Green energy companies reach a compromise with the Ukrainian government to avert an energy crisis this summer
Green energy investors into Ukraine have struck a compromise deal with the government, which wants to drastically cut the green energy tariffs, and do it retroactively, sparking a mass protest by Ukraine’s most significant direct foreign investors.
As bne IntelliNews reported, Ukraine was drifting towards an energy crisis as soon as this summer unless a compromise could be found.
Over 600 companies, of which a third are foreign, have poured $4.5bn into Ukraine’s burgeoning green energy sector in the last years to build 7 GW of badly needed generating capacity that helps wean the country off strategically uncomfortable Russian gas imports.
However, many of the companies have borrowed to pay for their investment and face bankruptcy after the state unilaterally called for the guarantee tariff payments to be cut by as much 20%-25% and the change to be applied retroactively.
The investors had offered to compromise with a voluntary 15% cut, but are also insisting the government simultaneously provide a new investment guarantee. With this piece of legislation the companies can then restructure their bank loans, industry participants told bne IntelliNews in an exclusive interview.
In typical Ukrainian fashion, an agreement has been reached at the eleventh hour.
“Active negotiations with the state on reaching a compromise in the sector of electricity production from renewable energy sources (RES) have been going on since October 2019,” the European-Ukrainian Energy Agency (EUEA) said in a press release emailed to bne IntelliNews.
In December 2019, the EUEA together with the Ukrainian Wind Energy Association (UWEA) started talks with the Energy Community Secretariat of Ukraine. But since then the situation has grown fraught as the government stopped paying for the power the RES were providing completely and has run up hundreds of millions of dollars of debt as a result.
“Ukraine is on the verge of complete destruction of the industry. To avoid a total catastrophe, on June 10, 2020, the EUEA and UWEA signed a compromise memorandum with the Government of Ukraine," the EUEA said in its statement. “Signing the memorandum is a responsible, albeit forced, step on the part of a group of investors.”
Under the terms of the agreement the green energy companies agreed to accept a reduction of the green tariff for solar power plants (SPPs) built in 2015-2019 by 15%; for wind power plants (WPPs) built in 2015-2019, by 7.5%; the introduction of solar pre-PPA “cut off” date being July 31, 2020; reduction of the green tariff by 2.5% for WPPs and SPPs, which will be commissioned from January 1, 2020, the EUEA reports.
“The most important are the state guarantees to ensure full current payment for RES by the Guaranteed Buyer, as well as the approved schedule of debt repayment to electricity producers from RES,” EUEA said.
"The state and time played against investors, and this greatly weakened their negotiating position. In a situation of 90% non-payment from the "Guaranteed Buyer" [GarPok] for several months, many investors simply cannot afford to wait until the [autumn]. Until then, they will simply go bankrupt. Not everyone will have the resources to support their business for three to four years, until they receive compensation through arbitration. The member companies of the EUEA faced a difficult choice. And everyone made [their] own choice, based on the understanding that it would do less harm to his / her company and the sector as a whole,” said Yuri Kubrushko, a member of the EUEA Board.
Despite the fact that the terms of the memorandum significantly reduce the profitability of RES power plants, the EUEA noted that the government has made significant efforts to reach a compromise.
“But the solution to the artificial crisis in the renewable energy sector, caused by the irresponsible policy of the previous governments, the inaction of the regulator, and further negative impact of quarantine, dictated the need for decisive action,” the EUEA said.
During the vote for the signing of the memorandum, certain members of the association did not agree to its terms, or abstained in the voting. However, most of the EUEA members supported the memorandum, so the association decided to join in its signing. The memorandum is indicative of the support of those members that approved, but is not legally binding on those that disapproved, the EUEA pointed out in its statement.
“The memorandum does not oblige any of our members to specific actions. Companies, especially those that do not agree with the terms of this document, will independently decide on their next steps. The EUEA Board will do everything possible to ensure that our companies support the sustainable development of the renewable energy industry and Ukraine’s transition to clean energy sources in the future,” stressed Olena Rybak, vice-chair of EUEA.
Still, the investors remain unhappy and feel they have been forced into a compromise by the failures of the government to stick to its promises and by the failures of the power sector reforms that were put in place in the last two years. However, at the same time the investors concede Ukraine is being buffeted by power external shocks and say they are willing to do what they can to help, as long as they can meet their obligations to their creditors.
Ukraine has been recovering from an almost total collapse of the economy in 2015 that followed the Euromaidan protests and change of president. Working with few resources the country desperately needs to attract foreign investors, and the green energy has been the one place where it has had some success. But commentators warn that the clash between the government and energy investors over the mooted changes to the green energy tariffs has hurt Ukraine’s already poor investment image. For their part, the energy companies see this week’s compromise as a temporary solution.
“The memorandum is not the final, but rather the starting point for power plant workers to get paid, for investors to continue operating their facilities, serve the communities, complete the construction of their projects. The EUEA will work with the government and the parliament to implement the provisions of the memorandum and, if possible, achieve more to address open concerns of all our members,” said Mats Lundin, chairman of the board of EUEA.
For its part the government promised to stabilise the sector’s work in the coming months, including the full and timely payment for generated electricity and the return of accumulated debts of UAH14bn ($534mn) over the next one and half years.
The memorandum should also become the basis for the corresponding draft law, which will be registered in Parliament in the near future. The Rada is due to go into its summer recess and the green energy companies want to see the new deal enacted as law before the deputies break up for the holidays. The companies need the legislation to be able to restructure their debts with their banks.
“The signing of the memorandum is a chance for Ukraine to stabilise the energy sector and secure an investment future. The expectations of market players and the international community for responsible government actions to stabilise the situation in the renewable energy sector are now even higher,” the EUEA said.