To get its renewable energy sector jump-started, Ukraine began luring investors with a high guaranteed price for the solar and wind energy that they produced. It worked spectacularly — until it didn’t.
The share of Ukraine’s energy from renewables rose from almost nothing to more than 10%, particularly with several billion dollars of fresh investment in 2018 and 2019.
But in 2020, the government realized it couldn’t afford its promises to pay the high green tariff in place. The agreement, in place until 2029, would have cost taxpayers $20 billion by the end of the decade. The amount represents 40% of Ukraine’s annual state budget.
Instead of being the cheapest source of energy to the electrical grid, the high green tariff made Ukraine’s renewable energy the most expensive.
So the government simply stopped paying the investors and came to an agreement with many of them on a future tariff cut. But the state still owes the private investors $600 million, a sum that it is paying off slowly and gradually.
The government’s backtracking threatens to halt future investment in green energy in Ukraine, according to experts participating in a Kyiv Post webinar titled “Renewable Energy: The Future of Ukraine” on March 17.
According to Oleksiy Feliv, managing partner at the Integrities law firm, eight international financial institutions have already suspended financing of Ukraine’s renewables because of the debts.
International donors like the European Bank for Reconstruction and Development won’t be lending money to the renewable power developers if the state doesn’t fulfil its obligations, Feliv said.
Ukraine should find a way to pay off the amount, Feliv said, or risk not meeting its commitment to stop net emissions of greenhouse gases — the chief culprit in global warming — by 2050. The carbon-neutrality pledge within 30 years is one that 126 nations have taken and expansion of renewable energy is considered the only way to achieve the goal.
Minister’s pledge
Yuriy Vitrenko, acting energy minister, says Ukraine won’t have enough money to pay off all debts from the state budget, which has “limited capacity.”
Vitrenko suggested that the debts could be repaid by increasing the carbon tax by 30 times — from $0.4 to $11 per ton of carbon dioxide emission. Even with the hike, the tax will remain three times lower than in the European Union. Another way is to issue state bonds to cover debts to investors.
Vitrenko is confident of a solution — and an end to guaranteed tariffs, which are no longer in place in many parts of the world as the costs of solar and wind power continue to plummet.
“Then we’ll stimulate development of renewables without any subsidies, in a way the market works,” Vitrenko says.
Investors’ concerns
The Cabinet of Ministers signed a memorandum with renewable producers last year, pledging to pay off 40% of the debt in 2020 and 60% in 2021.
DTEK Renewables, a subsidiary of Ukraine’s largest energy firm, has received only a small fraction of what it is owed. “We don’t see any movements,” Maris Kunickis, CEO of DTEK Renewables, said.
Kunickis thinks that the market should find an alternative to the feed-in tariff. He suggests corporate power purchase agreements at market prices or auctions.
Monaco-based energy firm EuroCape hasn’t received any money either after signing the memorandum with the state, according to its country manager Adrien Fouchet.
“We’ve started the construction of a 500-megawatt project. Today this project cannot be finalized because of the current situation,” Fouchet said. EuroCape decided to start with 100 megawatts and to build further when the situation stabilizes.
Magnus Johansen, vice president for Norwegian wind producer NBT in Ukraine, said that foreign investors are usually wary of entering new countries. And if there’s turbulence, they may postpone launching their operations here.
Johansen thinks few foreigners will risk entering Ukraine amid the green energy crisis.
“If things are smoother, the international component will probably grow larger than the local — at least in the wind sector, because wind requires more investment, sophisticated investors and longer time to develop,” Johansen said.
Johansen said one big obstacle to the development of the renewable sector in Ukraine is the lack of affordable financing. Interest rates are much higher in Ukraine than in most of Europe, he said. The high green tariff helped offset the financing costs, he said.
Ukraine’s potential
Ukraine has great potential in the renewables sector, including wind, solar energy and biofuel, but it should have a clear strategy on how to develop this market, the experts said.
“Smart approach is a combination,” Vitrenko said. According to him, solar is a great source of energy if there are batteries to store this power. Solar power plants generate most of the power when it’s sunny in summer, but not when it’s winter. Hence, there should be storage to get the power from when it’s cloudy.
“Solar energy plus storage is one of the important cornerstones of future development,” Vitrenko said, adding that Ukraine’s current approach is flawed and results in shortages of energy sources in winter.
“We have a deficit of energy because there is no solar; all thermal power plants worked at full capacity,” Vitrenko said. To survive, Ukraine has to import energy from Belarus and Russia and use expensive and carbon-producing gas to generate power.
“We have to do these things differently,” Vitrenko said.
At the same time, Inna Sovsun, a member of parliament on the energy committee with the 20-member Voice party, said that Ukraine has never had a clear strategy in the energy sector.
“Our general public policy was ‘how to survive winter this year,’” Sovsun said. She thinks it won’t be possible for Ukraine to become carbon neutral while the oligarchs’ lobby remains so strong on behalf of their coal, oil and gas interests.
“It’s politically hardly feasible to develop a strategy when so much is being pushed by fossil-fuel interests,” Sovsun said.
