Despite numerous challenges in Ukraine’s renewables sector, Norwegian companies Scatec and NBT haven’t given up on Ukraine’s transition towards green energy.
Scatec specializes in solar energy, and entered the Ukrainian market in 2017. It currently operates three power plants with a capacity of 133 megawatts, but when construction is completed on plants at Progressivka and Chigirin, this will increase dramatically to 336 megawatts.
NBT focuses on wind energy. It came to Ukraine in 2018 and has two projects: a 246 megawatt facility in Kherson Oblast which has started to operate in phases, and a 793 megawatt facility under construction in Zaporizhia Oblast.
When all the above-mentioned projects are finished, Norwegian renewable energy companies will be able to supply electricity to up to 600,000 homes in Ukraine.
Both companies are well positioned to help Ukraine’s government meet its target of 25% renewables in the country’s electricity mix by 2035. Norway is already generating 100% of its power using renewables meaning NBT and Scatec bring with them their national expertise.
However, progress has slowed in the last two years as the Ukrainian government’s decisions have become a barrier to creating more renewable energy source, or RES, plants.
Crisis follows gold rush
Both Norwegian companies entered Ukraine when times were good for the renewable industry: between 2014 and 2019, a total of over $7 billion of foreign investment was pumped into the market, with $4.5 billion invested in 2019 alone. This was driven by Ukraine having some of the highest feed-in tariffs in the world.
The lofty rates were put in place under President Viktor Yanukovych in 2010, mostly for the benefit of his associates Serhiy and Andriy Klyuyev.
However, the green energy gold rush didn’t occur until further market reforms in 2015. The tidal wave of investment in 2019 caused the crisis that has embroiled the sector since 2020: the state-owned purchaser of renewable electricity, the Guaranteed Buyer, couldn’t cope with the sharp rise in payments which it had to make and soon spiraled into debts of almost $1 billion.
Oleksiy Feliv, one of the preeminent energy lawyers in Ukraine, says that things came to a head after the unbundling of the electricity transmission system in 2019.
Under the new market rules, renewable energy producers are paid by the Guaranteed Buyer, which raises funds from Ukrenergo, the national electrical grid operator.
This arrangement immediately created a conflict between industrial consumers, Ukrenergo, and RES producers.
“The large industrial (players) more or less started a war against renewables and they succeeded as the government just stopped paying renewable producers,” said Feliv.
This has led to a drawn-out battle between RES producers and the Ukrainian government, which was supposed to be resolved by the signing of the green energy memorandum in June 2020. Both parties agreed to a reduction of rates, but the government committed to paying the tariffs for existing plants until 2029.
However, the state has thus far shirked many of the commitments it made in the memorandum, and debts to producers are still piling up.
According to Feliv, high renewable tariffs are necessary as the cost of financing RES projects in Ukraine is extremely high due to lenders seeing the country as a risky investment.
This sentiment is echoed by Magnus Johansen, vice president for Business Development at NBT, who is concerned that the government’s actions are making it even more difficult to obtain funding.
“The (renewables) situation contributes to increasing the overall country risk profile and will likely result in higher cost of capital. There is also a risk that investors will delay investment or simply invest elsewhere,” Johansen said.
Time to change
The potential for a collapse of foreign investment into renewables becomes even more alarming when one considers that many of Ukraine’s existing coal-fired power stations will reach the end of their lifespan in the next 10 years.
The impending obsolescence of the old thermal plants coincides with the introduction of the EU’s Carbon Border Adjustment Mechanism, which will impose import tariffs on goods from countries with high CO2 emissions. This measure poses a big risk to Ukrainian exporters.
Maintaining investor confidence will therefore be crucial in the coming years, especially as RES technology costs drop rapidly and become more economically viable every year.
Raymond Carlsen, the CEO of Scatec, told the Kyiv Post that market analysts forecast the cost of renewable electricity decreasing by 40–50% in the next ten years, and that he thinks moving towards renewables is the only sensible choice for Ukraine.
“The global renewable market is going to grow from 10 or 12 terawatts to 60 terawatts. It’s better for Ukraine to jump on the renewable train than to continue with nuclear and coal power plants,” said Carlsen.
“The cost of solar panels has been reduced by 95% over the past ten years. Batteries are following suit. New coal plants are not worth building because they will be more expensive than renewables. Old coal plants will be more expensive to operate from next year than renewables.”
This makes Ukraine’s current battles with renewable investors even more frustrating, as the country could risk missing out on a global transition to RES.
“In our experience, those countries that are predictable with regard to their renewable portfolio, in terms of tariff reductions and sticking to old agreements, are the most successful. We have experience in more than 40 countries, and in that respect Ukraine is an exception,” Carlsen said.
At present, there are few indicators that the Ukrainian government is ready to make decisions which appropriately address the severity of the situation. A new draft law is currently going through the parliament which would impose a 3.2% excise tax on renewable producers.
“It’s like reducing the tariff again. It should not be allowed and it’s not building confidence,” Carlsen said of the proposed measure.
Time will tell whether necessity will force Ukraine’s government to improve its renewables policy. Foreign investors have already begun filing international arbitration claims, so the sooner this happens, the better for the country.
