Betrayals and victories of Ukrainian "green" auctions start


On December 3, the Ministry of Energy of Ukraine presented its plans for auctions for the distribution of quotas to support RES projects. Opinions of energy market participants, as usual, have been divided. Let's try to understand the pros and cons of this fact. 

Betrayal 1: delay

The first "green" auction was to take place in April this year, which was clearly defined by the bill adopted in 2019. Even then, the authorities spoke loudly about the crisis in the electricity market, which was partly caused by the rapid growth of RES in the system.

As a partial solution - lowering the cost of RES for the energy market due to the competitiveness aspect of the auctions. The transition to the new mechanism, as expected, caused investors to be wary and to reduce the growth rate of new capacity. Everyone was waiting for auctions to adjust their business strategies. 

But we have the result - the process is delayed for more than a year. As a result, more investors "dropped out" of the Ukrainian market than should have.

Victory 1: finally

Whatever the process, the very fact of launching the "green" auctions is already wonderful. At the same time, remembering that we will be able to completely call this a victory only after the successful holding of the first auction in June next year.

The launch of this mechanism gives a very important message to investors and creditors: “Yes, we have done a lot of unnecessary things in the Ukrainian electricity industry lately. But despite everything, we are moving forward and launching a mechanism that will help renewable energy not to stop its development in Ukraine. ”

For the investor, specific payback figures are not the most important. The first thing is the predictability of the market and the clear position of the state and major stakeholders. This provides a basis for considering investment opportunities in principle. Therefore, from this point of view, the launch of auctions is definitely a plus.

Betrayal 2: quotas

For the first year of auctions, which are planned to be held starting in June, the following quotas are offered:

There are several important “treasonous” points regarding quotas.

  1. The Ministry of Energy took as a basis the proposal of the State Agency for Energy Efficiency. At the same time, it is not clear on what factors this choice was based. Calculations of the impact of these new capacities on the financial and technical condition of the energy market are not publicly available. The fact that the offers of NPC Ukrenergo (grid operator) are radically different is also alarming. The grid operator proposed not to hold auctions for solar and wind power at all in the next 2 years, arguing that they have problems with balancing the grid, which we have seen since the end of last year. Therefore, either these problems are not as critical as the authorities claim. Or they were ignored, which indicates the preservation of a high risk for the stable operation of the grid in the near future.
  2. The total quota for wind projects is 150 MW. The Ministry claims it to be this low due to the presence of 5 GW of signed prePPA contracts. According to them, their implementation will maintain the growth rate of renewable capacities in the near term. However, given the validity of the technical conditions for grid connection for wind projects ending at the end of 2022, most of them will no longer have enough time to be commissioned. Development and construction of wind projects is a long and complex process, so many investors will be very careful to assess the risks.
  3. 155 MW of quota for solar projects is explained by the "oversupply" in the construction of solar power plants, compared to the objectives of the National Renewable Energy Action Plan. But many experts note that the Plan itself has already become inadequate to the reality and has to be updated, along with the National Energy Strategy.
    Add to this the unstable payments under the "green" tariff to operational stations and the unresolved issue of debts for March-August of this year. 
  4. Low quotas are only part of the problem. Law 810-IX states that one company or its affiliates may receive a maximum of 25% of the quota set aside for the auction for one year. In fact, this means that next year one participant can offer:
    for wind farms - a maximum of 37.5 MW of annual quota
    for solar - a maximum of 37.5 MW of annual quota
    for other technologies (mostly bioenergy projects) - a maximum of 15 MW
    If for bioenergy and solar such figures may indicate the economic feasibility of participation in the auctions, then for wind projects it usually starts at about 50 MW. Therefore, we are likely to get very limited activity at the first auctions.

Victory 2: also quotas

And yet, there are positive points in the scenario proposed by the Ministry of Energy. 

If you look at the experience of other countries, quotas for the first auctions are often low. This is a rather complex mechanism that needs to be improved and patched. And you can see gaps in it only in practice. Therefore, we must use the situation to work on improving the functioning of "green" auctions.

Clean energy is not a fashion trend, but a direction of economic development of almost all countries and international organizations. Take a look at the European Green Deal, highly plausible American New Green Deal, the RES development goals of the leading countries and the UN. Ukraine is part of the international community, whether we admit it or not.

Therefore, the actual imminent "extinction" of the "green" tariff and unambitious auctions we can and should compensate with the introduction of other mechanisms to support clean energy. Corporate PPAs, feed-in premiums, contracts for difference, net metering, energy storage and balancing systems will allow us to save time and harvest the huge investment potential that is still waiting for the decisions of the Ukrainian state.

Like every crisis, this one opens up huge opportunities for Ukraine. And we already have the recipe. Relevant draft bills that will allow to launch a set of support mechanisms in parallel with the "green" auctions are already in place or under development. Our common task as the market is not to waste the moment and use it to the fullest.