Energy Sector of Ukraine:  Problems and Opportunities

The critical problems of the energy sector caused by the inconsistent policy of the state have been going on for decades. Despite the fact that the need to develop a strategic general approach to the development of the energy sector as a whole and the development of some of the most “problematic” sectors has been repeatedly raised, for many years the state’s policy in this sector was target-focused. It was only about separate questions, which emerged from the political conjuncture at the time, and were required by international obligations of Ukraine or lobbied by certain political forces.

Such policy has led to the fact that each time the decisions made by the state did not take into account the general state of the energy system, or possible problematic consequences for it in the future, or the impact on other sectors of the economy. The issue of “green” energy has become another one, the solution of which was carried out by the state in the above-mentioned targeted regime and, accordingly, one more among many other problems of the energy system of Ukraine.

In the previous year, after more reform of the energy market and due to the slowdown in economic development, these problems only worsened, as it became clear that the energy sector in Ukraine is on the verge of collapse.

Today, green energy has gradually created an enemy, the main problem of the current state of the energy system. In fact, solving the problem of feed-in tariffs is associated with solving the problems of the energy sector as a whole. Is that really so?

The problem with feed-in tariffs, which are currently inflated in relation to the state of the market, certainly exists. The state, trying to solve the problem, adopted changes in 2019 that introduce green auctions and quotas. Theoretically, this should lead to the size of feed-in tariffs to be competitive. World experience, in particular in Germany, Denmark and China, shows that the introduction of a system of green auctions has led to a significant reduction in the average size of the feed-in tariff without reducing the amount of investment attracted by the industry. That is, such approach is a very effective “intermediate” solution between full state support in the form of a sustainable feed-in tariff and the operation of RES stations on fully market-related, competitive conditions.

However, this does not solve the problem. Ukraine has already established a significant number of RES stations, the vast majority of which are solar. Moreover, before the entry into force of the new rules in 2019, there was a real boom of investors in this industry, who tried to “catch the last ride”. For example, as of today, prePPA contracts for the construction of about 5,500 MW have already been planned and signed in Ukraine, which is more than was put into operation by 2019.

Of course, it should be noted that given the economic downturn in Ukraine and the world after the pandemic and the problems with the feed-in tariff, it is expected that most of the contracted capacity will not be constructed – especially those that are only allocated land and construction design. However, construction has already begun on many objects and the question of the economic feasibility of its continuation is becoming very acute for investors. On the one hand, stopping construction will definitely lead to losses, on the other hand — continuing construction in the current conditions can only further increase these losses, especially if the state solves the problem of feed-in tariff only via administrative bans and forced reduction of its cost.

At the same time, the beginning of state support for green energy in Ukraine is quite specific, when the feed-in tariff for solar energy was many times more favorable than the tariff for other types of RES, the structure of RES production capacity in our country is extremely unbalanced. The number of solar stations is almost half of all generating green capacity, and this is taking into account the generation from hydropower. If we talk about the new stations — the solar is more than two-thirds of the total number of other RES constructed stations.

And with this, solar energy is the most difficult to connect to the general Ukrainian network – because energy is not exclusively generated only during the day, but also the generation capacity is difficult to predict and strongly depends on weather conditions. This creates additional problems with balancing the connected capacity in the network.

These problems are additionally exacerbated by the fact that the country has almost no balancing and maneuvering capacity. There is no legal basis for their normal and, most importantly, profitable operation. Therefore, there are no plans to build storage stations in Ukraine that could reduce the imbalance of networks. According to Ukrenergo’s calculations, shunting and energy storage capacities of up to 1.5 MW are required for the effective integration of renewable energy sources (RES) into the unified energy system of Ukraine and its safe operation by 2021.

The irony of the situation is that Ukraine cannot even balance its network by importing/exporting electricity, which, by the way, is one of the most effective and widely-used measures in the world. Ukraine’s energy system, which we mostly inherited from the USSR, is connected to Russia’s networks. But today our country should not and has no right to make the dependence of the stability of its energy network on relations with Russia. Connection to the single power system of Europe was carried out on only one pilot project, with a capacity of 600 MW, after which all relevant plans were traditionally frozen for Ukraine for many years. Therefore, we cannot cooperate with Europe technically, with Russia (as it was before) — politically.

Currently, the balancing and coverage of peaks is carried out thanks to depreciated coal-fired power plants, which do not meet modern requirements for harmful emissions. No type of modern shunting generation can compete on the price with such electricity, and there are no negative consequences for the owners of “dirty” power plants. Investors will not invest in the construction of shunting facilities in such conditions.

There is a paradoxical situation when the introduction of RES production facilities leads to an increase in the total amount of harmful emissions due to the need to balance their work at the expense of old extensive stations. That is, without building such facilities, Ukraine would have cleaner air.

What Changes Awaited Green Energy in 2020?

According to the amendments to the Law of Ukraine On Alternative Energy Sources, adopted in April 2019, solar power plants with an installed capacity of more than 1 MW and wind — more than 5 MW, were to win the auction for the allocation of state support quotas. According to the results of the auction “for reduction”, from the starting price (the size of the feed-in tariff) companies will have the right to enter into contracts of sale of electricity for 20 years from the date of commissioning of the station.

The total annual amount of state support quotas (installed capacity of the power plant) should be determined by the Cabinet of Ministers.

On 13 December 2019, the National Energy and Utilities Regulatory Commission of Ukraine made appropriate changes to the regulatory acts governing the work of the State Enterprise Guaranteed Buyer and approved a standard form of contract to be concluded based on the results of the auction. And on 27 December the Cabinet of Ministers approved the Procedure for holding auctions for the distribution of support quotas.

The procedure for holding auctions stipulates that land plots for the construction of renewable energy facilities with certain technical parameters and technical conditions for connection to the electricity grid may be offered for bidding. The land auction is held separately from the general auction. The procedure for holding auctions also determines the rules for depositing and returning the bank guarantee of the bidder and the winner of the auction.

Auctions were to begin in the ProZorro system by April 2020. However, they were never started. The main reason for not launching green auctions is the lack of annual quotas that determine the total capacity of green energy, which claims a favorable incentive tariff. The Ministry of Energy planned to develop a tariff after negotiations with businesses to reduce the so-called feed-in tariff. However, due to the introduction of quarantine, negotiations were suspended, and as a result — the launch of auctions as well.

Feed-in Tariff Reform — What are the Prospects?

The financial condition of the state and, in particular, the State Enterprise Guaranteed Buyer currently does not allow to ensure the fulfillment of the state’s obligations under the feed-in tariff, even for current stations. The existing debt to producers has already reached about UAH 3 billion and by the end of the year may reach UAH 19 billion. What should be done next is unclear, or when the facilities of 2019 will be put into operation.

Negotiations between the Ministry of Energy and investors and renewable energy producers began in October 2019, but the issue remained unresolved for quite prolonged period of time. The state proposed a “hard” option — a significant forced reduction of the tariff and the introduction of liability for imbalances, while at the same time, investors and producers point out that the tariff proposed by the state will make energy production unprofitable and threatened to go to court.

Such rhetoric had taken more than half a year to finally reach a compromise solution. In June the state and biggest RES investors signed a memorandum regarding the further fate of the RES sector in Ukraine. The final decision is that the green tariff will be lowered by 15% for solar and by 7.5% for wind generation and energy producers will be held liable for the energy balance. The term of the “green” tariff is not extended, however.

So, is the situation on the energy market solved by this? Unfortunately, no, since, as we have mentioned before, green energy production is not the main problem of the market. Moreover, the energy situation is significantly exacerbated by the coronavirus pandemic. Due to the introduction of quarantine and shutdown of enterprises, the demand for electricity has fallen significantly, and therefore the problematic issues of network imbalance. The question of whether the government will have the funds to pay the lowered green tariff also remains.

At present, a number of nuclear power plant reactors are being shut down due to the lack of need to generate these facilities. At the same time, thermal power stations are 100% loaded. Under such conditions the increase of the energy price on the market is almost inevitable — which under the current situation may lead to further energy savings and mass non-payments. I.e., it is hard to expect that the energy market will rich stability in the near future — and the further “negotiations” with the “evil” RES producers will probably begin by the end of the year.

All this may likely to be lead to a repetition of the Spanish scenario in Ukraine. It should be noted that in Spain, due to inefficient policies, the country was forced to reduce the feed-in tariff due to the impossibility of paying it, after which investors began to apply en masse to arbitration. Today, virtually any further development of this industry in Spain is blocked for several years, and the fate of many already constructed stations remains unknown.

In anticipation of the economic crisis in the country due to the consequences of overcoming the pandemic increase in electricity tariffs, which will inevitably happen if you transfer the main generation to RES and thermal power stations, may be the last nail in the coffin of many industries in Ukraine.

Obviously, the solution must be sought in reaching a compromise for all market participants, possibly with a proportionate and fair distribution of quotas. And such a dialogue should take place not only with the participation of RES investors, but also representatives of all types of generation. Unfortunately, history shows that such a decision is unlikely to be possible in Ukraine.

Currently, some experts fear that in the absence of a systemic solution, the energy market will be regulated manually. In particular, by instructing the dispatchers of the integrated power system to stop generating for “foreign” stations and repay the debt at the feed-in only to “their” privileged companies. It should not be forgotten that the existence of concluded contracts in Ukraine does not guarantee the receipt of funds. In the past, there have been precedents when certain state-owned companies, which had significant debts, received legally established immunity from lawsuits for recovery of funds, seizure of property, etc.