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Investing in renewable energy projects in Ukraine

Wind power sped past an installed capacity of 430 GW last year, on a trajectory to reach 2,110 GW by 2030, a build out that could translate into a steady annual investment of some US$220 billion. Solar fired up a further 50 GW, taking installed capacity to almost 230 GW. It could be ten-fold that by the end of the next decade.

Seen historically, 2016 capped a revolutionary decade for renewables, during which these two leading new energy industries expanded at average annual growth rates of 23 percent and 50 percent respectively, greatly aided by unprecedented cost reductions: since 2010, the price of wind turbines has dropped 45 percent, and solar modules are now 80 percent cheaper.

However, global growth—renewables accounted for the largest source of new power investment last year, equating to nearly a fifth of the total energy industry outlay—has masked regional change.

For Europe, specific challenges remain—not least the inconvenient truth that investment has in fact been sliding in the EU-28, slipping to US$60 billion in 2015 from US$135 billion in 2011. New money is now pouring into emerging markets including India, Chile and Mexico.

The European Commission’s longawaited Energy Union package unveiled late last year should restore faith in investing in the EU’s transition to a cleaner power system. Key to the plan’s eight legislative proposals to shape renewables deployment and electricity markets to 2030 is one clause that requires member states to give at least three years’ visibility on their support schemes and another— the “grandfathering” or “Spanish” clause—that will make it much harder for governments to change policies and support schemes retroactively. Together, these would provide an unprecedented boost to industry and investor certainty that would help cut the cost of capital and bolster confidence in spending on R&D and innovation.

The fact that industrial scale renewable energy generation has graduated from technical feasibility to economic competitiveness with status quo power sources will not on its own achieve the avowed ambition of the EU’s 2030 emissions targets and the Paris Agreement which is to limit temperature rises to 1.5°C above pre-industrial levels through total decarbonization of the world’s energy system. What could, however, is an energy transition fueled by a technology-led US$15 trillion investment opportunity, more transformative to the global economy than the Industrial Revolution.

The race is far from run. As recent quarterly data from Bloomberg New Energy Finance has shown, worldwide renewables spending lagged significantly year-on-year as China “paused for breath” in its wind and solar construction campaign. But, given the trend in investment away from old and into new energy sources, renewables are finding a marathoner’s pace. And investors are keen to back a winner.

According to the 2014 National Renewable Energy Action Plan of Ukraine up to 2020 (the National Plan), the share of renewable energy in gross final energy consumption in Ukraine should have reached 5.9 percent in 2014 and should grow to 11 percent by 2020 in line with the undertaking made by Ukraine as part of the European Energy Community.

As a result, Ukraine is taking all possible measures to stimulate the development of RES. Changes in the electricity sector adopted in mid-2015 unlocked the market for new RES power plants. 30 MW of new capacity were commissioned in 2015 after a two-year period of stagnation, and another 100 MW are installed in 2016. Continued growth of new RES capacity is expected in 2017 and beyond to 2020, especially in terms of large scale wind and solar projects.

The attractive premium to the feed-in tariff for locally produced equipment is encouraging equipment producers to produce nacelles, solar panels, turbines and other equipment in Ukraine. The first RES projects (wind and small hydro) have already obtained the 10 percent premium for the use of locally produced equipment.

A new stimulating tariff for heat from renewables is in the legislative pipeline and final adoption is slated for early 2017. These changes will mostly open up opportunities for producers of heat from biomass: by 2020 biomass is expected to replace annually up to 7 bcm of natural gas. As a next step, Ukraine plans to create a competitive heat market in 2017, which will eliminate the gas monopoly in its heating sector.

 

Drivers of RE sector in Ukraine:

  • Feed-in tariffs for electricity produced by solar and wind farms as well as biomass/biogas, small hydro and geothermal power plants (from 6 to 19 euro cents per kWh) are on average 15 percent higher than in the EU.
  • Feed-in tariffs are fixed (and EUR-linked), and there is a state guarantee to purchase the power produced, from the date of commissioning to the end of 2029.
  • In general, there has been a positive history of payments to RES projects.
  • A stimulating tariff for heat from renewables is expected.
  • Growth of tariffs for electricity from conventional energy sources and tariffs for consumers.
  • Availability of possible sites for projects and options to develop new sites.

 

Constraints and risk factors:

  • The feed-in tariff is granted and guaranteed only after the commissioning of power plants, not before. However, it is expected that from 2017 onwards it will be possible to sign a preliminary power purchase agreement with a purchaser before the construction stage.
  • Gradual introduction of responsibility for imbalances of solar and wind power plants will start in 2021.
  • Ongoing reform of the electricity market (from the single buyer model to bilateral contracts and balancing markets).

 

Based on the Dentons Guide "Investing in renewable energy projects in Europe", published in January 2017


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