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No effective solutions on debts to “green” generation have been proposed yet

On 18 September, a meeting of the Anti-Crisis Energy Staff was held, whose task was to find ways of sustainable current funding as well as sources of repaying debts to electricity producers from renewable energy sources (RES). These ways should be considered to be domestic government loan bonds (DGLBs), loans from state-owned bank and budget financing. However, as a result of the meeting, the government instructed to set up a commission to monitor the activities of the NCSREPU and Ukrenergo NPC to maintain the balance in the energy sector, including the settlement of the situation with payments to “green” generation. Thus, the government has actually held the Regulator and the transmission system operator fully responsible for resolving the situation. According to the Prime Minister, their market regulation should ensure settlements for RES.  

So, although the law on changing the RES support system provided for payment from the state budget of at least 20% of the cost of produced “green” electricity, the draft budget for 2021 did not include these expenditures. This option was also not considered at the last meeting of the Anti-Crisis Staff. According to the forecast of the NCSREPU, the expected cost of electricity from RES for 2021 is UAH 58.2 billion, of which UAH 26.4 billion is the support itself (“Guaranteed Buyer” services). The “Guaranteed Buyer” itself forecasts that the value of “green” generation goods will be UAH 60 billion (VAT exclusive).

It means that at least UAH 11.64 billion should be allocated from the budget, and this is not a sustainable mechanism, since it is necessary to provide for “compensators” for such expenditure. For example, the source of revenue could be the carbon tax, which now entirely goes into the general fund of the state budget. However, revenues from the CO2 emission tax amount to approximately UAH 1 billion per annum, and even if its rates are increased by 2-3 times and use them entirely on RES payments and debt repayment, this will not be sufficient.

In any case, the financing of manufactured products should come from the market and not be redistributed from the budget. There are few options where to get the funds. Since the government has held the NCSREPU and Ukrenergo fully responsible for the settlement of the situation, initiating the establishment of a supervisory commission, almost the only effective solution for the Regulator would be to increase the transmission tariff. So far, Ukrenergo has already calculated the changes in order to cover the deficit of funds for “green” payments; the TSO proposes to increase the tariff up to 640.48 UAH/MWh in November-December 2020, and up to 501.03 UAH/MWh effective 2021.

In the current circumstances, an increase in the tariff would be the right decision because it is one of the few steps that will help avoid new debts in the market. At the same time, the abrupt transition to excessively high tariffs will have negative consequences for businesses that need additional support due to COVID-19. There is no guarantee that the company will receive payment for transmission services from system users in time and in full. If the situation in which Ukrenergo owes the “Guaranteed Buyer” tens of billions continues, the crisis in the electricity market will only intensify.

In addition to seeking financing for current payments, a pressing issue for the government is to identify sources of revenue to cover debts to the same “green” generation. Government bonds and loans from state-owned banks are considered as options for settlements. The issuance of DGLBs with a five-year circulation period was provided for by Law No. 810-IX, and loans from state-owned banks were proposed by the Ministry of Energy as one of the solutions. However, both of these mechanisms mean the creation of new debts to repay old ones and can only be a temporary solution.

One of the additional sources of debt coverage to RES producers proposed in the memorandum is loans from international financial institutions. According to the NCSREPU (rationale for an increase in the transmission tariff dated 11 July 2020), Ukrenergo NPC proposed to attract EUR 128 million (UAH 3.8 billion) from the EBRD and EUR 92 million (UAH 2.8 billion) from the EIB. However, international loans will not be attracted in the near future. The EBRD  is reluctant to maintain Ukrenergo’s liquidity until the government meets its obligations to RES producers and investors, including the bank itself. The reason for such sentiment is incomplete settlements with RES producers in August, even though payments are higher than in any previous period in 2020 (UAH 3.36 billion), accounting for only 65% ​​of the amount charged. The dynamics of payment for September also does not give grounds for optimism, since 51% has been paid for the generation of the first decade of the month as of 20 September (UAH 0.8 billion).

In addition, the parliament recently rejected bill No. 3960, which was expected to provide state guarantees for international loans of TSO and/or state-owned generating companies. The Verkhovna Rada also refused to send it for revision. Such decision contributes to the EBRD’s reluctance to provide loans to support the industry.

The current system of functioning of the electricity market, including support for RES, is neither sustainable nor stable. Investors have no confidence to pay for the produced “green” kilowatt-hours and cover historical debt, and consumer enterprises are facing a significant increase in the transmission tariff. In addition, the government has no choice but to create a new debt to extinguish the current “fire”. Even if the current problems in the electricity market are resolved, there is no guarantee that this situation will not happen again. RES capacity continues to grow, and therefore the volume of charges will not change significantly in the near future.

The electricity market requires fundamental transformations. The transition to financial PSO and its subsequent termination, which means the sale of electricity to the public at market prices, is the only right decision in the medium term, i.e. within five years. The scheme, under which the development of RES is paid for by end consumers, both businesses and household consumers, has already proven its sustainability and efficiency in the EU.

However, the government may take other measures to improve the situation. These measures may be the possibility for RES producers to sell electricity in the market without intermediaries and receive compensation for the difference with the “green” tariff. Such steps will lead to more stable settlements. In addition, the market would “feel” better without price restrictions in the DAM and IDM segments as well as sales price restrictions for state-owned energy companies.

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