Yanez Kopach, ex-director of the Secretariat of the Energy Community

 

 

Ukraine had in the past chronic problem with the rule of law. With the war, things got worse, despite the tolerance of the domestic population and Western audience due to war circumstances. War will end sooner or later but the problem of the rule of law will remain, and tolerance will be much smaller.

Post-war reconstruction will be primarily based on private investments. All Western allies have problems with surging public debts, increased energy prices, and forthcoming recession and there will be not much appetite to launch a lot of public money for Ukrainian reconstruction on top of that. Private investors will come only if Ukraine offers sufficient legal security. Before the war, the per capita stock of foreign direct investment (FDI) in Ukraine was less than 1400 USD. In neighboring Poland, this number was almost five times higher. Scientific evidence shows that in absence of public money FDI inflow precedes gross domestic product growth and not vice versa.

The biggest chunk of FDI in Ukraine in the past came into the sector of renewable energy sources (RES). High feed-in tariffs attracted many investors from 2019 on. There was a reason: despite traditional Ukrainian high investment risks like high-interest rates, corruption, and non-functioning courts there was new legal security through a mechanism of generated electricity buyout via state-owned Guaranteed Buyer in the Law on Alternative Energy Sources and collection of RES surcharge through transmission system operator Ukrenergo offering a guarantee of uninterrupted liquidity.  Current high electricity market prices allow new investments without feed-in tariffs but old obligations exist and have to be respected.

There was strong emotional, and interest-driven opposition among several Ukrainian politicians and officials to respecting obligations towards investors taken by the feed-in tariff scheme already in 2019. After interventions of IMF, European Commission, Energy Community Secretariat, and several Western states the situation almost normalized. Only very few investors launched an international arbitrage against Ukraine, the majority agreed to wait a little bit. There was still opposition against respecting legal obligations, run primarily by the energy regulator, NEURC, which didn’t include a proper surcharge into the transmission tariff in 2021, but the state was almost entirely fulfilling its obligations till January this year. Rule of law, meaning also respecting legal obligations, was more or less saved once again.

War circumstances dramatically reduced the liquidity of the electricity sector. Many customers didn’t pay or ceased to exist. Renewables investors were one of the first victims. Russian army occupied some wind turbines and some photovoltaic fields, some wind turbines were stopped due to their location next to hostilities. In March 2022, the Ministry of Energy without any legal basis limited the level of settlements with RES producers to 15% for producers generating electricity from solar energy, and 16% for producers generating electricity from the wind and obliged the Guaranteed Buyer to direct the balance of funds to settlements with RES, and not pay Energoatom and Ukrenergo. The result was that RES producers got some 30% of their claims, slightly more in July. NEURC invented a special way of redistributing money from RES producers through creative calculation of fines for imbalances where RES producers are guilty if Guaranteed Buyer doesn’t sell their electricity on a market. And sometimes it doesn’t sell half of it. Further NEURC fixed the exchange rate for feed-in tariff receivers artificially low despite they must pay back their bank loans in foreign currency. Only this decision, completely contrary to the law, decreased payments of the feed-in tariff for at least a fifth.

Nobody is asking RES investors how they fulfill their obligations towards banks. Ukrenergo stopped paying Guaranteed Buyer for RES producers, despite having an obligation and sufficient funds from transmission tariff, EBRD, and EIB loans and from lucrative export of electricity, which EU allowed to assist in liquidity situation in the Ukrainian electricity sector. The market value of one MWh from Ukrainian RES producers, when exported to the EU, is four times the value of the feed-in tariff.

The reason for Ukrenergo’s non-payment apparently is that they are saving money for financing ineffective state-owned power plants to buy coal. Ukrenergo is further buying curtailment services from RES producers but not paying them. State interventions in distributing the money of market participants is coming back at a large scale and “national security issues” became a very untransparent way to materialize other interests against RES investors, among others.  

All these restrictions were not enough. The Head of the energy regulator, NEURC, Mr. Uschapovskyi recently started to talk about the initiative to cancel feed-in tariff during Martial Law due to lack of funds. As explained, sufficient funds exist, but there are strong interests in using them differently. The cancellation of the feed-in tariff would be so called economic nuclear bomb.

Back to the beginning: RES producers can still sue Ukraine to get their nonpaid feed-in tariff, now or after the war, even if they will bankrupt in between. Ukraine shall think about how to attract FDI since it is and most probably will be Europe’s riskiest economy and everybody will observe what happened to the most important foreign investment portfolio. The current hostile environment for FDI will perhaps in the future attract only highly risk-seeking and subsidy-hunting foreign investors. This is exactly the future killing situation that only enemies of Ukraine wish.

Dr. Janez Kopač, former Director of the Energy Community Secretariat