Chairman of Ukrainian Association of Renewable Energy Oleksandr Kozakevych: If we destroy the investment climate now, no one will come to Ukraine

Chairman of Ukrainian Association of Renewable Energy Oleksandr Kozakevych told about causes of non-payments situation on the electricity market and explained how to solve it. Find out the answers in his author’s column for Kosatka.Media.

A high feed-in tariff is more often called the main problem on the electricity market. But let's remember that the key reason for this tariff is the high risks of investing in the state. That is why investors are forced to lay a fairly high level of capital return – about 15-20%. In Europe, where investors are confident in the return of their investments, this figure is about 6-7% and about 9% in Poland. Loans for such a business are issued at 7-10% per annum in Ukrainian state banks, while in developed European countries you can borrow money at 1-2%. In addition, renewables are supported there, as a rule, during 20 years, and such support does not end in 2030, as in Ukraine. Conditions for long-term investments in the EU make it possible to sell electricity cheaper.

Last year, the number of commissioned renewables doubled compared to previous years. Accordingly, the load on the Ukrenergo tariff, which compensates a part of a feed-in tariff, increased. The tariff was revised several times in 2019. In July, when the market was launched, it was UAH 0.34. But initially, it contained the wrong volumes of electricity transmission. The tariff was reduced to UAH 0.11 in September and it was unchanged till the end of the year. On average, as the former head of NPC said, over the past six months the tariff was UAH 0.17. It was fixed at the level of 0.155 kopecks from January 1. The tariff was reduced as it was expected that additional funds for payments of feed-in tariffs would be received by SC Guaranteed Buyer from the resale of electricity of Energoatom and Ukrhydroenergo to the day-ahead market as part of fulfilling PSO for the population. This was supposed to allow SC Guaranteed Buyer both to cover losses from the sale of electricity to universal service providers for the population at fixed low prices, and partially to compensate for a feed-in tariff from the remaining profit.

But the price of electricity on the DAM was below the forecast. Guaranteed Buyer did not make a profit and was even forced to sell electricity on the market during several hours, several days in a row, cheaper than the cost of buying from Energoatom – cheaper than 57 kopecks because of artificial manipulations. This is the reason of Guaranteed Buyer’s debt to Energoatom. NNEGC sued Guaranteed Buyer and limited the sales of its own electricity to the compane.

As a result, funds from one tariff of Ukrenergo are not enough to compensate the producers of renewable energy, while Guaranteed Buyer does not have a sufficient level of profit from other obligations. NEURC obliged Ukrenergo to pay UAH 1.4 billion to Guaranteed Buyer in January and another UAH 2.6 billion in February. Obviously, NPC does not have this money. UAH 4 billion is almost half of entire UAH 8.6 billion that Ukrenergo was supposed to receive for the year. NPC can pay renewable energy produces no more than UAH 750 million per month from a dedicated source. If the company is obliged to pay UAH 4 billion in 2 months, a deficit of UAH 2.5 billion arises.

As a result, debts to renewable generation occurred. It is about UAH 3 billion since the beginning of the year. The solution of this situation is quite simple: it is necessary to increase the tariff of NPC Ukrenergo. Then the company will have money to fulfill its obligations. Yes, raising the tariff is not a nice thing. NEURC does not dare to take such measures. This can be understood, we saw rallies near the buildings of Ukrenergo and NEURC last year. But the law must be the law for everyone. And the activity of the most important company in the electricity market on a break-even basis is the main priority.

Prior to the launch of the market, NEURC predicted the required wholesale market price for the second half of 2019 at the level of UAH 1.72 excluding VAT. This price includes both the cost of electricity production and the tariff of Ukrenergo. In fact, when the market was working, in March such a price averaged UAH 1.51. This is 15% less than planned at the end of 2019. Even if the tariff is doubled, UAH 1.67 will be received. And it is still lower than the forecast of the previous year.

Regarding the forecast for this year, the tariff is 15.5 kopecks. It was formed on the basis of the price forecast on the DAM in the amount of UAH 1.55. But the DAM prices have declined, therefore, the tariff level is no longer enough to bridge the gap between forecast and real prices. In other words, Guaranteed Buyer does not receive money from the sale of electricity, which should have been paid to renewable energy producers and Ukrenergo cannot compensate for it at the current tariff. As prices on the free market are set on the basis of competition, there is only one way left for the state to fulfill its obligations to investors in renewable energy sector — to increase the tariff of Ukrenergo.

Another pressing issue is that the business is allegedly delaying the process of reforming renewable energy market. Yes, investors agree with the need to reform the market, and Yes – the process is very delayed. However, we urge to accelerate this process. But it should not infringe on the rights of investors and drive them into colossal losses.

Specialized associations offered many options for resolving this situation. We understand that the economic situation in the state is tense and continues to deteriorate, the market may not be able to handle it. Therefore, investors are ready to consciously reduce feed-in tariffs, despite the fact that this will reduce the profitability of their projects. But the government wants to reduce payments even more, and actually stop building new facilities. At the same time, it is proposed to disconnect those, who will refuse to restructure the tariffs, from the grid without compensation for electricity that they did not release to the grid due to such a disconnection. It will not be easier for those who agree with the restructuring proposal – they can be disconnected for free no more than 200 hours a year, which will also mean losses for investors, albeit smaller ones.

It must be understood that the complete deficit of Guaranteed Buyer eliminates neither our proposals nor those received from the ministry. The solution must be balanced and comprehensive. There is a need in a mechanism which will make the investor feel protected. At the same time, let's not forget that over the past two years, investments in the renewable energy sector amounted to about €5.5 billion. And the Ministry of Energy and Environmental Protection presented the draft concept of “green” transition of Ukraine by 2050, when the share of renewable energy should reach 70%. In other words, Ukraine has adopted a policy of greening the energy sector, which investors are ready to support.

Perhaps “green” auctions should have been implemented much earlier. Perhaps a feed-in tariff in 2019 should have been lower. But this does not mean that everything can be radically changed overnight and the investment climate, the flow of investment from around the world can be saved at the same time. And not only renewables need investments. It is necessary to develop balancing capacities, because Ukrainian ones have long been outdated. Coal-fired thermal stations have worked out their resources. But, if we destroy created favorable conditions for investment – no one will look towards Ukraine for many years. 

Tags: The Cabinet of Ministers, contracts, renewable energy, tariffs, solar energy, wind energy, NNEGC "Energoatom", legislation, electricity, EU, Ukrenergo, feed-in tariff, electricity market, foreign affairs, Ukrhydroenergo, Guaranteed buyer, debt, renewables, PSO, investments, investors, power system balance, electricity transmission, transmission system operator

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