Energy in Ukraine is a sensitive subject. Last month both the U.S. House of Representatives and the European Union made public statements against the Nord Stream 2 project. If the project will be canceled, it will allow Ukraine to continue collecting the crucial transit fees it generates as it brings gas from Russia to Europe.
Meanwhile, despite significant reforms in Ukraine’s energy sector, the transition from post-Soviet subsidized energy is painful. In 2018, roughly 10 percent of the country’s gross domestic product went towards energy subsidies. In November, the price of residential gas increased 23 percent to acquiesce to the demands of the International Monetary Fund and other international organizations for market price and energy independence, a brutal blow to the average Ukrainian household.
While there have been headways looking into sustainable ‘renewable energies’ of the future, Ukraine’s current legal framework is still trying to modernize. There is no doubt that Ukraine has enormous potential for renewable energy of which the incentives range from security to growth. Renewables for the entire world are a necessity to reduce emissions, and specifically for Europe where energy independence from an increasingly belligerent Russia becomes basic need.
Ukraine’s official targets for the Sustainable Development Goals (SDG) and beyond are ambitious, but not impossible. There are four national targets released on last year’s SDG National Baseline Report, three of which are directly related to energy diversification and renewables. However, currently renewables account for 2 percent of the country’s electricity, but 6 percent of overall energy costs.
This is partly due to Ukraine’s green energy tariffs which are notoriously overpriced and some of the most expensive in Europe. This means future energy bills for consumers can increase if such a method for ‘buy in’ from investors, contractors, and the government is not effectively managed now. Currently, Ukraine’s 2020 Strategy for National Modernization has set a goal of 20 percent usage of renewables for electricity by 2020, but output remains a mere 2 percent.
On the last day of voting before the New Year the Ukrainian Parliament passed Draft Law 8449. While far from perfect, it was a much needed response to the announcement in late November that the European Bank for Reconstruction and Development (EBRD) would freeze loans for solar energy projects until prices for renewable energy would be reduced, or ‘green tariffs.’
Olga Yeriomina, senior banker at the EBRD Power and Energy Utilities department openly stated last month at the Ukrainian Renewable Energy Forum, “There should be no illusions, we have to switch to a new system.”
The basic structure of setting prices is called a ‘feed in tariff,’ of which Ukraine has some of the highest in Europe. Law 8449 aims to update existing auction practices with a structure for increased risk spreading, transparency, and a sliding variable designed to provide a more balanced market price. The process is based on engagement from both contractors as well as the government to balance negotiations, and in general create a new culture for energy auctions with renewables.
In laymen’s terms, this means that solar projects over 10 megawatts will be awarded to the winner of an auction (saving the government money as the winner will be the lowest, qualified bidder), and that the green tariff will be reduced from its current level to a more sustainable level.
For example, the current solar tariff for panels on the ground is 15 euro cents, and is already scheduled to be reduced to 13.5 from Jan. 1, 2020, and to 12 cents from Jan. 1, 2025. Wind tariffs are also set to be reduced, but by a more modest 11 percent reduction next January. Parliament may yet reduce those amounts even further. However, in doing so, parliament must keep in mind that the country’s economic recovery is dependent on robust foreign direct investment.
Last year alone, renewable energy accounted for $300 million in FDI, with companies like TIU Canada, Spainish Acciona, and China Machinery Engineering Corporation (CMEC) leading the way. Dramatic cuts to the planned and publicly announced green tariffs will show Ukraine to be an unsafe harbor for FDI.
Given the ongoing conflict in Donbass, brief imposition of martial law last month and pending elections – current and prospective international investors remain wary. Parliament has taken steps to reduce the green tariff on renewables, but for the sake of sustainability they should only tweak the existing planned rates to avoid a chilling effect from the FDI community. Meanwhile, auctions on larger projects should go forward as proposed in draft law 8449.
Regardless, passing the law in the short term will immediately unlock lending by the EBRD (and de facto local banks) for existing projects to be completed. This is a very positive beginning of a new era: market-friendly, sustainable, Ukrainian renewable energy. In the long term, direct investment that Ukraine needs to not only drive growth but also increase transparency, and provide reliable, safe, and affordable electricity.
For average Ukrainians, a mix of renewable energy sources with stable pricing would reduce their energy cost and increase their country’s independence. Passing of a balanced, amended version of draft law 8449 is the best way to accomplish that.
Matt Kriteman is a Sustainability Leader for UBI Global and others. His background includes policy advisement on labor, energy and decentralization for the U.S. Congress, United Nations Development Programme Ukraine and others. He is an American based between Kyiv and Stockholm.
