Has COVID-19 struck a fatal blow for Ukraine’s green energy drive?
06 August 2020, 18:03
Even before the coronavirus pandemic hit, Ukraine’s push to use more renewables in its energy mix was under threat.
For more than a year, there had been wrangling over the level of financial incentives the government paid energy firms for investing in green power.
Then, in March, Ukraine’s first cases of COVID-19 began appearing, leading to a lockdown that has hit the country hard.
Kyiv quickly realised that supporting one of Europe’s most generous renewable energy subsidy schemes is politically difficult when thousands of people faced losing their jobs.
“The tariff is really very high and our national economy cannot pay such a high price,” said energy minister Olga Buslavets.
So the government in March began withholding a proportion of the payments for the so-called green tariffs, according to Oleksandra Gumeniuk, director of the European-Ukrainian Energy Agency (EUEA), an independent non-profit organisation. This put a lot of renewable energy firms on the edge of bankruptcy, she claimed.
In July, Ukrainian MPs passed a new law that considerably reduces the green subsidies. As part of it, the government will settle its debt over the withheld payments. Ukraine’s energy ministry says the energy firms are owed around 430 million.
“The memorandum of understanding is implemented in the new law, which gives a lot of responsibility to the government,” said Gumeniuk. “It is good. Secondly, the government has committed to pay – in full – by August its debt to green energy companies. However, we still need to see if it will be implemented.”
The newly-adopted law cuts subsidies for solar by 15 per cent and 7.5 per cent for wind generation. It will likely weaken the profitability of renewable energy by effectively lowering the price paid per unit of energy sold.
Yuri Kubrushko, a managing partner of Imepower, one of Ukraine’s leading advisory groups focused on the energy sector, said it is a tough deal for power firms. But, he added, it will help to stabilise the situation in Ukraine.
Poverty versus the most expensive green energy in Europe
The previous green tariffs system in Ukraine dates back several years. It secures producers a fixed price for renewable energy, higher than other forms of power. The subsidies were introduced to boost the proportion of renewables in the country’s energy mix.
The policy has successfully increased the green energy share from just 3.4 per cent in 2014 to 6.7 per cent in 2017. The aim was to hit 11 per cent this year, but it is unclear if this target has been reached.
“The price is the issue,” said Ukraine’s prime minister Denys Shmygal back in May. “We cannot have the most expensive green energy in Europe in a country with such poverty levels. We are all in the same boat. That cannot be true that the country loses, the budget loses, and we pay an increased price for green energy. We do not want to limit investment; we want to understand the value of this energy. This is our responsibility to the country.”
Several companies have expressed concern about the Ukrainian government withholding the payments, describing it as coercion
Geoffrey Berlin, the founder of Ukraine Power Resources, which focuses on wind power projects in the country, has said such action could blacklist Ukraine for foreign investors until the end of Ukraine President Volodymyr Zelenskyys time in office.
“As you can imagine, if such low payments continue for two or three more months, the entire sector will go into defaults and bankruptcy,” wrote Kubrushko.
“So, these were ‘gun to the head’ negotiations,” he added, arguing companies had no other option than to accept the deal.
Kubrushko said he hopes stability will be created so that the sector can get back to work. But, he added, if there were further problems with payments of subsidies then “we can invite everyone to the funeral of investment in Ukraine and not only in renewable energy”.
Gumenuk said there is also the danger investors will lose confidence in Ukraine and its government. He said given Ukraine — with its political instability and the war in the eastern regions — is a high-risk country the financial gains need to be higher enough to warrant the investment.
Grounds for optimism over Ukraine’s green energy transition?
Oleksandr Kharchenko, the managing director of the Energy Research Center in Ukraine, is more optimistic. He claimed that while the reduction in the levels of green subsidies might slow Ukraine’s energy transition, it wouldn’t be that dramatic.
Kharchenko said the consumers pay for the green tariffs on their electricity bill and that it was increasingly hard for politicians to justify higher prices.
“The Ukrainian government is not happy with the results and investors also could say that they are not happy with the results, but somewhere in the middle, they found a solution. It is good, and the results are, more or less, realistic and in line with common sense,” says Kharchenko, who noted that many Ukrainians are not ready to pay more for energy produced by renewable energy.
But Berlin argues higher tariffs are needed because the government only guaranteed to buy renewable energy for nine years. This drives the need for higher tariffs because energy producers need to earn back their investments faster. If the period was extended beyond nine years the lower subsidies might be easier to swallow, he added.
Ukraine, in line with the 2015 Paris climate change agreement, has committed to cutting its greenhouse gas emissions by 40 per cent — from 1990 levels — before 2030. Ukraine had already reduced its emissions by 64 per cent by 2016, as a result of the economic problems after the collapse of the Soviet Union. Nevertheless, some fear the cut in subsidies will hit the green energy transition. Currently, 90 per cent of Ukrainian energy comes from coal or nuclear power plants, while the rest comes from solar and wind.
The Ukrainian Renewable Energy Association previously estimated that a cut in green subsidies of about 15 per cent would result in a 50 per cent cut in profits for companies. According to Kharchenko, the changes are not so dramatic, and while the changes could affect Ukraine’s green energy transition, they will not “kill them”.
“There is always a risk that some investors would say that they don’t like this and that they are not ready to take any profit cutting,” said Kharchenko.
“Of course, we have a clear understanding that this is a risk, but on the other side, if the tariffs are cut in half, it means that while they might have had a two-year investment payback period before, half means that they will have four years now. In Europe, we know that many investors invest in 15-year payback projects.”