Auctions for new facilities in the energy sector: procedure and features

Last week, there was news that the market had been expecting, but had no real expectation of appearing.
The Cabinet of Ministers of Ukraine adopted Order No. 757-r “Some issues of pilot auctions for the allocation of support quotas in 2024” (from now on – Order No. 757) on August 13, 2024, following which a set of points are included:

• it was determined that a closed auction will be held to construct new solar power plants on the left bank of the Dnipro River with an allowable capacity of 11 MW (capacity implies the installed capacity, which is licensed)in October this year.
• a closed auction will be held for future producers of 88 MW of wind power in November this year
• a closed auction for 11 MW of electricity generation from other sources will be held without a date (the time is still unknown)
• set the maximum prices that can be bid by future participants in auctions for the allocation of support quotas (solar or wind generation – 9 euro cents per 1 kWh; biogas, biomass, micro, mini and small hydro – 12 euro cents per 1 kWh).

So, the most significant question is whether it is time for investors to be actively engaged in the upcoming auctions, what is the procedure for their holding, and whether such support models are valuable in the first place – a conclusion must be made by each individual. The leading conditions and features of the auctions to clarify these new procedures are below.

The procedure for conducting auctions for new RES generation was approved by the Resolution of the Cabinet of Ministers of Ukraine No. 1175 “On the Introduction of Competitive Conditions for Stimulating the Production of Electricity from Alternative Energy Sources” dated December 27, 2019 (as amended on March 1, 2024, hereinafter – Procedure No. 1175).
Only new future-generation facilities will have access to participate in the auction, which makes it impossible to switch to the auction model of assistance to existing producers at a feed-in tariff or market call option.
The auctions will be held based on Prozorro Sale, where the site operator must provide the participant with a specific hyperlink that enables temporary direct access to the auction module interface in the electronic trading system.

The Procedure stipulates that the auction platform must function uninterrupted, ensure the safety and integrity of data, have the ability to ask questions by potential applicants (they can be submitted no later than one day before the auction) and have other functionality provided for by law. Nevertheless, the significant requirements for the site and its operation will be rewarded more than expected, as the winner will have to pay EUR 800 per 1 MW for the services of the site operator.
Future entrants will learn about the auction, its details, and requirements from the announcement made by the Guaranteed Buyer on its website. The auction will take place no earlier than 30 calendar days and no later than 90 calendar days from the announcement date.

To take part in the auction, the applicant is required to apply the prescribed form through the personal account on the website of the site operator, indicating the volume (not more than 80% of the total capacity offered by all bidders, excluding, in case of a closed auction, the volume is offered by bidders who submitted incomplete or inaccurate information) and the cost (EUR per 1 kWh), which is attached:

• a bank guarantee provided by the category of banks specified in Procedure No. 1175 in the amount of EUR 5000.00 per 1 MW
• all necessary data on beneficiaries, or their absence, controllers, and related parties;
  -copies of documents providing information on the management body (e.g., minutes/order);
• other information, if its provision is contemplated by the specifics of the auction requirements.
  Before the deadline for submitting applications for participation in the auction (20:00 on the day before the auction day), the participants may cancel or amend their application and documents.

In case more than two bids are submitted, and the auction is not canceled due to the invalidation of the relevant CMU order on the auction or a malfunction of the platform, the auction module is automatically launched on a certain date and time.
After the module activation, the participant has 15 minutes to read the announcement and 15 minutes to update the offer. In the case of an open auction, if any member updates the minimum price offer among the current price offers submitted by all members of the auction within the last 3 minutes before the end of the auction, the time for updating the price offers is extended by an additional 3 minutes each time. The auction ends if none of the bids has been updated within the allotted 3 minutes.

In private auctions (like the ones we are looking forward to in the fall), participants do not see each other’s price offers and can update their price offer downward within 15 minutes and, if there is time remaining in the allotted time for updating offers, they further update their price offer, but not higher than the initially submitted one.
The auction is won by the bidder with the lowest price offer, and in case of equal offers, the one who submitted the offer earlier, no matter how controversial it may be.
A protocol is automatically generated after the auction. Following the publication of the minutes, the Guaranteed Buyer checks the applications and submitted documents of the participants for their completeness and accuracy within 10 business days. The final stage is the formation of acts of denial to sign the auction results protocol for each of the bidders regarding whom such a decision was made and a general act on the results of the inspection and the formation of the auction results protocol by the electronic system of the platform.

The potential winner has 15 business days to sign and conclude the service agreement, during which time he or she must submit:

• originals of the documents provided for participation;
• copies of the statute and documents on the appointment of the head;
• signature samples of the executive or authorized representative;
• a copy of the document on payment of compensation to the site operator;
• a bank guarantee of EUR 15,000.00 per 1 MW.
  The conditional winner, as well as the Guaranteed Buyer, may refuse to sign the agreement and the protocol.

The grounds for the Guaranteed Buyer’s refusal are:

• submission of incomplete, unreliable documents
• the support is already in place for the submitted object or a contract for the difference has been concluded;
• an offer has been submitted that does not correspond to the terms of the auction;
• more than one application for the same object has been submitted by one participant, or during the last year, the applicant, either independently or together with entities related through one beneficiary, has obtained the right to more than 25% of the total annual and additional annual support quota for the relevant year;
• the bank guarantee does not fully meet the requirements of Procedure No. 1175;
• the participant refused to sign the protocol on the result of one of the previous auctions within less than a year from the date of publication of the relevant act in respect of it;
• being on the sanctions list or being associated with the aggressor state.

In the event of such failures, the auction result protocol is automatically updated, and this process can take 29 business days. If there are no conditional winners within this period, the auction is considered to be a failure.
Moreover, after receiving the status of a conditional winner, such a winner must update his/her status in the platform’s system within 5 business days. If the status is updated and the contract is not signed, the guarantee that is provided for participation in the auction shall be paid in favor of the Guaranteed Buyer. In all other cases, the guarantee is refundable within 5 business days from the date of publication of the agreements with the winners, but no later than 30 business days from the date of the auction.
After publication of the relevant agreement, the winner may immediately start construction of the facility. The construction period is 18 months for SPPs and 36 months for all other types of generation. Furthermore, it is possible to extend the specified period for 1 year by paying a guarantee of EUR 30,000.00 per 1 MW.

Undoubtedly, a positive aspect of the new auction regulation is the fact that the documents confirming the ownership/use of the land plot/real estate and the connection agreement with technical specifications may be submitted by the winner within 6 months from the date of signing the relevant agreement with the Guaranteed Buyer. Permits to start construction are not required at all, unlike the previous requirements. Nevertheless, in case of failure to submit the specified documents within the deadline, the performance security must be paid in favor of the Guaranteed Buyer.
The fact of confirmation of the fulfillment of its obligations to build the facility is the provision of the relevant construction permits for the completion of construction and the act on the provision of services for the connection of the power facility or the construction stage (start-up complex) of the power facility to the electricity grid of the transmission system operator or distribution system. If these documents are not provided, the submitted guarantee will again“ expire”.
By the way, it is noteworthy that Procedure No. 1175 itself provides for the option of judicial appeal of certain points in the auction.

Therefore, the 2024 auction and all further auctions will be held according to this procedure. Although, the next auctions (that are expected in 2026), if the 2024-2025 auctions are successful, may be less intriguing, as their terms and conditions may include:
1) information on the size of the annual support quota for the next year with or without the definition of shares for certain alternative energy sources for technology-neutral auctions and auctions for other alternative energy sources – this information is available in the Order No. 757
2) information on the amount of the additional annual support quota (optional);
3) determination of areas (regions) within a separate lot for the construction of renewable energy facilities – we already see the implementation of this provision in the Order No. 757 for SPPs, which, accordingly, can be built only on the left bank of the Dnipro River;
4) determination of the maximum capacity of a power facility or the construction phase (start-up complex) of a power facility within a separate lot (option) – the auctions for 2024 do not specify such a maximum value, which means that, for instance, one 88 MW wind farm may receive support;
5) determination of technical parameters (characteristics) of energy storage facilities within a separate lot, only if they are installed at a future facility or construction stage, participation in the auction is possible (optional);

6) defining the daily time intervals during which support is provided within a separate lot (optional);
7) determination of load profiles within a separate lot (” optional ”);
8) setting the maximum price offer within a separate lot, which is reflected in Order No. 757;
9) determination of the share of the auction price within a separate lot, which is fixable for the winner in euros, but not less than 50 percent of the auction price (optional);
10) Offers of land plots or real estate for the construction of renewable energy facilities with certain technical parameters and technical conditions for connection to the electricity grid (optional).

In this context, it is vital to highlight that the Ministry of Energy, upon submission from the TSO, may identify priority areas for the construction of new RES facilities with certain technical characteristics and, consequently, apply to state authorities/local governments for the preparation of such plots or facilities (facades/roofs, i.e. only for SPPs). Besides, for the plots that will already be offered for auction, documentation on the allocation and change of the designated purpose of such land plots should be developed and approved, urban planning documentation on amendments to the detailed plan of the territory should be developed, and an environmental impact assessment should be conducted (if necessary). Furthermore, all costs associated with the preparation of these documents are to be reimbursed by the winner of the auction. In the meantime, the regulation on the possibility for potential bidders to audit the documents for a land plot is somewhat incomplete, as the maximum period between the publication of information about an auction with a land plot and the auction is 90 days, which is insufficient for both the audit and the implementation of the “plot” in the business plan. And there is no possibility of an in-depth audit at all.

Regarding real estate objects, their asset cover must conduct an inspection of such an object and reconstruct or repair the object, if such a need is established by the report. At the same time, the obligations for reconstruction/repair may be imposed on the winner of the auction.
Both land plots and real estate objects are offered at auction with a draft connection agreement and technical specifications, with an approximate calculation of the cost of connection;
11) the schedule of auctions for the next year, which determines the timing, size, and other parameters of the lots, which is not reflected in the Order No. 757;
12) information on the type of each auction (closed or open auction) – we will have a closed auction;
The term of support for the winner of each auction will be 12 years from the date of submission of the documents on connection and implementation.

Assistance itself is provided through the market premium mechanism. This means that taking into account the provisions of the Resolution of the National Energy and Utilities Regulatory Commission No. 641 dated 26.04.2019 “On Approval of Regulatory Acts Regulating the Activities of the Guaranteed Buyer and the Purchase of Electricity at the ‘Green’ Tariff, the Purchase of Services under the Market Premium Mechanism”, the Guaranteed Buyer will pay the auction winner the difference between the cost of electricity that is sold on the market and the auction price. At the same time, NEURC Resolution No. 641 contains a very significant regulation that if the winner of the auction sells its electricity for more than the auction price, such winner will make a payment under the market premium mechanism according to a certain formula in favor of the Guaranteed Buyer.

Hence, the launch of auctions is needed, as it is the only way to get a fixed price for electricity, which is necessary to attract financing. Still, at the same time, it is obvious that to implement all the plans and strategies adopted by our country, it is necessary to closely monitor the implementation of the legislation and the consequences of certain rules during the first auctions and immediately eliminate the identified regulatory shortcomings. As for the realization of the auction model through the market premium mechanism, this approach will also not help attract investors, and it would be more accurate to use the mechanism of contracts for difference for auction support.
We are therefore waiting, watching, and believing that commercial construction of renewable energy generation will finally return to Ukraine.