Located at the European Union’s frontier, having proWestern and pro-business government focus on implementing reforms, Ukraine is definitely worth to consider as investment opportunity.Download
1. Why Ukraine?
Located at the European Union’s frontier, having proWestern and pro-business government focus on implementing reforms, Ukraine is definitely worth to consider as investment opportunity. Ukraine is not very different from other emerging markets, but of course has its own particular features. Key attractive facts of the country:
1. Very rich natural potential of all renewable energy sources. Ukraine is in top tier European countries most suitable for generating electricity from wind and biomass. Country’s wind technical potential is estimated at 30 000 GWh. Ukraine has an impressive potential of biomass available for energy generation equal to 120 million tons per year.
2. Ukraine has developed legislation aimed to support the renewables sphere. The main advantage is one of the highest feed-in tariffs in the world, exemption from some taxes and customs duties for RES producers.
3. Ukrainian renewable energy market has not been widely advertised and promoted abroad, which is why competition has so far remained low, but is expected to grow rapidly.
4. National currency has lost much of its value recently and it means that Ukrainian based production and local assets are available for low prices for foreign investors.
5. Notwithstanding some political problems, Ukraine is successfully undergoing energy sector revolution, aimed to comply with EU standards.
6. International organizations such as EBRD, IFC, OPIC and others widely support renewable energy projects in Ukraine.
2. What are the feed-in tariffs and other incentives in renewable energy sector of Ukraine?
One of the most attractive incentives for investors in generation of electricity from alternative energy sources in Ukraine is the guaranteed by the state feed-in tariff. The state feed-in policy is called ''green'' tariff, was introduced in 2009 and will be open until 31 December 2029.
Energy sources such as wind, solar, biomass, biogas, micro-/mini-/small hydroelectric power plants, geothermal energy are eligible for the ''green'' tariff.
''Green'' tariff applies to legal entities generating energy from all types of eligible energy sources and to private households generating wind and solar energy.
The amount of the "green" tariff for biomass is set at the level of 0.1239 Euro/kWh until the end of 2019 and will be reduced further, i.e. – 0.1115 Euro/kWh from 01.01.2020 till 31.12.2024 and 0.991 Euro/kWh from 01.01.2025 until the end of 2029.
The State guarantees to provide access to the networks as well as that all amounts of produced electricity will be purchased by the guaranteed buyer (as of now it is a state enterprise) under a stipulated "green" tariff. Moreover, the "green" tariff is tied to Euro in order to protect investors from inflationary risks.
Another incentive is application of premiums from 5 to 10% to the "green" tariff in case of using equipment of Ukrainian origin at the energy facility that generates alternative energy.
The law also provides for some tax incentives for alternative energy producers, such as exemption from VAT taxation and import duty for import operations of equipment that operates on renewable energy sources, energy saving equipment and materials, etc.
3. Joint financing of alternative energy projects together with international financial organizations
Ukrainian government embarked on the path to low-carbon development to create and increase energy access, economic opportunities and to reduce carbon emissions. However, because of scarce state funding and investing of the renewable energy sector, the international community and the private sector engagement plays major role.
Most of renewable energy projects in Ukraine are financed by private companies at the expense of their own capital and loans from credit institutions, which include a small number of commercial banks, IFIs and donors.
As a matter of fact big RES projects are financed in cooperation with such international financial organizations and institutions as International Finance Corporation, International Bank for Reconstruction and Development, European Bank for Reconstruction and Development, The Council of Europe Development Bank, European Investment Bank, OPIC, NEFCO and others.
Almost each of the above-mentioned institutions has its strategy for investing in Ukraine’s energy sector. Some of them are aimed particularly on the alternative energy sector of Ukraine. When choosing either of the organizations, the investor shall closely investigate their financing conditions, namely in respect to the equity investors involved, their share, amount of investments proposed, requirements to the PPA, etc.
Following the good practice of international partners some Ukrainian banks are introducing ''Green banking'' strategies together with IFC. One of such national banks is the Ukrgazbank, which declared that its priority direction of work is aimed to financing projects related to efficient use of energy resources and reduction of negative environmental impact, namely biomass projects.
4. What are recent developments in regulatory environment of renewable energy in Ukraine?
Global popularization of "green energy" policy and necessity to attract foreign capital caused significant positive changes in regulation of Ukrainian energy sector.
Not so long ago a new Law of Ukraine "On market of electric energy" was adopted. The Law prescribes development of a totally new structure of Ukrainian electric energy market and rules of "play".
The main positive effect of this Law is to unbundle electric energy monopolies and to integrate Ukraine to the European Network of Transmission System Operators for Electricity.
To insure functioning of the new structure of Ukrainian energy market, some regulatory acts have already been developed and some are being finalized. Among them are: 1) Rules of the market of bilateral contracts; 2) Rules of the "day ahead" market; 3) Rules of the internal market; 4) Different types of model agreements; 5) Code of transferring system; 5) Code of commercial accounting, etc. All of them are developed in close cooperation with market participants and stakeholders.
Ukraine has recently joined IRENA statute which is aimed to help Ukraine increase green investments, get cheap loans for "green" projects, and develop joint mechanisms for financing the preparation and implementation of quality projects.
In order to make the model power purchase agreement bankable and to improve investment attractiveness of alternative energy sector, amendments to the PPA were adopted. New version of the PPA stipulates term of its validity till January 1, 2030, a right to sign so-called Preliminary PPA before start of construction works and commissioning of the power station was introduced. Furthermore the PPA establishes provisions, protecting investor from legislation changes.
5. Why Biomass?
Given Ukraine’s large territory, unique climate and natural resources, biomass represents a strong market opportunity for the country from the viewpoints of energy security, energy generation, and integration into the biomass supply chain. The land area of Ukraine is 60.35 million hectares, of which 70% are agricultural lands, 15.7% - forest lands. Correspondingly, main sources of biomass come from forestry, wood processing and agricultural companies.
According to IRENA report, Ukraine has the potential to increase renewable energy use tenfold from 87 petajoules (PJ) in 2009 to 870 PJ of the total final renewable energy in 2030. Out of this, 73% is accounted for heat, 20% by electricity generation, and 7 % by transport. Nearly 80% of this total comes from biomass technologies including heating buildings and industrial plants (particularly district heating), power generation, and transport fuels. By bringing this potential to energy production it is possible to satisfy 13-15% of the country demand in primary energy in the nearest perspective.
Besides availability of huge annual biomass resource equal to 120 million tons per year, biomass energy development in Ukraine is the most cost-effective due to the presence of stable raw material during the day and night and all seasons, as opposed to more expensive and cyclic solar energy and wind.
Lately biomass to energy production was the least popular alternative energy production in Ukraine due to absence of ready made solutions concerning particular issues such as: biomass supply and logistics, ash residuals disposal, etc. However, solutions to the mentioned concerns are already available for the market. So, while the Ukrainian biomass-to-energy market is just starting to evolve, this is a perfect time to invest.
6. What are typical mistakes while doing renewable energy project?
Almost any renewable energy project requires engagement of professionals from different spheres, e.g. lawyers, business advisors, finance officers, engineers, design and feasibility study developers, etc. There is no need to stress that such projects are complex to implement and thus many difficulties will arise. Hereby are some of the common mistakes, usually faced by investors.
While doing renewable energy project no person/company that will coordinate and control activities of all the engaged persons is defined. Similar mistake arises when at the very beginning of the project the step-by-step plan is not developed and is not being followed.
During development of the project’s business plan, Town-planning cadastre as well as provisions of certain legislative acts such as Tax Code, the law of Ukraine "On electric energy market" are not taken into account. Before starting a project the investor shall get acquainted with legislation in Ukraine and the specifics of the business environment.
Before acquisition, the due diligence of a land plot and its owner is not conducted at all or is conducted not enough scrupulous. Such negligence may cause serious consequences, e.g. there may be encumbrances over the land plot, easements, roads, power lines, security zones, etc.
Prior to acquisition of a land plot no necessary surveys, such as geodetic, topographical are carried out. Even if they are, it is recommended that the design development organization carried such surveys out, or at least agree the purchase of a certain land plot with the design development organization.
7. What to begin a renewable energy project with?
Before start of an energy project, particularly a biomass power plant, a variety of factors that may influence promotion and development of such project shall be considered.
From the very beginning it is worth to determine the location for the power plant and to find an appropriate land plot. Having determined the location it is essential to develop a business plan based on analysis of the following data:
- key organizational and technical solutions for building-up the technological process;
- market of raw materials and supplements needed for electricity production;
- logistics structure, possible ways for optimization of logistics expenses;
- initial and subsequent investments;
- estimated revenue vs. expenses and possible total income;
- potential risks.
The next step will be establishment of a legal entity.
8. What type of legal entity fits the project best?
The most common and most flexible type of legal entity for doing business in Ukraine is a Limited Liability Company (LLC). As in most other jurisdictions, LLC is a legal structure with members who are liable for the company`s obligations only in amount of their contributions to the share capital.
Key features of LLC:
- incorporation. Any individual or legal entity may apply for registration of LLC for free;
- members (shareholders). LLC must have at least one shareholder. There are no limitations on maximum amount of shareholders in LLC. Shareholders may be either resident or non-resident individuals, or legal entities;
- transfer of shares. Shareholders of an LLC may freely transfer their shares subject to preemptive right of other shareholders unless otherwise provided by the bylaws;
- managing bodies. Main managing body of an LLC is General meeting of shareholders, comprised of all shareholders. Executive body may be either a sole executive body – a Director or collective executive body – a Board of Directors (with Chief Director as a head). An executive body is responsible for all day-to-day operations and management of the Company. A non-resident may be appointed as a Director of the Company only after obtaining of a work permit. Shareholders may also establish Supervisory board of the company – a collective body which has controlling functions over executive body;
- director’s responsibility. Current legislation on LLCs in Ukraine provides several grounds for liability of Director of the company, e.g. for misleading of shareholders of the company regarding company’s financial status or for damages caused to the company. This gives the shareholders additional opportunity to control executive body;
- shareholders agreement. Shareholders of LLCs are allowed to enter into shareholders agreements and to settle within its scope possible deadlock situations between them;
- share capital. There are no limitations regarding minimum or maximum amount of the share capital of LLC. Contributions to the share capital may be either in monetary form, moveable/immovable property or proprietary rights;
- funding of LLC`s activity. An LLC may be funded through its shareholder’s initial and subsequent contributions to the share capital, non-repayable financial aid or loans provided to the LLC, etc.
9. How to register a legal entity?
In terms of improvement of doing business in Ukraine, the process of registration of a company has been much simplified recently. After providing the state registrar with a list of required documents, a company will be registered within 24 hours. However, prior to applying for registration of a company it is necessary to accomplish a number of actions as follows:
- draft the company`s charter (Articles of Associations);
- appoint a Director or Board of Directors;
- hold General meeting of the shareholders and pass a resolution on incorporation, approval of the charter and appointment of the management;
- submit an application to the State Registrar.
Having registered the company, it is required to file an application on Director’s appointment to respective local tax authority.
Moving forward, the company shall open a bank account for day-to-day operations. While opening an account the company will undergo KYC procedures, which may vary in different banks. Provision of false, incomplete or unreliable information may result in refusal of the bank to open an account.
With respect to the time, whole process may last from couple of days to several weeks depending on complexity of the project.
10. What issues will face the investor when acquiring a title over the land plot?
A land plot can be owned or rented by SPV. Both ways are suitable for renewable energy projects.
Situation which commonly occurs while searching for an appropriate land plot is that land plots are often too small to meet the requirements of the project. That is why usually investors have to deal with several landowners, that brings complexity.
Besides that while selling a land plot to foreign investor local landowners usually substantially overrate the sale price relying on the fact that investors are not well oriented in average market prices. In this connection it is advisable to have a local consultant, who can advise properly on the matter.
Legislation of Ukraine prescribes different types of restrictions for lands. A land plot may have easements, may be mortgaged or otherwise burdened with rights of third parties. Without proper analysis of the targeted land plot, problems may arise after the land is purchased. For example, certain types of lands may not be eligible with RES projects due to their close location to residential premises or may be a part of natural guard fund, etc. In most cases it will be necessary to change the designated purpose of the land plot in order to have a possibility to develop a RES project. In any case, it is strongly advisable to carry out due diligence when acquiring the land.
11. How to change the designated purpose of a land plot?
To change the designated purpose of a land plot the following steps shall be carried out:
Step 1. To issue a notarized application for change of the designated purpose of the land plot, signed by the owner.
Step 2. To get a land administration project. Change of the designated purpose of a land plot is carried out on the basis of a land administration project for land allotment. Drafting of such a land administration project takes in average from one to several months, during which additional actions shall be conducted (development of mapping materials, drawings, etc.).
Step 3. Drafted project regarding change of the designated purpose of a land plot has to be approved by such organizations:
- local authority of the State service of Ukraine for geodesy, cartography and cadaster;
- local department of Architecture and urban development;
- for some categories of land plots – other organizations (authorities of forest and/or water organization, protection of cultural heritage, ecology etc.).
Term of approval by each authority is 10 working days. But generally obtaining of such approvals takes much more time because of formalities which such authorities can require to change or correct.
Step 4. After receiving all the necessary approvals, it is required to apply to local department of the State land agency of Ukraine with the application for changing the information about the land plot in the State land cadaster. Term for consideration of such application is 14 days.
Step 5. The last stage is registration of such change in the State register of ownership rights to immovable property, which on the applicant’s choice can be conducted by a notary or a state registrar.
It shall be mentioned that current legislation of Ukraine provides certain peculiarities of changing the designated purpose of a land plot especially for valuable lands. In addition, the change of the designated purpose of a land plot of nature-preserving and other environmental, historical-cultural and forest managing purposes, which is owned by state or municipal authorities, is carried out after approval by the Cabinet of Ministers of Ukraine.
12. What documents compose project design documentation? Is it legal to use in Ukraine project design documentation, developed abroad for similar projects?
Project design documentation includes text and graphic materials which define town-planning, space-planning, architectural, constructive, technical, technological conditions and estimation of construction objects.
Development of project design documentation consists of independent but logically linked stages. Every stage is characterized by preparation of certain documents, namely: feasibility study, feasibility calculation, preliminary project, project, working project, detailed documentation, etc. All aforementioned documents compose together project design documentation.
Generally project design documentation that was prepared abroad can be used in Ukraine but only in parts that are not in conflict with Ukrainian rules. The main complication is connected to the fact that Ukrainian process of project design documentation development is based on national State construction rules that are different from European standards (rules) and are not harmonized with them. Disparities that arise are usually related to fire safety standards, construction requirements, etc. Differences between Ukrainian and foreign standards cause necessity to carry out amendments to the already developed project design documentation, that in majority cases generates increscent of construction costs.
13. How to choose the developer of project documentation in Ukraine?
Success of any project depends largely on developing clear, accurate and comprehensive project design documentation. This is the key documentation that investors and stakeholders will use to evaluate the project’s potential. Because completion of the project design documentation is a substantial and expensive undertaking, project developers have to be chosen very thoroughly.
Investors shall prefer those project developers that have experience (the more – the better) in development of similar projects and that are located in the area where the project is intended to take place.
Another criteria which is a specific feature of Ukraine, is that the project developer shall have close touch with appropriate authorities on the territory, where the project is located.
14. When is it required to conduct public hearings during EIA?
Public hearings are essential part of Environmental Impact Assessment procedure (hereinafter – EIA) which is compulsory for certain types of activities, namely gas and oil refineries; capacities for production of electricity, steam and hot water with a heat capacity of 50 megawatts or more with the use of organic fuel; highways; public roads with four or more lanes, special canals on land; waste treatment; deep drilling; agriculture, forestry and water management; production and processing of metal; processing of mineral raw materials; construction of some infrastructure projects, etc.
One of the main principles of EIA is transparency, which requires public disclosure of every stage of EIA and involvement of community. Such involvement is made in process of public discussion in forms of feedback collection and public hearings.
Within the process of public discussion public hearings are carried out to identify, collect and take into consideration comments and suggestions of the community regarding possible impact of energy production facilities on the local environment. Minutes and report on public hearings are integral part of conclusion on EIA drafted by Ministry of Ecology and Natural Resources of Ukraine.
It is prohibited to start the planned activities specified above without conduction of EIA and public hearings respectively. Moreover, in order to pass state expertise the project design documentation on construction of certain energy facilities shall be supplemented by conclusion on EIA.
15. How are public hearings conducted?
Conduction of public hearings prescribes certain steps, among which are: publication of announcement about start of public discussion of the EIA report; conducting of public hearings; consideration of community’s comments and suggestions that were received during public hearings and discussion; preparation and disclosure of the report on public discussion by means of its introduction to the Unified Environmental Impact Assessment Register.
Public hearings start with a report of chairman (representative of the Ministry of Ecology and Natural Resources of Ukraine), who presents substance of the issues to be discussed, composition of the participants and agenda of public hearings.
Afterwards the table goes to the entity which is going to execute the planned activity. The entity describes the planned activity, main provisions and conclusions of EIA report, information about possible negative influence on environment, measures that are aimed to prevent or eliminate significant negative environmental impacts, other information.
Following that all other participants may ask questions and the speakers shall answer. All suggestions and comments that were made during public hearings are recorded in the minutes of public hearings.
It is worth mentioning that even in case of absence of community representatives at the public hearings, such public hearings are considered to be valid.
16. What are the technical conditions for grid connection and how to obtain them?
Obtaining of technical conditions is the initial stage of grid connection. The technical conditions for grid connection are a complex of terms and requirements for the engineering provision of the customer’s object with electrical energy and are an integral appendix to the grid connection agreement.
The law establishes two types of grid connection - standard and non-standard. Standard connection is a connection at a distance not exceeding 300 m in a straight line from the power plant to the point of connection and which is differentiated according to the power level. The first level is up to 16 kW, the second level - from 16 kW to 50 kW. Accordingly, if the power capacity exceeds the above thresholds, or other parameters (distance to the point of connection) are not consistent with the above mentioned, then such connection is considered to be non-standard. Also a connection is considered as non-standard if the voltage at the point of connection and the point of power supply do not coincide.
The energy transmission operator or the energy distribution operator provides grid connection services in accordance with terms of corresponding grid connection agreement, namely: prepares technical specification for engineering and technical conditions, ensures reconstruction and/or re-equipment of external electrical supply electric networks of customer’s electrical installations (from the point of power supply to the connection point of the customer's electrical installations) ensures execution of construction, installation and commissioning works on a competitive basis, provides arrangement of electricity metering units and performs primary connection of the plant.
17. Are there any restrictions on grid connection?
One of the most difficult barriers for renewable energy projects is the condition of Ukrainian electric networks. According to data of the National Energy and Utilities Regulatory Commission the remaining lifetime of electric networks is approximately 10-11 years. The poor technical condition of electrical networks increases costs of connection and complicates designing documentation.
Also, in case of non-standard grid connection at the level of Oblenergos (local grid operators), there are difficulties in forecasting terms and lack of transparency in the process of obtaining technical conditions and signing agreement on connection to the grid.
Besides state of electrical networks, the situation related to obtaining of technical conditions (hereinafter – TC) for new RES projects is also complicated. The total capacity of renewable energy objects that have obtained perpetual technical conditions has almost reached frontier of grid connection capacity in the scopes of existing network configuration. Such situation is mainly observed in places with the biggest potential of solar and wind energy in Ukraine. At the same time, significant number of power capacities that already obtained TC have not been commissioned.
Issuing of perpetual TC caused situation of indefinite "reservation" of more than half of power capacity for renewable energy projects in Ukraine. To solve this problem, it is proposed to limit the validity term of TC by three years period from the date of its execution.
Another obstacle is that new construction, reconstruction, technical re-equipment of electric networks from the connection point to the customer's object are carried out by the customer or at the expense of the customer.
18. How to ensure the required annual amount of biomass for the plant?
It is very important to make sure that there is enough biomass fuel around the power plant within radius of at least of 70 km (or another radius determined by the business plan). It is possible to provide the necessary amount of biomass for the station by concluding contracts with biomass suppliers - lumber companies, wood processing companies, agricultural producers. Process of search for suppliers and conclusion of contracts should be started after obtaining of technical conditions for grid connection. In order to minimize the risks of crop failure of supplier or their bankruptcy, supply contracts should be concluded for a long-term and for more volume of biomass than is required for the plant’s operation.
For ease of logistics and fuel safety, it is recommended to collect supplied biomass in different warehouses.
Depending on the capacity of the power plant, it will be necessary to build operational warehouses directly near the plant to ensure biomass stock for a certain period of time.
19. What to do with waste products after burning the biomass?
The main waste product resulting from burning biomass is ash. Utilization of ashes is a significant part of power generation. The choice of utilization option must deal with different kinds of biomass ash. Type of the burning facility and composition of the fuel are the main factors that influence ash quality. Different kinds of the burning facilities result in multiple kinds of ash flows, each with differences in morphology, composition and leaching behavior. Classifications of ashes are between fly ash and bottom, and between ashes from fluidized bed combustion, fluidized bed gasification, grate stokers and entrained flow gasification.
In general there are three main options to utilize the ashes: a) utilization as (raw material for) fertilizer; b) application as building material or as component in the manufacture of building material; c) re-use as fuel.
Biomass ashes may be used directly as a fertilizer or soil improver or may be used as a raw material in production of a fertilizer. However, in Ukraine use of fertilizers or soil improvers is limited and legislative conditions have to be complied. Under certain circumstances there may arise a necessity to develop and approve in subject authorities technical conditions - a normative document which stipulates technical requirements, describes the process of ash production and ways of its usage. In other cases there may be a necessity to perform state registration of ashes as fertilizers. The procedure is rather difficult, costly and long-lasting.
Utilization of biomass ashes as building material or as component in manufacture of building material can be a sustainable form of utilization, however such ashes have to be eligible to certain technical and chemical criteria. For example possibility to use carbon-rich fly ash in building products is almost zero, at the same time bottom ash can replace some kinds of sand in road construction or landscaping.
Utilization as fuel is a viable option for ashes with a significant amount of unburned carbon. In practice, this option is limited to carbon-rich fly ashes from fluidized bed gasification.
20. How to ensure logistics needs of a biomass power plant?
One of the very important stages of biomass power plant project implementation is ensuring of logistics needs, i.e. packing and collecting, baling, storing and transporting of the biomass.
The experience of operating bioenergy plants shows, that solution for a logistic functioning is a use of a logistics company. The task of such logistics company is to optimize the material biomass flow – the baled straw from the fields of agricultural producers to the biofuel power station. It lies in the most complete consideration of limiting factors and assumptions of logistic environment, which have an impact on constructing the real logistic model in the conditions of Ukraine.
For the time being, it is hard to find in Ukraine a logistics company that will be able to ensure all logistics needs of the project for reasonable fees. In such a case it may be more expedient to create own separate enterprise, namely a logistics centre, as a legal entity in the shape of limited liability company in addition to the biofuel power station itself.
Its advantage over the structural unit of power station is, first of all, a higher responsibility for the results of work, which will be secured by contractual obligations and financial viability. Furthermore, such enterprise will be territorially separated, and this will enable to decrease environmental footprint around the power station. Also, quite a lot of disputes may arise over liability in accidents, damage to the material, and injury to property or persons during logistics operation. Having a separate legal entity for logistics can help mitigate these risks in many ways.
21. Construction stage. What are the main steps in legal meaning?
In general the steps at the stage of constructing a power plant may be divided into two categories.
• notification of the State architectural and construction inspection or its territorial bodies about commencement of preparatory works;
• notification of the local state administration or local self-government body and state bodies in the field of fire and technological safety on the beginning of preparatory works;
• registration of declaration on the commencement of construction works or obtaining a construction permit from the State architectural inspection;
• notification of the local state administration or local self-government bodies and state authorities in the field of fire and technological safety on the commencement of construction works.
Post construction, which prescribes:
• carrying out commissioning of equipment and systems;
• acceptance of the facility in operation;
• registration of the commissioned facility in the state statistics authority;
• informing state bodies in the field of fire and technological safety on the introduction of the facility in operation;
• conclusion of contracts for supply of necessary resources for the operation of the object: water, gas, heat, electricity (engineering networks) with corresponding enterprises, institutions and organizations.
22. What are the main licensing requirements for production of electricity?
In order to provide activities on production of electricity from alternative energy sources the law prescribes necessity to obtain a license as well as to comply with licensing terms that consist of staff, organizational, technical and special requirements.
Staff requirements prescribe that all electricity producers must duly execute a staff list with specification of minimum number of employees, availability of certain education, qualifications and work experience necessary for performance of works related to electricity production. At the same time, no certain requirements are envisaged as to which exact professionals have to be hired.
According to organizational requirements, all activities on production of electricity must be carried out only with the use of equipment that was specified as available at the moment of filing the application for obtainment of the license. If an enterprise intends to replace any equipment, it is required to inform respective authority. Equipment involved in production activity must belong to the enterprise on the right of ownership or rent/lease.
Electricity producers are obliged to disclose duly examined and approved by an independent auditor annual financial statements. Such statements along with information on all energy sources used for production of electricity must be published on official web-site of the producer.
Also the requirements stipulate that all produced electricity, except some specific cases, has to be sold on the wholesale electricity market. For this purpose producers have to become members of the wholesale electricity market.
Finally, it is not allowed to exercise control over a power plant by a resident of states that carry out armed aggression against Ukraine.
23. How to receive "green" tariff?
The right to receive "green" tariff is entitled to entities that have constructed and commissioned power generating facilities as well as have obtained or are intending to obtain a license for production of electricity and generate electricity from alternative energy sources. The "green" tariff will be valid until January 1, 2030.
In order to receive "green" tariff the producer must submit a package of documents to relevant state authority. Among such documents (not exclusively) are: a) justification of articles and elements of expenses for the cost of electricity production; b) copy of registered declaration of the beginning of construction works or permit for construction works; c) copy of technical conditions for grid connection; d) copy of registered declaration of readiness of the facility for operation.
The package of documents for "green" tariff may be submitted together with application for the license.
24. What is the mechanism of energy sale?
RES producers have several options on energy sale. As of now they can either use the "green" tariff support scheme or to enter into contracts on a bilateral basis. Within the framework of bilateral agreements RES producers will define their contractors, prices and volumes of supplies. At later stages of new energy market development there will also be a possibility for RES producers to bid into the Day Ahead Market pool and/or the Intra-Day Market and the Balancing Market.
Sale of electricity at "green" tariff may be carried out after commissioning the power plant, receiving the license for electricity production (or for cogeneration), receiving the "green" tariff and joining the multilateral agreement on wholesale market of electricity.
Terms of purchase and sale of electricity at "green" tariff, including premiums to it, are based on the bilateral agreement between the producer and the State Enterprise "Energorynok" (further will be reorganized to the Guaranteed Buyer) – the model PPA. It is worth to mention, that the model PPA may be concluded even before commission the plant, in case of fulfilment of certain obligations stipulated by the law.
The Guaranteed Buyer shall pay for electricity purchased from producers at the "green" tariff for the actual amount of electricity released at the power plant on the basis of metering data obtained from the metering administrator, in a manner and under terms determined by relevant agreements minus any own consumed quantities.
On later stages RES producers will be obliged to enter a balancing group of producers under the "green" tariff on the basis of corresponding PPA. Furthermore they will have to provide the Guaranteed Buyer on a daily basis with their production schedules (forecasts). The deviation of actual volumes of supply of electricity from their daily schedules of electricity delivery for the next day shall be considered as imbalances. Accordingly, the producers will have to reimburse their imbalances.
25. What taxes apply to activity of a power plant?
Activity of a power plant is followed by certain taxes related to the land plot, the income and the employees.
The land plot is taxed in case it is owned by the plant. For owned land plots a land tax is applied. Land tax rates are set by local municipal authorities as a percentage of the monetary valuation of the land plot. In any case such tax rate shall not exceed 3% of the monetary valuation.
Company’s profit from selling electricity is subject to corporate income tax with a tax rate of 18 % and the VAT with a tax rate 20%.
While paying the salary the power plant shall act as the tax agent of its employees and shall pay the following taxes:
- personal income tax with a tax rate of 18 %;
- military tax with a tax rate of 1,5%;
- unified social tax with a tax rate of 22%.
26. Are there any tax incentives for green energy producers in Ukraine?
Some operations connected with production energy from alternative sources are exempted from VAT. In particular this clause applies to operations of import on the custom territory of Ukraine of:
- equipment that operates on renewable energy sources, energy saving equipment and materials;
- equipment and materials for production of alternative fuels or for production of energy from renewable sources of energy;
- materials, equipment, components used for production of equipment that works on renewable energy sources;
- materials, raw materials, equipment and components that will be used in production of alternative fuels or production of energy from renewable sources of energy.
Abovementioned operations are exempted from taxation of VAT and custom duties provided that imported goods (according to the list, approved by Cabinet of Ministers of Ukraine) are used by the taxpayer for his own production and if identical goods with similar qualitative indicators are not produced in Ukraine. Unfortunately, such list of specific materials and equipment is not yet approved, which actually means lack of possibility to use this privilege.
27. Return of dividends
Dividends paid by a Ukrainian resident to the non-resident, are subject to 15% withholding tax, unless international double tax treaties provide otherwise.
Some Bilateral treaties on avoidance of double taxation and prevention of fiscal evasion with respect to income tax provide much lower rates – up to 5 %, in case some obligatory conditions are performed, e. g. in case the non-resident owns not less than certain amount of shares of Ukrainian resident or has invested in the shares or other rights certain amount of funds.
An entity has the right to apply a reduced tax rate under the relevant international agreement of Ukraine at the time of payment of income to non-resident, if such non-resident is the beneficial (actual) recipient (owner) of income and is a resident of the country with which Ukraine has signed an international treaty.
As to the dividends paid in foreign currency in favour of non-residents there are restrictions regarding period for which such dividends can be paid and total amount of dividends which can be paid during one month. Thus, dividends in favour of non-residents can be paid only for the period up to and including year of 2017 and total amount of such dividends paid during one month shall not exceed 7 000 000 USD or the equivalent of this amount in another foreign currency at the official exchange rate of hryvnia to foreign currencies established by the National Bank of Ukraine on the date of the relevant transaction.
Profit from which dividends are planned to be paid shall be previously taxed with corporate income tax at the rate of corporate income tax - 18%. Besides that the sum of dividends is not subject to taxation of VAT.
28. What are the main attractive features of PPA with alternative energy producers in Ukraine?
Regulator amended the model PPA in order to make it more bankable for investors. Among the main features that are of big interest for investors are:
1) agreement is effective until 01.01.2030;
2) arising disputes may be resolved either in a court of Ukraine or in arbitration under the Arbitration Rules of the International Chamber of Commerce (ICC) in Paris Arbitrage;
3) price of electricity purchase is the "green" tariff to be stipulated;
4) possibility to conclude the PPA before construction and commissioning of the plant is established. However, in such a case the PPA becomes effective only when producer fulfils all condition precedents, including among others: obtainment of a license for production of electricity, receipt of the "green" tariff, etc.;
5) the list of force majeure situations is more focused on armed conflicts and related situations;
6) costs received from Energorynok according to the PPA can be assigned by the producer to creditors for usage of such costs as financial instrument to secure creditors' rights.
29. Shall we expect "green" bonds and auctions as the support model for producers of energy from alternative sources in Ukraine?
State Agency of Energy Efficiency and Energy and UNIDO project "Increasing of energy efficiency and encouraging use of renewable energy sources in agro-food and other small and mid-size enterprises in Ukraine" are aiming to create the market of "green" bonds in Ukraine. "Green" bonds are one of the effective financial instruments for attracting investments in renewable energy projects.
"Green" bond is a debt instrument, funds from selling of which are directed exclusively on financing of "green" projects (both new and existing). The main issuers of "green" bonds are EBRD, World Bank, International Finance Corporation and European Investment Bank. One of the advantages of emission of "green" bonds is the possibility of access to the market of climate financing including Green Climate Fund which can provide financing for related programs. Implementing of "green" bonds in Ukraine will help to reduce the amount of financial recourses needed for realization of "clean" energy projects and will allow mobilizing necessary investment resources.
Also with an aim of obtaining additional opportunities to attract investments in the sphere of renewable energy sources the Regulator established a working group for discussion and development of support scheme for producers of energy from alternative sources in the form of auctions.
They are planned in "one stop shopping" auction principle which prescribes provision to the investor of secured land, all necessary permits, grid access, pre-determined fees/levies to local budgets etc. Investor, who will offer the lowest price per 1 kW*h for PPA duration (15-20 years) will be the winner of the auction. Penalties for underperformance and delays will apply to auction winners. It is intended that such novelty will bring more transparency and competiveness to the sector.
30. How the energy market in Ukraine will change in 2019?
In order to implement its international legal commitments in the energy reform sphere, the Verkhovna Rada of Ukraine on April 13, 2017 adopted the Law "On market of electric energy". The law envisages a change from the current single buyer model market, where State Enterprise "Energorynok" buys all electricity in the country and then sells it to regulated and non-regulated distributors, to a new liberalized market.
An important component of the new market should be the principles of fair competition; equal rights to sell and buy electricity; free choice of supplier; non-discriminatory and transparent access to transmission and distribution systems; non-discriminatory participation in the electricity market; independent regulation; and non-discriminatory price- and tariff-setting which reflects actual costs.
According to the new market model, a balancing market, an ancillary services market, a day-ahead market and an intra-day market as well as market of bilateral contract shall become effective starting July 1, 2019.
In the new model of the market the leading role will be assigned to two key operators: Ukrenergo NPC SE (the future transmission system operator) and Energorynok SE (market operator).
Current Oblenergos will be obliged to separate their distribution activities from electricity supply activities. Accordingly it is expected that Oblenergos will be divided into two separate companies:
- the operator of the distribution system, which will provide reliable and safe operation, maintenance and development of the distribution system and distribute electricity;
- electricity supplier, which will sell electricity to consumers, using networks of distribution system operators.
The new market will also create new responsibilities for market participants. Each producer and supplier will be responsible for deviation from the schedule of production or consumption, and accordingly will bear liability in case of imbalances.
Recent Draft Law on introduction of certain changes to Laws of Ukraine regarding ensuring competitive conditions for generation of electricity from alternative energy sources #8449 on introduction of auctions as new ways of stimulation of green energy production in Ukraine should be carefully considered as well.