GetMarket spoke with Andriy Konechenkov, Chairman of the Board of the Ukrainian Wind Energy Association and Vice President of the World Wind Energy Association. UWEA has been an active participant in the process of negotiations between the Government and investors in RES, which has been going on since the end of last year. Andriy shared his vision of the process and results of the negotiations, as well as forecasts for the development of the Ukrainian RES industry in the coming years.
- In the energy community, we see different, often diametrically opposed positions on the Memorandum. Is the memorandum a victory or a negative thing for the Ukrainian RES sector?
- First of all, it should be understood that the Memorandum of Understanding is incorrectly defined as “good” or “bad”. The Memorandum is a document fixing the consensus reached between investors in RES and the Government, in order to unlock the Guaranteed Buyer's payments for electricity supplied to the market members and resolve the energy crisis.
At the beginning of the summer of 2019, the RES sector faced the problem of unstable payments for generated “green” electricity by the then SE “Energorynok”. A few months after the introduction of the new electricity market, or rather in November 2019, the baton of instability of payments was taken over by the newly formed SE "Guaranteed Buyer" and since March 2020, RES producers receive only 5-8% of payments for electricity sold. That is why the Memorandum is the first important step to resolve the financial situation in the RES market and bring companies out of default.
- The memorandum was signed by two associations, including UWEA. Although there are at least four active ones in Ukraine. Why did this happen?
- In December 2019, the European-Ukrainian Energy Agency, and later the Ukrainian Wind Energy Association, appealed to the Center for Dispute Resolution and Negotiations under the Energy Community Secretariat on the need for mediation between the Government and RES investors in connection with the Government's violation of current legislation. In May 2020, the Ukrainian Renewable Energy Association joined the initiative of UWEA and EUEA.
Given the fact that these three associations took the initiative and became direct participants in the negotiations with the Government, they were the ones who had to sign the agreed version of the Memorandum. If other RES market associations joined the mediation, they would also have the right to participate in the negotiations and sign the document.
- The divergence of positions on the Memorandum among the associations is obvious. Do you think this was a key factor in the fact that the negotiations have been going on since the end of last year? What else influenced the course of negotiations?
- From the very beginning of the mediation process, the dialogue between the parties to the negotiations was not easy. The main reason for this was the difficulty for one party to understand and accept the position and conditions of the other parties. It was difficult for investors to agree to the terms of the Government, and the Government could not accept the offers of investors. The dialogue with the Ministry of Energy and Environmental Protection of Ukraine, headed by Oleksiy Orzhel, was particularly difficult. The conditions proposed by this Minister were completely uncompromising and subjective, which aggravated the relations of investors with the Ministry. With the appointment of Denis Shmygal, and later Acting Ministry of Energy Olga Buslavets, the negotiation process was significantly optimized and encouraged investors in RES to reach a compromise and the opportunity to make concessions to the Government.
The most worrying thing for investors was the settlement of financial issues with banks - creditors of green projects, as the restructuring of green tariffs required them to hold difficult negotiations with banks to change the system of payments on loans. This issue was especially painful for foreign investors, as they did not understand the reasons for changing the legislation when they entered Ukraine according to the same rules of the game, and more specifically with the guaranteed state size of the green tariff until 2030. However, in an effort to complete their projects, even foreign investors went to a meeting with the Government and agreed to restructure the tariff.
- Are there forces that are not at all interested in resolving the current situation through agreements with at least part of the market? What is their motivation?
- In summary, we can say that 3 positions were actually voiced in the negotiations.
The first position belonged to wind energy companies. Since, due to the rather long period required to build wind farms compared to other RES technologies, the key red line for the wind sector was the opportunity to complete the construction of wind farms, as provided by current legislation by the end of 2022. Having satisfied this condition, the wind energy sector quickly reached unanimity and, accordingly, reached a compromise with the Government.
The second position was voiced by solar energy companies. It was the most difficult to agree with the representatives of the solar energy sector, and difficulties still exist, as no unanimous position has been formed internally between them. Some investors agreed to restructure the green tariff, subject to the extension of its validity for 2 years, ie until 2032. The second, who built SPPs with a tariff of 46 eurocents, were not ready to reduce the tariff by more than 15%, and did not agree to the introduction of a fixed maximum price of 22 eurocents, and the third, who develop solar projects with a total capacity of 10 MW or lower, offered softer restructuring conditions than outlined above.
However, everyone is interested in unblocking payments for electricity and ensuring the further stability of these payments.
- In general, how do you assess the impact of the new conditions on the wind sector? New wind farm projects have the opportunity to be completed until 2022. What is your assessment of the introduction of new capacities in the coming years?
- Clearly, those wind energy projects that are already under construction, such as those that have signed contracts for the supply of wind turbines and other equipment, should be able to be completed. As I have already mentioned, the main reason for this is the long duration of the wind project development, where more than a year is spent only on measuring wind potential, conducting research on flora and fauna of the region in environmental impact assessment, and only then begin negotiations with manufacturers of wind turbines and contractors, as well as obtaining a loan from a bank. All this, in addition, makes wind projects more expensive than solar ones. Given the complexity and time-consuming implementation of wind projects, if a compromise with the Government is not reached, investors in wind energy would turn to arbitration with a high probability of further winning the lawsuits.
By the way, to date, more than 90 wind energy projects from 14 regions of Ukraine have passed the EIA procedure. The size of the tariff for most of these projects will be determined by the results of auctions, because, I emphasize, not all wind energy projects will have time to build by the end of 2022, most will go to auctions.
I would like to draw your attention to another vital issue for the further development of the renewable energy sector in Ukraine. Without the state resolving the issue of balancing capacities and taking measures to manage demand, connecting a large number of new wind and solar capacities to the grid will be either impossible, or NEC Ukrenergo will simply shut down these stations.
- The mood of the owners of solar projects has definitely not improved. Many companies expect non-payment of salaries, inability to service stations, non-fulfillment of credit obligations, even bankruptcy. What are your estimates? After all, many members of UWEA are also owners of solar stations.
- UWEA members do include companies that have solar power plants, at least 1,270 MW of solar capacity, who also intend to either already develop or operate wind projects. These companies agreed to sign Memorandum of Understanding and, accordingly, agreed to the terms set out in this document, because faced with the problem of non-payment for electricity, financial problems with payment for maintenance of their stations, staff salaries, delays in loan payments, penalties by the banks. The memorandum gave hope to these companies to prevent bankruptcy and get out of default.
- We see that the current crisis is already putting investors on hold. We might get an almost complete stop of the introduction of new RES capacity. What should be done first, apart from the adoption of new laws on the Memorandum, so that Ukraine does not lose the pace of RES development?
- The basis for the development of any industry is stable legislation. Every investor, starting a project, calculates its financial model, with which he applies to the bank for financing. The interest of investors in a country directly depends on the predictability of the legislation of this country, ie on how the state complies with the provisions of its legislation. Unfortunately, we have already had the experience of suspending investment projects in 2014 and 2015 due to unexpected changes in the legislation for RES market players. Then all RES investors went to court and won.
Undoubtedly, the current situation on the market will negatively affect the investment climate and attractiveness of Ukraine. Indeed, many investors have now suspended their operations and are waiting to see how the current crisis in the industry will be resolved. The appeal of companies that have already invested in Ukraine to international arbitration, and the probability of this is very high, will significantly reduce the level of investment not only in the RES sector, but also in the economy as a whole.
Therefore, for the further development of green energy it is necessary to resolve the current crisis situation as soon as possible. The first priority is to unblock payments for electricity sold to ensure further stability of these payments. It is necessary to start green auctions and guarantee the invariability of the law for those who win these auctions. The state must be accountable to investors for its commitments.
In addition, NEC Ukrenergo has no less responsibility, in particular, for resolving issues of balancing capacity development, for MPs of Ukraine, for timely adoption of relevant laws, and, of course, for the NEURC, for the implementation of fair tariff policy in all sectors of energy market.
- What is likelihood that the new legislation will be different from the Memorandum? Where exactly can there be changes?
- I would like to emphasize that the Memorandum is not a law, but a mutual agreement between the Government and investors in RES to resolve the systemic crisis in the market. And it is within the framework of these agreements enshrined in the Memorandum that the state has undertaken to fully comply with the terms of the Memorandum. If the provisions of the adopted laws differ from the provisions of the Memorandum in the direction of worsening conditions for investors, UWEA members will be forced to resort to arbitration.
However, I am convinced that wind energy will be developed in Ukraine, because it is the most modern energy generating technology that does not harm the environment and prolongs people’s lives. Wind energy is a balanced economic development of the country, and it is a global energy trend.
