A.1 Industry structure
The Ukrainian Wholesale Electricity Market ("WEM") is heavily regulated and is dominated by a small number of state and private companies. The existence of several overlapping electricity wholesale markets is strictly prohibited, so all market players, except for small electricity generating companies, must become WEM members. WEM is closely tied to the United Energy System of Ukraine ("UES") which means that all domestic technical infrastructure, grids and power generating utilities work under the control of a sole network operator.
As of January 2013, 113 electricity producers participated in WEM operations, including five power generating companies which operate 14 TPPs, one national nuclear power producer operating four Ukrainian nuclear power plants ("NPPs") and one operator of state-owned hydroelectric power stations ("HPPs") and pumped-storage power plants, as well as 34 producers of electricity generated at thermal power stations ("TPSs") and small low-capacity block-stations. In addition, in recent years more than 60 producers using renewable energy sources ("RES") have entered WEM (please see section D 4 below).
The state enterprise National Nuclear Energy Generating Company Energoatom ("Energoatom") operates 4 NPPs, which produce 45.6% of all electricity generated in Ukraine1. The company also maintains one of the largest wind power stations which is situated in Crimea with a total capacity of up to 10.4 MW2.
The national joint stock company Energy Company of Ukraine ("ECU") holds shares in 19 electricity companies, including four principal thermal power generating companies (DTEK Dniproenergo, DTEK Zakhidenergo, Donbasenergo and Centrenergo) which operate 11 of the 14 largest TPPs in Ukraine. After the sale of its significant shareholdings in Dniproenergo and Zakhidenergo to DTEK in 2012 and in Donbasenergo to Energoinvest Holding in 2013, ECU remains the major shareholder of Centrenergo which operates three of the 14 largest Ukrainian TPPs3. The total capacity of the power generating facilities operated by ECU's subsidiaries and affiliated companies constitutes 46.1% of all electricity generated by WEM4.
Ukrhidroenergo, a state public joint-stock company, operates nine major HPPs on the Dnieper and Dniester rivers (with a total capacity of over 40MW), as well as managing the construction of two new HPPs. All HPPs are exempt from the privatisation process. In 2012 Ukrhidroenergo produced less than 1% of all electricity generated in Ukraine.
DTEK, the largest privately-owned energy company in Ukraine, which is ultimately controlled by System Capital Management, controls DTEK Vostokenergo, DTEK Dniproenergo and DTEK Zakhidenergo (These three DTEK's subsidiaries operate nine out of 14 main Ukrainian TPPs.) In addition, DTEK is a major shareholder of Kyivenergo, the company which satisfies the electricity needs of Ukraine's capital. DTEK also focuses on production of energy from RES. Its subsidiary, Wind Power LLC maintains two wind power parks projects in the Zaporizhzhia and Donetsk regions with a total capacity of about 1,200 MW5.
Almost all oblenergos (обленерго) (public joint-stock companies which maintain local electricity networks and distribute electricity in 24 regions of Ukraine, as well as in the Autonomous Republic of Crimea and the cities of Kyiv and Sevastopol) also have licences for power generation. For this purpose oblenergos operate thermal power stations and boiler houses.
The state enterprise Energorynok, which was created in 2000, is the central administrator of WEM. It is the only member of WEM which buys electricity directly from producers and sells it exclusively to suppliers. It also acts as a settlement centre for the electricity market.
The state enterprise National Power Company Ukrenergo ("Ukrenergo"), a vertically-integrated natural monopoly, is responsible for the transmission of electricity by cross-border and trunk networks (from power generating facilities to connection points of local networks). Ukrenergo's principal business is to deliver electricity from major electricity producers, such as NPPs, HPPs and TPPs, to regional distribution companies (oblenergos) and to connect the Ukrainian network system with those of neighbouring states, as well as to provide technical support for the export and import of electricity. As the sole controller of the UES, Ukrenergo controls the consumption of electricity and the exploitation of electricity facilities on behalf of the State. However, it is expected that Ukrainian Parliament by the end of 2013 will pass the law which will transform Ukrenergo into a public joint-stock company. This process is aimed to facilitate Ukraine's compliance with ENTSO-E6.
All electricity suppliers in Ukraine may be divided into two groups: suppliers under regulated tariffs and independent suppliers (ie suppliers under non-regulated tariffs). Both groups buy electricity for the price established in WEM and pay for it directly to Energorynok.
Owners of local electricity networks which operate under the regulated tariff regime distribute electricity in their respective regions. This group of suppliers buys electricity at wholesale market price but sells it to end consumers under the tariffs established by NERC. Currently this group comprises 45 companies, most important of which are oblenergos. Previously owned by the State, oblenergos were privatised over the years by market players such as DTEK, VS Energy International Ukraine and Luhansk Energy Union. Supply of electricity by local networks at regulated tariffs was also permitted to specific public companies (eg regional railway operators, subsidiaries of defence authorities etc), as well as to certain private entities; namely, the owners of particular local networks (Eastern Crimea Energy Company, Servis-Invest and Atomservis).
Independent suppliers transmit purchased electricity to their end consumers through local networks owned by regulated tariff suppliers and reimburse them the cost of transportation services. Tariffs for electricity provided by independent suppliers are established by individual supply contracts with consumers. This group also includes 12 large industrial consumers which buy electricity for their own needs, as well as companies which purchase electricity for export7.
National Regulatory Authority ("NRA")
NERC is the main NRA in the Ukrainian energy market. NERC's role is to facilitate competition in the hydrocarbon, electricity and heat supply markets. For this purpose NERC establishes tariffs and regulates prices for electricity generation, transition and supply; issues, suspends and revokes licences; develops standards for services provided by natural monopolies on the energy market; and protects the interests of consumers in the markets operated by natural monopolies.
The Ministry of Energy and Coal Industry of Ukraine is the state authority responsible for the development and implementation of the State's policy in the fuel and energy sector. For this purpose the Ministry prepares and approves regulatory instruments for the energy market.
The Antimonopoly Committee of Ukraine ("AMCU") is the state authority responsible for the protection of competition in Ukraine. AMCU controls tariffs and prices for goods and services provided by natural monopolies. It is entitled to impose fines and apply other sanctions to the companies in breach of the rules of fair competition.
The key legislative, regulatory and contractual features
The Law on the Energy Industry establishes the regulatory framework for the Ukrainian energy industry. It covers the generation, transmission, supply and use of electricity. The legislation also regulates safety and pricing issues, as well as responsibility for violations of rules in the energy sector.
The Law on the Measures Aimed at Ensuring Sustainable Operation of Enterprises of Fuel and Energy Complex establishes state protection for state enterprises operating in the energy sector from bankruptcy and debt claims.
The Energy Strategy of Ukraine 2030, approved by the Cabinet of Ministers in 2006, states that the long-term aim of Ukrainian energy policy is to improve the State's energy independence by 2030 through increased reliance on renewable energy sources, development of hydrocarbon deposits and the domestic production of fuel for NPPs.
The WEM Agreement, which was entered into between power stations operators, suppliers and network operators in 1996, establishes WEM's operational conditions and rules, as well as setting out the rights and obligations of the parties including the conditions for joining WEM.
WEM's functions are also grounded on the following contractual relations:
- purchase of electricity by Energorynok from generators under price bids (TPPs) or regulated tariffs (NPPs, HPPs, TPSs);
- purchase of electricity by Energorynok from energy producers using RES under the "green tariff";
- sale of electricity by Energorynok to the suppliers under regulated tariffs (eg, oblenegos and companies that own local networks) and under non-regulated tariffs;
- supply of control and transmission services by Ukrenergo to Energorynok;
- supply of electricity by suppliers to end consumers; and
- supply of energy transmission services using local networks by suppliers under regulated tariffs (owners of networks) to suppliers under non-regulated tariffs.
Suppliers of electricity under regulated tariffs may purchase electricity directly from the producers, which do not sell electricity to WEM, provided that the producers' generating facilities are located in the territory assigned to the relevant suppliers. In addition, suppliers under regulated tariffs are obliged to buy surplus electricity generated from RES by private households at the relevant "green tariff".
The suppliers under non-regulated tariffs are empowered to sell electricity produced at their own generating facilities or at leased power producing units directly to consumers unless such electricity is classified as electricity that should be sold via WEM.
In turn, the RES producers may sell electricity to Energorynok via WEM or directly to consumers or electricity suppliers.
Mandatory licensing is established for activities such as generation (if the capacity of the generating facilities exceed 5MW for conventional energy sources or 10MW for RES or if the RES producer plans to sell electricity via WEM), supply (under both regulated and non-regulated tariffs), wholesale supply and transmission of electricity. Combined power and heat generation, as well as heat power generation at TPSs or at facilities using RES are also subject to licensing. It is usual for a market player to obtain licences for several types of activities (like electricity supply and generation). Licences are issued by NERC for a period of not less than three years. In the event of a breach of the licensing conditions by the licensee, NERC may revoke a licence.
Activities related to the construction of generation facilities and transmission and distribution networks are not covered by licences issued by NERC. In certain circumstances these activities may be subject to licensing under Ukrainian construction laws
Implementation of the Second Electricity Directive
Although Ukraine had an obligation to implement the Second Electricity Directive by 2012, the Law on the Operation of the Ukrainian Electricity Market, which implements the transformation of WEM into a competitive market, was not adopted until 28 October 2013. While this overview was being drafted, the Law was being prepared for submission to the President of Ukraine for signing, which is a pre-condition of its entering into force. Therefore, at this stage it is difficult to assess the influence of this Law on the Ukrainian energy market in the following year.
A.2 Third party access regime
Equal access to WEM and to the services of network operators is guaranteed to generating companies and electricity suppliers which have obtained relevant licences. The grid owners cannot refuse access to their networks provided that the applicant has developed a feasibility study supporting network connection on the basis of data received from these companies. The applicant and the grid owners must also conclude a standard network connection agreement.
Connection services are provided for a fee. The price depends on the type of connection (ie standard or non-standard). Fees for standard connections (no longer than 300 meters) are calculated on the basis of connection rates set by electricity transmission companies on an annual basis and approved by NERC. For instance, in 2013, the fee for a three-phase connection in urban areas varies from (approximately) 120 to 450 euros per 1kW depending on the voltage8 of connected power facilities. Payment arrangements for non-standard connections (longer than 300 meters) should be set out in the project documentation provided by the applicant seeking a connection and should be based on the charging methodology developed by NERC. If providing a connection would require the transmission company to incur additional expenses, the applicant may provide "financial aid". Any such "financial aid" should be repaid within five years. The costs for connecting renewable energy generating facilities will be met, in equal proportions, by a special component in transmission charges and by "financial aid" provided by the applicant. The term for reimbursement of such financing is set by NERC and cannot exceed ten years.
A.3 Market design
WEM was designed as a "pool" market, which means that all generating companies (except for producers whose generating facilities have small capacity) sell electricity to a sole trader, Energorynok. The latter sells electricity to suppliers which distribute purchased electricity to the end consumers using their own networks or via the networks of Ukrenergo or oblenergos. All these activities are closely monitored by NERC. Therefore market entry could be complicated. A third party can either buy shares in state companies (eg in oblenergos undergoing privatisation under the Energy Strategy) or construct or lease private power generating facilities, especially those using renewable energy sources. However, all businesses which meet the membership criteria have free access to WEM.
New entrants must also become members of WEM, which involves submitting an application to the WEM Council and completing the following three steps:
- obtaining a licence for the activity the candidate plans to carry out;
- submitting all information required to the WEM Council; and
- registering as a "subject of entrepreneurial activity" in accordance with Ukrainian legislation.
Free choice between regulated tariff suppliers and non-regulated tariff suppliers is seen as a sign of the liberalisation of the electricity supply market.
A.4 Public service obligations and smart metering
Ukrainian legislation does not contain any special provisions regarding public service obligations. Instead, it sets out the general rights and obligations for both suppliers and consumers, with more specific obligations being derived from individual supplier-consumer agreements.
A.5 CROSS-BORDER INTERCONNECTORS
Export and import of electricity is technically supported by Ukrenergo, which is responsible for the transmission of electricity by cross-border networks. Once a year Ukrenergo holds an auction for access to its inter-state network facilities to export electricity among suppliers in WEM. The successful bidder purchases electricity in WEM at the established wholesale price.
From 2011, Ukrenergo's auctions were usually won by affiliates of DTEK. However, Ukrainian authorities have announced their intention to change the regulations regarding third party access to cross-border facilities which may lead to the loss of DTEK's dominant position.
B.1 Industry structure
Currently domestic production of gas and oil covers 34% and 15% of domestic demand respectively. Consequently, up to 85% of Ukraine's hydrocarbons requirements are imported from elsewhere in the CIS and the EU member states (mainly reverse gas supplies from Poland and Hungary). However, Ukraine is set to increase domestic production of shale gas by promoting joint activity programs and entering into production sharing agreements ("PSAs"). Currently, certain sectors of the industry, such as hydrocarbon transportation and storage are run by state monopolies. Ukraine's state-owned United Gas Transportation System ("GTS"), operated by the public joint-stock company Ukrtransgaz, deals with all gas transportation, distribution and storage. However, private companies are quite active in other sectors such as exploration, extraction, processing and gas supply under non-regulated tariffs. Any activities related to distribution, transportation of hydrocarbons by trunk or ordinary networks, gas supply under regulated and non-regulated tariffs, and storage of gas require a licence. Exploration and extraction of hydrocarbons require a special permit for subsoil use.
State enterprises operating in the hydrocarbons sector also enjoy state protection from bankruptcy and debt claims as set out in the Law on the Measures Aimed at Ensuring Sustainable Operation of Enterprises of Fuel and Energy Complex.
Key market players
The national joint stock company Naftogaz of Ukraine ("Naftogas") is a vertically-integrated oil and gas company, whose affiliates produce over 90% of the oil and gas in Ukraine. Naftogaz has the following subsidiaries:
- State joint stock company Chornomornaftogaz which is responsible for exploration and production of oil and gas in the Black Sea and the Sea of Azov shelf as well as the transportation and storage of natural gas in the Autonomous Republic of Crimea; and
- Ukrtransgaz which is responsible for the transportation and storage of natural gas in Ukraine, except for the Autonomous Republic of Crimea, as well as the construction of pipelines and supply of natural gas to consumers.
Chornomornaftogaz, the public joint stock company Ukrnafta and Naftogaz's subsidiary company Ukrgazvydobuvannia are major oil and gas producers operating drilling and processing facilities.
The public joint stock company Ukrtransnafta distributes oil to refineries and transports exported oil through Ukraine. It operates the Druzhba and Prydniprovskyi Mahistralnyi Naftoprovody oil pipelines.
Due to obligations imposed on Ukraine by the EEC Charter, Naftogaz is being re-organised and several of its subsidiaries are being hived off. In particular, Ukrtransgaz and Ukrgazvydobuvannia were turned into public joint stock companies. It is also expected that Naftogaz will lose its regulatory powers.
There are also a number of well-known private players in the oil and gas industry that are actively involved in the production of hydrocarbons in Ukraine, such as Shell, Chevron and ExxonMobile which will develop shale and offshore gas deposits under PSAs with the Ukrainian government. DTEK, Eastern-European Fuel and Energy Company and Ostchem are the largest Ukrainian private importers of natural gas.
The Ministry of Energy and Coal Industry of Ukraine is the authority responsible for state policy in the energy sector (please see section A1 above).
NERC issues licences for business activities in the oil and gas sectors and approves tariffs for the transportation, supply and storage of oil and gas (please refer to section A1 above).
The State Service of Geology and Subsoil Use of Ukraine issues special permits for subsoil use, controls compliance with their requirements, and is empowered to suspend or terminate such permits.
The Ministry of Ecology and Natural Resources approves documentation submitted in order to obtain a special permit on subsoil use.
The State Service on Mining Supervision and Industry Safety of Ukraine designates the relevant land plots as mining allotments for oil and gas extraction and controls compliance with safety requirements for gas processing and transportation facilities.
The Code of Ukraine on Bowels establishes the general principles of subsoil use.
The Law on Oil and Gas regulates issues relating to the ownership of extracted oil and gas and the functioning of underground storage, processing and transportation facilities. The Law also governs conditions and requirements companies must meet to obtain special permits for the use of oil and gas deposits.
The Law on the Principles of Natural Gas Market Operation provides all licensees with free access to the GTS, as well as free entry to the gas market. Moreover, the Law sets out the unbundling requirements for market participants and essential provisions for contracts with consumers.
The Law on Coalbed Gas (Methane) establishes a legal framework for the extraction of gas from coalfields. In addition, it governs the relationship between coalfield users and the developers of any gas deposits. The Law on Pipeline Transport regulates ownership rights with respect to the pipeline system and its infrastructure. The Law on Production-Sharing Agreements ("PSA Law") regulates the procedure for entering into and operating PSAs and establishes their principal terms and conditions.
All mineral resources located in Ukraine belong to the State and therefore geological exploration, development of oil and gas deposits, construction of storages and carrying out upstream works under PSAs requires special permits for subsoil use.
Pursuant to the Law on the Licensing of Certain Types of Economic Activity, the following can only be undertaken after obtaining a licence from NERC:
- transportation of oil and oil products by trunk pipelines,
- transportation of gas by pipelines and gas distribution;
- supply of gas under regulated and non-regulated tariffs;
- storage of excessive volumes of gas (in excess of licensing conditions); and
- applicable to state-owned companies, joint ventures and joint activity agreements only, the sale of excessive volumes of their own natural gas to Naftogaz.
B.2 Third party access regime to gas transportation networks
According to the Law on the Principles of Natural Gas Market Operation, owners of gas transportation networks shall provide access to every market participant by entering into network connection agreements. Denying access without valid grounds is a breach of the network owner's licence which can result in sanctions including fines and suspension or even termination of the licence. However, owners may refuse network access for valid reasons, such as lack of available capacity.
Pipeline connections are subject to a standard gas transportation agreement entered into between suppliers and the relevant state company. To enter into a standard agreement, the supplier must first enter into a gas supply agreement with consumers and obtain a supply volume certificate from NERC.
Consumers can connect directly to gas distribution networks, but only if a gas supply agreement has been entered into and the gas supply system has been duly commissioned.
Similar to the fees for electricity network connections, the standard connection fees for new gas supply facilities are determined by NERC. The fees for non-standard connections will depend on the capacity of gas supply facilities. Applicants seeking a connection may also finance creation of additional capacity in the GTS network and in such case their investments will be paid back within five years.
According to the access rules for the GTS developed by Naftogaz, transportation tariffs are as follows:
the price for residents is established by NERC and is calculated by a special formula; and
the price for non-residents is established by a separate contract.
B.3 LNG and gas storage
The GTS is one of the largest gas storage systems in Europe, including 12 underground gas storages operated by Ukrtransgaz with an overall capacity of 31 billion cubic metres. To gain access to these storage facilities, a gas storage applicant needs to enter into an agreement with Ukrtransgaz. NERC establishes storage tariffs for residents, while non-residents pay the tariffs agreed with Ukrtransgaz under individual contracts.
As the construction of the first LNG terminal in Ukraine is only in a preliminary stage, legislation governing access to the facility has not yet been adopted.
B.4 Market entry
The Law on the Principles of Natural Gas Market Operation establishes unbundling requirements which provide that distributors or transporters of gas cannot also engage in development or supply. In addition, distributors cannot also provide transportation or storage services. If distributors and transporters are part of a vertically-integrated business their legal and managerial independence should be ensured. In this case, the relevant entities are free to choose the unbundling measures they employ however they shall submit a list of them to NERC. The unbundling regime does not apply to small enterprises.
To enter the gas market, participants only need to obtain a standard licence, during the term of which the applicant will need to have the asset base required to give them sufficient market power. Suppliers under non-regulated tariffs, together with their affiliates cannot supply more than 35% of the total amount of gas consumed in Ukraine. This is to ensure that they do not acquire a position of dominance in the market under the applicable competition laws.
B.5 Public service obligations and smart metering
Ukrainian legislation does not contain any special provisions regarding public service obligations or smart metering. Instead, it sets out the general rights and obligations of both suppliers and consumers with more detailed obligations being defined in individual agreements between suppliers and consumers.
B.6 Cross-border interconnectors
Gas and oil pipelines in Ukraine are used to transport Russian hydrocarbons to neighbouring European countries, including Poland, Slovakia, Romania and Hungary. The conditions of transit are established by long-term contracts between Naftogaz and Gazprom. However, recently Ukraine has also started to use its cross-border pipelines for the reverse supply of gas from Poland and Hungary. Ukraine is currently considering its technical ability to import gas from Romania, Slovakia and France on a regular basis.
C. Energy trading
C.1 Electricity trading
As mentioned above, electricity is traded on WEM on a "pool" model. WEM Rules regulate electricity prices at all stages, from generation to access by the end consumer.
Wholesale market price for electricity generated by TPPs per hour is based on hourly bids, production expenses, forecasted consumption volume, as well as cross-border electricity exchanges. Tariffs for electricity produced by NPPs, HPPs and TPSs are established by NERC. The technical transmission of electricity to consumers is performed by Ukrenergo and oblenergos.
Energorynok sells electricity for a wholesale market price which consists of the purchase price, Energorynok and Ukrenergo's service fees, and a premium for loss of electricity in transmission. Retail electricity tariffs only apply to oblenergos due to their local network monopoly. The tariff is set monthly by NERC and is the same for all oblenergos. Generally, the retail tariff is the wholesale market price adjusted to reflect various technological losses, distribution and supply tariffs.
C.2 Gas Trading
Ukrainian legislation defines the natural gas market as one which is based on competitive principles with certain exceptions. These exceptions apply to the activities of state-owned companies, joint ventures and joint activity agreements. Such market participants are obliged to sell natural gas based on pre-established prices to Naftogaz which will then distribute it to the end consumer. Sale of excessive amounts (ie volumes exceeding licensed volumes) of natural gas extracted by such companies is subject to separate licensing. However, investors under PSAs are exempt from these licensing requirements.
Suppliers sell gas to consumers under either regulated or non-regulated tariffs. The regulated tariff is established by NERC and applies to owners or users of distribution networks, while the non-regulated tariff applies to end customers and is negotiated in separate agreements. It is prohibited for the same company to supply gas under both non-regulated tariffs and regulated tariffs in the same area.
The Law on Principles of Natural Gas Market Operation requires the following contractual framework for gas supply:
- an agreement on the sale and purchase of gas between the supplier and gas producer;
- an agreement on the transportation of gas by trunk pipelines between the supplier and transporting company;
- an agreement on the transportation of gas by distribution networks between the supplier and distributing company;
- an agreement between the supplier and consumer; and
- agreements regarding economic management, use and operation of the elements of the GTS (between owners, gas transportation companies, and gas distribution companies).
C.3 Introduction of EMIR and REMIT
According to the Law "On the State Programme for Adaptation of Ukrainian Legislation to the Legislation of the European Union", Ukraine undertook to harmonise its legislation with that of the EU in a number of sectors including energy. Notwithstanding that the introduction of EMIR and REMIT will not directly affect the Ukrainian energy market, some provisions of the latter regulations may be implemented in Ukraine in the future.
D. Climate change and sustainability
D.1 Climate change initiatives
Ukraine joined the Kyoto Protocol in 1999 which was ratified by the Ukrainian Parliament in 2004. In 2005 the Cabinet of Ministers of Ukraine approved the National Plan for the Realisation of the Kyoto Protocol Provisions, most of the measures of which should have been put in place by 2012. Delays in the implementation of this plan were subject to court proceedings which resulted in the imposition of the obligation on state authorities to perform their duties under the Kyoto Protocol.
Presently Ukrainian legislation contains a number of legislative documents regulating the implementation of Joint Implementation projects aimed at reducing CO2 emissions.
The Ukrainian Tax Code introduced an ecology tax on polluting atmospheric and water emissions. This tax is due on all legal entities whose activities generate waste and/or emissions, including representative offices of non-resident enterprises and every car owner.
D.2 Emission trading
Since Ukraine is not an EU member state, it does not participate in the EU ETS. However, Ukraine is implementing a number of Joint Implementation projects and carbon credits trading schemes as established by the Kyoto Protocol. The State Environmental Investment Agency of Ukraine ("SEIA") is responsible for the implementation of the Kyoto Protocol and issues letters of approval for particular projects. In order to obtain permission for the sale of emission reduction units ("ERU") the owner or user of the Joint Implementation project] shall submit a set of documents to the SEIA together with a draft of the contract entered into with the buyer. Available public reports mention 272 Joint Implementation projects that have been approved by the SEIA since 1 April 2013 and which have made Ukraine a leader in the global ERU market.
D.3 Carbon capture and storage
Currently, there is no law providing for the implementation of carbon capture and storage projects. However, the EU Delegation to Ukraine finances scientific projects on the introduction of carbon free technologies in Ukraine. In October 2013 the Institute on Carbon Energy Technologies presented their report on the perspectives of carbon free technologies in the energy industry of Ukraine.
D.4 Renewable energy
The number of licensed producers of electricity using RES has increased in comparison to the previous year9 and as of the end of August 2013, the registry of such producers included 118 companies which include both public and private companies. However, only 103 of them were qualified for the "green tariff", including 53 producers of electricity from solar energy, 12 wind power producers and 35 operators of small, mini and micro hydropower stations. Only three companies are pursuing generation of electricity from biomass and only two companies have been awarded the "green tariff" for power produced from biogas10.
Power generation using RES is regulated by the following legislative acts:
- The Law on Alternative Energy Sources, adopted in 2003, provides the list of RES and types of permits issued for activities using RES, including permits for the creation of personal networks to transmit electricity directly to consumers;
- The Law on Energy Industry, which provides the "green tariff" for RES electricity supply, regulates Ukrainian component requirement and provides state guarantees for RES electricity producers;
- Resolution No. 444 of the Cabinet of Ministers of Ukraine (14 May 2008) provides a list of VAT-exempt imported equipment and materials for the construction of facilities using RES;
- Resolution No. 749 of NERC (15 June 2012) establishes the procedure for the calculation of the Ukrainian component in the construction costs of facilities using RES and defines expert organisations empowered to provide such calculations; and
- The Tax Code which contains taxation incentives for RES producers.
In 2006, NERC approved licensing conditions for heat power generation using renewable and non-traditional sources of energy. As of October 2013, 134 companies have obtained such licences.
RES electricity generators must obtain a licence from NERC before they can generate electricity and apply for the "green tariff". NERC has developed consumer proforma electricity supply agreements which should be used by generating companies to sell RES electricity under the "green tariff".
The "green tariff"
In 2008, the "green tariff" was introduced into the Ukrainian legislation as a special tariff for electricity generated from renewable sources, such as solar power, wind and geothermal energy.
Established by NERC for each electricity producer, the "green tariff" (which will remain in force until 2030) is based on a tariff multiplier, the value of which varies according to the kind of RES involved. This tariff multiplier is based on the January 2009 general retail tariff applicable to low-voltage electricity consumers calculated for the period of peak consumption. However, for RES power stations commissioned after 2014, 2019 and 2024 the multipliers will decrease by 10%, 20% and 30% respectively. The purpose of this is to incentivise the construction of RES power stations as early as possible.
The application of the "green tariff" depends on compliance with the so called "Ukrainian component" requirement, which was initially introduced in 2009 and amended in November 2012. In order to qualify for the "green tariff" biomass, wind and/or solar power facilities must demonstrate that 30% of the capital investment was used to purchase domestic materials, works and services. The "green tariff" will only apply to facilities commissioned after 1 July 2013. This minimum local capex component is set to increase to 50% for facilities commissioned after 1 July 2014. Biogas power facilities must spend a minimum of 30% on the "Ukrainian component" if they are commissioned after 1 January 2014 and 50% if commissioned after 1 January 2015. The law also sets out a percentage of the "Ukrainian component" in different elements of power generating facilities, as well as in construction works. The latter requires the performance of construction works by contractors having their domicile in the territory of Ukraine. After the commission of generating facilities, the applicant should submit documents confirming the value and origin of goods, materials and services to NERC in order to be awarded the "green tariff". If the applicant does not comply with the local component requirement, electricity generated by its facilities will be sold at the wholesale market price.
It is also important to note that the State guarantees to acquire all surplus electricity generated by facilities using alternative energy sources (except for electricity derived from small hydroelectric power stations) at the "green tariff".
General provisions on the production of biofuels are established by the Law on Alternative Types of Liquid and Gas Fuel, which distinguishes between conventional and alternative fuels and establishes a free access to the biofuels market for all producers. However, bioethanol production and trade need to be licensed by the State Tax Administration. The sale, although not the production, of biogas or biodiesel requires a licence from the Ministry of Energy and Coal Industry.
Recent amendments to Law on Alternative Types of Liquid and Gas Fuel established a gradual increase on the required percentage of biofuel in motor petrol that is produced or sold in Ukraine. According to its provisions, the required percentage of biofuel for the period 2014 to 2015 will amount to 5% and shall increase to 7% on 1 January 2016.
D.6 Energy efficiency
The Law on Energy-Saving is the main legal instrument governing energy saving projects. Although it establishes numerous economic bonuses and priority credit policies for enterprises implementing energy-efficient technologies, the number of projects facilitated by this Law is very small.
E. Nuclear energy
At present, there are four operational NPPs in Ukraine (Rivne, Khmelnytskyi, South Ukraine and Zaporizhzhia) providing approximately 46% of the country's total electricity generation capacity. Energoatom owns and operates these four plants. The main activities of Energoatom are the construction, commissioning and exploitation of nuclear installations and nuclear waste management.
The Chernobyl nuclear power plant was finally shut down in 2000. In April 2012, its operator, State Specialised Enterprise Chernobyl NPP started construction of a new radiation shelter, the New Safe Confinement, which shall be completed in 2015. The project is funded by the International Chernobyl Shelter Fund managed by EBRD.
Ukraine is an active member of the IAEA, meaning that Ukrainian legislation must comply with IAEA Regulations in force from time to time. The key statute on nuclear power is the Law on the Use of Nuclear Power and Radiation Safety which imposes obligations on operators of nuclear installations and governs liability for damage resulting from nuclear fission and fusion. The procedure for obtaining special licences is regulated by the Law on Permit Activity in the Field of Nuclear Energy Utilization.
The State Nuclear Regulatory Inspectorate is the sole nuclear power regulator in Ukraine empowered to issue licences and permits for the commissioning of nuclear power stations and waste storage facilities. It also develops and monitors safety standards.
Ukraine is set to increase its production of nuclear power through the construction of two new reactors at Khmelnytskyi NPP. The relevant law confirming these plans was adopted in 2012. However, it does not establish the precise term for commissioning these new facilities.
In order to lessen its dependence on imported fuel the Ukrainian government encourages development of natural gas, shale gas and coalbed methane deposits on its territory and also geological research on the Black Sea shelf. Ukrainian shale gas deposits are estimated to be among the largest in Europe.
Normally any legal person or an individual may provide upstream activities under special permits for subsoil use. Such permits are awarded to tender winners and issued by the State Service of Geology and Subsoil of Ukraine (with the exception for mineral resources deposited in the Autonomous Republic of Crimea as their use should be authorised by the local Council of Ministers). The term of the permit is set by the applicant and approved by the State Service of Geology and Subsoil Use. It may not exceed 10 years for oil and gas deposits exploration, 20 years for the production of oil and gas deposits (30 years for the production of deposits on the Black Sea shelf) and 50 years for the construction and use of underground storage facilities for oil and gas. The term of the permit can be extended if the applicant observes the conditions of subsoil use.
Also upstream projects in Ukraine may be implemented under joint activity agreements or PSAs. Pursuant to the PSA Law such contracts are entered into between the Cabinet of Ministers of Ukraine on behalf of the State and the investor(s). In a PSA the State authorises the investor to explore and develop hydrocarbon deposits at its own cost and risk, receiving a specified share in future production revenue in return. The PSA should establish the volumes and terms of works, as well as the budget and detailed programme for performance of activities under the PSA. The parties may negotiate the PSA's conditions, for example ensuring that the investor performs its obligations.
In case there are several investors under the PSA, they should nominate an operator responsible, inter alia, for maintaining a relationship with the State. For this purpose investors enter into a separate "operation agreement".
Pursuant to the PSA Law a foreign investor who is a party to the PSA shall register its representative office in Ukraine within three months upon execution of the PSA. However, if the foreign investor is the operator under the PSA, it shall fulfil the requirement within one month after the execution date. The investor or operator may transfer its rights and obligations under the PSA to any person who has sufficient resources and the necessary experience to conduct upstream activities, upon the consent of the Cabinet of Ministers of Ukraine and the approval of the local council. No consents are required in the case of an acquisition of an interest in an entity which is a party to the PSA, unless the PSA provides otherwise.
Tender conditions may contain an obligation on the investor to conclude the PSA with a state company (or an enterprise established by a state company) which will receive a certain percentage of the investor's profits.
After entering into the PSA the investor receives a special permit for subsoil use which will remain valid during the term of the PSA. Such term cannot exceed 50 years but may be extended. Further, the State ensures the issuance and approval of all other necessary permits, quotas and licences for the investor.
PSAs place certain obligations on the investor. Materials and services used must be of Ukrainian origin if possible (provided that they comply with international standards), and the majority of employees must have Ukrainian citizenship. Also, under the PSA all equipment and materials imported by the investor are released from customs licensing and quotas.
During the term of the PSA the investor is only obliged to pay income tax, VAT and subsoil use fee for the extraction of hydrocarbons, while the rest of taxes and mandatory payments are covered by the shared production.
The State guarantees to apply the same legislative instruments that were effective at the beginning of the PSA for the whole duration of its term, apart from any supervening legislation which provides a more favourable regime for investors. The State guarantees that no statutory instruments or local state and municipal authority regulations will have any binding effect on the investor, except for those regulating safety, health and welfare at work, environmental protection and public health.
1 In 2012 – Source: http://www.energoatom.kiev.ua/ua/about_nngc/nngc.
3 However, this year this company was also offered for sale by the State under privatisation process. Source: http://www.epravda.com.ua/news/2013/01/24/358097/.
4 As of 1 January 2013. Source: http://www.ecu.gov.ua/ua/activity/production.html.
6 Source: http://www.uaenergy.com.ua/post/15676.
7 Source: http://www.er.gov.ua/doc.php?p=2656.
9 25 companies obtained licences for power generation using RES in 2013. Source: http://www.nerc.gov.ua/?id=5701.
10 Source: http://www.nerc.gov.ua/?id=7844.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.