In Re (#11-12 November-December 2021)

UkraineТs Huge Biomethane Potential Ч What Potential Exporters should Know

by Maksym Sysoiev, Volodymyr Omelchenko

Biomethane prospects in Ukraine

Thanks to its extensive agricultural sector, Ukraine holds vast resources for the production of biomethane. This green energy source has garnered significant attention by Ukrainian producers and foreign investors, as many countries offer incentives for biomethane to become the green energy alternative to natural gas used in industry. With the high prices for biomethane due to its Уgreen valueФ in European countries, and the potential in Ukraine for producing and exporting up to 9.7 billion cubic meters of biomethane annually1, biomethane holds great competitive potential for its exporters.

Biomethane production potential in regions of Ukraine2.

General requirements for biomethane access to the grid

Recently Ukraine adopted an essential amendment that recognizes biomethaneТs vast potential. The amendment to the Law of Ukraine On Alternative Fuels introduces the definition of Уbiomethane,Ф determining it as a biogas, which in its physical and technical characteristics corresponds to the regulations on natural gas. It also provides for a biomethane register, a procedure for verifying biomethane origin, and a procedure for issuing guarantees as to the origin of biomethane and further transactions with them.

Under the Law of Ukraine On Natural Gas Market, biomethane producers in Ukraine are entitled to inject biogas into the gas grid provided it meets standards set for natural gas.

The Gas Transmission System Code sets out the following requirements for natural gas (Table 1).

Based on the requirements, the maximum oxygen molar fraction is 0.02 %, but almost no technology currently on the market can achieve this level in the process of producing biomethane or it would be extremely expensive. Nevertheless, the technical regulation, which is currently being prepared by the Ministry of Energy of Ukraine, should hopefully allow for some flexibility in the parameters and a maximum oxygen molar fraction of 1%.

Getting access to the grid and exporting biomethane Ч key steps

Producers will need to take the following steps to connect a biomethane facility to a grid as well as to transmit and export biomethane:

Ч Obtain permission to connect to the grid (gas transmission or distribution network).

Ч Enter into a grid connection agreement and technical agreement with the grid owner, formalize rights to the land plot under the gas networks, pay for the connection services, and fulfil the requirements of the connection agreement and laws of Ukraine in order to commence gas injection.

Ч Enter into a gas transmission agreement with the Gas Transmission System Operator of Ukraine LLC (TSO) for access to facilities, gas transmission services, etc.

Ч If planning to store biomethane in the system, the producer must also enter into a gas storage agreement with the gas transmission operator Ukrtrnasgaz JSC.

Ч Order and pay for distribution of capacity and transmission services, provide financial security and fulfil other obligations under contracts and Ukrainian law.

Ч Submit the appropriate nominations/renominations for gas transmission, submit reports to the energy regulator, etc.

Transmission charges and export duties

In addition to the construction and operation costs, as well as the cost of connection services, potential exporters will need to pay for transmission services at the entry/exit points within Ukraine and at the interstate connections (Table 2).

Various coefficients would apply to the gas transmission services depending on the capacity ordering period (Table 3).

Potential biomethane exporters should also be aware of neutral balancing and daily imbalance fees, which may be charged in favor of the TSO or exporter.

Biomethane sold by a resident of Ukraine to a non-resident (e.g., to an EU resident company) is subject to 0% VAT so long as the biomethane is exported outside the customs territory of Ukraine in accordance with the customs regime of export, duty-free trade or free customs zone. In addition, an estimated 0% rate of duties would apply on the transmission of biomethane through the customs border.

Another aspect of biomethane export concerns how to measure the volume of natural gas. Currently, natural gas in Ukraine is measured in cubic meters, while EU countries use units of energy (kilowatt-hours). Although this does not affect the ability to export and import gas, there may be issues with variations in the recalculation of natural gas at customs. That said, the Ukrainian Parliament recently adopted a law that sets out the transition for measuring natural gas in units of energy instead of cubic meters. The law, which sets May 1, 2022 as the date to shift measurement from cubic meters to units of energy, is expected to be signed by the president.

Thus, the potential for biomethane production in Ukraine is promising in consideration of the global transition to a lower-carbon and, eventually, net-zero carbon global economy.

Maksym Sysoiev is a partner at Dentons

Volodymyr Omelchenko is a junior associate at Dentons

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