New Europe: The unfortunate state of the “renewables” industry in Ukraine

Ukraine’s government was euphoric over the visit of US Secretary of State Tony Blinkin to Kyiv last week. Grip and grin photos aside, behind closed doors Secretary Blinkin delivered a tough message to Ukraine about corruption. Discussion about corruption in the energy sector was a key component of that delivery, especially as it relates to the renewables energy sector.

After the Euromaidan, the new government of Ukraine made a decision to establish a large-scale renewables sector with its prime motivation being to attract foreign investment. To this end, it offered attractive tariffs and made the renewables sector the greatest generator of FDI in Ukraine.

From 2017-2019, more than $8 billion poured into green energy. In 2020, approximately 7.3% of Ukraine’s electricity was being generated from renewable sources (12.4% including large hydro), with the goal of 25% by 2030. The move away from hydrocarbons was deliberate; Ukraine wanted to align itself with its European Union partners in both participating and contributing to lessening their overall dependence on hydrocarbons. In addition, Ukraine wanted to pursue a strategy towards energy independence.    

Though Ukraine’s strategic objectives are to be lauded, glaring missteps have become evident as they relate to the participation of foreign investors. Relationships with foreign investors is a key ongoing concern because without direct foreign investment, Ukraine cannot, and will not, fulfill its strategic objectives regarding the use of renewables.

The major issue that has cast doubt on this effort is that the government of Ukraine has not abided by its renewable energy contractual obligations, more specifically, paying electricity producers for their production.

After a promising and hopeful start, foreign investors are now owed close to $700 million in unpaid fees. These still unpaid bills, after numerous negotiations and compromises made by investors over the last 18 months are forcing investors to renegotiate bank loans, consider bankruptcy, and pursue international litigation against Ukraine. 

Most troubling is that the confidence of international institutions such as the U.S. DFC, EBRD, the IMF and others who have provided long-term financing for renewable projects in Ukraine, is being undermined and confidence shaken. 

This unresolved situation has the potential to cause financial and macro-economic instability within the country as Ukrainian lenders must prepare for an impending crisis of investors’ inability to service their debts. 

It has now become obvious to Western governments and investors that such behavior is the cause of increased consternation amongst Ukraine’s Western bilateral partners and that it is affecting Ukraine’s international standing.

Ukraine’s inconsistent, undependable, and even erratic behavior towards foreign investors has been exposed. And however hard its leadership may wish to deny that this is not the case, the unpredictable nature of Ukraine’s investment climate, its haphazard attempts to establish the rule of law, its lack of fealty to meet its contractual obligations and its ineffective anti-corruption efforts are privately scoffed at. The promises made by Ukraine’s political leaders are met with incredulity.

Ukraine still has not learned the fundamentals of managing foreign investment.  Attracting, and more importantly, keeping a constant flow of foreign investment into one’s country requires that the government keeps its promises, engender trust, and show a commitment to establishing and managing, a fair and competitive market.

Whether at the highest levels of the federal government to local municipalities, Ukraine’s political leadership still lacks fundamental knowledge of how a free market system actually works. The tradition of economically ambitious individuals entering government for the purpose of making money remains strong.

Stability and confidence are essential to attract long-term investment. With three regions of Ukraine under Russian occupation, attracting investment to Ukraine is no longer an easy proposition.

In general, Ukraine does not have the experience nor the realization that stable foreign investment takes place within a relationship that is based on established trust, good faith, and the expectation of fairness and a fair return on investment. 

What Ukraine still must learn on its road to becoming a major investment space with a western orientation is that if it continues to violate its contractual obligations and not act in good faith in fulfilling its agreements regarding state guarantees, it will continue to forfeit investment confidence within its greater economy. This will have definite long-term implications, greatly impeding its economic growth and the quest to job creation. 

In the renewables sector, Ukraine’s investment narrative and reputation has become such that it is becoming a country within which it is not only too risky to invest but may not even be worth the effort.

Years after the political upheaval of the Maidan, successive governments have not been able to ward off the political manipulations of high-level decision-makers and parliamentary committees by corrupt practitioners. Ukraine’s government cannot guarantee judicial fairness and protection for foreign investors by corrupt interests. One such example is the ongoing legal fight of TIU Canada and Igor Kolomoisky over the illegal disconnection from the power grid as an attempt to raid the company.

But most importantly, Ukraine’s government lacks the political will to pay its debts to foreign investors. This is cause for alarm for all. Ukraine must show that it is willing to learn the importance of committing to the principle of honoring its agreements with its foreign investors. 

What solutions exist to fix this crisis of confidence in the promises of the Ukrainian government to honor its commitments to investors?

First, the issuance of green bonds is viewed as a way to finance the so-called “Guaranteed Buyer”.  These bonds, with maturities of 5-10 years, can provide the Guaranteed Buyer the cash flow to make the monthly payments to green energy producers. State banks have already moved in this direction.  However, the problem is that money designated for green energy payments is diverted to Energoatom and other state agencies.

Second, a carbon tax is inevitable for Ukraine. The only questions that remain is when such a tax will be imposed and the rate of taxation. The country’s largest industries including coal, steel and metallurgy must reinvest in the future lest Ukraine become a countrywide exclusion zone due to pollution. Experts are pushing for the introduction of a carbon tax to cover debts to green energy producers, however, major industry participants (i.e. oligarchs) are already lining up against it. At the same time, government bureaucrats are growing expectant at the thought of new revenues to embezzle and squander.

In reality, the answer is that Ukraine needs both green bonds in the short term and a carbon tax for the longer term. The question that must be answered: does Ukraine’s government have the political will to make the tough choices to get both done?

The original article is available here – https://www.neweurope.eu/article/the-unfortunate-state-of-the-renewables-industry-in-ukraine/