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Kinstellar Energy & Natural Resources Digest: Ukraine. April 2019 in Review

May 2019 – Kinstellar Energy & Natural Resources Digest Ukraine, April in Review

OIL & GAS: the PSA tender is announced for the new offshore block

On 12 April 2019, the Ukrainian government adopted a decision to hold a public tender to enter into a 50-year production sharing agreement (“PSA”) for the development of the offshore hydrocarbon field known as “Dolphin”.

The Dolphin field is located in the north-western part of the Black Sea. With a total area of 9,536 square kilometres, it is the largest block put forward to date for a PSA tender in Ukraine.

The types of resources that may be produced under the PSA include natural gas, oil, condensate, and shale gas to a depth of 10,000 meters.

The state’s share of production will be determined within the competition procedure; however, it must not be less than 11%.

The state requires the investor to drill at least five exploration wells within first five years of exploration.

The minimum investment requirement is UAH 1,500,000,000 (USD 55,000,000).

Timing of the PSA Competition

According to Ukraine’s State Service of Geology and Mineral Resources (the Derzhgeonadra), the deadline to submit applications to the Ministry of Energy and Coal Industry is 17:30 EET on 12 June 2019.

Brief overview of application procedure

To apply, an applicant submits a sealed set of documents (the “Application”), a supporting letter and proof of payment of the participation fee, which is UAH 300,000 (approximately EUR 9,810 or USD 11,200). The Application must also be submitted in electronic form. The submitted documents must be in the Ukrainian language or translated into Ukrainian.

The PSA Interagency Commission – a special agency tasked with organising the entering into and operation of PSAs – will refuse registration of the Application if no evidence of payment of the participation fee is enclosed. After the deadline for applying, the PSA Interagency Commission opens the Applications to check whether all required information and documents have been provided; if not, the Commission adopts a decision by which it rejects the application on the basis of incomplete documentation.

The Applications will be evaluated using a score-based system within a month from the application deadline. The following criteria will be taken into account:

  • Work Programme: the best Work Programme and its focus on the comprehensive development of the field and early production – maximum 80 points;
  • Work Programme – environment: rational use of resources according to the Work Programme – maximum 15 points;
  • Work Programme – financing: level of financing of the Work Programme – maximum 30 points;
  • know-how: experience in exploration and production of hydrocarbons, including from unconventional sources – maximum 45 points;
  • investments: the highest amount of investment – maximum 35 points;
  • state share: attractiveness of the suggested state share (the minimum share is 11%) – maximum 30 points;
  • local component: ensuring the use of goods, services and works of Ukrainian origin – maximum 20 points;
  • environment: efficiency of the environmental protection measures – maximum 15 points.

The competition documentation is available Ukrainian language only, but the Dolphin description is also available in English and can be downloaded via this link.

RENEWABLES: New power purchase agreement and rules for the purchase and sale of electricity under feed-in tariffs in Ukraine

On 26 April 2019, Ukraine’s National Energy and Utilities Regulatory Commission (the “Regulator”) approved a number of acts governing the activities of the producers of energy from renewable sources (“RES-E producers”) and the Guaranteed Buyer, including the Template Power Purchase Agreement (the “New PPA”) and the Rules for the Purchase of Power under the Feed-In Tariff (“Rules”).

For RES-E producers selling power to the State Enterprise ‘Energorynok’ (“Energorynok”), the Rules set out a deadline to enter into an additional agreement by 1 July 2019 to align the current power purchase agreement with the wording of the New PPA and to replace the current off-taker (Energorynok) with the Guaranteed Buyer.

The majority of the bankable features of the PPA are kept

The bankability of the PPA is a major factor in attracting financing for new projects. Ukrainian law already provides for many elements of a bankable PPA, such as entering into a PPA for the whole term of FIT effectiveness, fixation of the payments in euro, obligation to off-take and pay for all power produced and dispatched, and a compensation obligation for power that was not dispatched due to fulfilling the operational orders of the transmission system operator.

The New PPA combines many bankable features that were first introduced in earlier years, such as a thorough force majeure clause and alternative dispute resolution options, including arbitration at the International Chamber of Commerce in Paris. However, unlike the previous wording, the New PPA does not include, among others, the step-in rights of creditors, and its provisions on termination gives less protection for RES-E producers.

Not only a PPA: the Rules that will ‘replace’ some provisions

Unlike the previous wordings of the PPA, the new wording differs in its approach to regulating relations between the RES-E producer and the off-taker. The terms of off-take, payment terms, metering matters, the procedure to notify about planned volumes of electricity generation, and the liability for imbalances are governed by the Rules and the PPA only refers to their relevant clauses. Such an approach will allow for more flexibility for the Regulator, which is especially useful at the outset of the full launch of the new energy market scheduled for 1 July 2019. However, one of the shortcomings of this approach is a risk of changes that may affect project implementation.

Procedure to enter into PPA

To conclude a PPA, the potential RES-E producer submits an application and a set of supporting documents to the Guaranteed Buyer, which is obliged to send the signed copies of the PPA within 15 business days from the date of receipt of the documents. The applicant needs to sign and return the signed copy within three business days.

The set of documents differs depending on whether or not the applicant has obtained a feed-in tariff. All potential RES-E producers must submit certified copies of their charter, order or other internal documents on the appointment of the CEO or authorised representative who will sign the PPA, including a signature sample. Applicants without an established FIT must additionally submit documents confirming rights to land, a grid connection agreement (GCA) and a relevant construction authorisation (permit or declaration).

An incomplete or defective set of documents (where the information provided is not accurate) will result in a refusal to process the application, which the applicant will be notified of within three business days.

Procedure to amend the PPA by current RES-E producers

To enter into the amendment to the PPA, the RES-E producer submits to the Guaranteed Buyer an application and a set of supporting documents (the same as required for entering into the PPA). Within two business days, the Guaranteed Buyer applies to Energorynok for entering into the amendment and the parties start the exchange of the signed additional agreements.

Assuming the Guaranteed Buyer is satisfied with the application and the supporting documents and does not refuse to consider them, the whole procedure takes more than three weeks, not including the term for delivery of the documents.

Entry into effect

The Rules and the New PPA are not yet effective. The majority of the provisions of the Rules will enter into effect on 1 July 2019, although certain provisions, including on the procedure for amending current PPAs, will be effective from the date following their publication in the official gazette.

RENEWABLES: Bill introducing e-auctions for renewable energy production passed by the parliament

On 25 April 2019, the Ukrainian parliament voted to approve bill No. 8449-д “On Ensuring Competitive Terms of Production of Electricity from Renewable Sources” (the “Bill”).

The Bill introduces a new concept of ‘state support’ – i.e., the obligation of the state to purchase, for a period of 20 years, all power off-taken from producers of electricity from renewable sources (“RES-E producers”) at a price determined by auction. At the same time, the Bill limits the applicability of the current feed-in (‘green’) tariff (“FIT”) and revises current FIT indices. In addition, the Bill also regulates other matters such as the terms of validity relating to the technical conditions for grid connection, energy cooperatives, and other initiatives.

The Bill will enter into effect after its signature by the president on the day following its official publication, although some provisions on quotas will enter into force on 1 January 2023. At present, the Bill has not yet been signed by the Head of the Ukrainian parliament because of proposals filed by members of parliament to cancel the voting results for the Bill. Parliament is expected to vote to approve or reject these proposals on 14 May 2019.

Ukraine currently has one of the highest feed-in tariffs for renewable energy in the world. The newly proposed system of e-auctions is designed stimulate competition among RES-E producers and lower prices for consumers.

Before the new system of e-auctions can be launched, the government must first adopt the Rules on Holding Auctions for State Support Distribution. The Regulator must also draft and approve the Template Power Purchase Agreement for auction winners and update other legislative acts to align them with the Bill.

Although the final text of the Bill has not yet been made available, below is an outline of the key developments according to the latest published version of the Bill.

E-auctions: compulsory or voluntary?

The Bill provides for compulsory and voluntary participation in semi-annual e-auctions. Generally, a potential RES-E producer will be obliged to compete at an e-auction if it uses solar (1 MW or more) or wind (5 MW or more) technology for power generation. This rule is subject to exceptions in the following situations, where RES-E producers will continue to benefit from the FITs:

  • if the renewable energy plant (“RE plant”) is commissioned prior to 1 January 2020;
  • if the RE plant, for which bidding is not compulsory, is commissioned on or after 1 January 2020;
  • if a pre-Power Purchase Agreement (“pre-PPA”) is entered into on or prior to 31 December 2019 and relevant RE plant is commissioned within two years (solar) or three years (other RE plants) from the date of entering into the pre-PPA;
  • if the RE installation belongs to a household or another customer and a FIT has already been granted for such an installation.

FITs as the auction price ceiling: ups and downs

The Bill revises the FIT indices in both directions: biomass and biogas installations commissioned from 2020 may qualify for a higher FIT, while the FIT indices for solar and certain wind technologies are decreased.

  • Biomass, biogas

Previously, in line with other technologies for power generation from alternative energy sources, the FIT for biomass and biogas was supposed to be decreased twice: in 2020 and in 2025. Instead, the Bill abolishes this decrease and keeps the same indices (2.3 – approximately 12.35 euro cents per 1 kW), which makes it the highest FIT among all RE plants in Ukraine from 2020.

  • Wind and solar

The years 2020-2024 will be quite intense for solar and wind projects: the FIT will drop on an annual basis. However, the drop in the tariff for wind technology is not as significant as for solar energy, as illustrated in Tables 1 and 2 below.

Table 1 Wind Technologies - click here.

Table 1 Solar Technologies - click here.

By 1 December of each year, the Ukrainian government will approve the annual quota for the next five-year period to be distributed via e-auctions. Unless the government decides to hold so-called ‘technology-neutral auctions’, the annual quota will be divided according to the technologies used, where 15% is the minimal quota for technologies other than solar and wind.Quotas

The amount of the quota will be suggested by the Ministry of Energy and Coal Industry of Ukraine and approved by the State Agency on Energy Efficiency and Energy Saving of Ukraine. In determining the quotas, Ukraine’s international obligations relating to promoting the development of renewables will be taken into account, as well as the Energy Strategy of Ukraine, the Plan for Development of the Transmission System and the assessment report on the sufficiency of generating capacities.

Unused quotas can be transferred to another period, based on the government’s decision.

Documents required to participate

To participate in an e-auction a potential bidder must submit an application, a bank warranty, information on the ultimate beneficial owner (UBO) and entities interconnected by control relations, evidence of its readiness to start construction of the power station, and other information on the bidder:

  • excerpt from the company register, copies of the documents on the company’s management bodies and their composition;
  • сopies of land title documents confirming the right to use land (lease), ownership or right to use land for construction (superficies);
  • copy of grid connection agreement (GCA).

Bids

The auction bidder will submit a closed bid identifying the capacity for which state support is sought and a price proposal that shall be not higher than the effective FIT. Interestingly, the price ceiling is the FIT effective on the date of holding the e-auction, although generally the FIT is linked to the date of the commissioning of the power plant.

The lowest bidder will obtain the right for state support, unless there are grounds for refusal to sign the minutes and enter into the power purchase agreement (PPA).

Timeline

Within 15 working days after the auction the successful bidder and the Guaranteed Buyer shall enter into a PPA, if the former provides an additional, irrevocable bank warranty in the amount of EUR 15,000 per 1 MW. The primary bank warranty is returned to the successful bidder within five working days from the publication of the concluded PPA. The 20-year obligation to off-take all electricity produced and discharged is calculated from the day following the commissioning of the RE power plant.

Dispute resolution: arbitration

The Bill allows for arbitration at the International Commercial Chamber in Paris. To ensure this option is viable, the RES-E producers that opt for arbitration shall pay an additional fee to the Guaranteed Buyer that must not exceed 1% of the net profit of the RES-E producer for the previous accounting period.

Small-scale generation

The revised FITs for small-scale generation are differentiated by the capacity of the generation unit (up to 50 kW or 150 kW, both inclusive) and the applicability of the FITs is broadened. Customers may produce power at beneficial FIT rates from biomass, biogas or energy of wind, sun, water or geothermal energy units with capacity of up to 150 kW. Households may produce power from either wind or sun energy or from wind and sun combined and apply for a FIT if their generation unit does not exceed 50 kW.

Key dates and numbers

Auction organisation

  • Pilot auction: 31 December 2019 at the latest.
  • Latest auctions: in 2029.
  • Frequency: semi-annually, in April and October.
  • Auction organiser: the Guaranteed Buyer.

State support

  • Duration of state support: 20 years from the date of commissioning of the RE power plant and start of off-take.
  • Currency of payments: UAH, although the auction price is fixed in EUR.

Bank warranty

  • For bidders: EUR 5,000 per 1 MW.
  • For successful bidders: EUR 15,000 per 1 MW.
  • For prolongation of the construction term for 1 year: EUR 30,000 per 1 MW.

Promotion of the competition

  • Limits of state support: annual quotas set out by the Government (available from 2020).
  • Limits for one bidder and related bidders with the same UBO: maximum 25% of the annual quota.
  • Specific quotas for solar and wind energy: 15% – solar (30% in 2020-2022) and 15% – wind (30% in 2020-2022).

Terms for constructions

  • Solar parks – 2 years.
  • Other RE plants – 3 years.
  • Extension – possible upon paying an additional bank warranty (EUR 30,000 per 1 MW).

 

For further information please contact Olena Kuchynska, Partner, at

e-mail

, and Viktoriia Pysmenna, Associate, at .