The Cabinet of Ministers has created a road map for compromise with green energy companies, whom the government owes more than Hr 14 billion ($530 million).
Two out of three of Ukraine’s major renewable energy associations signed a memorandum of understanding with the government on June 10. Under it, renewable companies would get less money for the energy they sell, while the state would have to repay its debts in full. Parliament must pass a law for this roadmap to become official.
“This process is extremely painful for this business, it is difficult for the state, but agreements were reached with the understanding that we are in the same boat and today neither the business nor the state is interested in destabilization and lawsuits,” Prime Minister Denys Shmyhal said at a news conference.
Many companies don’t support the memorandum. Even among those that do, support is less about agreeing with the Cabinet and more about getting some money soon to service their debts.
“We need to be realistic,” said Alper Tuncer, managing partner at Turkish solar company Emsolt. “It’s not a perfect solution but, considering the risk of alternatives… I think this was a good beginning.”
But problems in the sector are far from over. Many industry players are considering international arbitration to try to get their money, which would harm the state and torpedo investments.
On the other hand, uncontrollable growth in renewable power threatens Ukraine’s energy security, according to the State Security Service and multiple energy officials.
“To our knowledge, Ukraine is the first state in Europe that practically does not pay to electricity producers in the obvious breach of its obligations,” said Ruslan Sklepovič, CEO of Green Genius.
Renewable producers were paid less than 10% of what they are owed for each of the past three and a half months.
A best case scenario depends on parliament. Shmyhal said he would submit a bill by the end of the week. Lawmakers have three weeks to pass it before summer recess. If they don’t, companies may be stuck without revenue for months.
Several prior compromise bills have failed in parliament.
The memorandum
In 2008, Ukraine implemented a feed-in tariff (FIT), a guaranteed fixed, euro-denominated price for renewable energy. Feed-in tariffs were popular around the world to boost renewable investment.
Under the June 10 memorandum, solar tariffs for plants above 1 megawatt (MW) would be cut by 15%; plants under 1 MW would be cut by 10%. Wind tariffs would be cut by 7.5%. Solar and wind plants commissioned in 2020 would see another 2.5% reduction.
Renewable energy has big swings in output due to weather and the day-night cycle and needs balancing — i. e. energy from other sources, like coal or gas. Under the memorandum, renewable companies would be responsible for half their balancing capacity starting in 2021 and all of it starting in 2022.
The deal would also limit new plants under the tariff. Starting in August, new solar plants over 1 MW can only get a tariff by bidding for it in an auction.
For its part, the Cabinet promised to pay back all outstanding debts — 40% this year and 60% spread over each quarter of 2021.
However, Shmyhal and acting Energy Minister Olga Buslavets did not say where they would be getting this money. Shmyhal previously stated that energy costs for the population would not increase. Energy analysts believe that this is disingenuous. The money has to come from somewhere, especially with so many industrial consumers and state companies failing to pay their power bills.
While raising energy costs would not affect each citizen to a noticeable degree, there is no political will to do so, said Denys Sakva, energy analyst at Dragon Capital.
Green ambivalence
Many investors don’t like the deal. Most of them are in solar. In the European-Ukrainian Energy Agency (EUEA), which signed the deal, about 30% of member companies voted against it. The Agency called it a “responsible but forced step.”
EUEA board member Yuriy Kurbushko said that the state’s nonpayments “greatly weakened the investors’ negotiating position,” which forced many to accept a suboptimal solution.
The Ukrainian Wind Energy Association is the other major group that signed the deal.
The Ukrainian Association of Renewable Energy (UARE) did not and took some extra time on June 11 to study the memorandum. Its co-founder, Ihor Tinniy, said on June 9 that the compromise offered by the government was not tenable. Late on June 11, UARE reportedly rejected the memorandum as discriminatory and unlawful.
For starters, the companies wanted to extend the tariff by several years instead of just cutting it. But there is no extension under the memorandum. The feed-in tariff will run out at the end of 2029.
Solar producers also worry about the size of the cut. Tinniy said that a 15% cut in the feed-in tariff results in 50% cuts in revenues.
Members of EUEA and UARE account for roughly half of the country’s solar capacity, meaning that half of all solar producers didn’t even participate in the talks. An overwhelming majority of wind producers participated in the talks.
This means that, for many companies, the deal is not acceptable and many of the rest still have major reservations about it.
High tariff
Ukraine’s feed-in tariff was among the highest in the region when it was introduced. Oleksandr Kharchenko, director of Energy Industry Research Center, told the Kyiv Post that this tariff was designed with oligarchs in mind and domestic oligarchs long dominated the sector.
These included Serhiy and Andriy Kluyev’s Active Solar, which was, for a long time, the biggest renewable player in Ukraine. After the Kluyevs fled the country in the wake of the EuroMaidan Revolution in 2014, when their patron President Viktor Yanukovych fled, China National Building Materials Group bought their assets.
At Hr 2.92 billion ($110 million) in revenue for 2019, Active Solar remains the second-largest green energy company in Ukraine. It’s only behind DTEK Renewables, a branch of Rinat Akhmetov’s giant DTEK energy group, which made Hr 4.8 billion ($176.5 million) last year. DTEK had a 15% share of the renewable market in the first quarter.
However, the FIT also attracted foreign interest. Companies like Norway’s Scatec Solar, Spain’s Acciona Energy and Emsolt joined the market in recent years. Foreign businessmen like Sweden’s Carl Sturen and Johan Boden teamed up to develop wind and solar plants throughout the country.
Today, about 800 renewable companies, most of whom are in solar and wind, operate in Ukraine or have signed construction agreements. Close to a third of the sector is international companies and another large percentage is domestic small and medium enterprises. Wealthy businessmen like Akhmetov still have a significant share, but not a monopoly over the market.
Alina Sviderska, head of government relations at Scatec, said that the tariff makes sense because the company’s capital expenditures are about twice what they are in other European countries. The company usually has to build dozens of kilometers of power lines to connect its plants to the grid here, compared to hundreds of meters in more developed countries, she said.
Industry players also said that the tariff helps compensate for Ukraine’s major country risk.
Rising costs
Last year saw the most dramatic jump in renewable capacity in Ukrainian history. The country went from 2% wind and solar at the start of 2019 to over 8% in 2020.
The surge was partly due to a law that would retire the tariff for new plants after 2019 in favor of renewable auctions. The auctions were supposed to start earlier this year. But the standoff between the government and the green producers pushed them back.
Soaring green production brought soaring energy costs. Officials and energy consumers rail against high electricity prices — solar and wind is close to 9% of the total energy balance, but 25% of its cost. The amount of new renewable projects introduced in 2019 and early 2020 exceeded the amount for which the government budgeted.
The increase coincided with Ukraine’s new energy market, which many castigated as flawed and incomplete. Under the new system, state company Guaranteed Buyer is supposed to buy all renewable energy for the tariff.
But Guaranteed Buyer has a severe fund shortage. Normally, it’s supposed to get money from grid operator Ukrenergo, but it too has a deficit. Many consumers are not paying, including huge government enterprises, as well as Ihor Kolomoisky’s Privat group of companies.
The standoff between greens and the state over lowering the tariff has dragged on since September 2019. Multiple investors told the Kyiv Post that they were willing to compromise, but former Energy Minister Oleksiy Orzhel refused to listen.
Frustrated investors threatened international arbitration. Oleksiy Feliv, a partner at the Integrites law firm, said that the companies had a good chance of winning, as Ukrainian law explicitly guarantees the tariff. But Kharchenko believes that companies are kidding themselves if they think they can force a sovereign nation to pay when it does not want to.
Industry players warned that renewables are the one major source of steady foreign investment into Ukraine, now at $10 billion. Tinniy said that cutting the rates would deprive Ukraine of up to 300 million euros in taxes per year.
According to the State Tax Service of Ukraine, renewable energy producers paid Hr 93.6 billion ($3.5 billion) into the budget over the past 10 years, including Hr 19 billion in 2019.
Kyiv Post staff writer Anna Myroniuk contributed to this report.
