Renewables in Ukraine - KPMG in Ukraine July 2019
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Renewables in Ukraine KPMG in Ukraine July 2019
Table of Contents Foreword 3 A Global Perspective 4 Ukraine Overview 7 A Greener Future for Ukraine 8 International Investment 10 Plans for Growth 12 Investment Opportunities 14 KPMG in Ukraine, Local Knowledge, International Experience 18 Appendix - Macroeconomic Indicators 19 2 Renewables in Ukraine
Foreword
Ukraine’s Renewables Investment still secure the Green Tariff provided should be manageable, subject to the
Boom that projects have obtained land use capacity offered at each auction, as
rights, a grid connection agreement, advances in technology continue to
The Ukrainian government has a construction permit and a power reduce generating costs.
committed to increase renewables from purchase agreement (PPA) in the new
around 4 per cent of the energy mix format by 31 December 2019. We expect the investment climate
today, to 25 per cent by 2035. for Ukrainian renewables to remain
Passing of Ukraine’s Auction Law favourable. Indeed, the government’s
While hydropower dominates the for alternative energy sources in 2035 energy mix target will require
country’s renewable capacity, averaging April 2019 follows a well-trodden significant, and sustained investment
4.6GWp over the last decade, installed path. Use of auctions to manage in new renewable capacity, storage and
wind, solar and bio energy capacity supply to a national grid has become transmission networks.
increased by 54 per cent to 2.1GWp in commonplace in recent years.
2018 alone, with a further 4.6GWp of Overall, the outlook for the renewables
capacity in the pipeline. According to research by the sector in Ukraine looks bright.
International Renewable Energy Development of the sector has been
Much of this growth and pipeline, Agency (IRENA) the number of rapid in recent years, and will continue
particularly in wind and solar, has been countries that have adopted renewable in the years ahead, although investors
fuelled by a rush to secure the Green energy auctions increased from six in should carefully assess the impact of
Tariff, which will be replaced by an 2005 to more than 67 by early 2017, and the new auction regime.
auction-based regime from 2020. continues to rise.
Introduced in 2008, the Green Although the auction regime will
Tariff provides highly attractive and undoubtedly lower returns on
guaranteed Euro-denominated rates investment, compared to those offered
until the end of 2029. Investors can by the Green Tariff, any reductions
Renewables in Ukraine 3
A Global Perspective
Worldwide growth in renewables in 2008-2017 Since the adoption of the Kyoto
Protocol, in 1997, which committed 37
developed nations and the EU-15 to
8.3% CAGR reduce emissions, the international
5,886
5,517 community has set ever more onerous
5,326
5,034 targets for reductions in emissions of
4,723
4,162
4,370 key greenhouse gases. And, despite
3,725 3,857 the USA’s planned withdrawal from the
Paris Agreement, measures to reduce
emissions seem unstoppable.
While hydropower remains the
dominant source of renewable energy,
1,061 1,141 1,228 1,333 1,444 1,566 1,694 1,851 2,011 2,179 with the development of solar and
wind energy, its share has dropped
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
significantly and it currently accounts
Capacity, GWp Production, 1000 GWh Compound annual growth rate for 53 per cent of global renewable
capacity and 69 per cent of power
generation. The share of solar and
Global renewable power Global renewable power
wind has increased to 18 per cent and
capacity generation
24 per cent of total generating capacity
respectively, and we expect these
Hydro 53% 69% numbers to continue to grow.
Plans recently announced by the
Wind 24% 16% European Commission will impose
a range of reforms on the electricity
market from 2025, including an
Solar 18% 6%
end to coal generation subsidies,
and legislative initiatives aimed at
Bio 6% 9% increasing the share of renewable
Total, GWp 2,179 Total, 1,000GWh 5,886 energy to 50 per cent of the generation
mix by 2030.
Note: The difference between renewable capacity and power generation is explained
Globally, the picture is just as positive.
by the different utilisation ratios applicable to each source (approx. 40 per cent for A forecast by the International Energy
hydropower, between 20 per cent and 25 per cent for wind, approx. 10 per cent for solar).
Source: IRENA Agency1, which takes into account
prevailing market conditions and
1
International Energy Agency, 2018
4 Renewables in Ukraine
policy frameworks, expects capacity (LCOE), with the potential to drop to Global levelised cost of electricity
to grow by over one Terawatt (46 per USD0.03 given the right operating (LCOE) generation (USD/kWh)
cent) between 2018 and 2023. Solar conditions. Onshore wind too, has
energy accounts for more than half of seen significant improvement in cost
this expansion, driven by supportive per kWh to a global weighted average 0.36 - 73%
government policies, market and of USD0.06 (LCOE), 23 per cent lower
technological improvements and than 2010, with some projects regularly
0.28
declining capital costs. delivering electricity for USD0.04 per
kWh3 0.22
Long seen as a sector in need
0.18
of subsidy, now, however, those Against this background, worldwide 0.16
technological innovations, enabling investment in renewables has shown 0.13
0.12
policies and economies of scale mean strong growth of 9 per cent CAGR - 23% 0.10
that power generation from renewable from 2010-2017, spurred on in many
sources is increasingly competitive territories by a generous range of 0.08 0 .08 0.08 0.08 0.07 0.07 0.07 0.06
with, and in many cases, less costly subsidies and tariffs, and welcoming
than fossil based or nuclear power.2 regulatory environments. While 2010 2011 2012 2013 2014 2017
developed and industrialised countries
Solar photovoltaic (PV) modules have led the way, emerging economies
Solar Onshore Cumulative
declined in price by more than 80 per have also been active. Investors expect photovoltaic wind decrease
cent between 2010 and 2017 and with to see valuations grow across all
it, the average cost per kWh generated sectors but particularly in solar and
has tumbled by 73 per cent to USD0.10 wind. Source: IRENA
Renewable energy penetration (2017) and growth (2010-2017)
Renewable power capacity, GWp 0% 10% 20% 30% 40% 50% 70% 100%
Asia Europe North South Eurasia Other World
America America Share of renewable energy production in 2017, % of total energy production
Capacity in 2010 389 323 232 149 70 66 1,228
Change 528 189 116 54 27 36 951
Capacity in 2017 917 512 348 203 96 102 2,179 0% 4% 8% 12 % 16% over
CAGR in renewable energy capacity in 2010-2017
2
IRENA (2018) Renewable power: Climate-safe energy competes on cost alone.
3
IRENA (2018) Renewable power: Climate-safe energy competes on cost alone.
Renewables in Ukraine 5
Global M&A in the renewables sector based 1,218-megawatt (MWp) offshore USD5 million, the deal value
has focused on Europe and North wind farm, from Orsted A/S (Denmark) threshold for our database. In 2018
America, which attracted 37 per cent for GBP4.46 billion; Canadian group, the only large deal of the year saw
and 30 per cent respectively of all Brookfield Asset Management’s Syvashenergoprom, which is due to
deal-making activity between 2010 and purchase of Saeta Yield, the Spanish construct a wind plant with a capacity of
2017, despite their significantly lower listed renewable energy company; the between 250 and 330MWp, acquired by
share of installed renewable capacity acquisition of an undisclosed majority Norwegian renewable energy company
(23 per cent and 16 per cent), perhaps stake in Spanish wind farms to solar NBT AS. Post-acquisition activity
reflecting the higher cost base in these photovoltaic plant development has, however, been strong across the
developed markets. The sector attracts and construction business, Eolia sector and we have seen debt raising
interest from both private and public Renovables de Inversiones, S.C.R. S.A. and capital investment measured in
sector investors, who accounted for by Alberta Investment Management hundreds of millions of US dollars,
70 per cent and 30 per cent of M&A Corporation (AIMCo), for EUR600 and as the sector grows we expect
activities respectively. Over 68 per cent million and the acquisition of RTR to see increased activity as local and
of investments were cross-border. Rete Rinnovabile S.r.l. an Italian solar international operators compete for
generator and distributor, by F2i SGR dominance.
A 2017 KPMG Survey4 predicted SpA, an Italian private equity and
that the EMEA region would attract venture capital firm for EUR1.3 billion. However, among the positives, a 2017
up to half of all investment in the KPMG survey5 of 200 senior level
renewable sector in 2018 and indeed By comparison, deals in Ukraine were investors in renewable energy did
approximately 40 per cent of M&A significantly more modest. Interest identify some potential problems,
activities in the renewable sector in in the power and utilities sector has noting that the switch from feed-in
2018 were in this region. Among the however has been predominantly tariffs to an auction-based system
largest deals were the acquisition by focused on renewables. A number was, occasionally, an uncomfortable
Global Infrastructure Partners (GIP), of pre-construction projects secured transition and that valuations were
the US-based private equity firm, of a foreign investment through M&A, creeping up as more and more focus
50 per cent stake in Hornsea 1, the UK- activity but the majority fell below was placed on the industry.
M&A actvities, EURm
11% 11% 6% 4% 8% 13% 11% 24% 12% 15%
19% 14% 21% 16%
26%
36%
24% 31% 20%
46% 44% 9%
34%
32% 35% 35%
39%
55% 32%
54% 36% 31%
55
45
40
29 28
14 14
9
2010 2011 2012 2013 2014 2015 2016 2017
M&A activities, EUR billion Asia Europe North America Rest of the world
Source: Mergermarket, KPMG analysis
4
KPMG, Great Expectations: deal making in the renewable energy sector 2017
5
KPMG, Great Expectations: deal making in the renewable energy sector 2017
6 Renewables in Ukraine
Ukraine Overview
At present, Ukraine generates just 4 per Windtechnology, dominate the Elsewhere, the Solar Chornobyl project
cent of its electricity from renewable Ukrainian wind power market. In should be revered for both its ambition
sources other than hydroelectric the solar renewables sector, CNBM and symbolism. The 1986 Chornobyl
power, and the market opportunities New Energy Engineering, and Rengy disaster was the world’s worst nuclear
for investors are in practical terms, Development are the largest suppliers, accident, leaving thousands of square
limitless, given the country’s stated controlling almost one third of the kilometres of Ukraine and Belarus
desire in the National Energy Strategy, market. uninhabitable, leading to one of
to increase the renewables mix to the largest forced mass-migrations
25 per cent by 2035. This ambitious In both wind and particularly solar, in Europe since the Second World
strategy will require significant outside of the key players, whose War. In a sign of things to come, in
investment in the development of growth plans have thus far been largely early 2018, Solar Chornobyl, a joint
power storage capacity to reduce organic, the market is fragmented and venture between Ukraine’s Rodina and
losses to the grid and imbalances characterised by smaller operators and Germany’s Enerparc AG, brought a
between supply and demand, but we start-ups, many of whom have yet to small solar plant (1MWp) into operation
expect this to be largely resolved upon generate their first megawatt. in the Chornobyl exclusion zone and
liberalisation of the market. Currently, later that year signed an agreement
power storage facilities in Ukraine are During 2018, installed solar power to increase its capacity to 100MWp.
limited to approximately 1,500MWp of capacity increased by 646MWp (87 per Once completed, the project will see
pumped-storage hydroelectricity. cent). Wind power capacity increased Chornobyl restored to the power mix of
by 68MWp (15 per cent) and biofuel by Ukraine, and Solar Chornobyl become
DTEK Wind Power, the renewables arm 13MWp (33 per cent), driven mainly by one of the largest solar power plants in
of the local energy giant, and Wind the Green Tariff mechanism, increased the country.
Parks of Ukraine, which additionally interest from foreign investors, debt
builds equipment under licence financing and insurance cover provided
from German supplier, Fuhrlander by international financial institutions.
Renewables in Ukraine 7
A Greener Future
for Ukraine
In Ukraine, with its dated infrastructure The government stopped importing desire to capitalise on its undoubted
and reliance on fossil fuel generation, gas from the Russian Federation in natural advantages, Ukraine is carving
the ecological case for renewables November 2015 and has since relied on out a niche as a destination for
could not be clearer. Coal fired heating local production, supplies from Europe investment in renewable energy, and in
and electricity generating plants, and and other fuel sources for power and particular, wind and solar power. While
diesel engines, emit tiny particulates heat generation. As early as 2008, the nation’s published energy strategy
that lodge in the lungs and can lead to the government started to stimulate assumes significant development of
serious respiratory illness. In Ukraine, development of wind, solar, biofuel new facilities, there is already much
levels of these PM2.5 particulates, and small hydro energy projects, opportunity for more risk adverse
so-called as they are 2.5 microns or introducing a special Green Tariff, tax investors to take a stake in projects
smaller in size, are, on average, almost and customs reliefs, and incentives for currently in planning or in operation,
twice World Health Organisation (WHO) purchasing locally made equipment. in order to take advantages of the
limits6. Ukraine has pledged to cut its government-backed Green Tariff, which
greenhouse gas emissions by at least Driven both by the necessity to seek sets Euro-linked tariffs through to the
40 per cent from 1990 levels by 2030, alternative energy supplies and by a end of 2029.
under the 2015 Paris Agreement.7
Ukraine's growth in renewable power capacity in 2008-2017
2,118
68
98
1,344
1,079
64
945 961
73 1,419
788 56
47 53 59
558 43 49 52 742
24 531
41 422 428
6 353
124 168
52 60
49 465 533
29 343 368 428 428 433
40 19 25
- 88
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: IRENA, NERC (National Commission for State Regulation of Energy and Public Utilities)
Notes: (a) Hydropower capacity includes only capacity from small hydro plants (98MWp) which receive Green Tariff payments, and excludes large scale hydro
generation plants (4,571MWp) and hydro pumped-storage capacity (circa 1,500MW) which are owned and operated by Ukrhydroenergo, a government-
owned generator.
(b) Capacities of renewable energy plants exclude wind and solar plants located on the Crimean peninsula (circa 500MWp), but include the wind farms,
which are not currently operating, in the territories in Eastern Ukraine, currently outside the government’s control.
6
Word Bank, DataBank Micro Data Catalog (2015 data).
7
Reuters, Ukraine cities gear up to run on local clean energy by 2050
8 Renewables in Ukraine
From the outset, local operators were guarantees provided by organisations further investment in storage capacity
keen to start developing renewable such as the European Bank for to ensure that both investors and the
projects to take advantage of the Green Reconstruction and Development government can reap the benefits.
Tariff, and once the benefits became (EBRD), the European Investment Bank
clear, from around 2014, international (EIB), the US-based Overseas Private Alongside Ukraine’s clear natural
operators have seized the opportunity Investment Corporation (OPIC), the advantages, particularly for solar and
to invest in this fast growing sector in International Finance Corporation wind generation, the government is
Ukraine. (IFC), and other smaller lenders and committed to generating 25 per cent
investors, including German banks, of the nation’s power from renewable
By the end of 2018, some 2,117MWp of who together have contributed over sources by 2035. The country also has a
renewable capacity had been installed USD1.4 billion since 2009. fast-maturing regulatory environment,
and further facilities with a combined access to international finance and
capacity of over 3,000MWp are either The recently introduced law, On a workforce with the necessary
at the pre-development or construction Amendments to Some Laws of Ukraine skills and experience to implement
stage, with the aim of capitalising on on Ensuring Competitive Conditions complex projects. Output from wind
the Green Tariff. for Production of Electricity from and solar is expected to grow at 15
Alternative Energy Sources, No. 8449-d per cent (CAGR) to reach 25,000GWh
In the first quarter or 2019, Ukraine (the Auction Law), looks set to continue in 2035, up from 1,600GWh in 2015.
added 861MWp of renewable to keep the momentum up, providing Growth in hydroelectric power will be
capacity, five time more than during for new auction-based tariffs, a more modest but should still reach
the same period in 20188, of which coherent market and a clear strategy for 13,000GWh by the same date, following
almost 700MWp was solar. Investors integrating renewables into the overall overhaul of existing equipment and
worldwide, from Norway’s Scatec, energy mix. A planned integration construction of new generating units at
to China’s CNBM Engineering are with the European grid also raises existing government-owned plants.
recognising the opportunities. They the prospect of international energy
are being helped with funding and sales. The market will however require
Ukraine's power generation in GWh Investment from donors (2009-2018)
25,000
USD639 million
13,000
7,000 USD392 million
1,600
USD203 million
2015 2035
USD73 million
Other
donors USD118 million
Total USD1,425 million
8
Ukraine Business News
Renewables in Ukraine 9
International Investment
International investors are already key of Zophia, will be the largest onshore One of the largest domestic renewables
players in the renewables market, chief wind power plant in Europe. A further operators in the Ukrainian market is
amongst them are CNBM Engineering 4.6GWp of renewable capacity is vertically-integrated energy giant DTEK
with an estimated 22 per cent share currently planned or under construction which, alongside its fast developing
of the solar market in Ukraine with the aim of coming on stream in wind and solar interests is also the
(excluding plants in Crimea) and Rengy the coming years in order to secure nation’s largest coal miner, fossil fuel
Development, a multinational working the highly advantageous Green Tariff. electricity generator and the largest
in Kazakhstan, Armenia and Ukraine, Additionally, NBT, French group, private gas producer. DTEK Wind
which has a 10 per cent share. Total Eren SA and China Power have Power has approximately 40 per cent
agreed to invest USD450 Million in share of the Ukrainian wind energy
Norway-based NBT has signed an construction of a 250MWp wind farm market10. DTEK plans to invest EUR750
agreement with the Unit Venture in Kherson Region, Norway’s Scatec Million in 2018 and 2019 in construction
Investment Fund to develop a EUR1 will shortly bring on line an 83MWp of solar and wind power plans, with
billion, 742MWp wind power plant solar facility, and other local and total generating capacity of 740MWp11.
along the northern shore of the Sea international investors will bring on line
of Azov, in Yakymivka district. This as much as 500MWp of wind power in
development, with the working name the coming years9.
Installed capacity and key projects
Pipeline
Source: NEURC
9
Business News Europe, Ukraine's Renewable Rush
10
Biowatt, Alternative energy, who is interested, where are they investing?
11
Na chasi, Renewable Energy
10 Renewables in UkraineWind energy Solar energy
Installed capacity Pipeline Installed capacity Pipeline
DTEK and
DTEK 200 Zophia 742 CNBM 301 CMEC solar plant 200
Windkraft Ukraine 75 Eurocapewind farm 600 Rengy Development 130 Scatec solar plant 200
Ochakivskiy Wind Pokrovsk solar power
Park 49 Sivashenergoprom 250 Euroimex 21 plant 200
Prychornomorskiy Prychornomorskiy Prychornomorskiy
Wind Park 23 Wind Park 500 Leader 20 Wind Park 100
Other 186 Other 1,360 Other 946 Other 403
Total (MWp) 533 Total (MWp) 3,452 Total (MWp) 1,419 Total (MWp) 1,103
Small hydro Bioenergy
Installed capacity Pipeline Installed capacity Pipeline
None
Synelnykowe
Energiya-1 9 Biogasenergo 18 bioenergy plant 76
Voda Donbassu 4 Smilaenergopromtrans 9 Total (MWp) 76
Other 56 Oriel-Leader 6
Total (MWp) 68 Singa Energis 5
Other 60
Total (MWp) 98
Sources: information in the public domain, NEURC
Renewables in Ukraine 11Plans for Growth
In June 2017, backed by assistance development without significantly or approval by state bodies13. According
from the governments of Germany, affecting domestic bills. Pilot auctions to some estimates, this legislation will
Switzerland and Slovenia, Zhytomyr are due to be held by 31 December result in UAH5-10 billion in cost savings
became the first Ukrainian city to 2019. Regular biannual auctions are for renewable energy providers.
adopt a target of using 100 per cent planned from 2020.
renewable energy by 2050, with plans Work is already in hand to synchronise
for a solar plant generating up to In a further boost for the sector, other the Ukrainian power grid with
30MWp. Three other Ukrainian cities, recently introduced changes to the Europe’s ENTSO-E14 which alongside
Kamianets-Podilskyi, Chortkiv and Lviv Tax Code of Ukraine additionally grant providing much needed redundancy
have since come on board12. VAT exemption on imports of certain in the system, will also allow effective
wind and solar equipment (wind power competition in the domestic electricity
Ukraine plans to increase energy from units, PV cells, certain liquid dielectric market, with inflows from international
renewable sources from 4 per cent transformers and static convertors). providers, while providing access to EU
in 2015 to 12 per cent by 2025 and to markets for Ukraine’s nuclear power
25 per cent by 2035. This growth is There are also changes to land zoning, plants and renewable generators.
dependent on necessary developments such that until 31 December 2022, Completion of these works would
to the regulatory environment and developers of solar and wind projects enable Ukraine to disconnect power
access to international finance. Growth will no longer have to seek change of links with the Russian Federation.
so far has been driven in large part use designation for land previously
by the adoption of a Green Tariff, designated as industrial, transport, This internationalisation of the
introduced in 2008, which guarantees telecommunications or military. Further, market will increase the investment
prices until the end of 2029 for construction of wind plants has been attractiveness of Ukraine’s power
electricity from renewable sources, given an SS1 classification, meaning sector and hence encourage investors
brought online before the end of 2019. that work can be undertaken without a to commit to new renewable energy
Thereafter, the recently introduced specific construction permit and works operations.
Auction Law will drive further undertaken are not liable for inspection
12
Reuters, Ukraine cities gear up to run on local clean energy by 2050
13
EBA, VAT exemption for import of certain wind and solar
14
Ukrenergo, Integration to ENTSOE
12 Renewables in UkraineForecast power generation (billion kWh)
185 195
178 25
164 164 18
12 Nuclear
2 9
12 13 13
7 10
63 Coal thermal
68 64 63
60
Hydro
88 85 91 93 94
Solar and Wind
2015 2020 2025 2030 2035
Forecast structure of Ukraine’s energy supply
4% 8% 12% 17% 25% Solar and Wind
1.2% 2.4%
5.5% Heat and Geothermal
4.9% 10.4%
11.6% 6.9%
11.5% 8.8%
9.2% Hydro
8.2% 11.5%
25.5% 7.3%
29.3% Biofuels and waste
32.2%
29.7%
25.0%
Oil products
28.9%
29.3% Nuclear
31.0% 30.8% 30.2%
Natural Gas
30.0%
22.0%
16.1% 14.3% 12.5% Coal
2015 2020F 2025F 2030F 2035F
Total renewable energy sources
Source: Energy Strategy of Ukraine through to 2035
Renewables in Ukraine 13Investment Opportunities
Investors looking to enter the Ukrainian energy auctions increased from six in – The introduction of wind and solar
market have two options: either invest 2005 to more than 67 by early 2017, and power into the system is likely to
into existing projects benefitting from the process continues. create imbalances, as output is
the Green Tariff, or invest into projects dependent on weather conditions.
that will operate under the new Auction The Auction Law, introduced in April Nevertheless, winning bidders
Law. 2019, has the following key features: will bear limited or no liability for
imbalances between 2020 and 2030
Green Tariff – Regular biannual auctions are if their projects are commissioned
planned from 2020. Pilot auctions prior to the introduction of a
Introduction of the Green Tariff in 2008 are due to be held by 31 December liquid intra-day market or 2024,
kick-started Ukraine’s alternative energy 2019. Quotas will be set annually whichever is sooner.
market, by providing guaranteed Euro for the following five years and
denominated prices per kWh until the will be split into wind, solar and – There will be no retrospective
end of 2029. other RES. In the meantime, legislative changes for power
the government may conduct plants commissioned before 2020.
However, in order to secure the technology neutral auctions
attractive Green Tariff (currently or introduce special quotas for – The Green Tariff will be reduced by
EUR0.15 per kWh for ground solar particular projects. 25 per cent for solar plants in 2020
plants, EUR0.16 for rooftop solar and a further 2.5 per cent annually
plants, and EUR0.10 per kWh for wind – From 2020, solar power plants between 2021 and 2023. For wind
farms of more than 2MWp) investors with a generating capacity plants the reduction will be 10 per
must ensure that power plants are exceeding 1MWp and wind cent in 2020 with no further annual
commissioned by 31 December 2019. plants exceeding 5MWp (unless reduction. The Green Tariff will be
operating three or fewer turbines) further reduced for solar and wind
Even if commissioned after 31 must take part in auctions. Those projects commissioned from
December 2019, certain large solar and plants subject to the grandfathering 1 January 2024.
wind projects can still benefit from the rule (see left) are excluded from
Green Tariff, albeit at reduced rates. these requirements. Annual power production quotas for
Large solar and wind projects are not renewables will be set by the Cabinet
required to participate in auctions, – Auctions will use the ProZorro of Ministers, based on proposals
under the grandfathering rule, provided platform. Bidders will submit from the Ministry of Energy and the
they have secured rights to land closed bids which contain a Coal Industry, which will themselves
plots, a grid connection agreement, a technical bid (noting the capacity be founded on consultations with
construction permit and a PPA in the bid for) and bid price (per kWh) Ukrenergo, the electricity Transmission
new format in place by 31 December with the key criteria being System Operator (TSO), and the State
2019. Such developments have two price. Auction prices may never Agency on Energy Efficiency and
years (solar) and three years (wind) exceed those paid on the Green Energy Saving of Ukraine. The new
to complete construction in order to Tariff. These prices will be valid system should ensure that the TSO
benefit from the Green Tariff. for 20 years from the date of is better able to manage the already
commissioning of the power plant. discernable constraints related to the
Auction Law integration of renewable supplies with
– Bidders must provide a bank the power system. Ukrenergo has
Use of auctions to manage supply guarantee equivalent to EUR5,000 outlined three scenarios for the amount
to a national grid have become for every 1MWp bid for, before the of solar and wind energy the system
commonplace in recent years. start of the auction and a further could absorb and which balancing
According to research by the EUR15,000 for every 1MWp as a power generating capacities would be
International Renewable Energy performance bond, if they win the needed in the system.
Agency (IRENA) the number of auction.
countries that have adopted renewable
14 Renewables in UkrainePower Production Quotas
Scenario A Scenario B Scenario C
In this scenario, electricity generation The share of nuclear power plants Forecasting and management
by wind and solar power plants would in total power generation would be systems and 2.5GWp of balancing
be constrained, whilst additional limited and the growth of balancing capacities (gas piston plants and
balancing capacities are installed. The power generation capacity would be batteries) would be installed,
ability of the system to forecast and ensured by means of coal-fired power giving unhindered development of
manage variability in power generation plants. The development of ‘green’ renewable energy. Nuclear generation
would remain unchanged. generating capacipty would be not would increase and coal power plants
limited. reduce output.
Ukrenergo favours Scenario C, which they believe will meet the needs of both consumers and suppliers, and restrain
electricity tariffs for domestic and industrial consumers. Ukrenergo estimate the investment required to put this scenario
into operation is UAH55 billion (USD2 billion), with a 6-year payback period.
Project development map under the Green Tariff
Project development map under the Auction Law
Source: KPMG analysis
Renewables in Ukraine 15The EMEA region is expected to show A joint venture or investment in an Green Tariff and Auction Law, the
the biggest increase in M&A in the existing licenced solar or wind operator, grid is obliged to take every MWh
worldwide renewables industry in 2019. even one not yet generating (as long generated.
Research commissioned by KPMG16, as the project has an agreed pre-
exploring the views of business leaders PPA) is a viable option for an investor The government’s stated aim that
and industry experts showed that fully looking to secure access to Green Tariff by 2035, 25 per cent of all electricity
47 per cent saw Europe as the focus advantages. Those looking to develop will be generated from renewables
of worldwide growth, and we expect a greenfield operation should take a should ensure that auctions, whilst
Ukraine to play its part in that growth. longer term view of the market and competitive should not be too onerous,
be aware of the administrative and although this will of course depend on
During 2018 Ukraine’s renewable legislative hurdles. the capacity put out for tender at each
sector (excluding hydropower) saw 54 auction, and whilst return on capital
per cent growth in terms of installed An investment in a ready-to-build employed is currently exceptional for
power capacity, from 1,375MWp as at 1 pre-approved solar project, could see Green Tariff operators, auctions would
January to 2,117MWp at 31 December. power generation inside six months, deliver tougher competition to the
This capital investment and the at a cost of around USD750,000 or less market. Ukraine’s recently introduced
introduction of further capacity in 2019 per megawatt installed. Auction Law is a continuation of the
is sure to generate increasing interest global trend, following significant
in M&A activities in the sector. Without doubt, however, wind projects experience from other countries such
must be planned on a longer timescale. as Mexico, Argentina, Chile, Brazil,
The market is complex but at KPMG By their very nature, many of the Peru, Germany, UAE, Zambia, India,
we have the skills and experience prime locations for wind energy are China, and the Russian Federation, that
to guide you smoothly through the often remote and difficult to access, have made the switch to auctions, to
acquisition process, providing you with presenting the operator with logistical ensure that the system runs smoothly.
comprehensive advice at all stages of challenges unlike those for a solar
the process, including identification and project. Additionally, lead times for However, as renewables make up an
evaluation of investment opportunities, feasibility studies and fabrication of increased share of power generation,
conducting legal, financial and tax due towers and turbines can be lengthy and significant investment will be required
diligence of selected opportunities, delivery to site may require changes to into the grid and power storage
pricing analysis, support in negotiation local transport infrastructure. projects, and if growth is to remain
of the deal and related transaction unconstrained by technical bottlenecks,
documents (e.g. sale and purchase Both wind and solar plants however, the government will need to approve
agreement) and post-acquisition are guaranteed a connection to the storage and balancing plans, such as
support. electricity grid and under both the those favoured by Ukrenergo.
16
Great Expectations: Deal making in the renewable energy sector
16 Renewables in UkraineInvesting in any market is a complex Potential entry options
decision, irrespective of existing
international footprint and risk appetite Establishing a new company from The most time-consuming
a business may have. Before entering scratch (greenfield). This requires, option which requires
as a first step, a search for land with substantial contracting
the Ukrainian market, an investor 1 easy access to the electrical grid and workflows and a thorough
should develop a clear investment obtaining land lease agreements from understanding of the limitations
local communities or state authorities of the existing power grid
strategy, based on a thorough
assessment of not only country risks
but also the commercial, financial
and project risks specific to each
This option may allow an
opportunity. All investment strategies investor to take advantage of
Acquiring an existing company that
have their own set of specific risks and already has some of the required land the Green Tariff if a pre-PPA has
2 been signed. Time to market
rewards, and it is important that all use agreements and permissions
should be substantially shorter
stakeholders, including the board and than option 1
shareholders, are aligned.
In the Ukrainian renewable energy
market, investors should be particularly This option allows an
investor to generate return on
aware of the timing of their investment, Acquiring an operating renewable investment immediately and
3
given the change from the Green Tariff energy plant, already supplying power benefit from the Green Tariff.
to the grid However returns are likely to
and its associated guarantees and be lower
incentives, to the new Auction Law.
Whichever route you decide to take, it is essential to engage suitably qualified professional advisors to navigate you through
the investment process. Legal, financial and tax advisors with a deep understanding of the local business environment and
extensive experience in the renewables sector are a prerequisite to ensure that investors mitigate risks and avoid common
pitfalls, and maximise opportunities during the investment process and throughout the entire lifecycle of their investment.
Different investment options are associated with different risks and rewards for an investor
1 year
Launch from
Entry options: Buy Joint venture
scratch
Financial options: Equity vs. loans
Feasibility study
M&A process
Environmental assessment
Land allocation
Grid connection agreement
Due diligence
pre-PPA
Approval of the project
Project development:
Equipment purchase
Valuation
Raise required additional capital
Construction of a plant
Connection
Deal structuring
Obtain electricity production licence and green tariff
Maintenance
Project operation:
Reports
Sell/refinance debt on Operate during the
Exit options Gradual sale
the plant’s launch lifecycle
Renewables in Ukraine 17KPMG in Ukraine
Local Knowledge,
International Experience
KPMG has been present in Ukraine you throughout the process. We can knowledge, while our international
since 1992, and works closely with both support you, from market entry strategy network of member firms provides
project owners and investors in the and identification of suitable targets, access to the latest developments and
renewables sector. through to legal, financial and tax due insights from the global renewables
diligence, as well as preparation and sector.
Whether you are considering negotiation of transaction documents.
investment into a greenfield or existing At KPMG we focus on helping our
project, KPMG in Ukraine has the Our teams of specialists combine clients to maximise the value of their
experience and expertise to advise local experience with deep sector investment, both on entry and exit.
Credentials
Scatec Solar European Investor Chinese Investor Czech investor Turkish industrial
group
Financial due diligence Financial, tax and legal Financial, tax and legal Due diligence on two Pre-investment legal
on five solar power due diligence on seven due diligence on a wind solar power generating due diligence on
generating plants in solar power generating power generating plant plants in Ukraine construction projects
Ukraine plants in Ukraine. in Ukraine for solar power
M&A support generating plants in
Ukraine
2018 2018 2018 2018 2018
IB Vogt Wind Power LLC Confidential DTEK DTEK
DTEK
Legal and tax support Legal, financial and tax pre- Full-scope tax due Comprehensive tax Analysis of, and
for the acquisition and investment due diligence diligence on companies diagnostics on selected comments on, tax
development of a solar for a construction projects operating wind and companies belonging assumptions in a
power plant in Ukraine for a wind power plant solar power plants to the largest Ukrainian financial model for debt
with expected capacity energy holding raising purposes
300MWp
2018 2015 2018 2017-2018 2017-2018
Primorskaya Wind Confidential DTEK Confidential
Electric Plant Mainstream
Valuation services Financial, tax, legal and Assistance in Valuation services Financial and tax due
provided to customs due diligence connection with diligence on three
Primorskaya Wind on three solar power debt financing for solar power generating
Electric Plant LLC generating plants in the purposes of plants in Ukraine
Russia construction of a wind
park
2017 2017 2017 2018 2016
18 Renewables in UkraineAppendix
Macroeconomic Indicators
Ukraine's macroeconomic indicators1 2016 2017 2018 2019 2020 2021 2022
Real GDP growth, per cent y.o.y. 2.4 2.5 3.3 2.8 2.1 2.6 2.7
Nominal GDP, USD billion 93.4 112.2 127.9 138.2 157.6 178.0 199.9
UAH/USD exchange rate (end-period) 27.2 28.1 27.7 28.8 29.3 29.5 29.7
Consumer price index, per cent y.o.y 12.4 13.7 10.3 7.8 8.0 7.5 6.8
Population, million residents 42.5 42.4 42.2 42.0 41.8 41.7 41.5
Net direct investments, USD billion 3.3 2.6 2.8 3.2 3.7 4.6 5.6
FDI stock, USD billion 69.0 59.9 54.9 53.4 49.3 46.5 44.4
Total foreign debt, USD billion 114.7 113.3 116.8 119.1 122.2 124.9 128.5
Doing Business Index2 83rd 80th 76th 71st
Global Competitiveness Index3 85th 89th 83rd n/a
Moody’s Sovereign Debt Rating 4
Caa3 Caa2 Caa1 Caa1
EBA Investment Attractiveness Index5 2.85 3.03 3.07
Sources:
1
Economist intelligence unit
2
The World Bank - Ease of doing business index
3
WEF – Global Competitiveness Report
4
Moody’s Sovereign Debt Rating
5
EBA Investment Attractiveness Index
Glossary
Wind energy Solar energy Hydro energy Bioenergy
CAGR – Compound annual growth rate
GWh, MWh, kWh – Units measuring power generation output: Gigawatt hours, Megawatt hours, Kilowatt hours
GWp, MWp – Units measuring power generation capacitiy: Gigawatt Peak, MegaWatt Peak.
LCOE – Levelised cost of electricity is the ratio of lifetime costs to lifetime electricity generation, both of which are discounted
back to a common year using a discount rate that reflects the average cost of capital (according to IRENA data)
IRENA – The International Renewable Energy Agency, an intergovernmental organisation
M&A – Mergers and acquisitions
PPA – Power Purchase Agreement
pre-PPA – Preliminary Power Purchase Agreement
RES – Renewable Energy Sources
TSO – Transmission System Operator
DSO – Distribution System Operator
Renewables in Ukraine 19Contacts
Dmytro Shchur Yuriy Katser
Director, Director,
Transaction Services Tax and Legal
dshchur@kpmg.com ykatser@kpmg.ua
+380 44 490 5507 x34195 +380 44 490 5507 x34051
Peter Latos Maksym Zavalnyy
Partner Director,
Head of Advisory, KPMG in Ukraine Tax and Legal
peterlatos@kpmg.ua mzavalnyy@kpmg.ua
+380 44 490 5507 x34150 +380 44 490 5507 x34566
kpmg.ua
The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity.
Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is
received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a
thorough examination of the particular situation.
© 2019 KPMG-Ukraine Ltd., a company incorporated under the Laws of Ukraine, a member firm of the KPMG network of independent member firms
affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity.
The KPMG name and logo are registered trademarks or trademarks of KPMG International.
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