Svitlana Romanova writes:Ukrainian legislation has many errors where improvements are needed to make green tariffs effectively work.
The need for Ukraine to pursue energy independence has long been a parable and very often is viewed as a mere political declaration rather than a defined and well-planned direction of Ukraine’s development.
Over the years, the process of achieving this goal of independence has transformed into a series of short sprints made by legislators at various times in order to achieve immediate gains for a particular politician or a political party.
The absence of a clear-sighted, systematic and consistent approach to these issues resulted in a bulk of concepts and declarations documented in various laws which are often found to be contradictory and, as a rule, lack detailed implementation mechanisms.
Thus, for example, Ukraine has a number of laws related to renewable energy sources – Laws “On Electricity,” “On Alternative Energy Sources,” “On Energy Efficiency,” “On Combined Production of Thermal and Electrical Power (Co-Generation) and Utilization of Waster Energy Potential,” “On Alternative Types of Fuel,” and so on.
The Electricity Law is silent on the funding source of the green tariffs, which is a state subsidy to remunerate the renewable-source electricity generators above the market price.
Despite the fact that some of these laws have been around for quite some time, they still remain largely inoperative and do not provide for a clear and unhampered mechanism for tpopularization of renewable energy sources in Ukraine.
On the other hand, in those cases where such mechanisms do exist, they tend to be burdensome and non-transparent.
One such example is the so-called “green tariff” for electricity produced by alternative sources of energy, which was introduced into the Electricity Law in 2008.
Presently, the law declares the following mechanisms for stimulation of utilization and development of renewable energy:
– green tariff – a special tariff for purchase of electricity which is established for the renewable energy producers until Jan. 1, 2030;
– obligation of the wholesale electricity supplier to purchase the renewable-source electricity not sold directly to the consumers or distribution companies;
– prohibition for the electricity suppliers that carry out the transmission of electricity by means of their own electricity networks to refuse renewable electricity producers to access such networks;
– renewable electricity producers should receive full payment in monetary form for electricity produced with no set-off;
– electricity suppliers have the right to include losses incurred by connecting renewable-source electricity producers to their networks into their investment programs; and
– the wholesale electricity tariffs may include costs of financing of renewable energy development.
The successful implementation of the green tariff will depend on a number of factors.
The Electricity Law is silent on the funding source of the green tariffs, which is a state subsidy to remunerate the renewable-source electricity generators above the market price.
This creates uncertainty for generators and investors, despite the “guarantee” wording contained in the Electricity Law. There are essentially two options for the source of funding: the state budget and a surcharge to the electricity prices.
While it appears that the second option was meant by the Ukrainian legislators – in which case such producers will be compensated by Energomarket State Enterprise, raising these funds from adjusting the wholesale market price – the subsidy source for direct sales to end consumers or distribution companies remains unclear.
Furthermore, there is no absolute clarity regarding which renewable energy facilities are eligible for the special tariff. Three distinct aspects which need to be clarified are:
Eligibility of renewable energy producers that starter operation before the introduction of the green tariff;
Protection against changes in law for renewable energy producers that are in the process of construction, as currently only renewable energy generators that have started operation and are already receiving the green tariff are protected.
This creates uncertainty for investors, who have undertaken their investment planning based on the existing green tariff system.
As the law states that a minimum of 15 percent of Ukrainian content (materials, assets, works, services) is required in the construction of the energy object as of Jan. 1, 2012 in order to obtain the green tariff, increasing to 50 percent by 2014, the definition of “Ukrainian content” and how it is calculated should be clearly defined to protect investors.
Yet another serious drawback of the Electricity Law is that it establishes the green tariff only for vegetable biomass.
Such a definition fails to meet the definition given in the Law “On Alternative Types of Fuel” whereas “biomass” means biologically renewable organic matters that undergo biodegradation, such as agriculture waste, crop growing and cattle breeding, forestry and related industries, as well as the organic part of industrial and municipal waste.
The rationale for such differentiation is not clear and it essentially demotivates investors from developing renewable energy facilities working on non-vegetable organic biomass.
It is also notable that the green tariff establishes a single rate for all biomass produced energy. Even with the current narrow definition of biomass this is a very substantial problem. A single tariff for biomass cannot reflect the wide range of biomass fuels, conversion technologies and scale.
This may lead to distorted development of biomass electricity production in Ukraine favoring production from selected types of biomass only and based only on certain technologies.
The above illustration is not complete and can be continued to be painted with further examples and commentaries. It is clear, however, that Ukrainian legislation on renewable energy sources has many areas where improvements would be very important and are necessary for the further successful development of alternative energy sources in Ukraine.
Svitlana Romanova is a partner in the Kyiv office of Baker & McKenzie, an international law firm. She is actively engaged in natural resources projects in Ukraine, both mining and oil and gas.
