Ukraine’s Ministry of Energy and Environmental Protection (MEEP) in late February announced plans to retroactively slash government support for wind and solar farms, despite a law that encourages and obligates government to increase green energy use and move away from conventional hydrocarbons imported from Russia and dangerous nuclear generation that should be decommissioned during the next 10 years.
The ministerial plan drew cries from local and international investors, who’ve pumped billions of dollars into the country over the past several years to help it move closer to achieving a 25% benchmark for renewable energy by 2035 and reduce dependency on imported fuels. Bloomberg’s New Energy Finance Global Scope for 2019 noted Ukraine’s progress toward renewables and ranked it as the eighth most attractive investment market for green energy in the world among developing countries.
A government reshuffle in early March and the onslaught of the coronavirus pandemic pushed the Ministry’s plans onto the back burner. However, as a new Prime Minister takes power and grapples with pandemic’s costs to the state budget, officials are again raising proposals to solar and wind project investors for “voluntary reductions” in feed-in tariffs.
It appears, from this move, that the government is not only willing to damage its investment reputation but that it also doesn’t fully understanding that it will not be able to reach its own renewable energy benchmarks without the technological know-how and long-term financing from the investment community.
The government’s short-sighted views of covering a budget gap fail to take into account the positive track record that renewable energy investment has brought Ukraine in three very short years.
First, at the end of 2019, almost $10 billion had been invested in renewable energy ($6.2 billion from 2018-2019 alone) making it one of the top five sectors for investment in the Ukrainian economy. This has enabled Ukraine to increase its power generation from renewables to 6.8 gigawatts at the end of 2019 compared to 999 megawatts at the end of 2015, with solar plants showing the biggest increase.
Second, national and international investor confidence has helped Ukraine move closer to changing the strategic balance of its energy market towards renewables. Local and foreign investors from Austria, Belgium, Canada, China, Great Britain, Norway, Spain, Switzerland, Turkey and the United States, among others have raised funds for Ukraine’s renewables sector based on a fair and stable regulatory framework and a heretofore positive partnership track record with government. Leading international financial institutions and banks, such as the EBRD, the US Overseas Private Investment Corporation, as well as others from France, Denmark, Finland, Sweden, the Netherlands, and others have provided long-term financing for renewable projects in Ukraine.
Third, during the last four years, taxes and levies collected from the renewable energy sector to the state budget were almost $2.7 billion (67 billion UAH according to the State Tax Service) making the sector one of the largest new job creators and taxpayers in the country.
Even with this positive track record, the nascent renewables sector regulatory framework requires additional reform and transparency to ensure a more balanced market system is created that strengthens the guaranteed operator and continues to attract more investment to deepen clean renewable energy in the future.
Experts estimate government costs to cover the green tariff in 2020 will increase to 45 billion UAH ($1.8 billion) compared to 28 billion UAH ($1.12 billion) in 2019. It is estimated that under current tariff and regulatory policies the deficit required to pay renewable electricity generating companies for their electricity output may reach 19-20 billion UAH ($760-800 million).
There are a number of ways for Ukraine to cover that gap and stay on track increasing the share of renewables in the energy sector and attracting additional investment. First, however, the government, along with parliamentary support in the coming weeks, needs to do its own homework. There are a number of steps that should be taken.
First, current reforms have come under threat by oligarch interests that control large industrial customers. They’ve undermined government pricing policies through court litigation questioning transmission system approvals by the regulator and refused to pay for services, which are backed by dubious court decisions. As a result, transmission system operator has a significant gap in the total income. This needs to end.
Second, falling back on old practices and using loopholes in existing legislation, some Ukrainian power customers have fallen for price dumping from Russian and Belorussian electricity imports to gain preference over local power generators, further undercutting national energy interests.
Third, just as was done with natural gas prices, the government needs to gradually raise prices charged for consumer electricity to the market level. If done together, these three moves have the potential of significantly closing the gap between the guaranteed buyer needs to pay in feed-in tariffs to renewable power generators.
Fourth, transparency of power supply and demand and reporting delays by the government continue to be an issue that causes imbalances in the market, which are tough to correct on short-notice, not to mention retroactively. With investor help, a more updated system can be put into place that will benefit all stakeholders.
While local and international renewables players are open to discussing government proposed reductions in feed-in tariffs, unilaterally changing the rules of the game without government doing its own homework will force many investors into default and possibly bankruptcy. These government actions will undercut the country’s investment reputation in a key sector that has brought real FDI, tax revenues, and created new jobs throughout Ukraine’s regions. Furthermore, the positive attitudes of an investment partnership committed to the green energy milestones in 2035 and 2050, will be severely damaged and virtually impossible to achieve without international investment and financial backing.
Developing a green economy requires substantial investments on the part of business, government and the broad public. Close cooperation between business, science and education, stimulating the development of new technologies, innovation production clusters, to name a few, will help replace Ukraine’s reliance on energy and develop a more technologically advanced economic model.
However, if government only looks to business to close budget gaps without taking steps itself to further reform and meet its own KPIs, what was an investment boom may soon become an investment bust for Ukraine.