For decades, Ukraine was considered an economy dominated by heavy industries, marked by oligarchic conflicts and famous for the risks foreign investors faced in trying to set up businesses. Its Europeanness was manifested much more by devoted citizens sacrificing their lives for Western values then by government accountability or judicial transparence. But today Ukraine is increasingly a part of Europe when it comes to energy issues.
If immediate measures are not taken, energy collapse awaits Ukraine in the coming years. There is a high share of obsolescent energy grids, suffering from advanced wear and tear, which also hinder the development of renewable energy.
The gradual shift towards renewables appears a pan-European trend with central and Eastern European nations lagging behind Germany, the Nordics and other western nations. For many years the post-Soviet countries were outsiders in the renewables game, with Russia still producing just 0.42 per cent of its electricity needs by solar and wind power, followed by Belarus with 1.2 per cent, compared to the UK, where 26 per cent of electricity came from wind and solar in 2019. Until 2010 Ukraine relied on obsolete nuclear and coal-fuelled thermal power stations built in Soviet times. But then everything has changed.
In 2008 the government adopted a new feed-in tariff, and offered to buy all the “green” energy produced in the country for the price that varied from 702 hryvnia for 1MWh of wind energy to 5000 hryvnia for the solar-generated one (£54.55 and £384.6/MWh at the 2009 exchange rate). The tariff was pegged to the Euro for securing prospective investors against currency depreciation.
At the time reform started, the capacity of solar and wind power facilities was around 85 MW, or 0.14 per cent of country’s total. But the attractive prices and the government’s preferential policy made the renewables a unique sector in Ukraine’s economy. It turned into a fair playground with no assets to privatise, a lot of greenfield projects, attractive rates of return and strong judicial protection.
So it was no coincidence that in ten years the sector exploded with its overall capacity approaching 7GW in May 2020, accounting for roughly 8 per cent of total electricity production. To compare, it took the UK 23 years – from 1988 to 2011 – to produce such a change. Both Ukrainian and international companies invested close to Є9b in the sector with Є6.1b flowing in between 2014 and 2019 – despite a conflict with Russian-backed separatists in eastern Ukraine. Є2.5b was contributed by foreign investors, making the sector one of the main investment destinations in Ukraine.
But, as per usual, success created problems. Renewable energy sources suddenly became a cause for concern for those who thrived on cheap energy and would like to prevent an increase in Ukraine’s electricity prices – one of the lowest in Europe.
In the autumn of 2019, the government began the process of negotiations with renewable energy investors on tariff reductions as the cost is now fixed at 2200 hryvnias per 1MWh, or £65.95/MWh, compared to the British guaranteed price of £65.95/MWh. When the coronavirus crisis struck Ukraine’s economy, energy consumption fell sharply. As the share of renewable sources continued to grow, this further exacerbated the situation.
The Energy Community Secretariat became a mediator in difficult negotiations between the government and renewable energy investors. Ukraine’s credibility as a foreign investment magnet was at stake. Meanwhile, the state debt to renewable energy enterprises for produced electricity reached 12 bln hryvnia by May 2020. Finally, in June, an agreement was reached and a memorandum was signed between the government and investors who made serious concessions: they voluntarily agreed to lower tariffs (by 15 per cent for solar and by 7.5 per cent for wind) and abandoned a number of projects into which investments had already been made. However, the story is not over yet. The agreements need to be enshrined in law, which is still under consideration in the Ukrainian parliament.
Another serious barrier to the development of renewable energy was the poor state of distribution networks. The obsolescent grid with 63.9 per cent of high-voltage lines being in service for 40 years or longer needs to be adapted to new requirements – and a vast network of storage batteries and smart interconnectors must be installed. Therefore, these days, Ukrainian authorities are finally debating the introduction of RAB (Regulatory Asset Base) tariffs for electricity distribution companies and allowing more market-oriented reforms in the electricity sector.
Although the cost of distribution in Ukraine accounts for just 17 per cent of retail electricity price compared to 30 to 40 per cent in EU nations, some oligarchs perceive a threat in the upcoming RAB implementation. But rather than a food fight of oligarchs, this is a clash of the old and the new worlds. The old, post-Soviet world, in which energy was cheap and industry was energy-intensive and inefficient, seems to be on its way out.
Until now, the story of Ukraine’s “green” energy has been optimistic.
First, it makes clear the EU’s closest Eastern partner can manage and sustain a healthy investor climate, attracting billions of euros into a completely new sector of its economy.
Second, it seems that the development of green energy will eventually reduce the share of that produced from coal to almost zero in the next ten to 20 years – in contrast to the UK, most of Ukraine’s thermal power stations use coal, not natural gas.
Third, the green revolution now seems to be the trigger for the transforming of obsolescent grids into modern smart grids, which the country desperately needs.
And finally, all this together will force the nation’s industry to modernise, and the households to use smart meters, reducing excessive energy consumption like it is already happening all over Europe. So it looks like the green energy revolution is finally happening in a post-Soviet nation, despite its outdated industrial structure, old grids and 20th-century pricing systems. This may change not just the energy sector, but also the economy and society in general – in the future green energy in Ukraine could play an even more important role than across more developed nations in Europe.
Those who hesitate lose.