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Renewable Energy Recap: Ukraine

Developers, manufacturers, investors and other renewable energy industry stakeholders need to know where the next big market is going to be so that they can adjust their business decisions accordingly.

Since 2003, global consultancy Ernst & Young has released its Country Attractiveness Indices, which gives a numerical ranking to 30 global renewable energy markets by scoring renewable energy investment strategies and resource availability. The indices are updated on a quarterly basis and the most recent report can be found here.

Here is the firm’s assessment of Ukraine.

Policy

Ukraine is an emerging market economy at the cross-roads of Eastern Europe, Russia, Central Asia and the Middle East, and as such holds great potential as a new market for trade and investment. However, an uncertain economy and continued political instability have caused potential investors to hesitate, and inefficiencies in the energy system have resulted from aging power plants and corroding power lines.

There are strong signs; however, that the country is fully committed to meeting its goal of generating 19% of energy from RES by 2030 as set out in the Government’s 2006 strategy. Further, in mid-2010, a new deal with the International Monetary Fund (IMF) secured a $15 billion (€11b) credit line over a two-and-a-half-year period, which it is hoped will spur renewed investor interest.

The country’s renewable resource potential is impressive, and in April 2009, a new “Green Tariff Law” was approved which, unlike the previous tariff system, sought to differentiate between renewable sources. The Green Tariff (GT) is calculated by applying various coefficients to the Basic Tariff which was set on 1 January 2009. The Law also introduced a fixed minimum GT denominated in euros based on the exchange rate at the time, in order to mitigate the impact on the GT of a devaluation of the Ukrainian Hryvnia. 

The GT Law obliges the state to purchase green energy under the tariff system until 2030 and also ensure connection to the grid. Further, where there is a subsequent change to the GT rules, an energy producer will have the right to either follow the new rules, or those valid at the start of operations. In a bid to improve supply chain security, the Law also provides that, from 1 January 2012, a generation company can only charge its customers the GT rate where at least 30% of the materials, works and services associated with the project are based on domestic supply, increasing to 50% from 1 January 2014. 

However, to meet its 2030 target, the country will first need to address the challenges posed by its complex permittingprocedures and inadequate grid. While overall grid capacity is around 7 GW, the network around strong RES areas such as Crimea are limited to 2 GW.

Tax incentives and access to finance

A significant range of tax exemptions are available to green energy companies and projects including corporate taxexemption on the sale of RES electricity for 10 years from 1 January 2011, VAT exemptions on certain imports, and a 75% land tax reduction on the purchase of land for green energy projects.

The main source of finance for RES projects has historically been the Government. In April 2011, the Cabinet of Ministers approved a €7 billion increase in funding for the 2010-15 “economic program on energy saving to  program on energy saving” to €32 billion, the majority of which will in fact be used to renovate the power grid.

Wind

Ukraine has significant wind energy potential; however, it remains an under-developed market with only 87 MW installed at the end of 2009 and zero installations in 2010. The average wind speed in open sites is around 6.5 m/s, potentially reaching 8 m/s in hilly areas. Wind power potential is estimated to be 19-24 GW and a strong project pipeline currently exists, although only a few of these have the necessary construction permits. MAKE forecasts an additional 750 MW in the next five years. 

Crimea and the steppes of Southeast Ukraine are the most promising wind regions. Crimea expects €1.2 billion to be invested in a 900-MW wind farm, with signs construction could begin on the first 125-MW stage by the end of the year. Wind Power, a subsidiary of utility DTEK, has also already begun work on its 1.2-GW portfolio of wind capacity on the coast of the Sea of Azov. Government goals indicate that by 2030, 20%-30% of power will be generated by wind, supported by strong GT rates.

Solar

Ukraine also has strong solar energy potential, with irradiation of around 800-1450 kWh/m² per year in the north and south respectively. Installed capacity was negligible at the end of 2010; however, Austria’s Activ Solar has this year completed for all phases of its 80-MW Ohotnikovo project on the Crimean Peninsula, claimed to be the largest PV project in Central and Eastern Europe. The country’s target capacity for the period 2010-15 is 1 GW.

Other

Biomass represents more than two-thirds of Ukraine’s total estimated renewable potential thanks to its traditional focus on agriculture. The country currently produces less than 0.5% of its energy from biomass; however, it is estimated it could produce more than 10 times its current level of output.

Hydropower is currently the leading source of renewable energy in the country. There are approximately 22,400 rivers within the Ukraine of which only 110 are longer than 100 km. As such there is significant potential for small hydro plants, around 2.3 GW compared with the current installed capacity of 150 MW.

For more information on renewable energy development in Ukraine, contact the report’s author Victor Kovalenko.

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