After cutting the green tariff, once Europe’s highest guaranteed price for renewable energy producers, Ukraine is still struggling to pay it and cover its mounting debt of almost $1 billion.
If the debts keep piling up, renewable developers say international arbitration is around the corner. So is loss of investor confidence and Ukraine’s failure to take part in Europe’s Green New Deal.
“Right now, we have the coronavirus crisis, falling payments, we have market reform — these are objective problems why the Ukrainian government has run into problems with payments,” said Oleksiy Ryabchyn, adviser to the deputy prime minister on European integration. “Regardless, we have to meet our obligations.”
But even after the cut, the expensive green tariff is a big drain on state companies, industrial consumers and, starting next year, the budget.
Controversially, the tariff is paid in euros, which went from being worth Hr 26.5 at the start of the year to Hr 33.3 today, making it even harder for the government to keep up payments.
Others are having the same problem. France announced it is going after its solar sector’s “excessive profitability.” Spain, Italy and the Czech Republic have experienced similar situations.
But the inconsistent mess that is today’s energy market in Ukraine is truly a wonder. “Right now, there’s a situation that’s murky, the rules are practically absent and everything is regulated in manual mode,” said Oleksandr Kharchenko, director of Energy Industry Research Center.
There are several solutions. Parliament offer guarantees to let state grid operator Ukrenergo borrow money. The Ministry of Finance can also approve the sale of government bonds to retire the debt.
And next year, energy officials are supposed to change Ukraine’s public service obligation, giving state electricity producers like Energoatom more freedom to sell energy at market rates.
But there are obstacles in the way.
Legal challenges
Some green developers are waiting for the government to sort out the problem.
“We see improvements in the situation with payments of the Guaranteed Buyer compared to March-July,” DTEK Renewables CEO Maris Kunickis wrote in a statement. “But the future of renewable energy in Ukraine is still in question. We expect stable and predictable actions on the part of the State in the field of renewable energy.”
Others have already launched legal challenges.
Three industry players confirmed that multiple companies have filed trigger letters — notices telling the government that they want to start international arbitration. The players did not reveal the names of the companies.
In more public news, a few dozen companies have sued Guaranteed Buyer, the state company that is obliged to buy power from renewable developers. The companies are collectively demanding nearly $18 million.
These include Oril-Leader and Vynnytsia Poultry Farm, which run two biogas plants; Vita Solar, which belongs to Canadian developer TIU Canada; as well as a group of companies under the aegis of Ihor Tynnyi’s Ukrainian Association of Renewable Energy.
The companies will probably win, said Dmytro Sydorov, an energy expert at ExPro. But it doesn’t mean that they will get their money.
Tynnyi, a green energy entrepreneur, said that the lawsuits are meant to establish how much the government owes the companies. This amount can be used in later arbitration cases.
“Guaranteed Buyer doesn’t have enough to pay all of us (but)… losses have to be established,” said Tynnyi. “Later, there will be lawsuits against the Ukrainian government.”
If arbitration begins, it will be drawn out and messy. Spain, which retroactively cut its own green tariff a decade ago, lost 825 million euros to date and went through a renewable investment crash, following an unsustainable boom, not unlike Ukraine’s.
On the other hand, the Czech Republic won most of its own arbitration disputes after imposing a retroactive tax on solar plants.
In some ways, Ukraine’s situation resembles that of France’s. In recent weeks, President Emmanuel Macron’s government proposed an amendment to the 2021 budget to cut tariffs to a more “reasonable” level. The tariffs it pays for solar plants installed 10–15 years ago is much higher than it pays for newer contracts.
Parliamentary energy committee head Andrii Gerus said that he is not too worried about arbitration, because Ukraine stands a good chance of winning.
Kharchenko said that as far as he can see, no energy ministry authorities are worried about arbitration. The results will only arrive years from now, when most of them will probably not even be in office.
Another case is pending in front of the Constitutional Court of Ukraine after 47 lawmakers urged it to review the green tariff. Given the court’s recent decisions, it’s possible that it may also rule that the green tariff is unconstitutional, causing the government to scramble for solutions.
Gerus believes that if the tariff is struck down, the government will find some other way to reinstall it without going through parliament.
Ryabchyn said it is important to maintain the trust of foreign investors in all sectors, most of whom are eyeing the renewable situation. Finding a resolution would also be important for cooperating with the EU.
Where’s the money?
The green tariff was the highest in Europe. At first, it was a cash cow for oligarchs. Later on, it arguably did its job. Ukraine’s energy went from less than 2% to almost 10% renewable in a year and a half and many investors were foreign companies.
But the growth was unsustainable, due to its generosity, its euro denomination and Ukraine’s deeply problematic energy market. Starting late last year, Guaranteed Buyer hasn’t been able to pay the tariff.
“The main reason for the crisis of non-payment… is the rapid growth of green energy in the first half of 2020,” the energy ministry wrote in an email. “The crisis was also caused by the inconsistency of the tariff for electrical transmission, with the amount of required payments to increase the share of energy production from alternative sources.”
Under a reluctant compromise, which became law on July 21, solar tariffs for plants above 1 megawatt were cut by 15%; plants under 1 megawatt were cut by 10%. Wind tariffs were cut by 7.5%. Solar and wind plants commissioned in 2020 saw another 2.5% reduction.
Renewable energy has big swings in output due to weather and the day-night cycle and needs balancing. Under the law, renewable companies are responsible for half of their balancing capacity starting in 2021 and all of it starting in 2022.
Starting in August, new solar plants over 1 megawatt can only get a tariff by bidding for it in an auction.
For its part, the Cabinet of Ministers promised to pay back all outstanding debts — 40% this year and 60% spread over each quarter of 2021.
For a few months, the plan seemed to be working. Guaranteed Buyer covered 100% of the green tariff for August but September’s payment was delayed. For October, Guaranteed Buyer paid out just 30%. Projections are that it will only be able to pay about half.
Problems and solutions
“The situation in Ukraine is not unique,” said Ryabchyn. “European Union countries have also run into these problems.”
Ukraine’s attempts to cover the shortfall have been scattershot. For example, the payments starting from August had to rely on a one-time cash infusion of Hr 779 billion from Ukrenergo.
Starting next year, no less than 20% of the tariff has to come out of the budget, according to the July law. But the latest version of the 2021 budget still has no allocation for the tariff.
The energy ministry proposed a number of non-tariff methods to balance the situation, including the provision of guarantees for Ukrenergo to obtain credits from international institutions.
This week, parliament has passed a law that provides guarantees that will help Ukrenergo borrow money.
The Ministry of Finance could also approve the sale of government bonds to cover part of the debt.
“Non-tariff instruments for regulating the situation on the electricity market will help avoid a sharp increase in the tariff for electricity transmission,” the ministry wrote.
Stomping out market manipulation is another factor. Energy traders can buy discounted energy on two-way deals and resell it on the bilateral market or worse, put energy on sale that they don’t actually have, before quickly buying it up on the intraday market.
The head of the energy regulator, Valeriy Tarasyuk, told Interfax-Ukraine that manipulation of this sort is no longer possible. After having reviewed dozens of energy companies for wrongdoing, the regulator was planning to fine 40 of them for a total of Hr 16 million but later reversed course, saying “we don’t want to create hostile relationship.”
“For Guaranteed Buyer, market manipulation leads to a fall in prices on the day ahead market or the displacement of Guaranteed Buyer to the balancing market, leading to a decrease in electricity sales prices and a decrease in funds at the company’s disposal,” wrote Denys Sakva, energy analyst at Dragon Capital.
Kharchenko said manipulation of this sort is frequent and is a function of Ukraine’s patchy, rule-less and incomplete market.
Changing fundamentals
And this incompleteness, on top of Ukraine’s market-twisting cross-subsidy, is the root of the problem.
Households’ power bills are kept artificially low at the expense of non-residential consumers in a way that limits how state energy producers can sell their electricity.
For example, Energoatom has to sell 50% of its electricity to Guaranteed Buyer at fixed rates. Before August, it had to reserve 80%.
The European Energy Community has been pressing Ukraine to adopt a new form of public service obligation known as a financial PSO, where companies can sell energy how they want, and then use part of their revenue to cover the population’s costs.
Ukraine is planning to introduce a financial PSO starting on Jan. 1, but the energy regulator has not yet released a plan of what it will look like. The ministry’s ongoing feud with Energoatom may interfere by making the ministry more reluctant to make the change, according to Sydorov.
Resolving the situation for the greens would likely involve getting rid of the cross subsidy, which would make Ukrainians have to pay higher energy costs, a deeply unpopular move that politicians are reluctant to make.
It’s especially tough now, when half the country is projected to sink into poverty due to the coronavirus crisis that has no end in sight yet.
