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Kinstellar Energy Digest Ukraine, December 2018 in Review

January 2019 – Kinstellar Energy Digest Ukraine, December 2018 in Review

RENEWABLES: New rules may promote more environment-friendly solutions

In December 2018, the President of Ukraine signed the Law of Ukraine “On Amending the Tax Code of Ukraine and Other Legislative Acts of Ukraine on Improving Administration and Revision of Some Taxes and Fees” No. 2628-VIII dated 23 November 2018 (“Law No. 2628”). Law No. 2628 extends the period of VAT exemption for imports of electric cars by an additional three years and creates more opportunities for investors in renewable energy (“RE”), as described below.

Import VAT exemptions for RE plant equipment

Law No. 2628 exempts certain imported equipment for the construction of RE plants from VAT from 1 January 2019 until 31 December 2022. The VAT exemptions apply to:

  • wind power generation units (code 8502 31 00 00 under the Ukrainian Classification of Goods of Foreign Economic Activity (the “UCGFEA”));
  • photovoltaic and related elements (UCGFEA code 8541 40 90 00);
  • transformers with capacity exceeding 10,000 kV·A (UCGFEA code 8504 23 00 00);
  • invertors with capacity exceeding 7.5 kV·A (UCGFEA code 8504 40 88 00).

More solar panels at production plants: amended land regulations for RE installations

As a rule, a power station must be located on land specifically designated for such purpose. Typically, to install RE power stations, the investor must apply for a change of the designated purpose of the land plot to “J.14.01 - lands for placing and operating power plants” – a type of a designated land purpose belonging to the category of industrial lands (“J. Lands for industry, transport, telecommunications, energy, defence and other purposes”).

Law No. 2628 introduces an exemption from the above rule for the development of certain RE installations. If the RE installation is to be located at a site already designated as industrial land, no change of designated land purpose is required.

It is expected that this change will promote the construction of RE installations on land adjacent to manufacturing facilities, warehouses and other industrial buildings.

RENEWABLES: The Draft Law introducing e-auctions passes the first reading

On 20 December 2018, the parliament adopted in the first reading draft law No. 8449-д “On Ensuring Competitive Terms of Production of Electricity from Renewable Sources” (the “Draft Law”).

The most critical amendments to the Draft Law were presented during parliamentary debates and include a revision of the feed-in tariff (the “FIT”) for RE plants, as follows:

  • solar stations: the FIT is reduced with immediate effect by 25% and by a further 1.5% annually over the following three years;
  • wind parks: the FIT is reduced with immediate effect by 10%, and by a further 2.5% annually over the following three years.

Under the Draft Law, successful bidders obtain the right to state support in the form of the obligation to off-take energy produced from RE sources and to pay for it for a period of 20 years. To retain this right to state support, the successful bidder must commission the RE plant in a timely manner: within two years for solar installations and three years for other RE plants (extensions are possible only with additional bank warranties).

Below is a short overview of the key provisions of the Draft Law.

Compulsory bidding

The bidding is required for the future RE plant if the following criteria are met:

  • a share of the specific type of renewable energy source among total sales of energy produced from all alternative energy sources exceeds 15 %;
  • the installed capacity of the RE plant or construction stage thereof (the “RE plant”) exceeds the following thresholds:

-  in 2020: 20 MW (wind farms) and 10 MW (other RE plants);

in 2021-2022: 20 MW (wind farms) and 5 MW (other RE plants);

-  from 2023 onwards: 3 MW (wind farms, including a sole wind installation) and 1 MW (other alternative energy sources).

A voluntary participation in the bidding process is permitted.

Availability of the FIT

Introduction of the e-auctions limits applicability of the feed-in tariff, but does not cancel it. The Draft Law states that  the FIT will apply to:

  • RE plants commissioned prior to 1 January 2020;
  • RE plants commissioned on or after 1 January 2020 for which the bidding is not compulsory;
  • RE plants for which a pre-Power Purchase Agreement (“pre-PPA”) is entered into on or prior to 31 December 2019, and such RE plant is commissioned within two years from entering into the pre-PPA;
  • the household’s or other customer’s own wind and solar energy installations within permitted limits and if a special FIT for such installations is established by law.

Bank warranty

To participate in an e-auction and subsequently enter into an off-take agreement, a bidder must, inter alia, obtain a bank warranty. The amount of the various bank warranties are as follows:

  • primary bank warranty to participate in an e-auction – EUR 5,000 per 1 MW;
  • additional bank warranty by the successful bidder – EUR 10,000 per 1 MW;
  • additional bank warranty to prolonging the maximum construction term – EUR 30,000 per 1 MW.

Microgeneration

The Draft Law changes the approach to microgeneration by allowing all customers (not only households) to produce electricity from RE sources and to sell it at a special FIT. The threshold for permitted generation by customers is raised to 50 kW, and for some solar stations to 500 kW. The Draft Law also updates the FITs for microgeneration.

Technical conditions validity

Generally, all technical conditions are valid until completion of construction works. However, the Draft Law introduces changes to construction regulations by limiting the term of validity of the technical conditions for grid connection (the “TCs”) issued specifically for the construction of RE plants.

If the Draft Law is adopted in its current wording, the TCs will have the following maximum terms of validity:

  • for TCs issued after entry of the Draft Law into effect:

- 2 years – for solar installations;

-  3 years – for other types of RE installations.

The terms of validity for TCs is calculated from the date of issuance of the TCs.

- 2, 3 or 4 years (i.e., during the maximum term of construction of the RE plant) – for successful e-auction bidder.

  • for TCs issued at least 2 years prior of the entry of the Draft Law into effect:

- 1 year – for solar installations;

-  2 years – for other types of renewable energy installations.

The terms of validity for TCs is calculated from the entry of the Draft Law into effect. However, if on the day the Draft Law enters into effect no document granting the right to start construction has been obtained, such TCs shall be automatically terminated.

  • for TCs issued less than 2 years prior of the entry of the Draft Law into effect:

- 2 years – for solar installations;

- 3 years – for other types of renewable energy installations.

The terms of validity for TCs is calculated from the date of issuance of the TCs.

The adoption of draft law No. 8449-д remains on the watch list of RE investors in Ukraine. See the June issue of Kinstellar’s Energy Digest for a review of draft laws Nos. 8449 – 8449-7 and our note regarding an earlier initiative to limit the term of validity for TCs.

OIL AND GAS: The Government announces the sale of lucrative oil and gas fields via PSAs and Licenses

On 18 December 2018, the Ukrainian government announced the sale of 12 hydrocarbons fields under production sharing agreements (“PSAs”).

The government has issued the relevant twelve resolutions on holding the competitions, the winners of which will be entitled to enter into PSAs (the “PSA Competition”) and approved the terms of the PSA Competition. Recently, on 5 January 2019, the resolutions (Nos. 1178-1189) were published in the official gazette.

Under the Law of Ukraine “On Production Sharing Agreements”, a call to enter into a PSA must be announced no later than two (2) months after adopting the decision on holding such a competition.

Below is the list of fields for which decisions to hold competitions have been adopted:

(1) Grunivska Field:

  • location: Sumy, Poltava regions;
  • acreage: 1,108.36 square kilometres;
  • minimal investment in the first stage of exploration: UAH 850,000,000 (approximately EUR 26.5 million or USD 30 million).

(2) Buzivska Field:

  • location: Kharkiv, Dnipro Regions;
  • acreage: 669.65 square kilometres;
  • minimal investment in the first stage of exploration: UAH 600,000,000 (approximately EUR 18.7 million or USD 21 million).

(3) Berestianska Field:

  • location: partially in Lviv, partially in Kharkiv Region;
  • acreage: 286.38 square kilometres;
  • minimal investment in the first stage of exploration: UAH 450,000,000 (approximately EUR 14 million or USD 16 million).

(4) Sofiyivska Field:

  • location: Chernihiv, Sumy, Poltava Regions;
  • acreage: 2,715.95 square kilometres;
  • minimal investment in the first stage of exploration: UAH 1 billion (approximately EUR 31 million or USD 35.7 million).

(5) Ivanivska Field:

  • location: Kharkiv Region;
  • acreage: 841.61 square kilometres;
  • minimal investment in the first stage of exploration: UAH 800,000,000 (approximately EUR 24.9 million or USD 28.5 million).

(6) Varvynska Field:

  • location: Chernihiv, Poltava Regions;
  • acreage: 3,471.26 square kilometres;
  • minimal investment in the first stage of exploration: UAH 1 billion (approximately EUR 31 million or USD 35.7 million).

(7) Okhtyrska Field:

  • location: Sumy, Poltava, Kharkiv Regions;
  • acreage: 717.25 square kilometres;
  • minimal investment in the first stage of exploration: UAH 600,000,000 (approximately EUR 18.7 million or USD 21 million).

(8) Ichnianska Field:

  • location: Chernihiv Region;
  • acreage: 2,477.65 square kilometres;
  • minimal investment in the first stage of exploration: UAH 1 billion (approximately EUR 31 million or USD 35.7 million).

(9) Zinkivska Field:

  • location: Sumy, Poltava Regions;
  • acreage: 571.4 square kilometres;
  • minimal investment in the first stage of exploration: UAH 500,000,000 (approximately EUR 15.5 million or USD 17.8 million).

(10) Balakliyska Field:

  • location: Kharkiv Region;
  • acreage: 1119.25 square kilometres;
  • minimal investment in the first stage of exploration: UAH 800,000,000 (approximately EUR 24.9 million or USD 28.5 million).

(11) Rusanivska Field:

  • location: Sumy, Poltava Regions;
  • acreage: 766.56 square kilometres;
  • minimal investment in the first stage of exploration: UAH 800,000,000 (approximately EUR 24.9 million or USD 28.5 million).

(12) Ungivska Field:

  • location: Lviv, Ivan-Franko Regions;
  • acreage: 967.44 square kilometres;
  • minimal investment in the first stage of exploration: UAH 600,000,000 (approximately EUR 18.7 million or USD 21 million).

Once the call for investors to sign PSAs is announced, potential investors will have three months to prepare the application to participate in the competition and pay the participation fee, which is UAH 300,000 (approximately EUR 9,360 or USD 10,700). Under the PSA, the investor may produce different types of hydrocarbons, such as natural gas, oil, condensate, shale gas, gas from central basins, and gas (methane) from coal deposits. The state’s share of production shall be determined within the competition procedure; however, it must not be less than 11%.

Earlier in December 2018, the government announced the sale of 30 natural gas blocks through e-auctions. The first international oil and gas licencing round will take place on 6 March 2019 with ten blocks offered. To download information on these blocks, please follow the link (available in English).

HYDROCARBONS: New royalty rates for oil and gas condensate

From 1 January 2019, the following new royalty rates for oil and gas condensate apply:

  • 31% (instead of 29% in 2018) - for oil, natural gas condensate produced from wells with the depth of the deposit less than 5,000 m;
  • 16% (instead of 14% in 2018) - for oil, natural gas condensate produced from wells with the depth of the deposit more than 5,000 m.

ELECTRICITY: Regulator approves methodology for calculating grid connection fees

On 22 December 2018, Resolution on Approving Methodology (Procedure) for Calculating the Fee for Connection to the Distribution and Transmission Systems No. 1965 adopted by Ukraine’s National Energy and Utilities Regulatory Commission (the “Regulator”) on 18 December 2018 (the “Resolution”) came into effect.

According to the methodology approved by the Resolution, the fee for a standard connection to the distribution system will be calculated based on the capacity applied for and a flat tariff for the standard grid connection. The fee for a non-standard connection to the distribution system will be calculated based on the capacity applied for, the flat tariff for a non-standard grid connection plus a fee for the construction of linear connections to the power grid. The methodology further details a number of formulas to calculate the above-mentioned tariffs.

The Regulator will annually approve the flat tariffs for standard/non-standard connections to the distribution system by 1 December.

For connections to the transmission system, the grid connection fee will be determined on a case-by-case basis according to the project budget, which forms part of the design documentation.

For further information please contact: Olena Kuchynska, Partner, at

e-mail

and Viktoriia Pysmenna, Associate, at ,