Legislative scheme of support for the renewable energy sector in Ukraine
December 2013 | EXPERT BRIEFING | SECTOR ANALYSIS
Legislative support for renewable energy in Ukraine is now provided through a ‘green’ tariff (the Ukrainian feed-in tariff) and tax incentives.
‘Green’ tariff regulations
The first efficient program of support for energy production for alternative energy was introduced in 2008 when the definition of ‘green’ tariff and the rules for its approval and application were adopted. However, since then the system has been reviewed and changed several times.
Presently, producers of electricity from alternative energy sources may sell electricity under sale and purchase agreements directly to customers or to the operator of the Ukrainian wholesale electricity market (WEM), the state enterprise ‘Energorynok’. This enterprise is obliged to buy all the electricity produced from alternative energy from companies for which the ‘green’ tariff is established.
The exception to this rule is energy produced from coal gas. With regard to hydro energy, only electricity produced by hydropower plants with a power capacity up to 10 MW is entitled to the ‘green’ tariff.
The ‘green’ tariff rates are set by the National Commission for Regulation of Energy (NERC) in Ukrainian hryvnias, based on a specific formula provided by the law, but cannot be less than the fixed price. Rates are adjusted monthly by the NERC. Only the specified types of renewables are supported with the guaranteed minimum rates under the ‘green’ tariff, namely the production of electricity from wind and sun power, biogas/biomass and hydropower plants with a power capacity up to 10 MW. Other types of renewables may obtain a ‘green’ tariff, but only if substantial economic reasoning is provided by the producer.
Once the ‘green’ tariff rate is established for a producer, this rate cannot be reduced or cancelled until 1 January 2030. The ‘green’ tariff scheme of support is guaranteed by the state only for power plants commissioned during the term of its effect.
To obtain a ‘green’ tariff, the producer needs to comply with the local content requirement (LCR). This is important for producers that started to construct energy facilities from 1 January 2012 onwards. The LCR, stipulated in the law, is the requirement that a certain portion of raw materials, equipment and works connected with renewable energy production must be of Ukrainian origin.
The rate of LCR depends on the type of the renewable energy and the time of its construction and commissioning. This may vary from 30 to 50 percent and is calculated under specific rules and procedures. Small hydro and solar power installations fitted to households are exempt from LCR.
The NERC is the respective state authority which decides on compliance with the LCR based on the documents provided by energy producers.
As of the end of October, the ‘green’ tariff has been established for 106 companies which operate 164 power plants, including: (i) 59 solar power plants; (ii) three biomass power plants; (iii) two landfill gas power plants; 14 wind farms; and 86 hydropower plants with a capacity up to 10 MW. The installed capacity of all power plants is apprachiong 1 Gigawatt.
In addition to the ‘green’ tariff, Ukrainian tax and customs legislation also provides for a number of incentives for alternative energy producers and related equipment.
Corporate profit tax (CPT)
Exemption from taxation may be applied to 80 percent of the profits a company gains from the sale of the following goods in Ukraine: (i) equipment related to renewable energy; (ii) materials, raw materials, equipment and components which will be used for the production of energy from renewable energy sources; and (iii) equipment for the production of alternative types of fuels. The list of the specific products which fall under these criteria has been compiled by the Cabinet of Ministers of Ukraine.
In addition, up until the 1 January 2021, certain income derived from energy-saving and renewable energy technology are exempt from taxation, including: (i) the income of biofuel producers resulting from the sale of biofuel; (ii) the income of companies that produce mechanisms and equipment intended for the production and reconstruction of technical and transport means and electrical devices that consume biofuel, when such income is received from the sale of mechanisms and equipment produced in Ukraine; and (iii) the income of companies operating in the electric power industry gained from selling electricity produced exclusively from renewable energy sources.
Value added tax (VAT) and import customs duties
Under the Tax Code, importation of the following goods into Ukraine is exempt from VAT and customs duties: (i) equipment which operates using renewable energy sources; (ii) equipment and materials for the production of alternative types of fuels or for the production of energy from renewable energy sources; (iii) materials, equipment and components used for the production of equipment which operates using renewable energy sources; and (v) materials, raw materials, equipment and components used for the production of alternative types of fuels or for the production of energy out of renewable energy sources; (v) energy-saving equipment and materials; (vi) devices designed to ensure economical and rational usage of fuel and energy resources; and (vii) devices which measure, control and manage energy resources.
It should be noted that in order to benefit from this exemption the company has to use the imported goods only for its own purposes of production, and identical goods should not be available in Ukraine. The list of the goods has been compiled by the Cabinet of Ministers of Ukraine. However, as of today, very few companies have received VAT exemption due to of the lack of transparency surrounding the procedure. That said, this is expected to change going forward.
Furthermore, the Tax Code provides for temporary exemption from VAT until 1 January 2019 for the following transactions: (i) the supply of machinery related to biofuels; and (ii) the importation of certain items which are used in the reconstruction of active manufacturing sites, or the construction of new manufacturing sites, aimed at producing biofuels, and for the construction of technical machinery and vehicles operating on biofuels if such goods are not manufactured in Ukraine.
Land tax or land lease payments
Land taxes have been lowered by the following amounts for plots on which alternative energy objects are constructed and operate: (i) 25 percent of the standard rate for land tax; and (ii) 3 percent of the normative value for yearly lease payment (instead of the standard 12 percent rate) for state and municipal lands.
Maksym Sysoievis counsel and head of the Energy practice, and Leonid Cherniavskyi is an associate, at Danevych Law Firm. Mr Sysoiev can be contacted by email: email@example.com. Mr Cherniavskyi can be contacted by email: firstname.lastname@example.org.
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Maksym Sysoievis and Leonid Cherniavskyi
Danevych Law Firm