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Why reducing 'green' tariffs leads to further complications in Ukraine?

Author : Olena Holubeva

Source : 112 Ukraine

Ukraine has dealt with the issue of "green" tariff, significantly reducing it for solar power plants and less significantly for wind farms
10:14, 7 August 2020

Ukraine has dealt with the issue of "green" tariff, significantly reducing it for solar power plants and less significantly for wind farms. On the eve, the authorities faced a difficult choice: to take a conscious risk of losing investors by cutting green payments or to raise electricity prices for the population. However, the choice in favor of reducing the "green" tariff also did not completely solve the problem: there is still not enough money to pay off current liabilities and the accumulated debt to "green" generation. In addition, Ukraine is threatened with proceedings in international arbitration, in which investors can sue tens of millions of hryvnias of the lost profits.

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Ukraine cuts the "green" tariff

Last year, a Korean investor appeared who wanted to build a solar power plant (SPP) in the Poltava region. Representatives of this company repeatedly flew from Seoul, and the main condition they voiced was government guarantees of the invariability of the terms of purchase of electricity produced at the station. I personally explained to them that we do not have state guarantees, but there is a law that gives such guarantees, a member of the board of the Association of Solar Energy of Ukraine Yuriy Favorsky told 112.ua: “They recently called and said: ‘You see, your law does not guarantee anything, because it has been changed.’ Any change, especially, if it is done "retroactively", generates distrust both in the state and, accordingly, in all its organs. How can one now believe in guarantees and promises, if President Volodymyr Zelenskyy said back in 2019 that he was a supporter of green energy?"

After difficult discussions that have lasted since the end of last year, on July 21, the Verkhovna Rada adopted Law No. 810- IX "On Amendments to Certain Laws of Ukraine Concerning Improving the Conditions for Supporting the Production of Electric Power from Alternative Energy Sources". The document, which radically changed the rules for "green" generation on July 31, was signed by the president and came into force on August 4. According to the document, the "green" tariff was significantly reduced - a guaranteed price at which the state buys from producers from renewable energy sources (RES) electricity supplied to the united energy system: it is most significantly reduced for solar power plants and less for wind power plants. The reduction in tariffs did not affect small "household" users who install small renewable energy plants mainly to cover their own needs.

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By lowering "green" tariffs for large industrial producers, the authorities sought to reduce the burden of payments for servicing two PSOs ("special obligations"), according to which Ukraine’s tariff for the population is artificially kept in ​​significantly lower than the market price, while the tariff for the "green" generation is set above the market’s one. “Green” energy has become more expensive than electricity produced by nuclear, coal, or hydroelectric power plants.

This "skew" has put the power industry on the brink of collapse. The debt of the state-owned company Guaranteed Buyer (GB), responsible for settlements with the greens, to the greens has grown to the current 0,7 billion USD. At the same time, the debt of the operator of the main power grids, Ukrenergo, was growing, which compensates for the deficit of GB’s funds (for the fulfillment of special obligations) from the transmission tariff.

To fully cover the "green" tariffs (at the values ​​that were in force before the adoption of the law on their reduction), you need to either increase tariffs for the population by 100% or increase them by 50% for industry, Andriy Gerus, the head of the Committee on Energy and Housing and Utilities Services, explains. Of course, for political reasons, the authorities were not ready for either of the two options. According to a study conducted as part of a USAID project in Ukraine, most Ukrainians are not willing to pay more for electricity, based on considerations of the need to support the "green" energy.

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The "green" tariffs in Ukraine are among the highest ones, which made the "green" business attractive for large Ukrainian businessmen and oligarchs. In addition, the "green" generation was exempted from responsibility for imbalances - the state guaranteed to buy from it all the electricity produced, regardless of whether it was needed in the country's unified energy system, or in order of priority provided by electricity produced by nuclear or coal power plants, it was not allowed into the system at all.

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The signing of the bill, which reduced the "green" tariff, was almost blocked even within the walls of the Verkhovna Rada. The document was already voted on in the last reading at an extraordinary session of parliament, which was preparing to leave for the summer holidays. It was rumored that the MPs would not have time to approve the document before autumn. However, after a positive vote, MP Anna Skorokhod unexpectedly registered a decree to abolish voting for the bill, for which the votes of 288 MPs were collected the day before. This made it impossible to hand it over to the president for signature before being considered in parliament, which at that time was already on vacation. Acting advisor Minister of Fuel and Energy Oleksandr Trokhymets calculated that the delay in reducing green tariffs in August alone would cost 23 million USD.

Ukraine faces litigation and reduced investment inflows

It is too early to say that when the law in its current form enters into force and the “green” tariffs are reduced, it is too early to say that the issue is solved. "Now we expect that in August - September payment for the electricity supplied by the stations should be restored. The Memorandum of Understanding (signed between investors in renewable energy sources and the government on June 10, 2020) states that 40% of the debt to renewable energy producers will be guaranteed by the government before the end of this year. To date, the last payments were only for the month of March, while the level of settlements with the renewable energy sector does not exceed 5% so far. If the government breaks down its obligations (to repay debts), investors will be forced to turn to international arbitration," Andriy Konechenkov, head of the board of the Ukrainian Wind Energy Association, told in a commentary for 112.ua. According to ExPro, the level of settlements with "green" tariffs was 27% as of July 30.

In mid-July, under the crossfire waged by all large industrial producers who were fiercely fighting against a possible price increase, National Commission for State Regulation of Energy and Public Utilities was able to only slightly increase the tariff for the transmission of Ukrenergo - from 5,5 USD to 8,6 USD/MW, while it was planned to increase it to 11,8 USD, which was also not enough to cover the deficit of funds from Ukrenergo for settlements with GB, which, accordingly, contributed to the further growth of the state operator's debt to the "green" operators.

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It will soon become clear what to expect: either GB would sue Ukrenergo for not repaying their obligations to them, or the organizations would sign an amicable agreement, the head of the UWEA board noted. He also clarified that in the event of an "amicable agreement" payments (on the current debt to the "green") may be stretched over time, which will affect the investors, who, in turn, not receiving the payment guaranteed by the government, will go to courts. "Now the investors are negotiating with their banks to extend the terms for repaying loans. Ukrainian banks agree to this more willingly, but international ones still express concern about serious financial risks," he explained.

The green traders could also sue in Ukrainian courts or ICC arbitration in Paris to seek reimbursement of GB’s debt. "In this case, investors can demand not only reimbursement of debts but also the award of penalties," says Yaroslav Cheker, attorney-at-law, counsel at Arzinger. Four manufacturers have already filed such claims with Ukrainian courts. Experts also expect a reduction in the inflow of investments in "green" energy after the tariff restructuring. But even those who are more optimistic in their forecasts are forced to agree that there will no longer be such rapid growth rates as observed so far.

Ukraine was originally a country with great risks, says Konechenkov. The head of the UWEA is more optimistic in forecasts and expectations: "Construction and development of projects in the wind energy industry continue. Investors are looking at Ukraine, but the majority still took a pause for at least a month to see how the process of implementing the law and the provisions of the Memorandum (in part the authorities' obligations to pay off payments) will be implemented in practice."

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According to him, even after the restructuring, the "green" energy will have a future and new investors, especially if Ukraine is able to reach the market price of buying the produced "green" electricity: "This will also be facilitated by additional payments for localization, that is, for the percentage of produced equipment in Ukraine, which, in truth, is an additional positive innovation of the law. The document stipulates that if 70% of the components of a wind turbine or solar panel were produced in Ukraine, there is a + 20% surcharge to the "green" tariff. Previously, there was only a 5% surcharge for production of 30% of components in Ukraine and 10% at a localization level of 50%."

The head of the UWEA stressed that in Ukraine "such a sector as the production of "green" hydrogen is beginning to develop. "Green" hydrogen can be produced through a decentralized "green" generation. We expect a large-scale development of this direction," he predicts.

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The situation in the "green" industry could have been improved for a long time by auctions held on the principle that permits for the construction of renewable energy facilities are issued to those investors who have agreed to the lowest "green" tariff. Despite the adoption of legislation that allowed such auctions to be held, and the promises of the authorities that they are about to happen: so far not a single auction has taken place.

"The first auctions should have been held in the first quarter of 2020. On the one hand, everyone said that there would be auctions, everyone would switch, and there would be competition. Whoever offers the lowest price will build. But in fact, it remains a "green" tariff. And everyone understands that competition at a low-tariff auction because according to the experience of other countries, the very first auction leads to a decrease in the tariff by at least 30%. Besides, investors would not be attracted by auctions taking into account problems in calculations It would be necessary to do in such a way that at a certain moment the "green" tariffs would end, and all the investors who want to build would go to auctions and compete with each other. But we understand that we have signed prePPA (preliminary agreement electricity purchase and sale at a "green" tariff (Power purchase agreement) for almost 11,000 MW, today 7.2 MW has been built, and the rest can be introduced at any time at "green" tariffs. Therefore, anyone who wants to build may buy a ready-made project (with a guaranteed tariff), and it makes no sense for him to go to the auction. And herein lies the irony," Andriy Gerus explained.

As for the auctions, there are a number of serious questions, Konechenkov notes: “There is still no clarity about the allocation of quotas, which is a prerequisite for their holding. The quotas provide a guarantee that all objects that will be included in them will not be easy are guaranteed to be connected to the power grid, but they will also have guaranteed sales."

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Summing up, we can say that the current situation is very uneasy for the Ukrainian authorities. On the one hand, there is a threat of lawsuits and even greater losses in terms of investment attractiveness, and on the other hand, there is a lack of funds and their sources to pay off current obligations and debts to green energy producers. If these funds are not found, there will be no choice but to raise electricity prices for the population, which has not changed since 2017. Or you would have to go for another increase in electricity prices only for industry.

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