Expert opinion: “Renewable Energy Market Reform in Ukraine”

Magnus Johansen

Magnus Johansen, Business Development Manager, Scatec Solar

Scatec Solar AS (“Scatec”) is a solar development listed on the Norway Stock Exchange and has almost 1.500 MW solar power plants in operations or under construction globally. Currently we are building 200 MW in Malaysia, 400 MW in Egypt (with EBRD) and 162 MW in Brazil / 117 MW in Argentina (with Equinor, formerly known as Statoil). As a Norwegian-based company, we have high ethical standards and always bring much focus on the communities around our projects and consider this a key component of the business model and not just a nice value add for branding purposes.

After actively exploring the Ukrainian market last year, we acquired project rights of  250 MW of solar power projects. The majority of these projects we hope to finalize during 2019. Then moreover, and what is especially my job, is to understand if there can be any market for Scatec Solar in Ukraine after 2019. As Scatec Solar has experience working with auction markets in different countries around the world, we have several times before taken part in the process you are now having and believe we can provide valuable input to this discussion. So these are some main comments that we would like to provide to the development of the Ukrainian solar power market.

Generally speaking we are very positive to an auction-based system and have successfully participated in auction programs in countries such as South Africa, Brazil and Argentina. Should Ukraine be able to implement a successful auction scheme, that satisfies all parties, I am sure Scatec Solar could be one of the main supporting investors of the further development. Should however the scheme not be well implemented, as we have witnessed in several markets - where the auction scheme has led to market collapse and where projects have not been realized due to ineffective mechanisms (Turkey, Kazakhstan, Mexico etc), we would likely not be able to construct further projects after 2019. As we do not wish this to happen also in Ukraine, we would like to provide a few comments that we believe could further strengthen the development of the auction scheme:

Bank guarantee / bid bond: Scatec is concerned about the language proposed related to the bid bond of USD 5,000 per 1 MW of the participant and the performance bond of EUR 10,000. We would strongly recommend increasing the bid bond / initial bank guarantee significantly (our recommendation is to follow IRENA-policy, which is a bid bond up to EUR 35,000 per 1 MW and, in addition, a significant performance bond. This to avoid participation of stakeholders that does not have the capacity to realize the projects themselves. Based on experience from abroad, the main reason why many auction schemes have been unsuccessful is because “traders” (who bid in the auctions and aim to sell the rights to other investors) have entered the scene. These projects are normally not realized since the prices that the “traders” have bid are not considered bankable by investors or lenders - and therefore the projects are not realized. Turkey, Kazakhstan and Mexico are among the example where many auctioned projects have not gone into construction mode as investors are waiting for lower costs of installation. Argentina on the other hand is a recent positive example, where the scheme seems to work very successfully (mainly due to the high entry-barrier – USD 200k / MW - and thus the acceptance only of serious players). Screening out “traders” is very important and keeping a high bank guarantee is essential in this regard.

Scatec Solar also believes the introduction of UAH-based guarantees will be difficult for foreign investors as there is no availability of a hedge market to support a conversion of EUR to UAH to place cash guarantees. It should furthermore not be acceptable to deposit cash in Ukrainian banks below a certain credit rating.

Tariff differentiation. In addition, over time Scatec Solar also recommends considering different tariff levels in the country based on the level of irradiance. As irradiance differ greatly from North to South in Ukraine (leading to IRR-difference of up to 10% depending on location), the current one-level-national-tariff creates high competition in the South, while projects in the North are not being realized since they are not being considered economically viable (i.e. even with today’s FiT at EUR 15c, projects in the Northern hemisphere of Ukraine is not deemed viable when comparing return to risk). Such as system would correctly incentive private stakeholders to all parts of the country, if that is what decision-makers want to see happen.

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