Finding the Culprits: Will Curtailing Renewable Energy Resolve the Energy Crisis?

Photo of a solar panel from below, on a background of clear blue sky

Officials' recent statements have been unanimously accusing renewable energy (RES, or "green" energy) of the energy crisis, accumulation of debt to the electricity market players and the complicated financial dilemmas in this sector. The government has made a complete U-turn from the "green deal" declared by Honcharuk's team. What will be the consequences of curtailing renewable energy for Ukraine?

Medical History: What Is Green Energy's Fault?

The previous government clearly declared its orientation towards a "green energy transition," which was outlined in the concept of a "green" transition by 2050, presented in January 2020. It focused on the single vector of movement together with the European Union, which officially proclaimed the Green New Deal meant to overcome the global climate crisis. The next step in implementing the Concept for the next decade was supposed to be the Integrated Plan for Energy Development and Combating Climate Change by 2030.

"Ukraine is quite capable of achieving 70% of RES in electricity production by 2050, and it makes economic sense as well. Moreover, a significant part (up to 15%) should come from the production of electricity from rooftop solar batteries in households and businesses," the document declared.

However, despite this, discussions have repeatedly been raised about the "uncontrolled growth of renewable energy" and that the state's commitment to the "green tariff" is becoming a burden for the economy. This discussion has been going on almost since 2009, when the "green tariff" was introduced. Attempts to suspend the growth rate of renewable energy (Suspend! When it is supposed to account for 70% of all electricity!) have been made now and then. For example, a year ago, amendment No. 24 to law 8449-d was made, which zeroed out all "green" tariffs for domestic ground-based solar power stations with a capacity of up to 30 kW and banned the construction of new ones. The amendment was rejected but not forgotten.

And here we are back to the sore subject. First, in February, the Ministry presented proposals to change legislation concerning alternative energy. It was predicted that renewable energy would produce 12.3 billion kWh in 2020, and that it would inevitably entail debt to producers. The plan provided for increasing the responsibility of "green" energy manufacturers for imbalances, making the requirements to new solar energy stations more rigorous and reducing the time for commissioning of new solar power stations.

The appointment of the new head of the Ministry of Energy and Environmental Protection Olha Buslavets, has initiated a series of statements that renewable energy is a problem for the Ukrainian economy and its energy sector, and it requires an immediate solution.

"The high 'green' tariff creates a significant financial burden on the electricity market. Besides, this is non-guaranteed production, which is very difficult for the system to regulate," said Acting Minister Olha Buslavets at the meeting of the newly established Anti-Crisis Energy Headquarters.

According to the regulator (National Commission for the State Regulation of Energy and Utilities of Ukraine, NEURC), the share of "green" power stations in the production of electricity in Ukraine currently constitutes 8%, while the payment to these power plants accounts for 26% of all funds.

State-owned enterprise Guaranteed Buyer announced in April that the company had a debt of UAH 12.1 billion total to generation, including UAH 7.17 billion to generation from renewable sources.

The Acting Minister was also alarmed by the rapid increase in the growth rate of renewable energy. She pointed out that the volume of the generation had tripled in the past year and a half. This situation was caused by the fact that 2019 was the last year of the highest "green tariff," prompting investors to rush to get it in time. This was the reason for the rapid dynamics.

The national regulator immediately suggested two ways to solve the problem. The first one is prohibiting the construction of new "green" power stations until additional load-following capacities are built in Ukraine, the "green" tariff is reduced to €0.08-0.09, and companies are fully accountable for imbalances and restrictions without compensating for 20% of their production. The second proposal is less restrictive. It entails reducing the "green" tariff by 30% for solar power plants and by 15% for wind power plants, as well as the same liability for imbalances and free restriction on production.

Renewable Energy as a Climate and Economic Necessity

Both stakeholders of the renewable energy market, who will be affected by this issue economically, and the environmental community, who were unpleasantly surprised by the shift away from the "green course" and from neutral direction of the country climate-wise, expressed their disagreement with the Ministry's new policy of "coal industry development" (according to O. Buslavets). By the way, Ukraine has proclaimed the green deal at the international diplomatic level.

"Instead of talking about the Green Deal, they are now destroying the achievements of the last five years in Ukraine's climate and energy policy. Our shot at energy independence and security in the near future is being destroyed for the sake of a vague economic effect. Over the past five years, many people have made the effort to encourage investments into the Ukrainian energy, especially from Ukrainians themselves. Nuclear and coal-based energy, which is still in the focus of politicians and the Ukrainians influenced by them, is in a horrible condition. Most units at these power plants have to be shut down in the next 5 to 10 years. Unless we speed up the transition to RES, we will have to buy most of our electricity from Russia and the US in just 5 to 7 years. Towns and villages will take the hardest hit, left alone with their energy problems, which are certain to transform into social problems," says Yuliia Melnyk (Pashkovska), campaigner of the international climate organization

Apart from climate benefits, there is also economic rationale behind this.

According to a study by Stanford University, the transition of 139 countries to 100% renewable energy sources will create almost twice as many jobs (52 million) as the number of people laid off in the coal and oil and gas sectors (27.7 million).

Volodymyr Shmatko, mayor of Chortkiv, a community committed to 100% RES by 2050, is sure of the environmental and economic impact of the RES development.

"Apart from the environmental vision of the situation, the transition to RES also means taxes, jobs, safety and a healthy society; it means investments and self-employment of the population. After all, when people invest money in their business, they start caring about related issues. Therefore, we expect that the development of renewable energy will contribute to the environmental thinking and the development of civil society," says Volodymyr Shmatko.

Blow to Investors. Can We Agree?

However, the most important aspect that will be affected by the curtailment of renewable energy development is investments and trust in the government. In fact, the ambassadors of Belgium, the UK, Canada, Norway, Germany, France, Sweden and South Korea in Ukraine called for preventing non-return on investment in renewable energy sources (RES) in Ukraine in a letter to the country's leadership. They stressed that foreign companies have already invested more than $2 billion in the development of the renewable energy sector in Ukraine, which indicates confidence in the country's compliance with its regulatory and legislative obligations. Because of that, they warned the government against decisions which can undermine the investors' trust and have short-term benefits but long-term negative impact on the electricity market in particular and the investment climate overall.

The Ministry has prepared a draft framework Memorandum with renewable energy producers on a voluntary review of the existing "green" tariff model. It says that negotiations with investors are continuing and express expectations that investors will agree to all conditions. If no agreement is reached voluntarily and the government changes the terms unilaterally, we can expect international arbitration and financial claims.

"These governmental decisions may lead to the drop of internal and external investments. The response will not always be noticeable right away. But the economy is based on trust. This decision will eventually have an impact on the whole economy. Foreign investors will be more careful with investing into our country. Internal investments will suffer as well. Loans for RES facilities given out by Ukrainian banks amount to billions. Change of the rules will lead to potential issues with paying out the loans. This means problems for the entire banking system," says Andrii Zinchenko, head and co-founder of the energy cooperative enterprise Sun City, co-founder of NGO Association of Active Consumers and Prosumers. (Prosumer = producer + consumer)

Losses for Small-Scale Generation

The environmental community notes that the problem with the "green tariff" is that the government now does not make a difference between industrial renewable energy producers and prosumers. "Restructuring" of the tariff for big companies like DTEK and maintaining the conditions for small-scale generation objects are one of the proposed solutions.

"The energy transition must be fair. When power engineers speak about imbalance in the system, they speak primarily about big power plants. As activists, we primarily speak about the need for tens of thousands of small-scale solar power units in Ukraine, which would provide for the needs of their owners and would not lead to any sort of imbalance. We demand that the Government support access to renewable energy for regular Ukrainians, as opposed to oligarchs. Support mechanisms may include not just the "green tariff," but also accessible loans, tax deductions, etc. The situation in the energy sector shows once again that Ukrainian politicians do not serve the people or the public interests, they serve monopolies and big businesses," says Yuliia Melnyk (Pashkovska).

According to the State Agency for Energy Efficiency, there are currently 24,000 household solar power stations in Ukraine with a capacity of up to 30 kW. Their total capacity reaches 618 mW. People have invested about half a billion US dollars in them, and they want to get their money back. In the first quarter of 2020, households installed more than 2,100 solar power stations with a total capacity of 65 megawatts. This is 1.5 times more than in the same period of 2019. The leading oblasts by the number of installed solar power plants are in Dnipropetrovsk (3,200), Ternopil (over 2,200), Kyiv (almost 2,000), Ivano-Frankivsk (over 1,800) and Zakarpattia (over 1,400) oblasts.

The owner of a solar power plant from Khmelnytskyi oblast Mykola Matveiev took out a loan of UAH 730,000 in 2018 to construct two solar power stations of 30 kW each in Dunaivtsi of Khmelnytskyi oblast. The entrepreneur expected to make his money back in 5 years. He expected to sell 40,000 kW annually at the current rate of €0.18/kW.

The entrepreneur is prepared to discuss the reduction of the "green tariff" with the government; however, his loan for construction of the solar power station has not yet been returned. While the bank allowed to postpone loan payments due to the pandemic, the entrepreneur is still supposed to be paying until 2023.

"When they speak about the uncontrollable growth of RES producers, I think back to the entire path I had to go through to register the energy cooperative and engage those 97 co-owners. This means a lot of paperwork, oversight and bureaucratic procedures that you have to go through to get there. No, it's not easy. These people have believed in it and invested their own money, not necessarily a lot, some just invested UAH 15,000. And now what?" says Andrii Zinchenko.

Full Scale Reforms Are the Solution


The Energy Transition Coalition which has united stakeholders of the small-scale renewable generation market and the environmental community, believes this can all be resolved by means of energy reforms. They should include updating the energy infrastructure, reducing the use of "dirty" energy, developing distributed generation and citizens' energy projects (prosumers, energy cooperatives), developing various forms of renewable energy to better balance the system, in particular focusing on the development of biogas stations that contribute to balancing, paying attention to the issue of energy storage, etc.

By the way, joining the European energy network will help solve the issue of network balancing. However, Ukraine has not yet taken sufficient legislative and diplomatic steps to do this.

"The success of stopping the development of renewable energy as a solution to the energy crisis in Ukraine looks doubtful. Take the network balancing problem. What investors will want to invest into balancing capacities or accumulation systems if the government can let RES investors down? Of course, the problem of non-payments and debt to market participants must be resolved. The high "green" tariff can be restructured subject to coordination with big investors (but it should stay on the same level for prosumers and small-scale generation under 1 MW). Even those actions, however, will only produce partial and short-term effects. This is because the tariffs for nuclear and coal-based power are formed incorrectly, do not include expenses for depreciation, modernization, decommissioning, overcoming environmental and social consequences, and, in the end, the consumer will still pay for all these components in the form of taxes on subsidies for these industries. Therefore, it is necessary to stop underestimating the price of nuclear power and impose social obligations on it, forcing it to sell electricity to the public at a low price," says Andrii Martyniuk, a member of the Energy Transition Coalition, Executive Director of the NGO EcoClub.

The long-term policy of the "green" energy transition should form the basis of the state's development vector and become the foundation for overcoming the economic crisis emerging due to the coronavirus pandemic. Representatives of the Energy Transition Coalition are convinced that the government and the regulator should move away from the manual mode of solving crises in the energy sector and from acting in favor of oligarchs interested in cheap electricity for their own industrial production or the development of the coal industry.

Instead, systemic reforms, decarbonization of energy, and development of RES will make it possible not only to preserve the health of the population through reduced pollution of the environment, but also to start the innovative path in the energy sector instead of holding on to the post-Soviet heritage.

Written by: Svitlana Chernetska, Oksana Alieva