Ukraine is holding pilot renewable energy auctions on Thursday (31 October) to attract investments in decentralized power generation, but high debt and a lack of trust in state payments are threatening any fast build-out.
Ukraine’s energy sector is cash-strapped as Russia has damaged, destroyed or occupied around two-thirds of the pre-war generating capacity. Without sufficient air defense, the power grid and electricity supply will continue to be destroyed, making this winter likely to be even tougher than the previous ones.
This is where renewable energy can come in. As wind and solar parks are more decentralised than thermal power plants, they are harder to hit with missiles and drones.
As of 2021, renewables like wind, solar and hydro made up only circa 2% of the country's energy supply, according to the IEA.
Attracting investors to finance the build-out of more renewables is crucial. However, such projects in the country are currently not profitable.
“There are hardly any projects that pay off,” Michael Salcher, head of energy at KPMG told the author. “Investments in Ukraine are currently more a social and humanitarian than an investment question.”
For this reason, Thursday's auctions are trying to crowd in private capital through a state-funded feed-in-premium, meaning that the state-owned 'guaranteed buyer' covers the difference between the auction and the market price.
Various stakeholders see the auctions as a positive step toward creating a functioning market. “We hope that this pilot project will be replicated next year but with a larger volume,” Oleksandr Selishchev, CEO of the renewable energy company DTEK Renewables told the author.
Growing mistrust
The auctions, however, have one major weak spot: the government's involvement. There are misgivings within the investor community, given the troubled past of state funding of renewables in Ukraine.
Back in 2009, the government introduced a 'green tariff' which allowed investors to sell their renewable electricity at a higher price. But as the electricity generation from solar and wind power increased, the government lacked the financial means to pay the higher tariff and retroactively cut the tariff by 40% in 2019.
While the government repaid parts of the debt to investors in 2024, a clear repayment plan for the future remains unclear.
“We have investors that are very reluctant to proceed to work with the state-owned off-taker,” said Anastasiia Vereshchynska, CEO of the European-Ukrainian Energy Agency told the author.
“And we have international financial institutions that are also unhappy with providing loans to the businesses that involve the state-owned off-taker.”
Therefore, auctions involving 'guaranteed buyer' threaten to attract fewer investors than needed, especially from abroad.
“Rebuilding the broken trust between the investors and the Ukrainian government would be the first step,” said Kostiantyn Krynytskyi from the NGO Ecoaction. But “I think it can be really difficult.”
There are alternative models that could promote investments in renewable energy without involving the state. For example, a proposal that has received significant attention foresees a fund backed by international financial institutions, which would cover price fluctuations around a set price cap – as the 'guaranteed buyer' does for the feed-in-premium.
“I think this is the fastest way to push everybody to invest in renewables,” said Selishchev.
Tough choices
A further approach to bolster the state’s payment ability and attract investments could be cutting electricity subsidies. Despite two stark price hikes since the beginning of the war, households pay only about half of the market price.
Olia Evstigneeva, who works at the Ukrainian Ministry of Energy, emphasises: “If we do not act now, we risk losing the opportunity to expand renewable energy and build an efficient, transparent, debt-free market. It is essential to ensure that these subsidies are monetised effectively.”
However, reducing subsidies even further is a politically sensitive move during the war in which more and more people are falling below the poverty line. To avoid energy poverty, vulnerable groups could be protected by allowing a certain minimum energy consumption at subsidised prices.
Another approach would be to only subsidise households identified as energy-poor – a classification currently absent from Ukrainian law. More cost-reflective prices could also incentivise higher energy savings and more energy efficiency, both areas with room for improvement.
However, the central problem of the energy sector remains the war itself.
“Not all investors are ready to come here and to do something while the missiles are flying and while the bombs are falling down,” said Denis Jatsyshyn from the US-Ukraine Business Council.
“I am very doubtful that we will see big investments coming to Ukraine until the war is over.”
This article was first published at Euractiv on October 31, 2024. The views in this article do not necessarily represent the views of the Heinrich Böll Foundation, Washington, DC.