Curtailment in Ukraine: What to Expect
8 July 2020
The article is published in the June edition of PV Magazine Global
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 projects are to be compensated for the curtailed energy, but as Tetiana Mylenka of law firm Hillmont Partners reports, 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. In 2019 alone, the installed capacity of utility-scale solar and wind arrays reached 4.7 GW. As of the beginning of April 2020, renewable capacity had already increased to 5.2 GW, and is expected to reach 7.4 GW by the end of the year. But such a volume of electricity flowing into the Ukrainian power system, which requires significant modernization, is inevitably causing serious disruptions.
The Ukrainian electricity system is overloaded, and its reliability is deteriorating. This is partly due to a lack of fastresponding generators and energy storage systems, which can be used as a means to balance the power system.
National Power Company Ukrenergo, the country’s electricity transmission system operator (TSO), 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 load shall be compensated at the rate of the awarded feed-in tariff, or at an auction price. The only exception could be situations in which commands are given in the event of network constraints due to force majeure circumstances.
The first curtailment of renewable generation took place on Nov. 5, 2019, when dispatchers of Ukrenergo ordered the suspension of several wind arrays in the central Zaporizhia region, 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 impacts capacities of around 400 MW, but on certain days curtailment has 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.
As of March 2020, curtailment of renewable generation has become more frequent
Currently, the following proposals for a compensation mechanism are being considered by the public authorities.
The Guaranteed Buyer compensates the cost of undelivered electricity to 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 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, then 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, then 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.
A market-based approach may be the most economically efficient one
The TSO compensates the cost of nondelivered 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 the electricity. Therefore, the TSO should compensate the cost of undelivered electricity from the tariff on electricity transmission services.
A look to the experience of other countries with well-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 their 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.
The responsible entity should be the one which curtailed
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. The adaptation of power-injection and load-shedding measures are applied if measures designed to ensure system security and reliability do not warrant financial compensation and can be taken by the TSO/DSO without prior consent.
Denmark has made curtailment of renewables a part of its balancing market. There are four ancillary/balancing markets in the country. In three out of the four, 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 provide any actual 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.
About the author
Tetiana Mylenka is a counsel and the head of energy practice at Hillmont Partners. She advises investors on corporate and regulatory matters in conventional energy projects and renewable power installations. Tetiana is a member of the working group on the improvement of legislative regulation in the energy sector, an external adviser to supervisory and executive board members of strategic enterprises, an aide-consultant to a member of parliament, and the co-author of several draft laws in the power sector. Tetiana holds an 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.