Ukraine’s renewable rush still faces uncertainties

Ukraine’s renewable rush still faces uncertainties
Ukraine is ideal for generating solar and wind power
By Fabrice Deprez in Nikopol October 19, 2018

A cold autumn wind is sweeping through the roughly 400 hectares of dirt that will soon host the biggest solar plant in Ukraine. 350 workers started laying 750,000 solar panels in this former ore quarry near the city of Nikopol, in southern Ukraine. DTEK, the Ukrainian energy giant who will operate the plant, says it is set to start running in early 2019. To keep to the schedule, the number of workers will soon rise to a thousand, most of them Chinese employees from the China Machinery Engineering Corporation.

“We’re ambitious,” DTEK CEO Maxim Timchenko told bne IntelliNews. “Our goal is to set up 1GW of capacity in renewables by the end of 2019.”

40 kilometres south, on the bank of the Azov Sea, the company is also getting ready to operate 26 wind turbines currently being built by General Electric.

Sunny weather and the steady breezes blowing from the Azov Sea have put the southern regions of Zaporozhe and Dnipropetrovsk at the heart of Ukraine’s recent rush into renewables. Its supporters hope the increasing number of projects could translate into major foreign investments and bolster Ukraine’s energy independence. At the same time, uncertainties over the energy reform means the sustainability of this growth is still unclear.

Ukraine still relies on soviet-era nuclear power plants as well as gas and coal-powered thermal plants for its electricity. Nuclear, natural gas, oil and coal make up 96% of the country’s energy mix, with renewables estimated at somewhere between 1 and 2%. Several of these traditional facilities are also located in southern Ukraine: a 20 kilometres radius around the Nikopol solar plant includes both the most powerful nuclear plant and coal-powered thermal plant in Ukraine. The latter is also owned by DTEK.

DTEK is owned by Ukrainian oligarch Rinat Akhmetov, Ukraine’s wealthiest man. The conglomerate controls 70% of the country’s thermal plants, which provide most of the electricity. At the same time, it is set to become the biggest player in Ukraine’s renewables sector.

Rush into renewables

While renewables is still in its infancy in Ukraine, it has seen a flurry of projects in the last two years. The number of licenses for producing renewable energy delivered in Ukraine grew from 131 in 2015 to 163 and 230 in the following years, according to the Ukrainian Association of Renewable Energy (UARE). State-run power company Ukrenergo expect the country’s renewable energy capacity to go from the current 1.5GW to 3GW in 2019.

Renewables have benefited from so-called “green tariffs”, state subsidies designed to boost investment in clean energy. “The green tariff is set in euro, which is important to make it attractive to investors,” Iryna Krymus, an expert at the UARE, told bne IntelliNews.

Launched in the country in 2008, the green tariffs jumpstarted the renewable sector in Ukraine: 12 licenses for renewables projects were delivered in 2009, and 107 in 2013. “We started investing in renewables in 2010, with a pilot project, 200MW of wind power” DTEK CEO Maxim Timchenko says. “It was very successful, but the 2014 political and economic crisis forced us to suspend all our expansion projects. Now however, we’re back on the market.”

Foreign investors have also shown interest in renewables. In Nikopol, where DTEK has set up its 200MW solar plant, Canadian company TIU Canada is planning to start operating a 10.7MW solar power plant in January. Norway's Scatec Solar announced in June it would soon begin construction of two solar parks in the Cherkasy region with a total capacity of 83MW. Ukrainian businessman Vasyl Khmelnytsky has completed a 18MW solar power plant in the Kherson region. DTEK has also signed a second contract with US General Electric to supply equipment for Prymorska wind farm in the Zaporizhia region in October. Media also extensively reported on the construction of a 1MW solar plant in Chernobyl’s “exclusion zone”, which was the result of a partnership between Ukrainian company Rodina and Germany’s Enerparc AG.

Ukraine’s incentives to switch to renewables include the fact that “most of the existing power generation facilities in Ukraine are worn out and inefficient” Igor Dykunskyy says. As they will need to either be overhauled or replaced in the coming decades, renewables might prove a viable alternative.

But the most powerful argument could be the issue of energetic independence: the seizure of Donbas by Russia-backed separatist groups has forced the country to increase its imports of anthracite coal, mostly from Russia, to keep thermal plants running.

The shadow of the energy reform

The attractiveness of the green tariffs, reforms and the gradual recovery of the Ukrainian economy are generally credited for the growth of Ukraine’s renewables sector. “A key reason for the development of renewables in Ukraine is a good regulatory regime and guarantees from the state to investors,” Maxim Timchenko said. Oleh Savitskyi, an energy policy expert for the NGO “Ekodia”, also pointed out the support of state power company Ukrenergo as a major factor: “They’re pro-renewables. They are not restricting access to the grid and they created a very transparent and clear procedures for grid connections,” he says.

But analysts also see behind the rush a desire to take advantage of beneficial conditions before upcoming regulatory changes. Ukraine has engaged in an ambitious energy reform that plans to do away with the current green tariffs to replace them by an auction system. Rather than providing fixed amount of subsidies, the government would issue tenders to buy a certain capacity of renewables electricity.

“Right now, there’s a window of opportunity to get the green tariff before it is cancelled, so we see a rush of projects,” Oleh Savitskyi says. “But this is very short term, and there’s a real possibility we’ll see a drop in the numbers of big projects when the auctions are introduced.”

The current draft of the law states that renewable projects set up before July 2019 will be able to keep benefiting from green tariffs until 2029. Igor Dykunskyy, managing partner at DLF attorneys-at-law believes that “there is a risk of a decline in the renewable energy sector in Ukraine after 2020. Once the feed-in tariff is reduced, the payback period of the projects will increase.”

The current appetite for renewables projects could, paradoxically, cause some issues too. Analysts worry that the grid connection in southern Ukraine, where most of the renewable projects are located, might soon be saturated. “The construction of new power plants will not make any sense without the development of power transmission and storage systems,” according to Igor Dykunskyy

Ukraine still has major advantages that could make it a serious player in the renewable business. Its geographic position makes it ideal for both solar and wind power, with several promising regions (such as the western’s Transcarpathia) still untapped. The country joined the International Agency for Renewable Energy as a member in February 2018. And while renewables represent less than 2% of the total energy mix, it “accounted for around 6.4% of the total electricity generation by January 2017,” a Carnegie Europe report found. The figure is half the target (11%) set up in the National Renewable Energy Action Plan, adopted in 2014.

“Renewables will take a larger share of the market,” Oleh Savitskyi argues. “How big will depend mostly on political factors, the two key issues being unfavourable conditions for foreign investors and problems with the independent regulator, who isn’t independent.” Ukraine’s National Energy Regulator Commission was established in 2014, and has since regularly been accused of being subject to intense political pressure.