Does the New Memorandum Break the Deadlock for Renewables in Ukraine?

Solar panels with windmill

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On June 25th the Heinrich Boell Foundation together with regional KyivUkraine office organized the 2nd EU-Ukrainian Virtual Roundtable on Energy Transition. The online event was attended by expert community interested in energy sector developments in Ukraine. The aim was to clarify current proposals for future renewables development support schemes and discuss further prospects in this context for decarbonisation and energy transition in Ukraine.

The Government of Ukraine and investors conducted through almost half a year negotiations with the mediation by the European Energy Community Secretariat to find a solution in compromise. On June 10, the Prime Minister Denys Shmyhal and two renewable energy producers associations signed the “Memorandum of Understanding for the resolution of problematic issues in the renewable energy industry of Ukraine”. On one hand, this memorandum does show all stakeholders a way to a stabilization on the electricity market. On the other hand, damage to investments remains and many investors, especially owners of solar generation, are not ready to accept the negotiated cut of the feed-in-tariffs and seek arbitration.

Currently, enormous debts of payments to renewable energy producers of around 500 million Euro have accumulated after not being compensated for their produced energy since beginning of 2020. Neither the market mechanisms nor the technical capacities to balance fluctuating generation from renewables were ready for the fast growths in 2019.

All these factors created unclear preconditions for future renewable energy sector development. To solve this problem and to avoid future default of renewable industry there was initiated dialogue between renewables investors and the government to find a compromise decision on feed-in-tariff restructuring that would allow on-time payments for producers so they can operate normally and pay for credits.

Mr. Vitaliy Radchenko, Partner, Head of Energy & Projects, CMS Cameron McKenna Nabarro Olswang juridical company: Full presentation

“Unprecedented boom in the development of RE over the last 2 years, in particular solar generation. Basically we went from 2 GW to 7 GW of installed capacity over 2 years. This is what is causing the problem because energy system is not flexible enough. For that reason the transition system operator is having problem managing those volumes coming from renewables into the grid. Moreover, we’re having problem with payments for the generated electricity, because of the imperfections of the new electricity market, which is in place only from July 2019, it’s quite young. Plus government controls too much on this market: they control price gaps, and they don’t allow the market to function properly, they have the public service obligation in place. [...] Arbitrations from renewable investors are highly possible now. 

At the very beginning memorandum was considered as instrument of volunteer feed in tariff restructuring. So, investors could select, either to sign memorandum and agree on feed in tariff decrease but receive longer time of support plus few years after 2030 and lower responsibility for wrong production forecast, or to stay with current conditions. But now the memorandum signing looks like as the only instrument for investors to begin receive payments and survive with no other benefits proposed instead of feed in tariff cut.

This led to situation when not all the investors agreed with proposed conditions. There were 3 major renewable business associations taking part in negotiations with the government. Ukrainian wind energy association, European Ukrainian energy agency and Ukrainian association of renewable energy. And if two first have signed memorandum and agreed on proposed conditions the latest one has not.

Mr. Igor Tynnyi who is co-founder of Ukrainian Association of Renewable Energy:

“Roughly if this memorandum will happen and later the law will be adopted, we calculated that 83% of all financial losses will be beared by members of our association. The current crisis is not inevitable, it was created in an artificial way with absolutely unprofessional and criminal actions of the regulator.We don’t consider this memorandum voluntary at all, we consider this as type of pressure for the industry to sign it. However we are ready agree to do this cut if we were sure about stability of the market in the future. ... We believe that this all is the aggressive campaign against renewables, and we will see what kind of legislation will be adopted by parliament.” 

Ms. Oleksandra Humeniuk, Director of European Ukrainian Energy Agency:

“The positive side of the memorandum was the stabilisation clause, full and in time payments for investors, clarification auctions, technical improvement of forecasting, conducting tenders for balancing technology. Each Ukrainian governmental authority is responsible for this. During long period investors and our agency — we didn’t see any improvement for any of those. That’s why that was step forward to sign the memorandum and agree the reduction of the feed-in-tariff. But investors aren’t sure whether the government would implement these improvements or not. We saw different alternatives of signing the memorandum and not signing. We hope that majority of the paragraphs of the memorandum will be implemented into the legislation and all government authorities will follow their obligations in the frame of the Memorandum and, of course, in the frame of the legislation.”

Mr Dirk Bushle, Deputy director of European Energy Community Secretariat, mediator in the negotiations on the Memorandum:

“Ukraine was indeed in a deadlock situation. The Memorandum is a step to prevent a major crisis. It is imperfect but, at the same time, an important signal that Ukraine is willing to overcome a dispute of that magnitude that otherwise would have resulted into a major crisis of foreign direct investment in the Ukrainian energy sector. A major achievement of the dispute settlement talks was to prevent unilateral action by the government in early 2020. A protracted long dispute between the government and the investors can block the entire sector reform. […] Instead of redesigning the market in a comprehensive manner we see a lot of quick fixes and are not sure whether these quick solutions can improve the situation.”

Ms. Inna Sovsun, Member of the Parliament of Ukraine, Energy Committee:

“The draft law has just been approved an hour ago, so it can be presented to the first reading in the Verkhovna Rada next week. However, there was no discussion at all in the Committee about the law. The main goal is to get the law approved still before the summer break. I have the impression that there is general political agreement that there needs to be a solution for this problem, because the head of the Committee was just coming from a meeting with the Prime Minister and the President on this matter. The final design is now up to amendments in the coming three weeks.”

Ms. Ellen von Zitzewitz, Federal Ministry of Economic Affairs and Energy of Germany:

We very much like to support Ukraine and its developments with reforms in the energy sector. In Germany, the energy transition has created a lot of new jobs and contributed to economic development, and maybe this experience can also be a reason for Ukraine to continue on the path of decarbonisation. Together with our Ukrainian partners we will implement an energy partnership based on the pillars of energy transition, efficiency and also renewables development. The official signing of the Partnership was delayed due to the pandemic – but it will happen very soon.

After panelists interventions and discussion with participants that were concentrated around position of solar investors who expect the biggest cut of the current feed-in-tariff and future potential for development of distributed renewable energy, next conclusions were made.

1.         Systematic and continuous holistic reform of energy sector and of electricity market in order to increase its flexibility and security of supply is required.

2.         Ukraine needs to select politically vector of future energy sector development: either green just transition or fossil fuels and to go by this way step by step but not making two steps back and one forward. This political vector should coincide with already taken by Ukraine international commitments.

3. Stability of market conditions and no hand management are necessary for future energy transition.

4. Distributed renewable energy development generation should be of specific priority for Ukraine.

The next online briefing for expert community on development of Ukrainian energy sector is planned for September 2020.

Recording of the previous one “Electricity Market Reform in Ukraine: What Is at Stake?” from 06.05.2020

Further reading: What is in store for Ukraine: decarbonization or monopolization?

Author: Oksana Aliieva, climate change and energy policy program coordinator, Heinrich Boell Foundation, KyivUkraine Office