Ukraine needs to do more to cut reliance on expensive imports from Russia.
Ukraine’s current energy spat with Russia over natural gas import prices has once again underlined the need to diversify away from increasingly expensive Russian fuel imports.
But lawyers say the government and lawmakers need to introduce many more incentives and safeguards to boost investments into green and alternative energy resources that currently drive only a tiny part of the national economy.
The legal framework, they say, is incoherent and dissuades larger-scale investment.
Over recent years, Ukraine has enacted a number of laws aimed at encouraging renewable energy production, especially through financial incentives.
In May, for example, the Cabinet of Ministers increased green energy funding and approved a plan to increase the share of clean energy in Ukraine’s overall energy production to at least 10 percent from 2015, according to the Interfax-Ukraine news agency.
The most important of these reforms, according to lawyers, was the 2009 law instituting green tariffs, which requires the government to purchase green-sourced electricity at a special price.
But it hasn’t received universal praise.
“My opinion is that the law was enacted to advance someone’s political career,” said Baker & McKenzie’s Svitlana Romanova. “They have a good aim but they are pretty poorly developed.”
The green tariffs are just one component of Ukraine’s “National Energy Strategy,” which cites “enhancing energy security” as a key factor in favor of developing alternative and renewable energy sources (ARES).
The strategy claims that Ukraine’s current renewable potential “is not used sufficiently” and plans to raise the ARES contribution in Ukraine’s total fuel and energy balance to 19 percent by 2030.
Lawyers agree that the idea behind the law establishing the green tariff is laudable.
“Ukraine made a great step in the right direction on energy independence when it introduced its ‘green tariff’ tax breaks,” said Myron B. Rabij, partner at the Kyiv offices of international law firm Salans.
Sergiy Oberkovych, partner at Kyiv-based Gvozdiy & Oberkovych, believes the “transparent, understandable and predictable regulations” in the renewable energy sector are appealing to investors because the traditional energy sector “is dramatically overregulated and non-transparent.”
The attractiveness of renewable energy investment in Ukraine is increased, Oberkovych said, with the 2011 Tax Code, which offers “rather interesting tax benefits” for investors by temporarily exempting certain sustainable energy-related goods and equipment from corporate profit tax and value-added tax (VAT).
He points to a recent decision by energy major Royal Dutch Shell to reaffirm its hydrocarbon exploration and production investment plans in Ukraine as a sign of strong interest by investors.
Yet while complimenting the green tariff law’s motivations, Rabij said it is “a bit spotty and the spots are both fairly technical and business-driven.” What qualifies as “biomass,” for example, is unclear, according to both Rabij and Baker & McKenzie’s Romanova.
Romanova said the legislation obscures whether or not an energy producer established prior to tariff’s introduction can benefit from the scheme, which she said unfairly penalizes pioneers in the renewable industry.
Rabij said that some areas of Ukraine’s renewable energy market are beset by “a typical ‘chicken and egg’ issue in Ukrainian law.” Businesses, he said, wonder why they must obtain an energy production license prior to importing expensive equipment even when they have a committed supply contract in place.
Romanova said that Ukraine’s renewable energy legislation has misplaced priorities and illogical requirements, calling the suite of laws “grossly disconnected.”
The VAT component of legislation purporting to encourage green investment is a positive, she says, but argues more pressing issues that must be dealt with first; “land and construction issues should be resolved before the VAT,” she says.
The green energy market is not immune from the same problems applicable to Ukraine’s traditional energy market. The overarching problem, Rabij says, is that “the regulations change on an annual basis. These procedures should be put into a stable legislative framework as it is unnerving to the market.”
Romanova agreed, saying that the possibility that laws may suddenly change dissuades potential investors eager for guarantees in this capital-intensive industry. Most investors, she said, lose interest or defer their projects after hearing of Ukraine’s legislative scheme.
Kyiv Post staff writer Will Fitzgibbon can be reached at [email protected].
