President signs law on lower green power tariffs

The legislation that overhauls the conditions for
green electricity producers was signed by the president and implemented as of Aug.
1. Among its key conditions are reducing feed-in tariffs for wind and solar
power stations at preferential, predetermined prices till the end of 2029. In
particular, for wind farms, tariffs will be 7.5% lower for those commissioned
in 2H15-2019 (no changes for older capacities), and 2.5% lower for those
commissioned as of 2020. For large solar stations (over 1 MW), the tariff will
be 15% lower for those commissioned in 2H15-2019, 2.5% lower for those
commissioned by end-October 2020, 30% lower for those commissioned between Nov.
1, 2020 and Mar. 31, 2021 (with capacity of no more than 75 MW) and 60% lower
for those commissioned as of April 2021 (and those commissioned as of November
2020, with capacity exceeding 75 MW).

The new law also assumes that the state budget will
provide financing to the guaranteed buyer of green electricity in the amount of
at least 20% of the expected revenue of all green sources. Recall, the
government initiated a revision of green rates based on a memorandum signed
with some green energy producers in June. The initiative preceded a crisis on
the electricity market, which resulted in a significant reduction of payments
for green energy sources from the guaranteed buyer as of March 2020. Based on
the memorandum, cuts in green tariffs should only follow the resumption of full
payments for green electricity and restructuring of accumulated arrears.

Alexander Paraschiy: The
legislation adds clarity about future green tariffs in Ukraine, though we do
not rule out future revisions. For the biggest green energy operator, DTEK
Renewables (DTEREN), the new green tariffs will only slightly reduce the
fundamentals of its existing power stations. In particular, we estimate that
the new rates will decrease DTEK Renewables’ EBITDA by about 4% in 2020 and 11%
in 2021. Taking into account that new rules should improve the payment
discipline of the state buyer of green energy (poor payments are the core
problem now), the financial stability and liquidity of DTEK Renewables should
improve, which might lead to a revision of its negative rating watch introduced
by Fitch Ratings and S&P Global Ratings in June.
Therefore, we have become bullish about DTEREN bonds.

At the same time, increased discounts for green
tariffs that will be applied to new solar projects will likely lead to a
radical revision of new projects by DTEK Renewables. For instance, the commissioning
of two solar stations in 4Q21 for a total capacity of about 270 MW, as
initially planned by the company, won’t make sense under the new legislation
(the plants will be eligible for a EUR 43.5 / MWh green tariff, which does not
look attractive). If the company reduces the capacity of its new solar farms to
below 75 MW and is able to commission them in 1Q21, the rate will be way higher
(EUR 76.15/MW) with twice as short a payback period.