Feed-in-tariff in Ukraine: general regulation and risks

Anna Gladshtein. Center for Academic Publications, Materials of International Conference “Research of Conceptual Foundations of Modern Science” as of 3 November 2012.

Feed-in-tariff in Ukraine: general regulation and risks

One of the principles of state policy of Ukraine reflected in Article 5 of the Law on Electric Energy [1] is promotion of alternative energy as clean energy and without fuel segment by setting “green” tariff and payment to power plants that generate electricity using alternative energy sources (except for blast furnace and coke gases, and for hydro – produced only a small hydroelectric power plants), all produced electricity by them to the fullest extent in cash, without any kind of set-off debts for the payment for electricity. However, According to the Energy Strategy of Ukraine until 2030 [2] only 2% of total energy production shall be from alternative energy sources by the 2030.

The main objectives of the National Commission that conducts state regulation in energy sphere (NERC) are formation and maintenance of a register of energy facilities that use alternative energy sources (except for blast furnace and coke gases, and for hydro – only small hydropower). In addition, NERC provides implementation of state policy on the promotion of electricity from alternative energy sources, including through the approval of contracts for the purchase of such electricity wholesale electricity market of Ukraine in support of state guarantees established by law.

Pursuant to article of the12 Law on Electric Energy NERC, which performs state regulation in energy, while approving the investment programs of owners of electric networks must take full account of the cost of connection to the electricity networks of power facilities that generate electricity using alternative energy sources.

Moreover, NERC annually publishes information on the costs for connection to electric networks of power facilities that generate electricity using alternative energy sources.
Pursuant to article 15 of the Law on Electric Energy the purchase of all electric power and its wholesale is performed on the wholesale electricity market of Ukraine. Operation of other wholesale electricity market in Ukraine is prohibited.

Wholesale Electricity Market of Ukraine is obliged to purchase under “green” tariff electricity, produced by alternative energy sources (except for blast furnace and coke gases, and for hydro – produced only a small hydroelectric power plants) and not sold under contractual prices directly to consumers or distribution companies that conduct economic activities in the supply of electricity at regulated tariffs.

Electricity produced from alternative energy sources can be realized by “green” tariff for direct contracts with consumers. Thus, the body authorized by the Cabinet of Ministers of Ukraine issues to the consumer the document of established format confirming purchase of the energy produced from alternative energy sources and determines the order of usage of this document.

Pursuant to Article 17-1 of the Law on Electric Energy Ukraine ensures that entities that generate electricity from alternative energy sources from the operative energy plants will be subject to order on stimulating the production of electricity from alternative energy sources established on the date of place in operation of energy plants. If any amendments are introduced to the law governing the procedure of stimulating the production of electricity from alternative energy sources, business entities are free to choose a new order of stimulation.

Furthermore, Ukraine guarantees legislative consolidation of the requirement for purchasing of the electricity produced from alternative energy sources through the entire period of “green” tariff application.

It should be taken into consideration that the indicated order on stimulating the production of electricity from alternative energy sources is applied on condition that from 1 January 2012 the share of raw materials, equipment, works and services originated from Ukrainian in the cost of construction of the electricity generating facility that produces electricity using alternative energy sources is not less than 15 percent, from 1 January 2013 – 30 percent, and from January 1, 2014 – 50 percent.

An additional condition for application of this procedure for stimulating the production of electricity using solar energy from January 1, 2013 is utilization of the on-site power solar modules, in which the value of the share of raw materials of Ukrainian origin is not less than 30 percent, and from 2014 – 50 percent.

Pursuant to the Law of Ukraine on Electric Energy “green” tariff is a special rate under which electric energy produced from alternative energy sources (except for blast furnace and coke gases, and for hydro – produced only a small hydroelectric power plants) is purchased.

“Green” tariff is adopted by NERC for the business entities that produce electricity from alternative energy sources (except for blast furnace and coke gases, and for hydro – produced only a small hydroelectric power plants).

Pursuant to the Law on Electric Power for business entities that generate electricity using alternative energy sources, “green” tariff is established to 1 January 2030.

The amount of “green” tariff is established individually for each business entity that generates electricity using alternative energy sources, for each type of alternative energy and for each object of energy.

As a standard practice NERC issues a separate resolution for each applicant for the benefits of “green” tariff. By this resolution NERC indicates the calculated amount of “green” tariff and the period of its application (commonly till the expiration term of “green” tariff, i.e. till 2030).

The amount of “green” tariff for business entities that generate electricity from solar energy is set at the retail tariff for consumers of voltage for January 2009 calculated using the tariff rate applicable for peak hours (for three-zone tariff classification), multiplied on a coefficient of “green” tariff for electricity generated from solar energy.

Furthermore pursuant to the Law On Electric Energy the coefficient of “green” tariff for electricity generated by operating (or significantly upgraded) electric power platforms after 2014, 2019 and 2024, is reduced to ten, twenty and thirty percent respectively of its basic amount. Under this law power platforms that produce electricity using alternative energy sources are regarded as ‘substantially modernized’ when the cost of modernization of power generating equipment is more than fifty percent of original cost of such equipment.

The grounds for termination of application of “green” tariff for business entities using alternative energy sources may be the following [8]:

a) Expiration of “green” tariff;
b) Failure of business entity to provide or provision of false information about the activity of the business entity producing electricity from alternative energy sources to NERC;
c) Revocation of a license to conduct business activity with the production of electric power or license to conduct business activity with a combined production of electricity and heat;
d) In other cases envisaged by legislation.

According to the current practice in most cases the license was revoked under the application of the business entity. Therefore, under the initiative of NERC there were no revocations of licenses.

Fixed minimum amount of “green” tariff for business entities is established by transferring in euros the value of “green” tariff, calculated under the rules of the Order [8], as of 1 January 2009 for the official exchange rate of National Bank of Ukraine.

The amount of “green” tariff can not be less than the fixed minimum amount of “green” tariff, which at each date of setting the retail rates for consumers is transferred into the national currency at the official exchange rate of National Bank of Ukraine at that date.
The decision to establish fixed minimum quantities of “green” tariff as of 1 January 2009 for each type of alternative energy in accordance with the Order [8] is adopted at NERC open meeting. This decision is placed on the website of the NERC and published in the printed edition of the Commission – NERC Newsletter.

“Green” tariff is paid in UAH and at the same time pegged to EUR. Therefore, any fluctuations in the UAH – EUR exchange rate are reflected in the regularly adjusted tariff.
Since the “green” tariff is established with connection to euro the currency risk is mitigated to the fullest extent. Moreover, the minimum amount of “green” tariff is set in the legislation and is therefore legally binding.

Considering that pursuant to the Law on Electric Energy for business entities that generate electricity using alternative energy sources, “green” tariff is established to 1 January 2030 and the threshold of the minimum fixed “green” tariff is set by the law the possibility to change the tariff is highly unlikely. Moreover the legislation contains exhaustive list of conditions for termination the application of “green” tariff.

Since the “green” tariff is paid in UAH and at the same time pegged to EUR, the currency risk is mitigated due to regular (commonly on a monthly basis, adopted by NERC) adjustment of the amount of “green” tariff to reflect fluctuations in UAH-EUR exchange rate.

Список використаних джерел

1. The Law of Ukraine “On Electric Energy” as of 16 October 1997.
2. Energy Strategy of Ukraine until 2030 as of 15 March 2006 No. 145-р.
3. The Law of Ukraine “On Alternative Sources of Energy” as of 20 February 2003.
4. Resolution of National Commission for Electricity Regulation of Ukraine as of 23 July 2009 No. 857 “On Establishment of Fixed Minimum Amount of “Green” Tariff”.
5. The Law of Ukraine “On Amendments to the Law of Ukraine “On Electric Energy” concerning Ensuring the Commitments of the State on Stimulating the Usage of Alternative Energy Sources” as of 3 June 2011 No. 3486-VI.
6. The Law of Ukraine “On Amendments to Several Laws of Ukraine on Establishing “Green” Tariff” as of 25 September 2008 No. 601-VI.
7. Decree of the President of Ukraine “On Measures Concerning Maintenance of the Activity of the NERC” as of 14 March 1995No. 213/95.
8. Resolution of NERC as of 22 January 2009 No. 32 “On Adoption of the Order of Establishment, Review and Termination of “green” tariff for Business Entities”.
9. Resolution of NERC as of   29 September 2011 No. 1701 “On Setting the Values ??of “Green” tariffs for electricity in October 2011”.