral Europe“. The European Commission identifies Ukraine as a priority partner and calls for the development of cooperation in the field of electricity production from RES, as well as hydrogen production.

Prior to that, the issue of hydrogen energy in Ukraine hadn’t risen to such a high level, and the relevant regulatory framework has therefore not been developed. First of all, a strategic baseline document has to be developed, which is likely to be the Hydrogen Concept of Ukraine. Furthermore, a regulatory framework has to be developed and adopted to ensure the functioning of the hydrogen energy sector of Ukraine and approximation of legislation to the EU. Another very important issue is the introduction in Ukraine of a standardization system in the field of hydrogen energy, developed on the basis of the international standards and norms for this type of fuel, as well as the creation of a system of metrological and certification support. Ukraine will also need assistance in developing requirements and safety measures in the process of production, storage, transportation and consumption of hydrogen, taking into account modern technologies of the leading EU countries.

The Ministry of Energy is currently developing the Hydrogen Energy Roadmap and will begin to work on the Concept for Development of Hydrogen Energy until 2050. I would also like to note that a relevant working group has already been set up within the framework of the Expert Council under the Ministry of Energy.

• Don’t you think that hydrogen technologies are too expensive, as even in Germany they exist as experimental technologies?

Indeed, hydrogen technologies are not cheap and require significant investment. Nevertheless, a significant decrease in the cost of RES-based hydrogen production can be observed. However, as of today, neither hydrogen from RES nor low-carbon hydrogen are cost-competitive in comparison with fossil-based hydrogen. According to the European Commission, as of today, the estimated costs for fossil-based hydrogen are around 1.5 euros/kg for the EU, highly dependent on natural gas prices, and disregarding the cost of CO2. Estimated costs today for fossil-based hydrogen with carbon capture and storage are around 2 euros/kg, and hydrogen from RES – 2.5-5.5 euros/kg. Costs for hydrogen production from RES have already been reduced by 60% in the last ten years. It is expected that the costs for hydrogen production will halve by 2030 compared to today.

The European Commission in its Hydrogen Strategy envisages that achieving of the set goals will require significant investments. The strategy contains a “Roadmap” until 2050, which consists of 3 phases. The first phase (2020-2024) provides for installation of at least 6 GW of electrolysers for the production of hydrogen from RES, as well as production of up to 1 million tons of hydrogen from RES in the EU. The second phase (2025-2030) provides for installation of at least 40 GW of renewable hydrogen electrolysers and production of up to 10 million tons of hydrogen from RES. In the third phase (2030-2050), hydrogen technologies should reach maturity, price competitiveness, as well as cover carbon-intensive sectors. It is expected that the total investment in hydrogen production from RES until 2050 will amount to EUR 180-470 billion.

• What kinds of hydrogen technologies are being developed in Ukraine? What will be implemented first?

As we know, hydrogen can be obtained either by electrolysis of water or from natural gas. The general expectation is that the production of “green” hydrogen will be developed in Ukraine, despite it being cheaper to use electricity from nuclear power plants for electrolysis. Accordingly, the question arises of the economic feasibility of “green” hydrogen. After all, is it not more expedient to use the industrial production of hydrogen by electrolysis to balance the power system as an alternative to conventional storage systems?

I would like to note that the EU is focused on the development of hydrogen production from RES. The European Association “Hydrogen Europe” recently presented the Green Hydrogen Investment and Support Report, which envisages the import of 3 million tons of hydrogen from North Africa and Ukraine. According to the document, the implementation of 40 GW electrolyser capacity in North Africa (30 GW) and Ukraine (10 GW) that will produce 4 million tons of “green” hydrogen, requires the implementation of about 77 GW of additional capacity for the production of electricity from RES. Given this, the European Union is planning to invest about EUR 20.1 billion in Ukraine until 2030 to implement 10 GW of capacity for the production of “green” hydrogen, in particular:

• EUR 3.5 billion for the construction of electrolysis facilities;

• EUR 13.3 billion for the construction of wind farms;

• EUR 3.3 million for the construction of solar power plants.

According to the document, for the 10 GW of integrated power plants from RES into production of hydrogen in Ukraine which will produce 1 million tons of hydrogen, the subsidy from the EU will be EUR 1 billion per year.

Ukraine should become a reliable partner of the EU in the production and supply of hydrogen. Ukraine has a powerful gas transmission system and is likely to be able to use it to transport hydrogen to the EU countries, where it is expected to be in significant demand.

The next step should be use of hydrogen in industry, for vehicles in order to replace carbonaceous fuels.

• What is the future of the “green“ generation in Ukraine? What will happen to the industry in 5 years?

Pretty sure that a “green” generation in Ukraine will be developed. Currently, the key issue is to settle the financial position of the Guaranteed Buyer and start paying for “green” tariffs in full. It will restore investor confidence in Ukraine and allow the sector to be further developed, and the state will avoid unpleasant and costly arbitration proceedings. For the reliable and safe development of the renewable energy sector, it is also important to construct new highly maneuverable capacity and energy storage systems.

I believe that Ukraine will borrow the experience of highly developed countries in the energy sector. In 5-10 years, it is likely that auctions for RES producers will be actively operating in Ukraine, producers will be able to sell electricity directly to consumers under bilateral agreements (corporate PPAs), contracts for differences will be introduced, and some RES facilities will be integrated into the production of “green” hydrogen.

***

Tetiana Mylenka is attorney-at-law, Counsel and Head of Energy Practice at Hillmont Partners law firm (Kyiv, London).