While in some European countries, such as Italy or Norway, support systems for renewable electricity producers in the form of auctions have already finished having proved their effectiveness, in Ukraine such a system is just being introduced.
Who will participate in auctions?
Starting from 2020, auctions will be the only means for wind farms with installed capacity of more than 5 MW and solar power plants with installed capacity of more than 1 MW to receive state support. Other RES projects will have a choice: either to participate in the auctions and enter into a PPA for 20 years, or to retain the “green” tariff until 2030.
Government will provide land plots for projects participating in auctions.
This sounds tempting, but only some projects will receive such land plots. Most likely they will be offered only in certain undeveloped areas that are badly lacking new capacities. The allocation of such land plots for auctions will be done by local or state authorities at the request of the Ministry of Energy. At the same time, the transmission system operator and distribution system operators will draw up and submit to the Ministry of Energy draft technical conditions for connection to the grid. There are similar systems operating in Brazil and Denmark.
How will the auctions work?
Quotas of state support for RES producers will be distributed between investors at open auctions through an electronic trading system based on the ProZorro platform.
The auctions will be organized by Guaranteed Buyer, a state-owned enterprise. Those who intend to participate in the auction submit an application in electronic form through their personal account. The application must contain a closed offer consisting of the size of facility’s capacity and the offer price. The offer price may not exceed the level of the “green” tariff valid on the date of the auction. It is important that information about the participants, their quantity and offered prices are not displayed publicly and remain confidential until the end of the auction.
The auction will be conducted automatically in the electronic system at the date and time specified in the announcement of the auction. It is disturbing that each participant is able to reduce its offer price up to 10 minutes before the start of the auction. Participants who in some way managed to receive information about their competitors’ offer prices could take advantage of this.
After the completion of the auction, the electronic trading system automatically performs the simultaneous disclosure of the offers of all of the auction participants and the information about them. The lowest price will be the only criterium for choosing the winner of the auction.
Within 10 working days after the auction’s completion, Guaranteed Buyer evaluates the documents of all participants. If the evaluation reveals grounds for the exclusion of a participant, including grounds for refusing to sign a PPA with the auction winner, Guaranteed Buyer publishes the relevant verification report and the electronic system records the results of the verification and the updated rating of the participants, omitting the excluded ones.
The auction system does not require the pre-qualification of participants which, of course, is the correct approach, designed to ensure the confidentiality of the participants’ offers. At the same time, given that all documents and submitted information are subject to verification after the auction’s completion, poorly prepared documents could work against the auction winner, and even cause it to lose this status.
Qualification requirements for auction participants
In addition to a grid connection agreement and documents confirming ownership or the right of use of a land plot, the participants of an auction have to submit an irrevocable bank guarantee in favour of the Guaranteed Buyer of the amount of EUR 5 /1 kilowatt. The winner of the auction, before the conclusion of the PPA, must provide a bank guarantee of the amount of EUR 15/1 kilowatt.
The guarantee will be returned to participants that have not received the right to state support as a result of the auction. The participant’s guarantee will also be returned to the auction winners. In its place, the auction winners will have to provide an auction winner’s guarantee.
It is worth noting that the issue of the size of the guarantee was one of the most debated issues during discussion of the draft Law, and the approach to setting it changed several times. Among market participants it is widely thought that the guarantee is still too high for the Ukrainian market. At the same time, for comparison, in Germany, the guarantee size for solar plants is EUR 50 /1 kilowatt, for onshore wind farms EUR 30 /1 kilowatt and for offshore wind farms EUR 100 /1 kilowatt.
Despite the approaching deadline for the launch of the first auctions, Ukrainian banks are still only drafting their conditions for issuing guarantees. It is already obvious that a guarantee from a Ukrainian bank will also have to be secured, most likely by monetary funds.
Conclusion
Despite there being certain gaps in the regulations, and previously announced deadlines for the preparation of secondary legislation having been missed, it now looks like the new support system will definitely be launched in 2020.
Investors should take into account that winning an auction with their offer price does not automatically guarantee the conclusion of a PPA. Poor preparation of documents for participation in auctions could nullify all efforts if the company is ultimately disqualified. Potential players should already start preparing their documents, including those for the issue of a bank guarantee, as far as this process can be delayed unpredictably.
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