On the night of September 21st, russia, for the first time in six months, shelled energy infrastructure facilities. Partial power outages occurred in the Rivne, Zhytomyr, Kyiv, Dnipropetrovsk, and Kharkiv regions – about 400 settlements were left without electricity.
Our long-suffering energy system has already withstood hundreds of missile and drone strikes and survived the first blackout in its history, when all the country’s nuclear reactors were shut down.
In total, about 50% of the country’s energy infrastructure is damaged. Green energy is no exception, as its share in the production structure before the full-scale war was over 13%. And the capacities were increasing.
Moreover, in 2019, Ukraine was among the top ten countries in terms of green energy development. In 2020, it was in the top five European countries in terms of solar energy development.
By the beginning of 2022, the total capacity of green energy facilities in Ukraine had reached 9,656 MW. But by autumn, almost all wind power stations and about half of the solar ones were forcibly taken out of operation. As a result, the share of renewable sources in the energy balance fell by more than half.
What is happening in the industry now, and are there opportunities not only to restore it but also to develop it further?
Prospects for green energy
Transitioning to renewable energy sources is one of the priorities in combating global warming. The topic gained active development after the signing of the Paris Climate Agreement in 2015.
Last year, the European Union for the first time received more energy from renewable sources than from burning gas, saving about 10 billion euros on the purchase of blue fuel, according to a report by the Ember analytical center.
Solar and wind energy accounted for about 22% of the electricity produced, which is a record figure. In contrast, gas combustion provided about 20%.
Due to the rejection of russian gas following the full-scale invasion of Ukraine, Europe is focused on rapidly reducing its demand.
At the same time, the region is gradually moving away from coal, particularly due to the war in Ukraine – from August 1, 2022, an embargo on coal imports from russia came into effect in the EU. The share of russian coal in the EU’s consumption structure was 45%.
These factors, Ember analysts note, should spur a rapid expansion of green energy in Europe.
The risks of investing in green energy
Industry representatives are actively discussing two crucial aspects: how to save existing projects and investments, and how to find ways for the further development of renewable energy. The economic difficulties associated with the onset of russia’s full-scale war have impacted Ukraine’s electricity market, including producers from alternative energy sources.
One evident problem is the reduction in payments by the State Enterprise “Guaranteed Buyer” to producers under the “green” tariff. From March to June this year, this level decreased by 20-25%, and in July, it amounted to 38.7%. This situation has two main causes.
Firstly, the debt of the National Energy Company “Ukrenergo” to the State Enterprise “Guaranteed Buyer” has significantly increased. The Guaranteed Buyer has not received payments from “Ukrenergo” for services related to increasing the share of energy production from alternative sources for a long time. This funds the deficit in payments under the green tariff, and this occurred due to legal disagreements, because of which the acts of service provision were not signed.
Secondly, the Ministry of Energy of Ukraine introduced restrictions after adopting Orders No. 140 of March 28, 2022, and No. 206, effective from July 5, 2022. According to these orders, algorithms were established for distributing funds from the State Enterprise “Guaranteed Buyer” among renewable energy producers, ranging from 15% to 75% of the average weighted rate of the “green” tariff. This created unequal conditions for different producers: solar and wind power producers receive 18%, biogas producers – 30%, and biomass producers – 75%. Additional payments are possible if there are remaining funds in the accounts of the State Enterprise “Guaranteed Buyer” at the end of the month.
The second factor causing concern is the notable delays in payments by the National Energy Company “Ukrenergo” for services related to load reduction. According to the legislation, renewable energy producers are entitled to compensation for unreleased and, consequently, unsold electricity if this is due to dispatch commands from “Ukrenergo.”
Due to military actions, electricity consumption in Ukraine has sharply decreased, while there has been a seasonal increase in solar power generation. As a result, dispatchers were forced to limit the production of electricity from these sources. Under normal conditions, “Ukrenergo” would have to compensate the losses of such electricity producers. However, this was not done in time, partly due to technical difficulties in accounting and calculating dispatch commands under wartime conditions and partly due to a lack of funds.
The third factor, which had a nearly devastating impact on the industry, is related to the compensation of imbalances. According to the legislation, if the actual generation of electricity deviates from the forecasted, renewable energy producers are obliged to compensate the State Enterprise “Guaranteed Buyer” for the imbalances.
An unfavorable situation arose here: on the one hand, due to the reduced demand for electricity, it was difficult for the State Enterprise “Guaranteed Buyer” to sell all the purchased electricity, forcing it to incur losses in the balancing market. On the other hand, as already noted, renewable energy producers constantly changed their generation schedules following dispatch commands. However, due to the lack of communication between the State Enterprise “Guaranteed Buyer” and the National Energy Company “Ukrenergo,” the Guaranteed Buyer considered such deviations as a basis for charging for imbalances.
Ultimately, the majority of producers under the “green” tariff were forced to allocate a significant portion of their modest revenues to compensate for the “imbalances” of the Guaranteed Buyer.
As of July 2022, the renewable energy sector in Ukraine was on the brink of a financial crisis. Electricity producers were actively negotiating with banks to restructure loans, and sometimes they even lacked the funds for current operational expenses, forcing owners to finance the operations of the stations from their own resources.
Meanwhile, government representatives, including speeches at conferences in Lugano, emphasize the importance of further developing renewable energy in Ukraine as one of the key sectors capable of attracting investments and contributing to the post-war recovery in the country. In this context, industry representatives are actively discussing two main issues:
- How to save already implemented projects and invested capital;
- How to find ways for further development of the renewable energy sector.
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Some solutions are already beginning to emerge. The Ministry of Energy of Ukraine, the National Commission for State Regulation of Energy and Utilities and the National Energy Company “Ukrenergo” are actively working on resolving current tactical issues.
Moreover, it is anticipated that “Ukrenergo” will be able to find a way to settle the debt for load management services and start making payments to the State Enterprise “Guaranteed Buyer,” which, in turn, will ensure a level of payments to renewable energy producers of no less than 30%.
Nevertheless, even with such prospects, renewable energy producers are still compelled to consider seeking alternative solutions. This is particularly relevant in the context of a crisis of confidence in the government’s policy in the field of alternative energy.
Some companies are considering the possibility of suspending the use of the “green” tariff and transitioning to competitive segments of the electricity market. These intentions became more realistic after the Verkhovna Rada adopted the bill No. 7427. In addition to the expected provisions on the prohibition of tariff increases, amendments were introduced that provide renewable energy producers with a temporary opportunity to exit the balancing group of the State Enterprise “Guaranteed Buyer.”
The reason for this trend is quite straightforward. The average “green” tariff is about 4 hryvnias per 1 kWh. Meanwhile, the average market price of electricity has recently been around 2.22 hryvnias. By selling electricity on the market, renewable energy producers can receive more than 50% of the “green” tariff, which is much more profitable compared to selling to the State Enterprise “Guaranteed Buyer.” This might not yield huge revenues, but at least it allows many renewable energy producers to survive.
On the other hand, companies that decide to temporarily abandon the “green” tariff will temporarily lose the privileges and guarantees associated with selling electricity at this tariff. They will be obliged to independently bear full responsibility for imbalances and will not receive compensation from the National Energy Company “Ukrenergo” for unsold electricity due to dispatch commands.
For those who will choose this option, the law establishes the right to resume the contract with the State Enterprise “Guaranteed Buyer” at any time and return to selling electricity at the “green” tariff.
However, it is not anticipated that a significant portion of renewable energy producers will take advantage of this opportunity, although such a scenario has long been discussed in the industry, and there are already companies selling electricity on the market.
Firstly, recent improvements in the payment discipline of the State Enterprise “Guaranteed Buyer” have actually reduced the attractiveness of the market entry for many producers.
Secondly, the business processes of most of these companies are not ready for market operations. The risk of errors in forecasting imbalances and trading activities and the associated losses is too high.
Thirdly, the level of trust in the state’s regulatory policy in the industry is low. Producers have reasonable fears that after temporarily exiting the guaranteed buyer group, the state might change the rules and not allow them to return.
Given this, in our opinion, only a small number of producers might try to use this opportunity “for learning” and attempt to work in the market. However, a large-scale refusal to sell under the “green” tariff should not be expected.
Finding ways for further development of renewable energy represents an even more complex task. State officials and industry experts are considering various options. Primarily, this includes transitioning from the “green” tariff to a feed-in premium mechanism, which involves renewable energy producers entering the market and receiving an additional payment over the market price of electricity.
Secondly, the possibility of applying mechanisms such as certificates of origin (otherwise known as “green” certificates) and contracts for difference is being considered. In Ukrainian legislation, they are implemented as tools to ensure price stability for electricity.
Nevertheless, all these options face two issues for which there are still no definitive answers.
The first challenge is restoring investors’ trust in the Ukrainian Government’s renewable energy sector, including the Ministry of Energy and the National Commission for State Regulation of Energy and Utilities (NCSREU). Since early 2019, authorities have repeatedly failed to fulfill their commitments to investors, reducing the market participants’ willingness for dialogue and acceptance of proposals.
Currently, the state has an opportunity to “elegantly” exit this situation and demonstrate its readiness to be accountable to investors. To this end, a long-term proposal, which investors have been suggesting since 2019, is being considered: converting the debt of the State Enterprise “Guaranteed Buyer” into state-guaranteed securities. Such securities could be used by investors for restructuring debts with banks or sold to attract funds for station maintenance and business development.
This will serve a dual purpose: firstly, it will be an example of the state’s responsible treatment of investors and readiness to find mutually beneficial solutions in times of crisis. Secondly, it will allow the State Enterprise “Guaranteed Buyer” to shed its status as a perpetual debtor failing to meet its contractual obligations.
The second aspect involves developing a competitive electricity market in accordance with European directive requirements. All mechanisms that can attract investors to the electricity market depend on transparency, clarity of rules, market prices, and minimal state intervention.
To achieve this, the state must provide investors with a clear plan of action, including measures such as ending the cross-subsidization of consumers, implementing mandatory standards of European legislation, including REMIT and state aid regulation, as well as reforming the NCSREU and the Antimonopoly Committee of Ukraine.
Overall, the struggle of renewable energy producers for survival in the industry is not yet over. In July, consolidated efforts of market players brought their first results. However, they face the challenging task of protecting the industry’s interests, which requires an active stance and, in some cases, strength in dialogue with the government.
Apart from this, the future undoubtedly belongs to a competitive electricity market. Therefore, companies that decide to seize this opportunity today and begin adapting to market operations will gain an advantage over competitors in the near future and will be able to successfully implement new projects.