Solar energy activities in Ukraine. Barriers and prospects for further development

Long-term experience of collaboration between EC NET Company and foreign investors shows that there are significant problems associated with implementation of alternative energy projects in Ukraine. Foremost it affects solar energy. Currently, there are several problems that significantly limit possibilities for further development of the solar energy.

Being experts and practitioners in the field of conventional and alternative energy EC NET offers to review the main steps to be taken in order to help the Ukrainian market of renewable energy sources to solve problems at the legislative level.

What has been done

Since April 1, 2009 came into force the relevant Law of Ukraine aimed to create incentives for renewable energy. As a result this gave a significant boost for development of the alternative energy. Differentiated "green" tariffs for power energy produced from solar, wind, hydro, biomass and biogas sources were set by the Law. According to the Law:

The green tariff is a special tariff for electricity produced from renewable energy sources. It was set several times higher than the rate for plants using conventional resources in order to promote investments in the sector. The value of the "green" tariff depends on the year when the facility is put into operation.

In addition, the legislation foresees a number of benefits and incentives for alternative energy facilities, such as:

• exemption from income tax till 2020 inclusive;
• exemption from value added tax and import duties on equipment and utilities supplied to Ukraine in framework of renewable energy projects;
• purchase of 100% of generated electricity is guaranteed by SE "Energorynok";
• binding the "green" tariff rate to Euro exchange rate which helps to protect investors against inflation risks.

What does not work perfect?

Such incentives would have to facilitate the rapid investments in capital-intensive solar power projects. However, in practice it does not work perfect due to inconsistency of the requirements foreseen in the Law and real state of play.

Among the existing problems that threatened the future of solar energy in Ukraine we would highlight the following:

1. Local share.

The main obstacle in development of solar energy in Ukraine became the local share that includes fixed proportion of the equipment produced by the domestic manufacturers.

The abovementioned Law sets the mandatory requirement of so-called local share for alternative energy projects. The local share represents costs of equipment or services of the domestic manufacturers.

This requirement was quite acceptable and understandable to developers because by doing this the government has provided mechanisms to protect the domestic market of goods and services from overflow of foreign goods at dumping prices.

However, in 2011 by the law have been adopted such innovations that have become a major obstacle in development of the solar energy in Ukraine. Namely, the corresponding changes in imposing the local share with regard to the fixed proportion. Under the term fixed proportion shall be understood clearly set percentage for each of the components of local share such as equipment, materials and construction works.

Starting from July 1, 2014 in order to obtain the "green" tariff the fixed proportion of solar modules of Ukrainian origin must be at least 50%. Six months prior to the date the investments in development of solar energy projects were suspended because of such demands. This is due to the following: implementation of solar energy projects requires considerable time because of the long-term preparation phase (obtaining permits, land issues, project approvals, etc.). Therefore, potential investors do not dare to invest in solar projects as they have experienced a threat being in a lack of time to declare putting the facility into operation before July 1, 2014.

Such risks would cost investors millions of Euro wasted as the requirement to ensure 50% local share by fixed proportion is impossible in Ukraine. While adopting the relevant law the state did not consider the real possibility of domestic producers to adjust their production of high-quality energy-efficient equipment (solar modules) within a limited period of time and to enter the market with its competitive price. Lobbying of the Law with a fixed proportion of local share was beneficial only to some market players thus creating their monopoly position.

2. Connection procedure.

In case of connection of additional capacities in the form of new solar power plants (SPP) most of the power grids would require renovation and modernization (replacement of power lines, transformers, etc.). This reconstruction requires significant investments. However, the Law of Ukraine "On Electricity" foresees connection of alternative energy facilities by means of energy transmission company (Oblenergo) including the swing financial assistance to the customer (investor). This means that the funds that are invested in SPP power distribution scheme shall be later returned by Oblenergo (DSO). But in fact, to date the mechanism of swing financial assistance is not developed by the state and therefore investors cannot determine either opportunities or the period of connection procedure through the specified manner.

Therefore, in most cases, connections of the facilities that use renewable energy sources are done at the investors own expenses because of their interest to implement the projects at the optimum time. Thus, the investor protects itself against the risks.

3. Conditions of the project preparation

One of the reasons for the low rate of implementation of solar energy projects and scaring away investors is a long-term process of the project preparation. Investors have no will to spend time and money to perform a number of preparatory measures envisaged by the current legislation of Ukraine. Having no practical experience of project preparation in Ukraine the investors are mostly interested in sites that are already prepared for SPP construction with already obtained permits. But perfectly designed resource that would allow investors to search for such sites in Ukraine does not exist.

EC NET proposals

Proposal #1. EC NET deems appropriate to cancel a fixed proportion of the local share for solar power plants. Thus, investors would be given an opportunity to determine the percentage of investment in local share. Funds that investor would allocate to fill the local share may be aimed at:

• design;
• purchase of main equipment;
• reconstruction of power grid to connect the facility;
• performance of construction works, etc.

As far as production of solar panels and inverters is not established in Ukraine the investor will invest primarily in modernization and reconstruction of power grids for SPP connection. Such innovation should increase investor’s interest in these projects with the ability to make independent decisions regarding selection and purchase of the equipment in terms of feasibility and not a forced necessity.

Proposal #2. Currently the "green" tariff for solar power facilities is high enough. Meanwhile the "green" tariffs for facilities that use biomass and biogas for regular and round-the-clock electricity generation are unreasonably low compared to tariffs for solar power plants with an uneven distribution of generation throughout the day.

In order to establish a compromise between the investor and the state we offer to make following changes to reduce the value of existing "green" tariffs to economic levels for those solar energy projects that are not yet commissioned or under the initial design and have not suffered significant investments:

• for on-site solar power plants with capacity over 10 MW for 50%.
• for rooftop / facade solar projects for 10%.

This is necessary in order to create more favorable conditions for implementation of the projects with low capacities and generally increase their volume in energy sector. In turn, introduction SPP projects with low capacities will ensure even distribution of the load on the unified energy system of Ukraine.

Reducing the value of the "green" tariff for different types of SPP differentiated by capacity is as follows:

Proposal #3. Since the mechanism of swing financial assistance for connection to the power grids has no effect for alternative energy facilities we consider appropriate to impose such conditions for connection of these facilities same as in case for non-standard connection. This will help the customer to independently control duration of drafting of the design specifications and estimates; the scope of work necessary for connection; direct payment of the connection cost and to shorten execution of all types of work. It should be noted that while paying for the connection services under non-standard conditions the investor fulfills requirement of the local share (in case of absence of the fixed proportion as suggested above), which is a prerequisite for obtaining the "green" tariff.

In addition to direct network modernization this change will simplify the playing field for investors and facilitate the flow of foreign investment.

Proposal #4. To help investors and to improve conditions for attracting investment in solar projects we propose to develop an improved informational resource in the form of an interactive map of alternative energy projects of Ukraine (hereinafter - "the map").

This "map" will allow performing optimal search of the projects by specific criteria including the availability of permits, such as:

• Land use right and designated purpose of the land lot for development;
• Specifications for connection of the facility to external power grids;
• Technical specifications for fire and technological safety, environment and other;
• Urban conditions and restrictions;
• Geological survey and documentation;
• Report on the analysis of solar radiation;
• Design documentation of the facility with the appropriate approvals;
• Permit for construction and installation works, etc.

"The map" developed on the following criteria will accelerate implementation of the solar energy projects. Also, it is feasible to introduce such maps for other sectors of renewable energy same as the solar projects "map" sample with aim to promote the improvement of the investment climate in this area.

Conclusions

All of the above mentioned proposals made by EC NET foresee benefits to all participants of the project implementation, among which are the following:

For the Investor:

• Creation of a flexible environment for investors to fulfil requirement of the local share by own investments;
• Simplification of the process of ensuring local share;
• Establishment of clear conditions for connection of the facilities to power grids;
• Optimization of search conditions for solar energy investment projects by means of the "map";

For Oblenergo (DSO):

• Investment funds  for modernization and reconstruction of power grids;

For the State:

• Rreplenishment of the state budget (through tax payments);
• Support of the domestic producers.

The above benefits will ensure the sustainable development of solar energy and will help to prevent a monopoly position in the domestic market by creating similar conditions for all.

In the opposite case solar energy in Ukraine simply could not develop under the applicable law. And only adoption in the nearest future of the correct legislative changes could save the sector of alternative energy.