While the Ukrainian government is taking the right step in seeking to close tax loopholes and gray schemes to ensure those who are not currently paying taxes, make their contribution to the national budget, at least one element of their proposed legislation (#5600) is giving cause for concern. This is the proposal to introduce an excise tax on green energy.
This is a surprising and ill-advised move for a number of reasons, so consequently, there is already has a broad coalition of international and Ukrainian investors (including System Capital Management’s DTEK) against it. Indeed all industry associations in the renewables sector as well as business associations strongly oppose the idea and have sent formal letters to the Cabinet of Ministers and the Verkhovna Rada, Ukraine’s parliament. The European Bank for Reconstruction and Development, Energy Community Secretariat and Black Sea Trade Development Bank sent a joint letter to parliament on June 22.
Placing a tax on a sector that is leading the drive to a greener, lower-carbon economy and Ukraine’s future energy security flies in the face of Ukrainian government policy, which is seeking greater investment in energy to help transform the sector, integration with the European Union transmission system and seeking to be a champion in the region for green energy and carbon emission reductions.
The proposed excise tax on green energy is just another ill-judged step in the long-running saga of Ukraine’s desire to stimulate much-needed foreign direct investment in the energy sector and other areas of the economy. As has been well documented, the dispute over the level of feed-in tariffs, or guaranteed state payments to renewable energy producers, led to serious fallout with international investors and a loss of trust in the government just at a time when the government had set an ambitious plan to increase foreign direct investment and use this as the engine for economic growth.
As we now know, after much wrangling and arm-twisting, a deal was finally agreed between investors and the government at the end of last year. This agreement guaranteed the repayment of the debt to renewable energy producers of Hr 22.4 billion ($835 million) by Dec. 31, but as of June 30, 2021, only Hr 4.6 billion ($171 million) has been repaid.
So having damaged investor confidence and trust in Ukraine initially by going back on tariffs, the government has also yet to pay investors for green energy delivered in 2020 and is now behind in payments for 2021. On top of this, they plan to introduce an excise tax of 3.2% on green energy, further undermining the investment attractiveness of the sector. But why does this matter?
This approach has consequences for Ukraine that reach far beyond the breach of trust with energy investors. The continued attack on the sector is undermining the future in an area that was seen as ripe with potential for investment, energy transformation, job creation and a positive case study for investors to come to the country. In short, it sends a concerning message to the investment community that in Ukraine promises and guarantees are not delivered on. Capital risk is therefore much higher as a consequence and investment will be lower.
With the global attention on climate, change in advance of the United Nations-led COP26 talks later this year, as well as the emphasis placed on the need to move renewable energy resources and cut carbon emissions by Ukraine by the US and the EU, Ukraine is again out of step with its international partners.
In the energy sector at least, an area which is of great strategic importance and watched closely by her supprters, donor, investor and strategic partner, Ukraine is once again saying one thing while doing another. This will have real and negative consequences measured in lost investment, taxes, and jobs. Again, for this mismanagement ultimately the ordinary citizen will pay the price. So while ensuring that taxes are paid is a sound objective, raising tax income on green energy is not and this counter-productive policy should be rethought before irreparable damage is done both to the sector and to Ukraine’s investment climate.
Jock Mendoza-Wilson is the director of international and investor relations at System Capital Management.
