Renewable curtailment in Ukraine: what to expect

There has been an increase in curtailment events impacting renewable energy arrays in Ukraine in 2020 – growing from a trickle to a flood. At present, there are no measures for how the owners of these arrays are to be compensated for the curtailed energy, but efforts are underway to put a compensatory regime in place.

Over the past few years, Ukraine has seen a significant increase in its installed capacity of renewable energy generating capacity. In 2019 alone, the installed capacity of utility scale solar and wind arrays increased by 2.7 times and reached 4.7 GW. As of the beginning of April 2020, renewable capacity had already increased to 5.2 GW. Such a volume of electricity flowing into the Ukrainian power system, which requires significant modernization, inevitably causes disruptions. It is expected that by the end of 2020 the total installed renewable energy capacity may exceed 7.4 GW.

The Ukrainian power system is overloaded, and its reliability is deteriorating, which is due, among other factors, to the lack of fast-responding generators and energy storage systems, which can be used as a means to balance the power system.

The electricity Transmission System Operator (TSO), the National Power Company Ukrenergo, has been forced to curtail power generation at solar and wind installations. However, renewable energy producers do not receive compensation for the involuntary curtailment of generation in Ukraine, despite their right to such compensation being explicitly stipulated by law.

According to the Electricity Market Law, the cost of electricity which has not been delivered due to execution of the TSO’s dispatch commands to reduce the load shall be compensated to RES producers under the rate of the awarded feed-in tariff or at an auction price. The only exception could be cases where commands are given in the event of network constraints due to force majeure circumstances.

Curtailment events

The first curtailment of renewable generation took place on Nov. 5 2019: dispatchers of Ukrenergo ordered the suspension of several wind arrays in the Zaporizhzhia region in central Ukraine, with a total capacity of nearly 400 MW. The wind installations were curtailed for 41 minutes.

As of March 2020, curtailment of renewable generation has become more frequent. Usually such curtailment impacted capacities of around 400 MW, but on certain days curtailment exceeded 1.5 GW. A significant surplus of electricity, due to decreased consumption as a result of Covid-19, was added to the long list of existing problems in the power system.

Curtailments of renewable generation in April 2020 reached 1.5 GW – for a duration of five-to-six hours. In April, such frequent curtailment, as well as the absence of a transparent and effective compensation mechanism, has led to the refusals of two dozen renewable energy producers to adhere to the dispatch commands of the TSO to curtail generation.

As a result, the TSO has asked the National Energy and Utilities Regulatory Commission of Ukraine (NEURC) to conduct unscheduled audits of these renewable energy producers and apply appropriate measures. On April 23, the energy regulator adopted an official decision to conduct unscheduled on-site audits to verify compliance with licensing conditions of the renewable energy producers in question.

Options for compensation

Currently, the following proposals for a compensation mechanism are being considered by public authorities:

1. The Guaranteed Buyer compensates the cost of undelivered electricity to RES producers through a balancing group.

This concept was developed by the TSO and requires the amendment of the Transmission System Code, the Market Rules, the Procedure on Purchase of Electricity Under the Feed-in Tariff and the Electricity Commercial Metering Code.

The obligation of the Guaranteed Buyer to compensate the cost of undelivered electricity shall be considered part of the electricity imbalance settlement of the Guaranteed Buyer’s balancing group. The renewable producer is obliged to notify the Guaranteed Buyer about curtailment within the day of it having taken place, and the volume of undelivered electricity shall be determined separately for each curtailment period. The compensation shall be regulated by the agreement on mutual reimbursement of a share of the cost of electricity imbalance settlement. The mechanism provides for the following structure:

• If the cost of reimbursement for the imbalance settlement exceeds the cost of compensation for renewable energy curtailment – the renewable producer pays the difference to the Guaranteed Buyer.

• If the cost of reimbursement for the imbalance settlement is less than the cost of compensation for renewable curtailment – the Guaranteed Buyer pays the difference to the producer.

Ukraine’s National Energy and Utilities Regulatory Commission (NEURC) has submitted its comments regarding the proposed mechanism and it is expected that Ukrenergo will finalize it as a draft in the near future. Thereafter, the NEURC should approve it as a draft regulatory act, subject to public discussion, and ultimately issue the formal by-law.

2. The TSO compensates the cost of non-delivered electricity to renewable energy producers.

This concept is also being considered among stakeholders. Under the framework, Ukrenergo will compensate the cost of undelivered electricity from the tariff on electricity transmission services or from the tariff on dispatching management services. On May 18, the Acting Minister of Energy and Environmental Protection, Olga Buslavets stated that the responsible entity should be the one which curtailed – therefore the TSO, which should compensate the cost of undelivered electricity from the tariff on electricity transmission services.

Experience of EU countries

A look to the experience of other countries with developed renewable energy sectors such as Germany and Denmark could be beneficial for Ukrainian policymakers.

In Germany a distinction is made between curtailment of generation units to prevent grid congestion or overload and curtailment when there is a threat to system security and reliability. These two measures are addressed by two different laws, and reimbursement of affected generators differs accordingly.

In the case of curtailment due to grid overload, renewable generation operators are financially compensated for 95% of the incurred revenue losses. If the lost revenue within a single year exceeds 1% of the total revenue that year, such generators receive full financial compensation – 100% from the date of curtailment. Compensation must be paid out by the relevant network operator in the grid area where the bottleneck occurred.

In the case of curtailment due to a threat to or interruption of system security and reliability, compensation applies depending on the type of measures taken. Network and market related measures, such as balancing, counter-trading and re-dispatching are remunerated based on contractual agreements. Adaptation of power injection and load shedding measures applied if measures prove to be insufficient to ensure system security and reliability do not warrant financial compensation and can be taken by the TSO/DSO without prior consent of the affected parties.

Denmark has made the curtailment of RES generation a part of its balancing market. In Denmark, there are four ancillary/balancing markets. In three out of the four markets, balancing power providers are paid a capacity payment based on the standing reserve capacity they make available, just for agreeing to participate in the next day’s ancillary/balancing market – even if they don’t actually provide any actual electricity generation (kWh). They also receive an energy payment for any electricity they provide to the balancing market, based on different tariff regimes.

It is worth considering the possibility of participation of renewable energy producers in the balancing market in Ukraine as well. That way, if the power system requires the volume of renewable generation to be decreased, it will be decreased, but the producers will receive a monetary reward for participating in the balancing of the power system. This will help reduce financial risks for renewable energy producers. A market-based approach may be the most economically efficient one, as the compensation for curtailment of RES generation is determined through the interaction of supply and demand for electricity rather than a lump sum compensation.

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Tetiana Mylenka is attorney-at-law, Counsel and Head of Energy Practice at Hillmont Partners law firm (Kyiv, London).

She advises investors on corporate and regulatory matters in conventional and renewable power generation projects. Tetiana is a member of the working group on improvement of legislative regulation in energy sector, external advisor to supervisory and executive board members of strategic enterprises, aide-consultant of a Member of the Parliament of Ukraine, co-author of several draft laws in power sector. Tetiana holds Executive LL.M degree from King’s College London, and has been admitted to the Bar in Ukraine. She is a member of Ukrainian and American Bar Associations (Environment, Energy, and Resources Section) and Associated European Energy Consultants (AEEC).