Opportunities for Investment in the Renewable Energy Sector in Ukraine

Since russia’s full-scale invasion, Ukraine has faced unprecedented challenges in the energy sector, including the need to quickly replace lost generation, including through the construction of new renewable energy sources (RES). The government is currently taking all possible regulatory actions aimed at attracting investment in the development of renewable energy production, as we shall discuss below.

In particular, on 09.08.2023, the Law of Ukraine On Amendments to Certain Legislative Acts of Ukraine on the Implementation of Investment Projects with Significant Investments, No. 3311-IX (hereinafter – Law No. 3311-IX ), which provides for state support for businesses with significant investments, came into force.

Thus, state support for investment projects with significant investments may be provided to an investor with significant investments in the following forms:

• ensuring the construction of engineering and transport infrastructure facilities (highways, communication lines, heat, gas, water and electricity supply, engineering communications, etc.) at the expense of the state, local budgets and other sources not prohibited by law or compensation at the expense of the state, local budgets and other sources not prohibited by law for the cost of engineering and transport infrastructure facilities built by the applicant or investor with significant investments (highways, communication lines, facilities;
• exemption from compensation for losses of forestry production of an investor with significant investments for the implementation of an investment project with significant investments in accordance with the Land Code of Ukraine.

In turn, an investment project with significant investments, for the implementation of which state support may be provided under this Law, must meet all such requirements:

1. an investment project with significant investments is implemented on the territory of Ukraine in the areas of the processing industry (except for the production and circulation of tobacco products, ethyl alcohol (except for the production of bioethanol intended for use as a fuel component), cognac and fruit, alcoholic beverages), biogas and biomethane production (including liquefied or compressed), extraction for the purpose of further processing and/or enrichment of minerals (except for coal and lignite, crude oil and natural gas), waste management, transport, warehousing, postal and courier activities, logistics, education, scientific and scientific and technical activities, healthcare, art, culture, sports, tourism, resort and recreation and electronic communications;
2. an investment project with significant investments provides for construction, modernization, technical and/or technological re-equipment of investment objects in the areas specified in clause 1 of this part, purchase of necessary equipment and components thereto, and may also provide for construction at the expense of the investor with significant investments and/or the applicant of engineering and transport infrastructure facilities necessary for the implementation of an investment project with significant investments;
3. creation of at least 10 new jobs with an average salary of employees that is at least 50% higher than the real average salary for the relevant type of activity in the region where the project is implemented for the previous calendar year during the period of implementation of the investment project with significant investments, or 30 new jobs with an average salary of employees that is at least 30% higher than the real average salary for the relevant type of activity in the region where the project is implemented for the previous calendar year, or 50 new jobs with an average salary of employees that is at least 15% higher than the real average salary for the relevant type of activity in the region where the project is implemented for the previous calendar year;
4. the amount of significant investments in investment objects for the implementation of an investment project with significant investments exceeds the amount equivalent to EUR 12 million, calculated at the official exchange rate set by the National Bank of Ukraine as of the first business day of the quarter in which the application is submitted and as of the date of actual implementation of significant investments in investment objects under a special investment agreement.
5. the term of implementation of an investment project with significant investments does not exceed five years.

The evaluation of an investment project with significant investments is carried out by the authorized body and includes:

1. verification of compliance of the applicant, the investment project with significant investments and the submitted documents with the requirements established by law (first stage);
2. analysis of an investment project with significant investments and a draft special investment agreement (second stage):

• • analysis of   financial, social and environmental impacts of an investment project with significant investments;
  • analyzing the risks of implementing an investment project with significant investments;
  • analysis of the forms and total amount of state support proposed to be provided for the implementation of an investment project with significant investments;
  • Analyzing the draft special investment agreement and preparing comments on its revision, if necessary.

The Antimonopoly Committee of Ukraine, the central body of executive power that ensures the formation and implementation of state financial and budget policy, the central body of executive power that ensures the formation and implementation of state legal policy, the central body of executive power must be involved in the evaluation of an investment project with significant investment, which ensures the formation and implementation of state policy in the field of environmental protection, the central executive body, which ensures the formation of state policy in the field in which an investment project with significant investments is expected to be implemented, and a local self-government body (if state support is provided by such a body for implementation of an investment project with significant investments). Other state bodies may also be involved in the assessment in accordance with their remit.

In addition to the above-investment support, the legislator has also simplified the requirements for allocation and change of land designation. In particular, the Law of Ukraine No. 3563-IX of 6 February 2024 On Amendments to Certain Legislative Acts of Ukraine on Simplifying the Procedure for Changing the Designated Purpose of Land Plots for Attracting Investments for the Rapid Reconstruction of Ukraine came into force, which simplifies the mechanism for changing the designated purpose of land plots outside settlements for the location of such facilities:

• industrial and warehouse buildings;
• non-residential agricultural buildings;
• pipeline, electronic communication networks and power transmission lines (except for main oil and gas pipelines);
• complex structures of industrial facilities (except for structures of enterprises engaged in the extraction, production and processing of nuclear materials, structures of enterprises and facilities for enrichment and processing of nuclear fuel; structures of enterprises intended for thermal treatment (incineration) of household waste; nuclear power plants).

According to the Classifier of Buildings and Structures NK 018:2023, which came into force on January 1, 2024, complex structures of industrial facilities include (class 2302):

• power plant facilities and equipment for electricity generation, including thermal, nuclear, hydroelectric, wind power plants and others.

In such cases, the designated purpose of land plots is changed:

• by the decision of the land plot owner by submitting an application for entering information on the changed designated purpose of the land plot into the State Land Cadaster;
• without developing land management documentation;
• on the basis of the conclusion of the authorized body of urban planning and architecture of the local council on the possibility of locating the planned facility.

The conclusion of the authorized urban planning and architecture body of the local council on the possibility of locating the planned facility can be obtained by submitting an application through the electronic cabinet of the Unified State Electronic System in the field of construction.

The owner’s application for entering information about the changed designated purpose of the land plot is submitted to the State Land Cadaster (to the cadastral registrar) together with the relevant conclusion of the authorized urban planning and architecture body.

The state cadastral registrar, who received the application of the land plot owner to change the plot’s designated purpose, shall, no later than the next business day after receipt of the application, send a request to the relevant executive authority or local self-government body authorized to approve the relevant urban planning documentation, to provide an extract from the urban planning documentation indicating the functional zone within which the land plot is located. Within two business days from the date of receipt of the request, the body of local self-government is obliged to provide the state cadastral registrar with the relevant extract from the urban planning documentation.

This simplification will be valid for five years from the date of termination or abolition of martial law in Ukraine or in the relevant area.

It is worth noting that the system of connection to the power grid has also undergone significant simplification.

In particular, until December 2023, due to the war in Ukraine, a temporary connection procedure was in place, which significantly complicated the connection process. Since December, the standard grid connection procedure has been restored and the procedure is quite transparent and regulated.

Thus, today, the connection of generating facilities is carried out by connecting to the power grids of the distribution system operator (DSO), i.e., the relevant reginal energy authority (regional energy supplier) or DTEK.  The customer must apply to the DSO to obtain the connection service and conclude the relevant agreement.

This service is provided by the DSO on the basis of a standard public agreement on non-standard connection. At the same time, the applicant can choose whether to connect to the grid on a turnkey basis or to connect with the design of the linear part.

Thus, turnkey (ready-to-operate) connection greatly facilitates the applicant’s obligations. Turnkey connection is carried out by the distribution system operator according to the standard connection procedure. If the applicant decides to independently design the linear part of the power grids, he has such a right, but in this case, he should ensure the development of design documentation for the construction of power grids for the linear part of the connection and take measures to allocate land plots for the placement of relevant power facilities in favor of the DSO.

The applicants can preliminarily familiarize themselves with the content of the relevant non-standard connection agreement on the official website of the relevant DSO. Also, as a rule, DSOs post separate explanations on their official websites regarding the peculiarities and procedure for concluding non-standard connection agreements. After the conclusion of the relevant agreement, the DSO acquires the status of a connection service provider.

In addition, the Resolution of the National Energy and Utilities Regulatory Commission of 8 May 2024 No. 875 On Approval of Amendments to the Resolution of the NEURC of 26 March 2022 No. 352 introduced additional incentives for fast connection, in particular, subject to the installation of electricity storage facilities.

The features and benefits of joining the Resolution are as follows:

• electricity consumers have the right to install generating units for autonomous power supply without the need to operate in parallel with the integrated power system of Ukraine;
• such connection is carried out without obtaining/providing connection services, simplifying the procedure;
• a prerequisite for the connection of installations using solar or wind energy is the installation of energy storage facilities with a capacity equal to or greater than the capacity of generating facilities, with a capacity that provides at least 4 hours of power output;
• the distribution system operator must submit a signed draft connection agreement and technical specifications no later than the second calendar day from the date of registration of the application;
• bringing the distribution systems of electrical installations temporarily connected during martial law into compliance with the requirements of the Code is free of charge.

Regarding the development of the implementation of energy storage projects in the field of renewable energy, it should be additionally noted that at its meeting of 26 June  2024, the NEURC, by its Resolution No. 1172, approved amendments to certain NEURC resolutions” (regarding the introduction of special auctions for ancillary services). The amendments provide for the introduction of special auctions for the purchase by the transmission system operator of an ancillary service for the provision of frequency and active power control reserves (namely, automatic reserves), the term of which may last from two to five years with a delay in the start of such ancillary service provision of up to three years. The NEURC expects that this will help ro attract investments in maneuverable generating capacities and/or energy storage facilities and stimulate the development of competition on the ancillary services market.

It should also be emphasized that starting from 2021, construction of facilities in Ukraine can be formalized in terms of permits and can be issued online through the Diia system. Such registration requires special knowledge, but it significantly eliminates any risks of abuse and the project can be put into construction operation quite quickly.

There are several ways in which constructed RES generation projects are able to operate on the electricity market.

Thus, after obtaining a license for the right to conduct business activities for the production of electricity and concluding the necessary agreements with the DSO and the Transmission System Operator, the producer may sell electricity under a bilateral agreement to a trader in the market. Such sales will be made at the day-ahead market prices minus the trader’s commission, which is a profitable option given the rising market prices, especially in these times of energy shortage.

Another way to operate in parallel with the sale of electricity may be the sale of electricity under bilateral contracts to adjacent consumers or the sale of electricity under contracts for difference. Such models of operation are regulated by Law of Ukraine No. 3220-IX On Amendments to Certain Laws of Ukraine on the Restoration and Green Transformation of the Energy System of Ukraine (hereinafter – Law No. 3220).

In particular, according to Law No. 3220, producers are allowed to supply electricity to their own enterprises located on the same land plot as the generation facility and to the facilities of other owners located on adjacent land plots, provided that they organize connection and the necessary metering.

In this case, the line connecting the producer and the consumer is not considered a direct line, and the electricity consumed by the own facilities or adjacent facilities is considered electricity consumed for own needs. At the same time, it is not permitted to power one’s own electrical installations with electricity from external networks of the TSO or DSO and electricity from the generation facility. Changing the “source” of power supply is allowed from the beginning of the next billing day, unless it is necessary to change due to an emergency.

For cogeneration facilities with a capacity of up to 20 MW, the option of providing power supply to electrical installations of critical infrastructure facilities is additionally provided for in an agreement made with local authorities.

Also, as mentioned above, Law No. 3220 provides for the possibility for RES producers which have left the balancing group of the Guaranteed Buyer to enter into contracts for the provision of services to ensure the stability of the price of electricity produced from alternative sources with consumers, electricity suppliers, or traders.

In general terms, this mechanism is essentially a contract for difference, which has long been widespread as a form of cooperation in other countries. The concept itself was introduced in Ukrainian legislation back in August 2023, though the Law sets out a separate provision specifically for RES producers.

The essence of the “contract for difference” is that the RES producer and the counterparty fix the indicative price on the electricity market and its fluctuations acceptable to the parties. If the indicative price on the market is lower than the lower limit of the indicative price under the contract, the counterparty pays the RES producer the difference between the lower level of the indicative price and the indicative price on the market. If the price is higher, the RES producer shall pay the counterparty the difference between the upper level of the indicative price and the indicative price on the market. The minimum term of such a contract is 1 year, and the maximum term is not fixed. In addition, the parties must determine the amount of electricity that can be regulated under the contract, provided that such amount cannot exceed the number of MW supplied by the producer, stipulate the periodicity of the contract, the payment procedure and other conditions required by the parties.

As for state support, auctions will be the only mechanism to support new commercial RES facilities.

It is worth noting that the regulation of auctions in Law No.3220 has changed somewhat.

If we briefly describe how auctions were supposed to be held before the adoption of the Law, we can cite the following algorithm.

The Cabinet of Ministers of Ukraine, upon the proposal from the State Agency on Energy Efficiency and Energy Saving, which in turn received data from the TSO, had to set annual quotas for auctions and determine the dates of auctions twice a year. A potential producer had to provide documents confirming the availability of a land plot and technical specifications for the construction of the facility, a bank guarantee, and its price offer for the cost of electricity. The lowest price offer won, and within a certain period of time, the producer had to build the facility and conclude an agreement with the Guaranteed Buyer.

As for the new regulation defined by Law No. 3220, the Cabinet of Ministers of Ukraine, upon submission by the Ministry of Energy, no later than December 1, sets the annual quota and auction schedule, as well as indicative forecasts of annual quotas for the next 4 years. Proposals for quotas are prepared by TSOs, taking into account Ukraine’s international obligations (when writing the text, we made three stinging comments on this issue, which were eventually deleted to preserve the style).

In addition to quotas, each auction must also have a maximum price offer, the level of which is set by the Regulator.

Additional requirements may also be imposed on auctions, such as:

• defining technical parameters (characteristics) of energy storage facilities installed at an electric power facility in respect of which a business entity may acquire the right to support at the relevant auction;
• defining the daily time intervals during which a business entity may acquire the right to support in respect of an electricity facility based on the results of the relevant auction;
• determining the load profiles of the electric power facility for which the business entity may acquire the right to support at the relevant auction;
• setting the auction price not in euros, but in hryvnia and euros (at least 50% is still fixed in euros).

In addition, after winning the auction, the entity will have to sell electricity on the market and will only receive compensation from the Guaranteed Buyer for the difference between the auction price and the market price under the market premium mechanism, which will be discussed below.

Furthermore, the term of state support for the auction mechanism will be 12 years, instead of 20.

The first auctions are scheduled for September.

Thus, we can sum up by saying that all the necessary legislative processes are under way in Ukraine to attract new investments and the corresponding construction of RES generation facilities. The correct use of available mechanisms and incentives and the use of war risk insurance give every reason to expect an increase in investment in this sector and mutual benefits for both the state of Ukraine and investors.