Fresh out of the trip to Glasgow to discuss saving the planet by becoming the former Soviet state with the most Eurocentric climate change policies, Ukraine wants us to believe that it is ready to go super green. Don’t tell that to some of their biggest clean energy producers. They don’t buy it. A recent dispute with the government over a bond issue designed to fund clean energy projects has mired in a muddy mess of money.
First, an introduction: Ukrainian President Volodomyr Zelenskiy pledged on November 1 at the United Nations climate summit, COP26, to reduce greenhouse gas emissions by 65% below the level 1990s over the next 8 years.
“Our goal by 2030 is to reduce greenhouse gas emissions by 65% and achieve climate neutrality by 2060 at the latest.” he said.
Ukraine had previously pledged to end coal-fired power generation by 2035 while investing heavily in renewables, the Powering Past Coal Alliance said on November 4 at COP26. This greening of the energy sector is important for Ukraine as its mostly depleted coal mines are in the eastern industrial province of Donbass, occupied by Russian-backed separatists, and its state-owned company Naftogaz n has failed to develop adequate natural gas production despite reservations.
Ukraine also depends on European multilateral institutions for development finance. It holds the second largest IMF loan after Argentina. And is constantly seeking funding from the European Bank for Reconstruction and Development (EBRD). In the not-so-distant future, these lending institutions will make adherence to climate change policy a prerequisite for borrowers. Zelenskiy knows it.
“The temperature on Earth can rise much more than two degrees,” he warned, given the continued use of coal and oil in recent times due to rising demand after the lockdown and a reduction of these two resources in the energy matrix of Western Europe. “To curb global warming and achieve carbon neutrality, we will have to make much more effort than expected in Paris in 2015,” he said.
A green mess
Ukraine’s greenward-ho is going to be a tough job. It is a state powered mainly by nuclear and coal. Only Poland has more coal-fired power stations in Europe. Nuclear power represents 52% of electric energy production in 2020, and the share of renewable energies was only around 8%. Ukraine’s current energy strategy sets the target of 17% by 2030. By comparison, the corresponding EU target for 2030 is 32%, but some EU countries have already largely exceeded this figure (for example, in 2020, the share of renewable energies in Germany reached 46.3%).
If they are to rely on euros for cheap money, they will have to go through the program.
Ukraine ranks 26th in the world in terms of CO2 emissionss, roughly on par with smaller Spain – but Spain’s GDP is 8 times greater than Ukraine’s GDP. About 40% of CO2 emissions in Ukraine come from the energy sector. Zelenskiy and many members of the Ukrainian government believe that reducing the use and replacing fossil fuels with renewable resources will show that Ukraine is fighting climate change alongside Europeans.
The problem: this sector is in a precarious financial situation. The largest debt in the wholesale electricity market in Ukraine is owed by renewable energy producers – at the beginning of November it reached 28 billion Ukrainian hryvnas (about $ 1.1 billion).
Debts to renewable energy producers have been accumulating for two years now. According to to official data, the government payment to RES investors for 2020 was about 69% of what was owed under the contract to generate electricity. In 2021, not a month has passed during which the government has paid off its contract in full.
In the summer of 2020, the government all but forced renewables developers to enter into a protocol in which they agree to a “voluntary” reduction in tariffs, but that didn’t help – debts continued to pile up. However, the memorandum provided for a mechanism to repay old debts – the missing funds were to be raised through a state guaranteed loan.
This is exactly what was done: the state-owned company Ukrenergo (the operator of the transport network of Ukraine) issued “green bonds”, guaranteed by the state – and raised the colossal sum of 825 million of dollars. The money came from private investors. The EBRD was also an investor. These funds were transferred to another crown corporation – the Guaranteed Buyer, which was specifically created to provide payments to renewable energy producers. And then the good times began.
The head of the guaranteed buyer Konstantin Petrikovets was immediately sacked – according to him, “for refusing to comply with illegal instructions” not to make payments to renewable energy producers. He went on television saying that.
After the appointment of a new director, payments were made, but not as required to all companies in prorated amounts, as was the original intention.
One company, DTEK Renewables, owned by Ukraine’s richest man, Rinat Akhmetov, has not received any funding. It is the largest producer of renewable energy in Ukraine.
According to Ukrainian media, one reason is that the typical politician-business conflict takes place between the president and Akhmetov – which makes the disbursement of green bond funds one that comes with political prerequisites.
Zelenskiy was elected to fight corruption (like his desoligarchization law, something that George Kent, Assistant Under Secretary of State for European and Eurasian Affairs, says “difficult”) and reform the economy. After COP26, Zelenskiy joins the fight of Europeans against climate change. Everyone wants Ukraine to succeed.
Even without the government’s sidelining of DTEK for now, the private sector in Ukraine is playing a game of Survivor with the government. In each episode, someone is elected off the island, regardless of the sector of the economy. Energy is particularly volatile because it constitutes an important part of the economy.
DTEK is the largest investor in the renewable energy sector in Ukraine and has been in the market for around 14 years. They say they invested 1.5 billion euros in Ukraine during this period and built around 11% of all renewable energy capacity in the country.
If the bond payments are not distributed evenly, it will likely be difficult to see investors willing to develop large-scale renewable energy projects in Ukraine. DTEK, for example, is a large issuer of bonds to foreign investors.
Without the local company’s investment in renewable energy, Ukraine will struggle to meet the Zelenskiy target. It will also be more dependent on Russia for energy, as Foreign Policy magazine pointed out this week.
The perception of the scandal is still strong in Ukraine. This is something Ukraine needs to get rid of as it tries to look less like the Wild East and more like Europe’s “fancy crowd”, the kind that make the world conference circuit and talk about it. climate justice and social equity.
Europe is Ukraine’s biggest donor. If EBRD capital is not used for what Ukraine claims it will be used for, it reduces the credibility of public issuers and damages Ukraine’s still relatively positive image as a bond investment. .