Ukraine is at another policy crossroads as it debates what government support is both effective and sustainable for encouraging the development of renewable energy. The focus is what could and should replace the current incentive feed-in tariffs for new power projects.
There can be no debate that renewables do need the support of host governments and international agencies. The recent announcement by the French government of plans to increase annual state support from the current 5 billion euros to 7-8 billion underlines this.
And the European Union, which has strict rules on state subsidy distorting competition, makes provision for support of the renewables sector.
The current tariff, which kick-started new local and international investment in both solar and wind projects in Ukraine, is open only to new projects that will be completed by the end of 2019. The European Bank of Reconstruction and Development, in the case of solar, believes that the feed-in tariff has already played its role effectively. It has indicated that it will no longer support solar projects benefiting from the tariff ahead of the 2019 cutoff point.
So the question under debate is: what comes next? As a committed investor in Ukraine renewables, it is a debate in which I have a keen interest. At TIU Canada, we have demonstrated our commitment to building a substantial renewables business in the country. We have already built and commissioned one plant in Nikopol and have another due for commissioning in Mykolayiv next year.
First, we need to examine the purpose of changing government policy. Is it only to reduce the subsidy expenditures or also to encourage investors to identify ways of reducing generation costs? Should the policy be designed to encourage more investment and increase competition? For Ukraine with its unique geo-political situation, the policy also has to significantly increase energy security and decrease dependency on imports.
Renewable electricity support should not be considered in isolation but as an integral part of Ukraine’s energy sector reform. This includes policies to transform the country from being one of the least energy-efficient in Europe and address an energy intensity that is two to three times greater than neighboring countries Poland, Slovakia and the Czech Republic.
Until these multiple questions have been identified, debated and answered, it will be difficult to identify the optimum support model for the next phase of renewables development. This includes the parameters for the “green auctions” predicted to become the mechanism for allocating support after Jan. 1, 2020.
The December 2017 report from the European Union AURES research project on auctions for renewable energy support scrutinizes all aspects of green auctions. It states unequivocally that “renewable energy auctions have been shown to be an important policy instrument for allocating renewable energy support and setting appropriate support levels.
However, auctions are no panacea, i.e. they are not the ‘golden bullet’ that is superior to any other support allocation mechanism at any time.”
It is imperative that the learning from the AURES project should be considered in relation to Ukraine’s situation. The country needs to be confident that the supply of potential projects exceeds demand, a pre-requisite for an effective auction process, and that sufficient cost and volume controls are in place. And while auctions have been shown to improve allocation of support, they seem to be more appropriate for projects of 20-25MW and above rather than all those over 10MW.
The green tariffs – their reduction rates and end date – need to be included in this analysis to ensure that the correct balance is struck between attracting investment and reducing the burden on the state and end consumer. For example: is the planned 10% reduction in the feed-in tariff for solar in 2020 correct or should it be slightly higher.
Would investors accept a bigger cut but in exchange for the green tariffs being available beyond 2030?
As a committed investor, for us the actual mechanism for delivering support is not as important as the policies that underpin it. We need to be confident that there is an ongoing commitment to renewables; a consistent level of support during the investment cycle; a supportive regulatory and permitting environment; transparency in the distribution of support; and a level playing field for investors.
And we should not lose sight of the end goal – to develop the renewables industry to the stage where it can compete with established technologies and fossil fuels without subsidy.
We are still at the beginning of this transformation as only 2% of Ukraine electricity is produced by renewable sources.
Michael Yurkovich is chief executive officer of TIU Canada, a Ukrainian power generation company.
