Ukraine’s green tar­iff at­tracts in­vestors, yet hurts econ­omy

Kyiv Post - - Business Focus - BY OLEKSIY SOROKIN [email protected]

In re­cent years Ukraine’s green tar­iffs have at­tracted in­ter­na­tional in­vestors and have en­gen­dered a lot of pos­i­tive hype from in­vest­ment pro­mo­tion agen­cies in Ukraine. But the tar­iffs might also place a ma­jor fi­nan­cial bur­den on the state.

In 2015, Ukraine adopted the am­bi­tious goal of pro­duc­ing 25 per­cent of its en­ergy from re­new­able sources by 2035. The green tar­iff, which is higher than in any other Eu­ro­pean coun­try, was meant to at­tract in­vestors into the sec­tor to help achieve the govern­ment’s goal. How­ever, the in­crease in en­ergy out­put from re­new­able sources has mainly been ben­e­fi­cial for large play­ers. The ben­e­fits also are fi­nan­cially un­sus­tain­able for the coun­try in the long run, as the price at which the govern­ment buys re­new­able en­ergy is pegged to above-mar­ket prices.

A new law on green auc­tions is cur­rently in limbo in par­lia­ment. But if adopted, it will cre­ate a fairer mar­ket that doesn’t just ben­e­fit mainly large com­pa­nies.

Green tar­iff

Oleksiy Fe­liv, a man­ag­ing part­ner at law firm In­tegrites, ex­plains that while the ini­tial green tar­iff was adopted in 2009 at a rate of 0.46 eu­ros per kilo­watt to pro­mote in­vest­ments into re­new­ables, prices were set to drop ev­ery five years. Af­ter the in­tro­duc­tion of the feed-in tar­iff, state agency En­er­goRynok, which is re­spon­si­ble for en­ergy dis­tri­bu­tion, was obliged to buy re­new­able en­ergy at the high­est price in Europe.

Fe­liv says that the price was sub­stan­tially above mar­ket prices, mak­ing the re­turn on in­vest­ment in pro­duc­ing en­ergy from so­lar pan­els, wind farms and bio­gas higher than in most coun­tries.

Ac­cord­ing to Eco­nomichna Pravda, when Vik­tor Yanukovych was pres­i­dent, 85 per­cent of Ukraine’s so­lar en­ergy was pro­duced by Ac­tiv So­lar, a com­pany owned by Ser­hiy Klyuyev, a close ally of the ousted pres­i­dent, due to a pro­vi­sion oblig­ing com­pa­nies to use Ukrainian-made equip­ment. This ef­fec­tively closed the mar­ket to for­eign in­vestors.

Olek­san­dra Gu­me­niuk, head of the Eu­ro­pean Ukrainian En­ergy Agency, says that af­ter 2015, that re­quire­ment was can­celed.

The tar­iff it­self is set to de­crease each year, with the price for plants open­ing in 2019 stand­ing at 15 euro cents per kilo­watt for so­lar en­ergy, 10 euro cents per kilo­watt for wind farms, and 10–17 euro cents per kilo­watt for hy­dropower. Plants put into op­er­a­tion this year will en­joy the green tar­iff un­til 2030.

The feed-in tar­iff ex­ists in most Eu­ro­pean Union coun­tries, says Gu­me­niuk, yet the gap be­tween the cost of pro­duc­tion and the tar­iff by which com­pa­nies sell elec­tric­ity is much less, with Ger­many hav­ing a two times lower so­lar panel rate of 8 euro cents per kilo­watt.

Free cash

“Be­cause the tar­iff is so high we see that so­lar pan­els are be­ing built even where it isn’t eco­nom­i­cally jus­ti­fied,” Fe­liv says.

For ex­am­ple, Slavu­tych, a city of around 25,000 res­i­dents that’s 150 kilo­me­ters north of Kyiv, is aim­ing to crowd­fund the $300,000 con­struc­tion cost of a pho­to­voltaic power sta­tion which will cover the needs of the city, while earn­ing prof­its for res­i­dents that are will­ing to in­vest.

How­ever, Slavu­tych is rather an ex­cep­tion. Mostly the cur­rent mar­ket is run by large cor­po­ra­tions will­ing to in­vest a lot of money as well as by those closely af­fil­i­ated with the law­mak­ers that in­flu­ence the green tar­iff.

Big play­ers dom­i­nate

“We have an up­side-down sys­tem in which the field is dom­i­nated by large com­pa­nies, whereas in Europe it is the small pro­pri­etor­ships that ben­e­fit,” says Oleksiy Ryabchyn, head of the par­lia­ment’s sub­com­mit­tee on en­ergy ef­fi­ciency and a rep­re­sen­ta­tive of the 20-mem­ber Batkivshch­yna fac­tion.

In 2016, the China Na­tional Build­ing Ma­te­rial Com­pany, fully-owned by the Chi­nese govern­ment, bought so­lar plants and wind farms owned by Klyuev. The cor­po­ra­tion now con­trols 10 plants with a to­tal out­put ca­pac­ity of 300 megawatts, be­ing the largest for­eign in­vestor into the field.

TIU Canada has in­vested over $100 mil­lion into two new so­lar sta­tions in Odesa Oblast, while Nor­way’s NBT is plan­ning to in­vest $400 mil­lion in what will be­come, when built in late 2019, Ukraine’s largest wind farm, cit­ing “at­trac­tive” green tar­iffs as the main rea­son for their in­vest­ment.

But the largest ben­e­fi­cia­ries from the feed-in tar­iff are large Ukrainian com­pa­nies, in­clud­ing those con­trolled by Ukraine’s rich­est per­son, Ri­nat Akhme­tov, whose net worth passed $6 bil­lion on Feb. 1, ac­cord­ing to Bloomberg.

DTEK Re­new­ables, a DTEK sub­sidiary cre­ated in April 2018 as a branch of Akhme­tov’s en­ergy hold­ing, in mid-Jan­uary this year be­came the coun­try’s largest sin­gle pro­ducer of so­lar en­ergy, af­ter the com­pany launched a 200-megawatt so­lar plant near the city of Nikopol, 650 kilo­me­ters south-east of Kyiv. DTEK Re­new­ables is plan­ning to ex­pand even more as its re­new­able en­ergy ca­pac­ity is planned to reach 1 gi­gawatt by the end of 2019.

Oli­garchs, law­mak­ers

Other no­table Ukrainian busi­ness­peo­ple that have in­vested in re­new­able en­ergy and col­lected green tar­iff ben­e­fits are: oli­garchs Yuriy Kosyuk and Va­syl Kh­mel­nyt­sky, and Vi­taliy Antonov, the owner of the OKKO chain of gas sta­tions.

While the mar­ket’s prof­itabil­ity is largely sus­tained by a high feed-in tar­iff, a num­ber of Ukrainian par­lia­men­tar­i­ans, govern­ment of­fi­cials and peo­ple con­nected with them also seized the op­por­tu­nity to ben­e­fit from sell­ing green en­ergy to the state agency En­er­goRynok at above mar­ket prices.

As of Jan. 1, over 300 com­pa­nies re­ceived the green tar­iff. The list in­cludes com­pa­nies owned by Stepan Ivakhiv, a mem­ber of par­lia­ment from the 18-mem­ber Volya Nar­ody fac­tion and a co-owner of Con­tin­uum, a com­pany that op­er­ates a chain of gas sta­tions un­der the brand WOG.

Yu­lia Ly­ovochk­ina, a par­lia­men­tar­ian from the 38-mem­ber Op­po­si­tion Bloc and the sis­ter of Ser­hiy Ly­ovochkin, for­merly head of Yanukovych’s pres­i­den­tial ad­min­is­tra­tion, owns six com­pa­nies with a to­tal out­put ca­pac­ity of 30 megawatts of clean en­ergy, re­ceiv­ing the feed-in tar­iff un­til 2030.

Maxim Efi­mov, a mem­ber of the 138-mem­ber Petro Poroshenko Bloc, has the largest stake among all mem­bers of par­lia­ment with seven wind farms, four of which are lo­cated in Rus­sian-con­trolled ter­ri­tory, with a to­tal ca­pac­ity of over 200 megawatts.

Ac­cord­ing to Eko­nomichna Pravda, a num­ber of mem­bers of par­lia­ment have stakes in re­new­able en­ergy ei­ther through rel­a­tives or busi­ness part­ners. Among them are the Dub­nevych broth­ers — Yaroslav and Bo­hdan — of the Petro Poroshenko Bloc, who were in­volved in a scan­dal with two power plants in Lviv Oblast, al­legedly cost­ing the state Hr 305.2 mil­lion ($11 mil­lion).

Oth­ers in­clude Vik­tor Ro­manyuk and Yuriy Voznyk from the 81-mem­ber Peo­ple’s Front, Va­syl Pe­tovka from Volya Nar­odu, Yuriy Chizh­mar from the 21-mem­ber Rad­i­cal Party, In­de­pen­dent law­mak­ers Yuriy Levchenko and Olek­sandr Livyk, Va­leriy Ly­bi­nets, Mykhailo Dovbenko and Olek­sandr Dom­brovskyi from the Petro Poroshenko Bloc. Dom­brovskyi is the deputy head of the par­lia­ment’s en­ergy com­mit­tee.

Rule­book changes

The Eu­ro­pean Bank for Re­con­struc­tion and De­vel­op­ment, an in­ter­na­tional fi­nan­cial in­sti­tu­tion, which, among other func­tions, gives out loans to com­pa­nies look­ing to pro­duce re­new­able en­ergy, re­leased a state­ment in mid-Novem­ber that it will hold off from fi­nanc­ing any new so­lar projects un­til the re­new­ables mar­ket be­comes more trans­par­ent.

An­ton Usov, the bank’s spokesper­son, ex­plained that the EBRD is per­suad­ing Ukrainian par­lia­men­tar­i­ans to adopt the so-called “green auc­tions” law that would make prices more com­pet­i­tive.

“The green tar­iff served its pur­pose, now we need clear pric­ing, and to main­tain the de­mand we need to change the rule­book,” Usov says.

The EBRD fears that with a ris­ing per­cent­age of en­ergy com­ing from re­new­ables, main­tain­ing a high feedin tar­iff will put a heavy bur­den on Ukraine’s econ­omy.

A sim­i­lar prob­lem oc­curred in Spain, ac­cord­ing to Ryabchyn, where its high feed-in tar­iff at­tracted in­vestors, even­tu­ally rais­ing the per­cent­age of re­new­able en­ergy gen­er­a­tion to a level that the govern­ment could not sus­tain fi­nan­cially.

“With the launch of green auc­tions we’ll wit­ness an eco­nom­i­cally jus­ti­fied price, be­cause com­pe­ti­tion will drag the price down,” says Fe­liv.

Ryabchyn ex­presses a sim­i­lar opin­ion, stat­ing that the green tar­iff was worth it, as it at­tracted in­vestors into re­new­ables, but the time for a com­pet­i­tive mar­ket has come.

“We now have to tran­si­tion to a phase where com­pe­ti­tion will dic­tate the price,” he says.

The pro­posed law, which passed the first hear­ing on Dec. 20 2018, al­lows mul­ti­ple com­pa­nies to bid for the right to sell their en­ergy to En­er­goRynok. The com­pany that of­fers the low­est price to the state will sign a 20-year con­tract. Con­cern­ing those al­ready col­lect­ing the feed-in tar­iffs, the pro­posed leg­is­la­ture will de­crease the tar­iff by 20 per­cent for so­lar en­ergy and 10 per­cent for wind farms in 2020, with fur­ther grad­ual de­creases un­til 2030.

But the green tar­iff would be kept for small pro­duc­ers such as Slavu­tych. The law is meant to cre­ate fair com­pet­i­tive pric­ing for large com­pa­nies that are cur­rently mak­ing ex­cess prof­its yet help small lo­cal pro­duc­ers main­tain sus­tain­abil­ity, ac­cord­ing to ex­perts.

Gu­me­niuk ex­pects that the new green auc­tion law will make the re­new­ables mar­ket more pre­dictable. She ex­plains that cur­rently there is no penalty on those who do not match their de­clared en­ergy out­put. But if the new law passes, com­pa­nies will be fined if they do not meet their gen­er­at­ing tar­gets, and the law would also set a dead­line for com­pa­nies to com­plete their so­lar plants within a two-year term.

Ac­cord­ing to Fe­liv, the balanc­ing tax for those us­ing the green tar­iff starts in 2020 and will in­clude a 10 per­cent fine for those pro­duc­ing green en­ergy and not meet­ing their de­clared tar­gets, with the fine in­creas­ing by 10 per­cent each year un­til 2030.

None­the­less, while mem­bers of par­lia­ment are dis­cussing the law and over 200 amend­ments that were sub­mit­ted af­ter the first hear­ing, large com­pa­nies are speed­ing up the con­struc­tion of new so­lar panel ar­rays and wind farms to qual­ify for the green tar­iff while it lasts.

“While com­pa­nies like DTEK had plans for mul­ti­ple years ahead, now they are in a state of emer­gency try­ing to put ev­ery­thing into op­er­a­tion this year to ben­e­fit from the green tar­iff,” says Ryabchyn.

DTEK’s Nikopol so­lar power sta­tion launched in mid-Jan­uary be­com­ing the largest pho­to­voltaic sta­tion in Ukraine. DTEK is owned by the rich­est Ukrainian oli­garch Ri­nat Akhme­tov (Cour­tesy)

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