Ukrainian gov­ern­ment tests trust of Ger­man in­vestors

Kyiv Post - - BUSINESS - By Alexan­der Query query@ kyiv­post.com

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.

Risky mar­ket

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.

Adap­ta­tion

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.

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