Ukraine has been remarkably consistent in terms of the state support to renewables and protection of investors in the energy sector. However, suggested by ex-Prime Minister Oleksiy Honcharuk’s government and aimed at covering the Hr 17 billion deficit ($600 million) of the state Guaranteed Buyer to producers, the drastic recent developments in the sector can put at risk the trust Ukraine as an investment destination has built over the years.
As a legal practitioner, I have been advising foreign investors, particularly those with a focus on energy and renewables, since 2005. Over the last 10 years, Ukraine has become the fastest-growing renewables market in Europe. The outcome is record-breaking: over 6.7 gigawatts of green power generating facilities installed, over $3.7 billion foreign investment attracted only in 2019. This money constituted the majority of the total foreign direct investment into the Ukrainian economy.
The outstanding pace of growth has been inspired by the lucrative feed-in tariffs introduced in 2009. The tariffs, and even more the consistent state policy towards protecting the rights of the foreign investors, became the main reasons for them to come to Ukraine and stay. Now they might reconsider their options.
Both parties have previously declared the will to reach a compromise that could have stabilized the situation with the state support of the industry and at the same time preserve the guarantees for project developers. But the recent initiative of the government to cut the feed-in tariff for wind and solar energy producers as well as to cut the validity terms of the pre-power purchase agreements changed the outlook.
The result of the six-month negotiations with the former Cabinet of Ministers appeared quite unexpected to the investor community. It looks like the former government’s initiative to cut down the tariffs has been driven solely by the need to cover the deficit of the Guaranteed Buyer – the state enterprise obliged to buy out all the energy generated from renewable sources from the producers. Importantly, the introduced changes seem more forced than voluntary.
However, even if investors accept the changes, it will allow the government to cover the Guaranteed Buyer’s deficit only partially – by up to 20%. Another option to help cover it in full could be the obligation for large industrial enterprises to duly pay for energy transmission. However, for some reason, the issue doesn’t seem to be on the government’s agenda.
What is left out of the discussion now is the long-term economic interest of Ukraine as a state willing to stick to the declared energy independence goals. The growing share of renewables in the total energy output has been proving Ukraine’s consistent effort to gradually switch from traditional to alternative power sources. According to the Green Deal 2050 presented by the Ukrainian Ministry of Energy and Environment Protection, in 30 years energy generated from alternative power sources should comprise up to 70% of the total energy consumption of the country. Controversially, the state demonstrates an approach that is rather reactionary than visionary.
Along with tariff cuts, developers might face risks related to another change – reduction of the development terms for projects under pre-PPAs signed by the end of 2019. In particular, the risks could be higher for wind facility developers. Development of wind power plants takes 5 to 10 years; shorter terms would eventually cause suspension for the majority of the ready to build projects.
So far it seems like the scenario suggested by the state narrows down the opportunities to find a solution that is acceptable for both the government and investors. Notably, the renewable energy market players are still ready to look for a compromise. They were actually quite close to setting a new deal with the state but the former Government suddenly took a step back.
The last thing foreign investors would want to do is to start arbitration proceedings against Ukraine. Many of these proceedings would relate to projects which are not even under construction. It means that Ukraine would have to pay off the investor damage largely for deals that exist only on paper.
In the end, Ukraine might face multimillion investment arbitration obligations because investors are given no other choice. Would it help attract $50 billion into the national economy as promised by Zelensky? Seems like the answer is obvious.
All the hopes now go to the new government under Prime Minister Denys Shmygal, where the seat of the minister of energy is still vacant. The industry is, therefore, waiting to see the new negotiator of the green deal for Ukraine.
Oleksiy Feliv is managing partner at INTEGRITES law firm based in Kyiv.
