Gas-piston and gas-turbine power plants: legal operating models

Due to the situation in Ukraine's energy system caused by Russia's ongoing attacks on energy infrastructure and the destruction of major generation facilities, including thermal power plants and combined heat and power plants, the development of distributed (decentralized) generation in Ukraine has become a highly relevant issue.

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Distributed or decentralized generation is a solution consisting of a network of small power plants spread across Ukraine's energy system. This makes the power grid resilient to potential enemy attacks, as damage to a single energy source cannot lead to a major system-wide failure or prolonged blackouts for consumers. Decentralized and highly flexible generation potentially makes the energy system antifragile against the threats posed by war and systematic enemy shelling.  

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Beyond technical nuances, the operation of gas piston and gas turbine power plants in Ukraine involves specific legal considerations. Any investor aiming to install and operate such plants must understand that the legal relationships arising from their operation are governed by Ukrainian energy legislation, which is quite complex and difficult to grasp quickly—not only for investors and business owners but also for lawyers who have not previously encountered it.

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It is common for Ukrainian businesses to want to purchase and operate a gas piston or gas turbine plant without knowing how to do so in the most cost-effective way.

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In this article, we will examine the potential aspects of operating gas piston and gas turbine plants for their owners, as provided by Ukrainian energy legislation (as of the date of this publication).

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1. Electricity generation without grid feed-in.‍

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The first operating model for gas piston/gas turbine plants we will examine is the simplest from a legal perspective. This model—generating electricity and heat without feeding it into the grid—has been used by Ukrainian enterprises, particularly in the agricultural sector, since well before the full-scale Russian invasion and the current widespread demand for distributed generation.

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This option involves minimal legal complexity regarding installation, grid connection, and operation. It does not require an electricity production license, regardless of the plant's installed capacity, as explicitly provided for in Section 1.3 of the Licensing Conditions for Conducting Business Activities in Electricity Production (hereinafter – Licensing Conditions).

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Under this operating model, all electricity produced is consumed for the user's own needs, ensuring energy independence from power outages.

2.     Electricity generation with grid feed-in.

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The second option for operating gas piston/gas turbine plants is more complex in its legal nature than the first. The ability to feed electricity into the distribution/transmission system operator's grid or the networks of other business entities entails specific features and obligations for the enterprise operating gas piston/gas turbine power plants, as established by Ukrainian legislation. The process of connection, certification, and obtaining the legal status that allows for feeding electricity into the grid and generating revenue from it is governed by a number of industry-specific regulatory acts.

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First of all, we believe it is necessary to answer a fairly common question from our clients: "Is it necessary to obtain a license for electricity production if we want to install a gas piston plant and sell electricity to the market?"‍

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Answer: The issue of whether a license is required for electricity production activities is regulated by Section 1.3 of the Licensing Conditions, which states the following:

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"Electricity production activities by business entities are subject to licensing (except for cases defined by this section):

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- if the total installed capacity of power-generating equipment at a single metering point exceeds 5 MW, or if the total installed capacity of power-generating equipment across all metering points exceeds 20 MW;

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- regardless of the installed capacity of the power facility using alternative energy sources (and in the case of hydropower, only for micro-, mini-, and small hydroelectric power plants), the production of electricity from which is subject to stimulation in accordance with the law through the establishment of a "feed-in" tariff or auction price.

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Electricity generation activities by business entities are exempt from licensing if the electricity is produced:

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- for self-consumption without the intent to sell it under a contract, regardless of the installed capacity of the power-generating equipment;

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- by a mobile (autonomous) power plant during the period of martial law in Ukraine and for six months after its termination or cancellation.

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Therefore, if the installed capacity of a gas piston/gas turbine plant does not exceed 5 MW, or if the capacity of the power-generating equipment across all metering points does not exceed 20 MW, a license is not required. Additionally, if a power plant qualifies as a "mobile (autonomous) power plant," no license is required during the period of martial law in Ukraine and for six months after its termination or cancellation.

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Having addressed the licensing issue, we now provide an answer to another common question from our clients and other market participants: "In which markets can we sell electricity and how can we generate profit from such activities?"

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As of the publication date of this article, our team's comprehensive analysis of energy legislation identifies the following markets where an enterprise producing electricity via gas piston/gas turbine plants can operate:

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- Bilateral contracts market;

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- Balancing market (from 1 MW);

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- Ancillary services market (from 1 MW);

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- Day-ahead market and intraday market;

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- Sale of electricity to consumers;

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- Sale of electricity as part of an aggregated group.

We would like to specifically highlight the ancillary services market. This is a market where entities operating gas piston or gas turbine power plants with a capacity of 1 MW or more, and which have obtained the necessary certification, provide services to the transmission system operator, NPC Ukrenergo. These services involve increasing or decreasing power output upon the operator's request, for which the entities receive payment.

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Market participants now have the opportunity to obtain the status of an ancillary services provider even before their power plant is commissioned, allowing them to enter into a contract with the transmission system operator at pre-determined service rates. This mechanism serves as a positive incentive for the development of decentralized generation and facilitates access to bank financing for the acquisition of gas piston or gas turbine power plants.

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Undoubtedly, the development of decentralized generation in Ukraine is a key mechanism and an effective way to counter attacks and blackouts. The legislation governing companies that install gas piston or gas turbine power plants, as well as the regulations for their market operations, is extremely dynamic and effectively changes every month. We also see the state's interest in stimulating the construction of distributed generation and encouraging such projects, as evidenced by NPC Ukrenergo's introduction of auctions for future ancillary services, as well as the legislative framework allowing electricity producers to participate in various market segments.

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The team at FEDOTOV & PARTNERS has extensive experience in providing legal support to companies purchasing gas piston or gas turbine power plants—from managing manufacturing and import contracts to providing comprehensive legal guidance for entering the electricity markets mentioned in this article. We actively support and advise on projects related to the operation of gas piston and gas turbine stations, ranging from relatively small units (starting at 1 MW) to large-scale distributed generation projects (exceeding 50 MW of total capacity).

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If your company plans to use gas piston or gas turbine power plants to support our energy system and generate revenue, we would be pleased to provide the legal support you need to bring your projects to life. 

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