On the information portal Liga.net was published a special project “Phantom “Green” Future. Ukraine risks losing billions of foreign investments in the development of green energy. What is the matter?” examining the emergence and development of the existing RES crisis in Ukraine since the start of the new electricity market, starting July 1, 2019, and the reaction of policy makers at each stage of the conflict development.

The EUEA Board Members, Yuri Kubrushko, Managing Partner of  IMEPOWER and Magnus Johansen, General Manager of the Norwegian NBT in Ukraine, provided their comments on the situation.

The material prepared with the support of the EUEA.

Read more (Russian) on Liga.net.

Translation from Russian:

In the expert community, discussions about whether global warming is harmful and that it is anthropogenic in nature have long ceased. A significant part of greenhouse gas emissions is provided by the energy sector, which is why over the past decades, governments in different countries have been stimulating the development of alternative energy, primarily solar and wind.

And one of the most common incentive methods is the long-term purchase of electricity produced by power plants operating on renewable energy sources (RES) at a special (“green”) tariff or auction price, evenly distributed among all (at least industrial) consumers. In Ukraine, the “green” tariff was introduced in 2008.

According to various estimates, by 2050 the share of renewable energy sources (RES) in the world will increase from the current 10% to 20-40%. In about 50 countries, their share in electricity production already exceeds 50%; in some, it is approaching this level. For example, last year, far from the sunniest Germany was able to boast a share of 46%. Overall, in 2019, two-thirds of the world’s commissioned generating capacities were green.

On paper, the plans of the Ukrainian authorities in this area are no less ambitious. According to the concept of a “green” energy transition presented in January of this year, by 2050 the share of renewable energy in the structure of electricity production can reach 70%, while coal (the most environmentally dirty) generation can be completely abandoned.

And last year there really was a breakthrough. According to the State Agency for Energy Efficiency and Energy Saving, in 2019, 4.5 GW of new capacities were installed, which increased the total capacity by about a factor of three, to 6.8 GW. In total, these stations allow producing over 8.4 billion kWh of electricity, or 5.5% of the total. All this is thanks to € 3.7 billion investment. According to market participants, in order to achieve the goals outlined by the ministry, such amounts must be invested every year. However, investments may not work out.

“Under existing legislation, another 4.8 GW of wind farms can be built to receive the green tariff within 3 years from the pre-PPA date, that is, in fact, in 2021-2022,” says Yuri Kubrushko, Managing Partner of IMEPOWER. – And a maximum of 1.2 GW will be built according to the most optimistic scenario. This is about € 1.8 billion of investments, a significant part of which will go to local construction companies. Plus, about 0.6 GW in the phase of active construction (turbines are already at the sites). They should have been completed by 2020, but due to quarantine and logistics failures in Ukraine and around the world, part of the turbines will be transferred to 2021.”

Green story in five acts

The conflict between alternative energy producers and the Ukrainian authorities began last summer, with the launch of a new electricity market. Although the SE “Guaranteed Buyer” was originally conceived as an exclusive buyer of electricity at a “green” tariff and the operator of a balancing group of power plants operating on renewable energy sources, the government also ordered it to provide a complex system of subsidizing household consumers. Due to a poorly prepared transition to a new market model, in August 2019, the GB had debts to renewable energy sources.

In the fall, it became clear that something needs to be done. But, as it often happens with us, the proposed solution was completely political, and prepared “on the knee”.

Act one

At first, deputies from the mono-majority began to make statements one after another about the need to reduce the green tariff.

Then they registered project No. 2236-2, in which, among other things, they proposed not to pay for limiting the volume of electricity produced by large renewable energy plants (over 150 MW).

However, it quickly became clear that the project was contrary to EU law, the Association Agreement between Ukraine and the EU, as well as other international obligations of Ukraine. As a result, the project was withdrawn from consideration.

Act Two

Then the Ministry of Energy and Environmental Protection suggested that market participants voluntarily restructure the green tariff – reducing its rates, but increasing its life by 5 years. In particular, a reduction of 17% was proposed for solar stations (SES), and 10% for wind (wind) plants. For projects that are planned to be implemented within the framework of signed pre-PPAs (purchase and sale contracts for electricity under the existing ST for future facilities) – by 15% and 10%, respectively.

However, according to investors, this proposal of the Ministry was not actually voluntary, as it contained sanctions against companies that would not have accepted such a restructuring. The Ministry also proposed a significant reduction in the time period during which investors could complete their wind farms and solar power plants within the framework of the pre-PPA signed, which jeopardized the implementation of many large projects whose construction was planned in 2020-2022.

Act Three

A little later, a group of deputies registered bill No. 2543, which provided for more moderate restructuring conditions. It was proposed to reduce the tariff for existing wind farms by 5%, for commissioning in 2020-2022. – by 7.5%. The reduction for existing SPP was provided at the level of 10%, for future SPP – by 15%.

Most market participants supported the bill. The document improved the financial position of the SOE, but at the same time retained the industry’s attractiveness to foreign investors, according to the Ukrainian Wind Energy Association (UWEA). The project was supported by the European-Ukrainian Energy Agency (EUEA).

Act Four

However, the Ministry opposed the draft law. Later, literally one vote was not enough for him to pass the profile parliamentary committee.

And the National Commission for State Regulation in the fields of energy and utilities (NEURC) not only criticized the deputy draft law but also proposed to significantly reduce earlier guaranteed rates for both existing and new stations. It was also proposed to introduce a 100% refund for the settlement of unbalances. Finally, as stated in the regulator’s letter, “in order to protect the rights of investors, it is necessary to provide for the possibility of transferring renewable energy facilities to the state’s property and receiving compensation for them”.

Many industry experts took this as a hint of nationalization, and on incomprehensible conditions and at the expense of what means.

“We were very surprised at this position of the Regulator, which actually offers to nationalize solar and wind stations that are not yet completed. I can’t say that it is offered on a voluntary basis.” – Andriy Konechenkov, Chairman of the Board of UWEA.

Act Five

And in order to completely intimidate investors, a group of 49 Parliament Members in December 2019 gathered to appeal to the Constitutional Court regarding the constitutionality of the very introduction of green tariffs back in 2008. According to the deputies, the parliament exceeded its authority by writing into the legislation the methods of calculating the tariff and the tariff itself, while the government should have done it. The move was, apparently, solely as an argument in the discussion, since in the end such an appeal was not filed. The fact that they decided not to touch green tariffs for households hinted at double standards (although, in this logic, the parliament also had no right to set their rates).

Position of the policy makers

Why did the authorities so stubbornly avoid compromises with investors? The Regulator himself explains it this way. Firstly, the opinion was often voiced that too many RES operators appeared on the market, which is associated with one of the highest “green” tariffs in the World, and this ultimately becomes a heavy burden for consumers.

“High tariffs should not lead to energy poverty of consumers and the lack of competitiveness of Ukrainian goods” – Oleksiy Orzhel, ex-Minister of Energy.

By the way, the Energy Industry has now been left without a new minister for more than a month.

Secondly, there is often a hint that the main beneficiaries are Ukrainian oligarchs.

“We have a society that has a request. And very often, society feels an injustice from the fact that certain decisions that were made before that were made in the interests of certain well-known people. And therefore, this factor of injustice, which the Ukrainian society feels, we cannot ignore” – Oleksiy Honcharuk, ex-Prime Minister. Although he himself publicly recognized the inadmissibility of “retrospective” changes.

Thirdly, it is believed that renewable sources introduce imbalances in the operation of the integrated Power system. According to the former head of Ukrenergo Vsevolod Kovalchuk, the Power system in some periods can no longer balance the ever-increasing volumes of “green” generation, the problem is also very poor forecasting of electricity generation.

Fourth, the accelerated development of renewable energy leads to an increase in the deficit of the Guaranteed Buyer state enterprise. According to the forecasts of the relevant ministry, according to the results of 2020, the deficit of GB may reach UAH 8-17 billion.

This was the opinion of the previous government. Despite the fact that the Ministry itself developed a concept with a very ambitious plan, even by world standards, to increase the share of renewable energy to 75% by 2050. And despite the fact that the then Minister Oleksiy Orzhel, before working in the Cabinet of Ministers, headed the Ukrainian Renewable Energy Association and, it would seem, had to understand the features of the work and the needs of the sector.

Investor position

Investors believe that the authorities distort the picture. Although at some time Ukrainian oligarchs – in particular, Rinat Akhmetov and Andriy Klyuyev – were indeed the most active in this market, nevertheless, in recent years, many commissioned capacities have been built for the money of various investors, mainly foreign. The largest player (DTEK) now accounts for only 15% of installed capacity. At the same time, in the second quarter of 2020, the share of foreign investors will exceed 30% of the total installed capacity of RES of power plants. There are also hundreds of small and medium Ukrainian investors on the market who have built stations with a capacity of several MW.

According to UkraineInvest, the state office for attracting and supporting investments, the amount of foreign investment in renewable energy projects accompanied by the office over the past two years amounted to about $ 1.15 billion (more than 20% of total foreign direct investment in 2018-2019 – Aut .). Another $ 1 billion worth of projects were funded by international financial institutions – BSTDB, DEG, EBRD, FMO, GIEK, GGF, IFU, NEFCO, OPIC, Proparco, Swedfund, and others.

There is a business case for high “green” tariffs. Firstly, this is a relatively short guaranteed term for the purchase of electricity at such tariffs – about 10 years (until 2030), compared with 20-25 years in many other countries. Secondly, the historically high country risk – which the current situation with renewable energy perfectly illustrates. Thirdly, the high cost of capital in Ukraine. Fourth, investors should connect to the network at their own expense (including upgrading the infrastructure of distribution companies and NPC Ukrenergo). The fact that renewable energy companies do not bathe in money is also indicated by the financial statements of companies – the return on investment most often begins in 5-7 years.

There was nothing unexpected in the growth in the number of renewable energy subjects – the state itself laid down a similar growth in its program documents 5 years ago. During this time, it was possible to assess the impact of the segment on the market as a whole, to invest in infrastructure (including energy storage systems) and in new forecasting and dispatching systems. The transmission system operator Ukrenergo in recent years has issued or agreed on technical specifications for connecting to the network for more than 13 GW RES of power plants, which did not particularly concern the Ministry of Energy or the Cabinet of Ministers until the end of 2019. And the very fact of limiting the production of electricity at renewable energy plants, which many officials perceive as a sign of destabilization of the energy system, is essentially not a problem – this is a generally accepted way in the world to balance the energy system in a situation of increasing electricity production from renewable energy sources, which can and should be used in Ukraine.

Finally, the Guaranteed Buyer’s shortage of funds is associated with hasty and not very high-quality implementation of the new model of the electricity market, including some decisions that were made on the fly. Recall that before all the energy was sold to the Energy Market, which then sold it to electricity suppliers. Now a multi-story scheme with bilateral agreements is working.

Since no one will voluntarily buy directly more expensive “green” energy, the responsibility is to redeem it to the GB, which then sells it on the market “a day in advance”. According to the legislation, this activity of the GB should be funded exclusively by the premium to the Ukrenergo tariff for electric power transmission. The problem is that the Regulator (NEURC) sets tariffs insufficient to cover the needs of SOEs. So, according to the statements of the management of Ukrenergo, in the tariff for the transfer of Ukrenergo in 2020, only 1/3 of the required amount of compensation of the GB for settlements with RES is included.

“The current global crisis, limited funding for emerging markets, delays in the supply of turbines, and failures in logistics have regulated the situation,” said Yuri Kubrushko, Managing Partner of IMEPOWER. – With the stabilization of the situation with the Guaranteed Buyer in the summer of 2020, it is unrealistic to build a wind farm before the end of 2021-beginning of 2022.

What’s next?

Two renewable energy associations – UWEA and EUEA – have recently sent the Government updated proposals for resolving this situation. Despite their innocence, investors were initially prepared to make concessions, but on moderate conditions that do not undermine the ability to service loans and do not reduce the investment attractiveness of the industry. It seems that the government also understands that the imposition of rigid formats for the restructuring of the green tariff, not to mention retrospective solutions like retrospective reduction or even cancellation of the green tariff, will lead to nothing but problems.

Beginning in December 2019, mediation between investors and the government continues. It takes place, by the way, through the mediation of the Energy Community Secretariat, according to which the last package of proposals is in the interests of both the state and investors themselves and can be a “good basis for compromise.” At the same time, the confidence of foreign investors in Ukraine is an important asset for recovery after a coronavirus, the Secretariat believes. “Now this is mainly a matter of political will,” concluded one of the investors, NBT Ukraine General Manager Magnus Johansen.

“The main principle is to propose all changes to investors on a voluntary basis so that any restructuring is not forced. Retrospective changes will entail instant arbitrage. There is the experience of other countries that will pay penalties for such situations.” – Olga Yeromina, Associate Director, Senior Banker, EBRD.

Such examples are the Czech Republic and Spain. In the Czech Republic, a “green” tariff was introduced in 2005 for 15-30 years, depending on the type. However, in 2010 it was canceled for large stations and halved for small ones. As a result, in 2011 they stopped building new SPP. In Spain, GT was introduced in 2007-2008, for 15-25 years. However, at the beginning of 2012, the Government also curtailed the program, mired in arbitration and completely stopped the development of solar energy and now has to pay millions in compensation.

And despite the fact that in the near future the system of functioning of the “green” tariff will change in any case in order to keep pace with rapidly cheaper technologies. A year ago, the Parliament passed a law according to which, from this year, tariffs for new projects should be approved during green auctions. Participation in them is mandatory for investors in SPP with a capacity of more than 1 MW and wind farms – more than 5 MW. It was originally planned that the first auctions will be held in April 2020.

However, the launch was postponed. As recognized in the relevant ministry – precisely because they did not find a dialogue with investors. Which, however, gives hope that they will still be looking for him. Since billions of dollars in investments in the industry, especially during the economic crisis, Ukraine could always use.