Fresh off the Glasgow trip to discuss saving the planet by becoming the former Soviet states with the most Euro-centric climate change policies, Ukraine wants us to believe it is ready to go super duper green. Just don’t tell that to some of their biggest clean energy producers. They’re not buying it. A recent fallout with the government over a bond issue that was designed to fund clean energy projects has become mired in a muddy, money mess.
First, a primer: Ukrainian president Volodomyr Zelenskiy pledged on November 1 at the United Nations climate summit, COP26, to reduce greenhouse gas emissions 65% below 1990’s level within the next 8 years.
"Our goal by 2030 is to reduce greenhouse gas emissions by 65% and to achieve climate neutrality not later than 2060," he said.
Ukraine had previously committed to ending coal-fired power generation by 2035 while massively investing in renewables, the Powering Past Coal Alliance said November 4 at COP26. This greening of the energy sector is important for Ukraine because its mostly-exhausted coal mines are in the eastern industrial province of Donbas, occupied by Russia-supported separatists, and it’s state-owned Naftogaz failed to develop adequate natural gas production despite confirmed and ample reserves.
Ukraine is also dependent on the multilateral institutions of Europe for development finance. It has the second largest IMF loan out there after Argentina. And is constantly looking for funding from the European Bank for Reconstruction and Development (EBRD). In the not-so-distant future, these lending institutions will make climate change policy adherence a pre-requisite for borrowers. Zelenskiy knows this.
“The temperature on Earth can rise much more than two degrees,” he warned, given the continued use of coal and oil lately due to rising post-lockdown demand and a reduction of both of those resources in the energy matrix of Western Europe. “In order to curb warming and achieve carbon neutrality, we will have to make many times more efforts than planned in Paris in 2015,” he said.
A Green Mess
Ukraine’s greenward-ho is going to be a tough slog. This is a mainly nuclear and coal fired power state. Only Poland has more coal fired power plants within the European landmass. Nuclear makes 52 percent of electric energy production in 2020, and the share of renewable energy was just about 8%. The current Energy Strategy of Ukraine sets 17% as the goal by 2030. For comparison, the corresponding EU target for 2030 is 32%, but some EU countries have already surpassed this figure by far (for example, in 2020, the renewable energy share in Germany reached 46.3%).
If they have to rely on the Euros for cheap money, they’re going to have to get with the program.
Ukraine ranks 26th in the world in terms of CO2 emissions, roughly on par with smaller Spain - but the GDP of Spain is 8 times higher than the GDP of Ukraine. Around 40% of CO2 emissions in Ukraine are from the energy sector. Zelenskiy and many in the Ukrainian government believe that lowering the use and replacing fossil fuels with renewable resources will show Ukraine is fighting climate change alongside the Europeans.
The problem: this sector is in financial dire straits. The largest debt in Ukraine’s wholesale electricity market is owed by the renewable energy producers – at the beginning of November it reached 28 billion Ukrainian hryvnas (about $1.1 bln).
Debts to renewable energy producers have been accumulating for two years already. According to official data, government payment to RES investors for 2020 was around 69% of what was owed on contract to produce electricity. In 2021, not one month went by when the government paid its contract in full.
In the summer of 2020, the government practically forced RES developers to conclude a Memorandum in which they agree to a “voluntary” reduction in tariffs, but this did not help - debts continued to accumulate. However, the memorandum provided for a mechanism to pay off old debts – the missing funds were to be raised with a state-guaranteed loan.
This is exactly what was done: the state-owned company Ukrenergo (the transmission system operator of Ukraine) issued so-called “green bonds”, guaranteed by state - and raised a whopping $825 million. The money came from private investors. EBRD was an investor, too. These funds were transferred to another state-owned company – the Guaranteed Buyer, which was specially created to provide payments to renewable energy producers. And then the fun began.
The head of the Guaranteed Buyer Konstantin Petrikovets was immediately fired - according to him, “for refusing to comply with illegal instructions” not to make payments to renewable energy producers. He went on television saying this.
After a new manager was appointed, payments were made, but not as required to all companies in proportional amounts, as was the original intent.
One company, DTEK Renewables, owned by the richest man in Ukraine, Rinat Akhmetov, wasn’t given any funds. It is the largest renewable energy producer in Ukraine.
According to Ukrainian media, one reason is your typical politician-businessman conflict unfolding between the President and Akhmetov — that makes the disbursement of green bond funds one that comes with political pre-requisites attached.
Zelenskiy was elected on fighting corruption (like his de-oligarchization law, something George Kent, deputy assistant secretary of state for European and Eurasian affairs, referred to as “difficult”) and reforming the economy. After COP26, Zelenskiy is joining the Europeans fight against climate change. Everyone wants Ukraine to succeed.
Even without the government’s sidelining of DTEK for now, the private sector in Ukraine is playing a game of Survivor with the government. Every episode, someone is getting voted off the island, no matter what sector of the economy. Energy is particularly volatile as it is an important part of the economy.
DTEK is the largest investor in the renewable energy sector in Ukraine and has been in the market for around 14 years. They say they have invested 1.5 billion euros in Ukraine over that time frame and have built about 11% of all renewable energy capacity in the country.
Should the bond payments not be distributed evenly, it will likely be difficult to see investors willing to develop large-scale renewable energy projects in Ukraine. DTEK, for instance, is a big bond issuer to foreign investors.
Without local company’s investing viably in renewables, Ukraine will have a hard time meeting Zelenskiy’s target. It will also be more dependent on Russia for energy, as Foreign Policy magazine pointed out this week.
The perception of scandal is always strong in Ukraine. It’s something Ukraine needs to shed as it tries to look less like the Wild East, and more like the “sophisticated crowd” of Europe, the kind that do the global conference circuit and talk about climate justice and social equity.
Europe is Ukraine’s biggest funder. If EBRD capital isn’t used for what Ukraine says it will be used for, it reduces credibility of state-owned issuers and damages the still relatively positive image of Ukraine as bond investment.
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