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What are the Factors Constraining the Development of Renewable Energy?


Oleg Trokhimchuk, Attorney at Law

Source:Yuridichna gazeta

Growth in the renewable energy production is a priority for the world community, as soon as it is the prerequisite for solving the burning problems facing humankind today (ecology disruption, climate change with all consequences harmful to people and the planet as a whole).

Due to its convenient geographical location Ukraine is quite a good object of interest for investors, which is confirmed by the constant growth of the number of new projects in the field of renewable energy, especially in the field of production of energy from renewable sources such as solar and wind. The main reason for this growth is the legislatively established guaranteed level of “green” tariff for electricity produced from renewable energy sources, which is pegged to the exchange rate of Euro and will be unchanged till 2030, as well as obligations on purchasing the entire volume of “green” energy released into the energy system of Ukraine.

Today, the share of energy from renewable sources is about 2% of the total volume of generated energy, and its cost is almost 9% of the turnover in the electricity market. Such a financial burden was caused by the “green” tariff due to its pegging to Euro. Today’s tariff, which was approved several years ago, is one of the highest in Europe.

Due to the established level of the “green” tariff in Ukraine, the return on the investments made into renewable energy may be made on average in 4-6 years (depending on the capacity). However, as shows the experience of some European countries where the “green” tariff was introduced, the development of the industry, which was built solely on the support mechanism, is not sustainable.

Being aware of this fact, the special-purpose committee of the Verkhovna Rada prepared a draft Law No. 8449-d On Introduction of Amendments to Certain Laws of Ukraine as to Ensuring Competitive Conditions for the Production of Electric Power from Alternative Energy Sources, which was adopted by the Verkhovna Rada in its first reading at the end of 2018. The said draft Law introduces new competitive mechanisms of price formation (auctions) and provides for a reduction of the amount of the “green” tariff for solar power plants by 25% from 2020, and by 10% for wind power plants.

The European Union, the EBRD, the World Bank and the Energy Community are supporting Ukraine’s need to move from the current “green” tariff to a competitive system based on “green” auctions. These institutions believe that the current system, although useful for launching the sector, is no longer viable to maintain its long-term development.

In addition, Ukraine was informed that the EBRD will no longer be able to finance new projects in its territory that rely on the “green” tariff, except for those which are already currently underway. Unless a law will be passed guaranteeing a long period of economic stability in the sector, which will provide the necessary comfort for investors and financiers.

In such way, it can be stated that currently the main constraint to the development of renewable energy in the long run is the transitional processes occurring at the market, as well as the legislative uncertainty of the new rules of the game.

In the current realities, to start a “green” energy project from scratch it will be necessary to go through a difficult way before construction starts (it especially concerns the procedure of obtaining technical conditions for connecting the electrical grid). The market for the sale of ready-made renewable energy projects in Ukraine is in the early stage of its development. However, the economic feasibility of building new green energy facilities will remain until the end of 2019, provided that their construction will begin in the first quarter, given the need for their commissioning. In the future, investors are unlikely to risk their own funds and start financing new projects.

It must be noted that currently there is a big discrepancy between the declared and implemented projects.

The volume of technical specifications issued for connecting to the grid significantly exceeds the capacities that can actually be put into operation. There is a situation on the market when a significant number of projects (experts cite figures of 70-80%), where the technical specifications for connecting to grids are only declarative in their nature and were organized without the intention of carrying out any construction activities, but simply for subsequent resale. For such projects, reserved were the capacities that could have been allocated to the parties having a real intention to perform the construction. The reduction of the “green” tariff and the introduction of auctions should demonstrate which of the issued technical specifications are real and viable.

In any case, if the mentioned amendments to the legislation are adopted, it will be necessary to wait and see how they will be implemented in practice. Moreover, let’s not forget that 2019 is a year of elections, when political instability is felt particularly keenly, which usually does not contribute to strategic investors coming to the market.

The development of the “green” energy sector depends, first of all, on the political will and the stability of the legislation, which will pave the way to long-standing investment projects that will contribute to the growth of the share of renewable energy in total consumption (now the national plan for the development of alternative energy is not being fulfilled: from the planned 11% of generation and renewable energy sources in 2020 the level of only about 6% has been reached taking into account the indicators of large hydro-power and hydro-accumulating power plants), as well as to the refusal to use coal and other non-renewable energy sources, on which our country is very dependent today.

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