You're reading: Biofuel market’s huge potential hostage of state policy, corruption

Ukraine’s combination of developed agriculture and energy dependence makes the country a perfect candidate for the use of biofuels. Making money on energy extracted from straw, pig or chicken manure could be a lucrative opportunity at a hand’s reach. But it is not.

Unfavorable and often changing legislation, as well as corruption, has caused both domestic and foreign investors to put off big projects.

“It’s ridiculous that in an agrarian country with huge resources of biomass, everything is being done to prevent the development of this resource,” said Georgy Geletukha, chairman of the Bioenergy Association of Ukraine.

Fifteen percent of Ukraine’s territory is covered by forest, and 42 million hectares are designated as agricultural land, making biomass the most promising alternative energy source after small hydro, experts say.

In 2011, biofuels and waste products were used to produce 1.56 million tons of coal equivalent, a widely used energy measure. Experts say all the three forms of biofuels – solid, gaseous and liquid – have good prospects in the country.

Currently the most developed and widely produced are solid biofuels, such as husks of sunflower and pellets, byproducts of straw or wood shavings. In 2011 Ukraine produced 650,000 tons of solid biofuel in the form of pellets and briquettes, most of which was exported to the West.

But the most lucrative is biogas, also known as biomethane, which is produced from organic matter like pig or chicken manure or silage.

Experts say biogas could substitute up to 10 billion cubic meters of gas imports, significantly decreasing Ukraine’s dependence of Russian supplies.

“It is cheap, it is environment friendly, and it allows recycling of piles of manure, which surround livestock complexes,” said Vitaly Daviy, president of Ukraine’s Association of Alternative Fuel and Energy Market Participants.

A number of investors, including Ukrainian egg-producer Avangard, Germany’s Biogas Nord and France’s mineral-processor Imerys announced plans to build biogas plants in Ukraine. Driving the trend were plans to impose a high green tariff for renewable energy, guaranteeing strong revenues.

But after lawmakers passed on Nov. 20 a bill amending the law on electric energy in which unclear rules and low green tariffs were enacted, many believe these projects were put at risk.

“These changes will give in fact nothing to the biogas (industry), and this sector in my opinion will not be developing,” Geletukha said.

He added those who already built their plants will be discriminated, as the green tariff will only apply to plants launched after April 1, 2013. A requirement on locally produced equipment has also irked investors. Starting this year in order to qualify for green tariffs, 30 percent must be locally sourced, and in 2014, the rate increases to 50 percent of local sourcing.

Moreover, Geletukha added, biogas got a lower tariff than solar and wind energy (around 30 percent lower than what was expected), extending the payback period for such projects from 7-10 years to 12-15.

Olena Rybak, director of European-Ukrainian Energy Agency, believes that to be interesting for foreign firms, payback periods should be three to five years to compensate for Ukraine’s level of risk.

“When the payback is 6 or even 10 years it is too much,” Rybak said. “These investments will hardly happen.”

Several biogas projects, promoted by the European Bank for Reconstruction and Development, were frozen last year when it seemed they would not receive a green tariff, Rybak said. They have yet to be revived.

Yet Lidia Slivotska, spokeswoman of Avangard, said the new law is positive insomuch as “without this law biogas didn’t have any prospects in Ukraine.” But she added it’s still unclear if the company would be able to benefit from the lucrative green tariff.

The stronger wind and solar energy lobbies are behind the relatively unfavorable norms for biogas, according to Geletukha.

Taras Rozputenko, senior associate of Gvozdiy & Oberkovych law firm, said Ukraine’s legislation has no real norms favoring the development of biofuels. “There are no reasons to think that the state aims to develop this area or does something for this,” he said.

Liquid biofuels, such as biodiesel and bioethanol could substitute petroleum and give a boost to the country’s currently stagnating distilleries. Over 30,000 tons of motor fuel based on ethanol was generated in 2011, but experts say this number is far below Ukraine’s potential.

Biogas and solid biofuels could also be applied for heating facilities, an idea hailed by officials. The State Agency on Energy Efficiency and Energy Saving of Ukraine allocated Hr 42 million for 45 projects on converting boiler houses that serve social facilities to alternative fuels.

But Geletukha said that with the low tariffs for gas consumed by communal services and households these projects are now not profitable for business.

Daviy forecasted the gradual development of solid and liquid biofuels in 2013 with fewer prospects for biogas. Ukraine’s traditional headache of corruption is adding to the sectors legislative problems.

“It’s hard to persuade a local official to agree on modernization of a boiler room from natural gas to biofuel if he receives paybacks from gas consumption,” Daviy said.

Kyiv Post staff writer Oksana Grytsenko can be reached at [email protected]