Renewable energy sources policy will be a test if Ukraine’s future is renewable
Yanez Kopach, ex-director of the Energy Community Secretariat
Ukraine has had a chronic problem with the rule of law in the past. With the war, things got worse, despite the tolerance of the national population and the Western public due to the circumstances of the war. The war will end sooner or later, but the problem of the rule of law will remain and tolerance will be much less.
Post-war reconstruction will rely primarily on private investment. All Western allies have problems with rising public debts, rising energy prices and the coming recession and there won’t be much appetite to throw big public money at reconstruction Ukrainian on top of that. Private investors will only come if Ukraine offers sufficient legal certainty. Before the war, the stock of foreign direct investment (FDI) per capita in Ukraine was less than 1,400 USD. In neighboring Poland, that number was almost five times higher. Scientific evidence shows that in the absence of public money, FDI inflows precede gross domestic product growth and not the reverse.
In the past, most FDI in Ukraine came from the renewable energy sources (RES) sector. High feed-in tariffs attracted many investors starting in 2019. There was a reason: despite traditional Ukrainian high investment risks like high interest rates, corruption and non-functional courts, there was a new legal certainty thanks to a mechanism for buying back the electricity generated via the state-owned guaranteed buyer in the law on alternative energy sources and collecting the RES surcharge via the transmission system operator Ukrenergo offering a guarantee of uninterrupted liquidity. Current high electricity market prices allow new investments without feed-in tariffs, but old obligations exist and must be met.
There was strong emotional and interest-driven opposition among several Ukrainian politicians and officials to the fulfillment of obligations to investors taken on by the feed-in tariff regime already in 2019. After interventions by the IMF, the European Commission, the Energy Community Secretariat and several Western states, the situation almost normalized. Only very few investors launched international arbitration against Ukraine, the majority agreed to wait a bit. There was still opposition to meeting legal obligations, managed mainly by the energy regulator, NEURC, which did not include an appropriate surcharge in the transmission tariff in 2021, but the state was almost fully meeting its obligations until in January of this year. The rule of law, i.e. compliance with legal obligations, has been more or less saved once again.
The wartime circumstances have considerably reduced the liquidity of the electricity sector. Many customers did not pay or ceased to exist. Investors in renewable energies were one of the first victims. The Russian army occupied wind turbines and photovoltaic fields, some wind turbines were stopped due to their location next to hostilities. In March 2022, the Ministry of Energy, without any legal basis, limited the level of settlements with RES producers to 15% for producers producing electricity from solar energy and 16% for producers producing electricity from wind energy and obliged the guaranteed buyer to direct the balance of funds to settlements with RES, and not to pay Energoatom and Ukrenergo. The result was that RES producers received around 30% of their applications, slightly more in July. NEURC has invented a special way of redistributing RES generators’ money through a creative calculation of fines for imbalances where RES generators are guilty if the guaranteed buyer fails to sell their electricity in a market. And sometimes he doesn’t sell half of it. In addition, the NEURC has artificially fixed the exchange rate for feed-in tariff recipients as they have to repay their bank loans in foreign currency. Only this decision, completely against the law, reduced feed-in tariff payments by at least a fifth.
No one asks RES investors how they fulfill their obligations to banks. Ukrenergo stopped paying the guaranteed buyer for RES generators, despite an obligation and sufficient funds from transmission tariffs, EBRD and EIB loans and lucrative electricity exports, which the EU has authorized to help with the liquidity situation in the Ukrainian electricity sector. The market value of one MWh from Ukrainian RES producers, when exported to the EU, is four times higher than the feed-in tariff value.
The reason for Ukrenergo’s non-payment is apparently that they are saving money to fund inefficient state-owned power plants to buy coal. Ukrenergo additionally purchases reduction services from RES producers but does not pay for them. State interventions in the distribution of market players’ money are returning on a large scale and “national security issues” have become a very non-transparent way to materialize other interests against RES investors, among others.
All these restrictions were not enough. The head of the energy regulator, NEURC, Mr. Uschapovskyi recently started talking about the initiative to cancel the feed-in tariff during martial law due to lack of funds. As explained, sufficient funds exist, but there are great interests in using them differently. Canceling the feed-in tariff would be what is called an economic nuclear bomb.
Back to the beginning: RES producers can still sue Ukraine for their unpaid feed-in tariff, now or after the war, even if they go bankrupt in the meantime. Ukraine will have to think about how to attract FDI since it is and most likely will be the riskiest economy in Europe and everyone will be watching what happened to the largest foreign investment portfolio. The current environment hostile to FDI may in the future only attract foreign investors who are very risk- and subsidy-seeking. This is exactly the future killing situation that only the enemies of Ukraine want.
Dr Janez Kopač, former Director of the Energy Community Secretariat