New impetus for distributed generation projects

The Verkhovna Rada of Ukraine has adopted draft law No. 9381, which simplifies the development of energy projects in Ukraine.

On January 14, 2024, the Verkhovna Rada of Ukraine adopted Draft Law No. 9381 (the “Draft Law”), which introduces a capacity reservation mechanism, extends the validity of technical specifications for alternative energy projects, and introduces a number of positive changes for businesses that build energy facilities for their own needs. This raises a number of important points that should be addressed in detail.

1. Capacity reservation

Capacity reservation is a service provided by NPC Ukrenergo to a customer to reserve technical decisions on the connection scheme (capacity delivery) of the customer’s generating facilities under the capacity reservation agreement for a customer for a period not exceeding two years.

After the law enters into force and the bylaws are developed, developers planning to build power plants with a capacity of more than 20 MW may apply to NPC Ukrenergo and reserve the scheme of connection to the power grids of the future power plant for 2 years before the conclusion of the main connection agreement.

The capacity reservation fee is EUR 5,000 per 1 MW of capacity booked. This payment must be made within 20 days from the date of conclusion of the capacity reservation agreement.

During this period, the developer has the opportunity to conduct the necessary wind and environmental studies, as well as to take actions to obtain the land rights necessary to make a decision on project implementation and conclude the main contract for the provision of services for the connection of the power plant to the electricity grid.

Up to two years after the conclusion of the agreement, if the developer decides to implement the project and conclude a grid connection agreement, the capacity reservation fee will be credited as part of the connection fee. Otherwise, the capacity reservation fee is “burned” and can be used by NPC Ukrenergo for grid development.

The costs that a developer incurs at the start of large-scale projects (before making a final investment decision) are minimized. In addition, the “chicken and egg” problem faced by developers forced to allocate land and enter into grid connection agreements before conducting wind and environmental studies to determine the physical feasibility of the project is resolved.

We expect this innovation will increase the number of large utility-scale projects and help attract investment in the post-war recovery of Ukraine’s energy sector.

2. Technical conditions for connection to the power grid

According to the current version of the Law of Ukraine “On Regulation of Urban Development”, the validity of technical specifications for the construction of wind energy projects is 3 years, and 2 years for other alternative energy facilities. Such restrictions were introduced to limit the duration of projects that applied for a feed-in tariff.

Over the past 5 years, this problem has lost its relevance. Instead, this short period of validity for connection put an end to the possibility of attracting foreign investment in most existing alternative energy projects. Foreign investors understand that in times of war, implementing an energy project in 2-3 years is a fantasy. Even without taking into account military risks, the project development period to reach the ‘ready to build’ stage takes at least 2 years, given the necessary wind, environmental, and geological studies, land acquisition, and urban planning permits. Raising financing, designing the wind farm, ordering turbines, installation, and building the grid infrastructure also takes more than 1 year.

After the adoption of the Draft Law, the validity of technical specifications for the construction of alternative energy facilities will be extended. The technical specifications will be valid for 3 years after their issuance. Following approval of project documentation, payment of the connection fee, and receipt of documents granting the right to perform construction work on the construction object, the validity of the technical specifications may be extended for another 3 years.

In general, taking into account the capacity reservation mechanism, the guaranteed right to connect a project to the power grid can be valid for up to 8 years.

At the same time, connection agreements and technical conditions for connection to power grids in force as of the date of entry into force of the new law will be extended for an additional 3 years if by the date of entry into force of the new law the following conditions have been met:

• developed and approved project documentation for connecting the project to the power grid;
• project documentation has been submitted to the transmission system operator/distribution system operator for connection works;
• payment of the connection fee in the amount determined by the terms of such connection agreement.

As an alternative (if the above conditions are not met), developers may bring their contracts in line with the new rules and pay the advance connection fee (see below) within 3 months after the law comes into force. In this case, the new terms of reference and agreements under the “3+3” formula will be applied.

3. Payment for connection to electricity grids

In addition to extending the validity of technical specifications, the Draft Law introduces a mandatory connection fee prepayment under contracts concluded with NPC Ukrenergo of EUR 10,000 per 1 MW of connected capacity.

After the conclusion of the relevant agreement, the Customer shall pay the specified amount in the following order:

• 50% within 30 calendar days from the date of receipt of the technical conditions for connection;
• 50% within 12 months from the date of receipt of the technical conditions for connection.

In the event of a breach of payment obligations, the connection agreement may be terminated and the allocated capacity may be used for other projects. This provision was initiated by NPC Ukrenergo in exchange for the extension of technical conditions to avoid situations where the project for which the reserved capacity is not implemented.

4. Removal of restrictions on the installed capacity of electricity facilities

According to current legislation, the installed capacity of an electricity facility must correspond to the capacity allowed to be supplied to the grid in accordance with the agreement with the transmission system operator or distribution system operator.

In other words, a power plant operator whose grid connection allows for the supply of, for example, 50 MW of power is not entitled to install generating facilities with a capacity of more than 50 MW. Such a restriction is not relevant for alternative energy facilities, as solar and wind power plants can operate at maximum capacity only a few days (and only during certain hours) a year. Therefore, a significant part of the “limit” is not used efficiently.

After the Draft Law comes into force, power plant owners will be able to install additional generating capacity at existing facilities. The only condition is that the instantaneous output of power to the grid should not exceed the limit set under the contract with the transmission system operator or distribution system operator.

The draft law allows for the implementation of hybrid power plants (using several energy sources such as solar, wind, energy storage systems, gas generation, etc.), as well as so-called cable pooling projects, when new generating facilities use the grid capacity of existing facilities.

These innovations will accelerate the construction of power plants, reduce the amount of investment required to connect to the grid, and increase the efficiency of using existing power capacities.

5. New opportunities for active consumers

Legislators did not ignore the projects of active consumers seeking to expand the possibilities of installing generating facilities for their own needs.

Firstly, active consumers will be able to purchase electricity generated by any third-party power plants connected to the consumer’s grid. Prior to the adoption of the amendments, current legislation only allowed such a possibility for power plants using alternative energy sources and limited the development of other types of generation such as gas. The adopted amendments will not only open up new opportunities for the development of distributed generation for business, but will also promote the development of distributed energy to meet the needs of utilities and critical infrastructure of communities.

Secondly, requirements for licensing electricity generation activities for active consumers have been canceled in cases where electricity is produced by active consumers and by third parties connected to the electricity grids of active consumers when the installed capacity of such generating units does not exceed 20 MW. These changes are intended to reduce the regulatory burden on investors for whom electricity generation is a non-core activity, and to reduce the burden on the regulatory authority, the NEURC.

Ivan Bondarchuk, Partner, Head of Energy & Projects, exclusively for Mind.UA