Joint Letter to the Ministry of Energy from EUEA and UABIO on the development of bioenergy projects in Ukraine

biomass

Comprise absolute majority of participants of bioenergy sector of Ukraine, EUEA and UABIO are expressing deep respect to your everyday work and your initiative on being open with energy market players. Considering recent and upcoming changes in Ukrainian legislation we would like to draw your attention to the following issues that are being a significant concern of all RES market players in bioenergy sector.

Level of Quotas. Ministry of Energy and Environmental Protection of Ukraine represented preliminary suggestions on the size of the annual state support (the quota) for the first auction for biomass/biogas/hydro producers in the amount of 50 MW.

According to Art. 9-3 of the Law of Ukraine "On alternative energy sources", competition is a prerequisite for holding auctions on allocation of the annual support quota. The amount of power for which the participants are entitled to support as a result of the auction may not exceed 80% of the aggregate amount of capacity offered by all auction participants of the respective type of alternative energy sources. Furthermore, according to the same article of the Law, an entity is entitled to receive no more than 25 percent of the annual support quota for the year.

The size of the proposed auction quota for biomass/biogas/hydro energy producers, subject to the competition requirement, represents a significant concern from the investors as far as it does not make it possible to implement neither large (50 Mw and more) nor even medium scale projects (25 Mw and more). In its turn, small scale bioenergy projects do not constitute proper interest of investors due to low level of their IRR and long investment return period.

This leads to the situation that quotas at the level proposed will make it impossible to implement a sufficient amount of bioenergy projects under development and will lead to investors and developers leaving the market. In its turn it will block development of quality and necessary projects for the grid.

The bioenergy market of Ukraine has big scale projects that are under development already for several years and are planning to participate in auctions. One of such examples is Khmelnytsk Bio Power Plant (KBPP). A group of foreign investors from Ireland and UK is planning to build a 46 MW straw fired bio-power plant. The project is now on its final stage and is awaiting for the first auction to secure funding. The investor has already invested 1.4 million Euros in its implementation. In future, the investor intends to build 10 more similar plants in other regions of Ukraine, investing more than Euro 2 billion and creating more than 5 thousand new work places. Each plant will provide enough electricity to power 82,000 homes and reduce carbon emissions by 300,000 tonnes per year. Also, according to our knowledge other examples of big scale projects under development are: 60 MW biomass power plant of Kernel and 24 MW biogas power plant of MHP.

Current level of “green” tariffs. Current level of “green” tariffs allows solar and wind power producers to receive acceptable return on their investments. However, bioenergy projects do not have such opportunity. This is due to the fact that construction of bioenergy projects takes more than three years. It means that in case the project construction begins in 2020, the investor will receive a “green” tariff only for seven years - until 2030. The risks for the investor in such projects exceed the possible return. This explains the very low level of activity in the bioenergy sector compared to production of electricity from solar and wind sources.

In addition it shall be noted that compared to other renewable energy sources, biomass is the most efficient and solves a number of problems that are not typical for solar and wind power plants. That is why we believe that the generation of biomass electricity requires additional support from the state and provision of opportunities for comfortable business in this sector.

The attractiveness of biomass to electricity projects is caused by significant benefits for both investors and the state, namely:

• Baseload Power. Bioenergy plants provide constant, predictable baseload supply of electricity. They do not require expensive ancillary services such as balancing or energy storage. Output capacities of such plants can be predicted with accuracy for days or even weeks in advance.

• Workplaces. Construction and operation of a big scale biomass power plant creates up to 500 new work places for each project (for the term of construction of the plant - 300 work places; for management and administration of capacities for the whole term of their operation - up to 50 work places; for logistics purposes - up to 150 work places).

• Extra income for farmers. As of today biomass is used by farmers in a critically inefficient way or burned in open areas, polluting the environment. Instead, biomass projects envisage purchase of the biomass from farmers on an ongoing basis at an attractive price.

• Meeting the targets for renewable energy. Under COP21, Ukraine has committed to reduce greenhouse gas emissions and to move from hydrocarbon fuels such as coal and oil to renewable energy. The development of biomass electricity generation projects can ensure fulfilment of big part of Ukraine's obligations under this agreement.

Taking into account the abovementioned, we would respectfully ask the Ministry to consider the following options to resolve the issues of bioenergy sector development:

1) To extend the validity of the “green” tariff for biomass and biogas producers at the current rate until 2035. Such option is acceptable for bioenergy projects and will allow foreign investment to be attracted to projects under development. This will provide additional growth for the sector.

2) To increase the level of annual support quotas for biomass, biogas and small hydro. In our opinion, the level of annual support quotas for the mentioned renewable energy sources shall be at least 200 MW, which will allow bioenergy projects to reach scales attractive for foreign investors.

The industry needs additional support from the Government and we firmly believe that these projects can be hugely beneficial to not only the energy market of Ukraine but also the agriculture market as well as providing an increase in long term workplaces both directly and indirectly. Ukraine shall use its bioenergy potential to provide long term, affordable energy to the country.

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