In order to avoid a global climate catastrophe, it is necessary to keep the increase in the average global temperature “below 2 ° C” in the current century. The use of renewable energy sources (RES) is the cornerstone of an acceptable climate solution.
In 2020, the world invested an unprecedented $501.3 billion in low-carbon assets, including $303.5 billion in new renewable energy capabilities with proven record-breaking solar (132 GW) and wind (73 GW).
And this is just the beginning of the global shift from minerals to renewable energy. The necessary reduction in the global average temperature rise will require massive investments, from $78 trillion to $130 trillion by 2050.
In 2050, wind and solar energy will provide 56% of the world’s energy mix. Leading countries will achieve indicators up to 80%.
In Ukraine, from 2015 to 2019, green energy has become one of the few industries that can be considered successful within the Ukrainian economy and on a global scale.
After the signing of the EU-Ukraine Association Agreement in 2014 and the ratification of the Paris Climate Agreement in 2016, Ukraine committed itself to bringing the energy system into compliance with EU standards. This cycle is reflected in the Energy Strategy of Ukraine (ESU) until 2035, according to which the share of renewable energy in Ukraine’s energy balance should increase from 11% at the moment to 25% by 2035.
The adoption of amendments to the Green Tariff Law in 2015 and the Electricity Market Law in 2017 enhanced investor confidence in the state’s green energy subsidy system. The total volume of direct investment in renewable energy in Ukraine since the introduction of the “green” tariff in 2008 is estimated at $12 billion, of which $7.2 billion is in 2015-2020. About $3.4 billion was invested in 2019 alone.
These achievements allowed Ukraine to improve the investment climate and took 15th place in the world ranking in terms of renewable energy investments in 2019.
In terms of the increase in the installed capacity of wind power plants (WPP) and solar power plants (SPP), Ukraine ranked 9th in the world.
As a result, in 2019 Ukraine ranked 20th in the world in terms of the total installed capacity of solar and wind farms. It also raised its position in the rankings on the attractiveness of investments in renewable energy from 63rd place in 2018 to 8th in 2019 among developing countries (according to Bloomberg NEF Climatescope).
About $3.6 billion, or 30% of the total investment in renewable energy, was made by strategic foreign investors, making green energy one of the leading industries in terms of foreign direct investment.
The structure of foreign investors in SES and WES in Ukraine by country (as of July 2020), MW
In addition to direct investment, renewable energy projects have created more than 30,000 jobs, modernized outdated energy infrastructure, and boosted local budgets through income tax and land lease payments. In the frustrated rural areas, modern technological works sprang up.
The contribution of RES to the state budget in the form of taxes amounted to about $ 3.7 billion, of which in 2019 – more than $ 550 million.
At the end of 2019, the situation began to deteriorate significantly. The Ministry of Energy created a negative informational background in the media about the “green” tariff, and together with the Verkhovna Rada and the Cabinet of Ministers began a retrospective review of state obligations to support industry. The ministry stated that due to the large number of implemented and planned renewable energy facilities, the state could no longer fulfill its obligations.
The Ministry’s actions caused serious resistance from investors who invested their own capital and attracted loans in accordance with the established support system. Investors argued that the budget constraints mentioned by the ministry were created artificially through ineffective market mechanisms and could be removed with simple actions. The most important of these measures were:
- increase the electricity transmission tariff, which was reduced several times in July 2019 to please the oligarchy close to power;
- A slight increase in the subsidized household electricity tariff, which is among the lowest in Europe and among the lowest in the world.
But under the pressure of oligarchy lobbies trying to maintain unreasonably low electricity prices for the production of ferroalloys and the electrical steel industry, as well as due to populist policies, the government refused to take the necessary measures to stabilize the situation and further develop the market for renewable energy. .
Investors declared their readiness to meet the government halfway and agree to a “voluntary” restructuring of the subsidy system, and proposed a number of compromises. But all the investors’ proposals were rejected.
In December 2019, the Ukrainian European Energy Agency (EUEA) and the Ukrainian Wind Energy Association (UWEA), which together represent the majority of the largest renewable energy investors, began European Energy Commission mediation between investors and the ministry.
The situation escalated in the spring of 2020. Non-payment of the electricity supplied by the state began, and investors began to threaten the government with international arbitration.
After a six-month standoff, the two parties agreed on a memorandum in which the investors agreed to:
1) the voluntary reduction of “green” tariffs;
2) reducing the commissioning period for projects for which partnership agreements have been previously signed;
3) Rejection of international arbitration proceedings.
The government, in turn, ensured:
1) timely additional payments to producers of renewable energy;
2) to repay the historical debts of renewable energy producers within the agreed time frame;
3) no further deterioration of the subsidy scheme until 2030;
4) Adapting the compensation mechanism to reduce electricity production;
5) Launch renewable energy auctions from 2021.
Based on the memo, “Law 810-(2020) on Amendments to Certain Laws of Ukraine on Improving Subsidies for Electricity Production from Alternative Energy Sources” entered into force on August 1, 2020.
Nine months after the law was adopted, the situation remains disappointing. Despite regular declarative statements, the government has not fulfilled any of its obligations under the memorandum.
Promises to repay debts to renewable energy producers for 2020 have not been fulfilled and no measures have been taken to provide long-term sources of payments to renewable energy producers. Although the payment system for existing payments has improved significantly since August 2020, it has not yet reached 100%. Moreover, experts believe that with the onset of the sunny season, serious problems with paying for the electricity supplied will resume, since the resources necessary to support the payment will not be provided.
Another key provision in the law to approve annual quotas for renewable energy auctions has also not been fulfilled, and a number of recent statements from the Department of Energy indicate that auctions will not take place in the near future.
On May 12 of this year, the Cabinet approved a bill amending the Tax Code, according to which electricity produced by WPPs and SPPs will be excluded from the group of goods that are not subject to excise tax. If the law is adopted, renewable energy producers will be required to pay 3.2% of electricity revenue to the treasury, which would mean a further deterioration of the subsidy scheme and would be in contravention of the memorandum and existing law.
At the moment, the state system of support for renewable energy in Ukraine is completely compromised, billions of dollars in investments have been frozen, and the investment climate has deteriorated sharply. There are no alternative mechanisms, such as auctions, contracts for difference (CFDs) and direct corporate agreements, that can restore investor interest and ensure the sustainable development of the industry. The government is not taking the measures it has repeatedly promised to implement.
Deceived foreign investors are preparing international arbitration proceedings against Ukraine, the first of which has already begun in April 2021. If the government does not take the necessary measures in the near future, the state is threatened with multi-billion dollar payments for non-fulfillment of its obligations. In addition to the massive direct damage to taxpayers, the situation also has incalculable indirect damages to the economy associated with the loss of investor confidence.
The significant reduction in the cost of renewable energy technologies has led to the fact that the cost of 1 kilowatt of conventional energy today is less than that of renewable energy. According to the World Bank, the standard cost of electricity (LCOE) produced by SPP is $27.1/MWh. And today SPP is the most profitable generation technology. Onshore power plants are slightly inferior to coal power generation.
Thus, in most countries, including Ukraine, renewable energy does not require government support. But in order to attract the necessary investments and financial projects, it is necessary to create and support effective market mechanisms by the state, which do not exist in Ukraine.