Ukrainian government tests trust of German investors
Ukraine has much to offer in terms of renewable energy, thanks to favorable wind and solar exposure.
And the role of the market is only going to grow in the country: Ukraine’s nuclear power infrastructure is aging, while coal power plants are highly damaging to the environment.
But despite all of these factors, skepticism prevails among German investors about whether to enter the Ukrainian market.
They are concerned over Ukraine’s decision to cuts its attractive green tariffs, guaranteed payments for renewable energy production, Robert Dunaevskiy, managing partner at German-based wind turbine engineering company Katzenbach, told the Kyiv Post on Sept. 22.
His main concern is the government’s lack of funds to pay back a massive debt of more than Hr 14 billion ($530 million) it owes to green companies.
The initial green tariff was adopted in 2009 at a rate of 0.46 euros per kilowatt — the highest price in Europe — to promote investments into renewables. After the introduction of the feed-in tariff, state agency EnergoRynok that is responsible for energy distribution, was obliged to buy renewable energy. The price was substantially above market level, making the return on investment in producing energy from solar panels, wind farms and biogas higher than in most countries.
“This model had shortcomings, and it means the government lacks money to pay for green energy projects already done by investors,” he said.
About 800 renewable companies operate in Ukraine, but the country’s renewables only account for about 4% of the country’s energy. By contrast, Germany managed to get 52% of its electricity from renewables in the first quarter of 2020, and it can offer Ukraine leading expertise on transitioning toward a renewable energy market.
To that end, both governments signed an energy partnership agreement on Aug.17 to expand cooperation.
Over the years, thanks to German investment, Ukraine launched 14 projects. Ten of them, with a total budget of 19 million euros ($22 million), have already been successfully completed.
German businesses mostly provide wind turbines made in Germany and their leading expertise, but do not provide the full installation of turbines as Ukraine is a risky market, Dunaevskiy said.
“As a market, Ukraine is interesting but (its) renewables ( make up) a risky market because it is highly political,” he said. The sector depends on the government’s political will, he added, as recent turmoil in the sector showed, compromising long-term cooperation between Ukraine’s government and investors.
Too good to be true
Bilateral cooperation in the field of renewables between Ukraine and Germany began in 2008 when Ukraine set up generous guaranteed payments, or tariffs, for renewable energy companies.
Those tariffs were supposed to attract investors and help the country move closer to achieving a 25% benchmark for renewable energy by 2035 and reduce dependency on imported fuels.
The government also pledged to buy all the energy produced. But the state, which faces a recession partially caused by the coronavirus epidemic, doesn’t have enough money to buy the green energy it promised to acquire. In February, the government announced it would reduce the green tariffs.
And it is slow in paying its existing debts to producers. The state-owned Guaranteed Buyer of Electricity, which was supposed to buy energy and redistribute it on behalf of the state, owes at least $500 million to green producers.
In order to calm the investors, the government proposed a memorandum of understanding on June 10, signed with two out of three of Ukraine’s major renewable energy associations. Under it, renewable companies will get less money for the energy they sell, while the state will have to repay its debts in full.
As a result, most green energy projects were suspended, Dunaevskiy said, and development of the market is on hold. Overall, uncertainty worried investors, he said.
“We don’t know how long this compromise will last for,” he said.
Oleksandr Kharchenko, director of the Energy Industry Research Center analytics agency, echoed this statement, adding that projects have ground to a halt.
“The dynamics are close to zero and there is no information from the government’s side,” Kharchenko said.
According to Peter Baum, an expert for Germany-based analytics agency Aurora, it is a question of adaptation.
The reduction of feed-in tariffs was not a surprise, as it happened in other countries of Europe, including Spain, Poland, Romania and Croatia. But in Ukraine, especially, Germans lack trust in the government, he told the Kyiv Post on Sept. 22.
Baum said he sees more investors looking to invest in market-driven renewables rather than in subsidized markets, prone to political changes. “When the confidence in the government is lower, investors are happier to invest in the market than trust the state,” he said.
He also said that, in contrast to Ukraine, Germany is an established system, where trust is high in the government. But return on investment is low in Germany, too.
“Germany is a bit boring in that matter,” he said.
Few ongoing projects
Ukraine is attractive for German companies because there is significant investment demand, Baum said, and some companies have learned to navigate Ukraine’s shaky politics.
German-based Notus Energy signed a memorandum of understanding with local authorities on March 4 to develop three wind farms near Odesa.
The wind farms will be located some 30 kilometers west of the city. They will be made up of 54 wind turbines scheduled for launch in 2021.
Heiner Röger, the managing director of the company, says that the green tariff changes won’t affect the project, according to a press release in September 2019.
“We would like to make use of the existing feed-in tariff, but the tender system will also provide us with a stable framework,” he wrote.
Another example is the German company De Raj Group, which signed an agreement with the Ukrainian STC Energy in September 2019.
The companies will build six solar power stations with an 88,000 megawatt capacity in Kyiv Oblast and will sell electricity to the state if the latter can afford to buy it.
Overall, Baum said Ukraine should take the opportunity to work more closely with Germany, especially to acquire its expertise.
“Germany already built thousands of renewable energy installations. Ukraine should benefit from that,” he said.
A solar power plant jointly built by Ukrainian firm Rodina Group and German engineering company Enerparc AG in Dunaivtsi, a city located 390 kilometers southeast of Kyiv, in May 2018. German companies provide components to build renewable energy installations in Ukraine and help the country achieve its goal of 25% green energy supply for its grid. But the government cannot assume the costs of Ukraine’s attractive green tariff and that deters foreign investments.