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What the new law on “green” energy “fell short” of

The President has signed the law changing the terms of support for electricity production from renewable energy sources. This document envisages restructuring of the “green” tariff by lowering it (without extending its applicability period), an accelerated schedule of increasing liability of renewable electricity producers for imbalances, and a number of other decisions.

It seemed that the long-running “serial” of political discussions between the government and investors in renewable energy has ended. But in fact, the new law may not solve the problem after all, as there are at least five reasons for that.

Firstly, the decision embodied in this law is based on a very shaky consensus, and not among all market players at that. In particular, a number of developers in the solar energy market opposed the new “green” tariff rates. They reasoned their stance by claiming that their projects will become unprofitable after tariff restructuring, especially in the conditions of discontinued support. Since the calculations laying at the core of the revised “green” tariff rates weren’t published, threats of litigations and arbitrations are becoming louder, even though all preceding months of negotiations were aimed at avoiding this scenario.

The government could have used as the basis a reasonable rate of return that takes into account the market situation, development of technologies and the consequent cheapening of project costs, as well as the risks typical for the sector and the country. This way, the revised “green” tariff rates could accommodate specifics of every technology (solar/wind power) and the power plant commissioning year, being an economically viable decision.

Secondly, this law does not solve the entire problem of serious financial imbalances which occurred in the market because of the flawed system of PSO. According to estimates by the lawmakers themselves, the law will help reduce deficit of Guaranteed Buyer’s budget by only UAH 6.4 billion per year, whereas as of July, this enterprise owed UAH 19.4 billion to renewable electricity producers.

As a result, many operator companies are now facing the risk of bankruptcy, and are extremely interested in the settlement of that debt. It is obvious that in order to resolve this situation, additional decisions that would allow to bring Guaranteed Buyer on the positive financial side over a long run are needed. Otherwise, the debt won’t be reduced even with the revised “green” tariff rates, and some owners of renewable power plants will have to sell them in the event of default or bankruptcy. It is quite possible that this situation could benefit certain persons or companies intending to buy up renewable energy assets at an attractive price and establish their own energy business.

Thirdly, this document de-facto introduces direct budget subsidization of renewable power producers, which contradicts European principles of operation of the electricity market and the rules for government assistance. This novation takes “green” power even farther away from the full-fledged participation in the market.

In addition, the funding from the state budget of at least 20% of Guaranteed Buyer’s costs of purchasing electricity from renewable electricity producers is going to cost billions of hryvnias per year. The law does not stipulate the “compensators” of these budget expenditures, i.e., additional revenue sources or budget items from which expenditures will be reallocated. Presently, it remains unclear where the additional financial resources would come from, and therefore, there is a probability that the government will continue accumulating more debt to electricity producers.

It is worth mentioning that when introducing this amendment, MPs did not ask whether any feasibility studies were made or at least whether consultations were held with the Finance Ministry to find out how realistic these multibillion expenditures would be. The path already stipulated in the memorandum between the government and investors in “green” energy – taking out government-guaranteed loans from international financial institutions (such as EBRD) – did not receive proper attention, either.

Fourthly, the infamous amendments concerning “green” electrometallurgy, to which a “discount” on the transmission tariff will apply. Both the criteria for classification as a “green” metallurgical enterprise (direct emissions not exceeding 250 kg of CO2 per ton of production output and the use of solely the electric arc method) and the overall discriminatory nature of support vis-à-vis other environmentally efficient production enterprises and industries remain questionable.

According to mass media assessments, the preferences will be accorded to Interpipe Stahl (Viktor Pinchuk), Dniprospetsstahl (shareholders affiliated with VS Energy), Elektrostahl (Ihor Andreiev) and Azovelektrostahl (Oleksandr Savchuk). However, this list might be incomplete – time will tell.

Surely, these changes could be regarded not as lobbyism but as an additional impetus for the transition of enterprises using blast furnaces and basic oxygen furnaces to the electric arc production method. However, these decisions must obviously be made upon agreement with the government, which recently has even introduced the post of Vice Prime Minister for Strategic Industrial Sectors.

Fifthly, the very style of passing this law – in the familiar chaos of “overdrive” – represents a violation of the Ukraine-EU Association Agreement. According to the obligations stated in Annex XXVII, Ukraine shall “refrain from any actions that could obstruct the goal or the outcome of the approximation of its national legislation to that of the EU.” For that purpose, our government must hold consultations with the European Commission as regards the compatibility of draft laws with the EU law.

To be sure, the law on changes in the renewable energy support system concerns concrete commitments under both the Association Agreement and the Energy Community Treaty. Specifically, it concerns Directive 2009/28/EC on the promotion of the use of energy from renewable sources, whose implementation must facilitate the full integration of Ukraine’s electricity market into the EU.

The updated Annex XXVII was ratified in June 2019, and presently, Ukraine and the EU are working to decide what the procedure of consultations should look like to be effective. However, had the text of the draft law for second reading – especially with the approved amendments concerning “green” metallurgy – been made available to European Commission experts, the opinion of Brussels could have been negative.

Roman Nitsovych, DiXi Group Research Director

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