Law "On Operating Principles of Electricity Market of Ukraine" to Impose New Restrictions on the "Green" Projects Implementation

Law of Ukraine "On Operating Principles of Electricity Market of Ukraine" No. 663-VII effective from 1 January 2014 (the "Law") introduces some important amendments to Law of Ukraine "On Electric Power Industry" No. 575/97-ВР.

Such amendments provide that with effect from 1 January 2015 (i) getting the "green" tariff for electricity produced by electricity generating companies using alternative energy sources (except blast furnace gas and coke oven gas, or, in case of hydropower, electric energy generated by micro, mini and small hydropower plants) with installed capacity exceeding 5 MW, and (ii) financing 50% of the costs of connection of electricity generating facilities producing electric power from alternative energy sources (without any restrictions in terms of the facility's capacity) to the grid at the expense of refundable financial aid granted by the customer of the electric power transmission organization will be possible provided that the projects for construction of electricity generating facilities are in compliance with the Ukraine's unified energy system development plan for the ten years to come (the "Plan").

It is noteworthy that the above provision requiring electricity generating facilities producing electric power from alternative energy sources to comply with the Plan does not extend to electricity generating facilities with whom the agreement on connection to the grid is entered into before 1 July 2014.

The Law establishes procedures for elaboration, approval and adoption of the Plan. The obligation to elaborate the Plan rests with the system operator (whose functions are currently performed by State Company "NEC" Ukrenergo") who also has to arrange public hearings and consultations with the concerned market players. System operator is to elaborate the Plan in accordance with the procedure to be adopted by the Ministry of Energy and Coal Industry of Ukraine by 1 May 2014. The draft Plan is to be approved by the Ministry of Energy and Coal Industry of Ukraine, the National Commission for State Regulation of Energy Sector and the State Agency for Energy Saving and Energy Efficiency of Ukraine. According to the final and transitional provisions of the Law, the Plan is subject to approval by the Cabinet of Ministers of Ukraine by 1 January 2015.

The Plan will encompass the following matters: justified forecasted volumes of electric power demand, volumes of interstate electric power flows, volumes of power plant required installed capacity based on a breakdown by the type of generating capacity, type of fuel (energy source, particularly alternative energy sources and regions of their location) used in the technological process, and timing of putting the generating capacities into and out of operation; facilities of bulk (interstate) power grids to be constructed and/or reconstructed and the time period for their construction; estimation of the need for investments in the development of generating capacities and bulk (interstate) power grids for the next three years and proposals regarding the sources of funding.

A confirmation that construction of electricity generating facilities producing electric power from alternative energy sources complies with the Plan is granted by the system operator in the form of an opinion to be issued when the system operator is in the process of approving the technical specifications for connecting the respective facility according to the electrical grid code to be adopted by 1 January 2015. The opinion is provided subject to the needs for relevant generating capacity from the relevant energy source and in the relevant region as prescribed in the Plan, and the previously provided technical specifications and constructed facilities.

Generally, market players negatively estimate the provisions of the Law introducing requirements for compliance with the Plan for the purposes of obtaining the "green" tariff and financing the connection of the electricity generating facilities to the grid, for the following reasons: absence of long-term plans for development of Ukraine's economy complicates the elaboration of the Plan; potential of abuse and possible inclusion into the Plan of requirements that electric power producers will not be able to comply with; inability of producers to obtain the "green" tariff on formal grounds and enjoy preferential terms for connection in case the Plan is not approved by the Cabinet of Ministers of Ukraine within the prescribed period of time; lack of transparency of the process of confirming the compliance of electricity generating facility construction project with the Plan which opens broad possibilities for abuse; and uncertainty of how often the Plan will change as the Law provides that the system operator must annually prepare such Plan. It is likely that lawmakers presumed that the system operator should annually update the Plan, instead of developing a new one.

For further information please contact Asters' associate Yaroslav Petrov.

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