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Political will and active energy policy are key to Ukraine's energy success

Political will and active energy policy are key to Ukraine's energy success


30.12.2020 (№ LDaily #16)

Political will and active energy policy are key to Ukraine's energy success

Olha Bosak is a member of the Board of Directors of the Norwegian energy company AICEHydro, the founder of Energy Salon XXI and the director of Olha Bosak Management Consulting. She has extensive and successful experience in the energy industry (“Woman of the Year of Ukrainian Energy 2019” in the “Business Leader of the Year” nomination). Olha shared her thoughts on the establishment of the domestic renewable energy market and emphasized that the potential for its development is very high across Europe, and all Ukraine needs is the will to realize it.

LDaily: What do you think about the development of the global renewable energy market? Which countries’ experience is the most attractive for Ukraine and why?

O. Bosak: The development of the global renewable energy market is stimulated by two key factors — economic and environmental. The cost of such energy is getting cheaper every year. According to the International Renewable Energy Agency (IRENA), the cost of new solar power plant projects has fallen by 82% since 2010. We are noticing that renewable energy sources (RES) overtake even coal — their cheapest competitor — in value and displace fossil fuels from the market. According to the forecasts of a leading expert on innovative technologies Ramez Naam, by 2035, the cost of solar energy may fall to $0.01 per kilowatt-hour in the solar parts of the world. The competitive costs of electricity generation make investments in RES more attractive.

Renewable energy has become a global trend. Governments of many countries use it as a tool for sustainable development, which should contribute to balanced social progress. In 2015, the UN set the main goals of sustainable development for up to 2030. The participants of the UN Framework Convention on Climate Change prepared the Paris Climate Agreement. They address these calls to action to all countries. Countries that acceded to the Paris Agreement committed to reducing harmful emissions. Striving to reduce carbon footprint, governments are relying on renewable energy. Given that these energy sources harm the environment less than coal, oil or natural gas, the development of RES has become an important tool for decarbonizing many economies.

Historical transformation processes in the energy sector have been taking place over the last few years in different parts of the world. It is difficult to say which country’s experience can be the most valuable for Ukraine. To my mind, finding a unique way to solve precisely defined problems is the most attractive method. As for benchmarking, I would like to draw attention to France where nuclear energy plays a key role in electricity generation, as in Ukraine, and to countries that are at about the same level of economic development as Ukraine.

LDaily: How would you describe the current state of the RES market and what is your strategic vision for the renewable energy market in Ukraine? What potential do you see?

O. Bosak: At the beginning of this year, when I was moderating a panel discussion on the transition from “green” tariffs to “green” auctions in the country’s renewable energy, I asked a BloombergNEF representative what Ukraine’s chances to take a leading position in Eastern Europe are. I got the expected answer: “Ukraine has a chance to become a leader in renewable energy in Eastern Europe.”

Ukraine has very high potential. It is the largest country in Europe, rich in rivers and lakes, forests and steppes. The continental climate with its warm summers and frosty winters, plenty of sunny days and strong winds in spring allow Ukraine to develop solar, wind and hydropower. The climate in the coastal areas of the Black and Azov Seas is also very beneficial for RES. The bioenergy potential of the country that is well-known for its fertile lands is also obvious. Agricultural land occupies 70% of its territory, which is approximately 41.5 million hectares. According to the International Energy Agency, bioenergy could account for 32% of potential renewable energy production in Ukraine in the future.

In the coming years, I would like to see significant growth in the bioenergy sector. Given the huge amounts of agricultural and industrial waste, Ukraine has great prospects in the production of biofuels produced from biomass. In this market segment, Ukraine has every chance to take a leading position in Southeast Europe in the near future. All Ukraine needs is the desire to realize its potential.

Over the last few years, Ukraine has demonstrated its ability to grow the renewable energy sector, and my expectation is that this trend will continue. According to the plans of the government of Ukraine, the share of renewable energy sources should increase in total electricity production to 25% by 2035. I believe that even more ambitious results can be achieved. I would really like the further development and implementation of the public policy on renewable energy to facilitate the introduction of effective market mechanisms that would support maintaining the balance between supply and demand for electricity in the energy system of Ukraine.

LDaily: What opportunities do you see for investors? Who is the biggest investor in this market today? What is your main recommendation for potential investors?

O. Bosak: Any market at the stage of creation and formation attracts investors’ attention. Unoccupied profitable business niches have made Ukraine an investment target for many investors. During recent years, the Ukrainian renewable energy sector has been one of the key areas of international investment in the country. The Chinese company CNBM Engineering owns about 22% of the solar energy market in Ukraine. The Norwegian companies Scatec Solar and NBT are among the largest investors in the renewable energy sector. It is also important that international financial institutions demonstrated their confidence in the development of the Ukrainian RES sector. The European Bank for Reconstruction and Development co-finances a 30 MW solar power plant in the Cherkasy region (built by a Norwegian solar power project developer Scatec Solar) and a 250 MW wind farm in the Kherson region (built by a local company Syvash Energo Prom and co-owned by French Total Eren and Norwegian NBT).

Until recently, the “green” tariff was one of the main competitive advantages of the Ukrainian renewable energy market. It provided attractive rates for electricity. Starting in 2020, it was replaced by an auction system that reduces the return on investment. Since the cost of electricity production decreases with the development of technology, “green” auctions that seem to be commercially unprofitable should not negatively affect the expected profitability of projects in the near future.

The main opportunities for investors in Ukraine are determined primarily by the government’s plans for further development of the renewable energy sector. If Ukraine continues to focus on increasing the share of renewable energy in the general structure of electricity production, there will be opportunities for businesses. Given that not only Eastern Europe is on the list of attractive regions for investment, the opportunities for investors will be determined by other competitive advantages that Ukraine will be able to offer. Interested investors should constantly monitor the RES market in Ukraine, assess risks and identify potential threats, explore opportunities to take advantage and obtain the expected benefits. After all, constant keeping a finger on the pulse can contribute to a more confident behavior of investors in any market in developing countries.

LDaily: For more than a century, coal, oil and gas have fueled the world. We are currently witnessing a historic transition period. Ukraine has declared a sustainable expansion of the use of all types of renewable energy sources in its energy strategy until 2035. It is planned to increase the share of solar and wind energy to 10.4% and reduce the share of nuclear energy to 32% of the total primary energy supply. Are these terms real?

O. Bosak: Despite the stir over renewable energy, Ukraine still significantly depends on nuclear energy and fossil fuels. The operator of all active nuclear power plants of Ukraine, Energoatom provides more than 50% of electricity generation in the country while nearly 40% of electricity supplies are produced from coal. According to the results of the REmap 2030 analysis, Ukraine could increase the use of renewable energy tenfold — from 87 PJ (2009) to 870 PJ (2030). The obvious natural advantages of the country allow it to expand the share of solar and wind energy to more than 10%. Whether and when this will happen depends primarily on political factors and on the government’s ability to effectively implement relevant strategies.

LDaily: Based on your experience and knowledge, what would you recommend to people who are currently developing renewable energy market reforms? In your opinion, what should they focus on?

O. Bosak: The development of the renewable energy market needs stimulation from the state. It is important to hold public consultations with all stakeholders, discover the basic needs of all market participants, take into account recommendations of both energy producers and consumers when implementing reforms. The coordinated work of key ministries (energy, environment and natural resources, economy, finance, justice, communities and territorial development) and their effective interaction with parliament on energy reforms are extremely important.

Ukraine should strive to increase the investment attractiveness of its own energy sector and improve access to international financing. Attracting international investors provides such benefits for the national economy as the growth of state budget revenues, modernization of infrastructure, new jobs… Consequently, the presence of powerful international companies in the Ukrainian market promotes competition. International investment in Ukrainian renewable energy projects is beneficial as foreign companies can pass on their expertise to Ukrainians when starting a business here.

It is also important to note that an effective corporate governance system is a strong signal for international investors that the country’s energy sector is an attractive prospect. Global energy market participants have repeatedly stressed that greater transparency and simpler access to energy markets can facilitate the foreign capital inflow. Acceptable corporate governance practices in state-owned companies play a very important role in this process, as investors consider them when making decisions. Investors look closely at how companies are managed and how they build their relationships with key stakeholders. Accordingly, improving corporate governance can help Ukrainian energy corporations attract investment. Positive results of the corporate governance reform in the country might influence the investors’ behavior in addressing the issue of investing in the Ukrainian energy sector.

LDaily: What steps does Ukraine need to take to actively develop the industry and gain energy independence?

O. Bosak: The first step is a powerful and effective energy strategy, which should clearly define the future energy profile of Ukraine. What is the desired general structure of electricity production in Ukraine in 10, 20 or 50 years? What will be the balance between nuclear energy, fossil fuels and renewables? How will the share of renewable energy be increased? What is Ukraine’s vision for its main source of renewable energy? What is the percentage of all the country’s renewable capacity and what percentage of the electricity generated will be solar and wind? How will the share of hydropower change? How much capacity will be allocated for bioenergy? What are Ukraine’s investment priorities? When will the domestic electricity market be fully liberalized? What role will Ukraine as one of Europe’s largest energy markets and consumers play in the global market? How will Ukraine strengthen its position? The answers to these questions will help to determine the next crucial steps that the country needs to take for the active development of the renewable energy sector.

Political will and active energy policy are key to Ukraine’s energy success. Diversification of energy sources and supply routes contributes to energy security and independence. By developing the renewable energy market, Ukraine can come significantly closer to achieving this strategic goal. Legislative changes over the past few years have repeatedly demonstrated the country’s intentions to reform the energy sector and promote the development of renewable energy. However, the formation and implementation of renewable energy policy need to be carefully refined. It is essential to create an effective system of state support for the development of renewable energy sources, which will facilitate the systematic implementation of further changes. Synchronization of the Ukrainian energy system with the European ENTSO-E will undoubtedly contribute to energy independence. Ukraine needs to gain access to the markets of the European Union. ENTSO-E will help increase the resilience of Ukraine’s integrated energy system, strengthen effective competition in the domestic electricity market, and provide the necessary reserve functions in the system.

The direction of Ukrainian energy development chosen by the president and parliament, as well as the government’s way of solving the main issues of Ukraine’s energy development, is perhaps the most decisive factor influencing the country’s energy independence, national security and economic growth today.

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