Energy efficiency and alternative energy are now the key point in almost all governmental declarations and programs of national economic development. It is promised that this sector, now of top priority, will receive generous funding next year. As The Day has already reported, Ukraine’s Prime Minister Mykola Azarov recently announced that the government was planning to invest about 100 billion hryvnias in the national economy in 2011. How will energy efficiency and the alternative energy sector be affected by this investment? Is this industry prepared for public partnership? The Day discussed the current interest in alternative energy on the part of state-owned business and Ukraine’s most promising and interesting options for entrepreneurs with Daria REVINA, chair of the Commission for Ecological Investments, Alternative and Renewable Sources of Energy, advisor to the president of ICC Ukraine, chair of the Entrepreneurs Council under the Cabinet of Ministers of Ukraine, and advisor to the president of the National Agency for Effective Exploitation of Energy Resources.
What is the situation in this sector today? To what extent is energy efficiency and alternative energy interesting for Ukrainian business?
“The state has done very much this year for the energy efficiency and alternative energy sector to develop. The 2009 law ‘On the Feed-in Tariff’ has worked, and business has seen that investments in renewable sources of energy can bring good profits, within an acceptable recoupment period. In addition, this year the National Agency for Effective Exploitation of Energy Resources (NAER) has allotted about 600 million hryvnias to this sector — much more than it did in the previous years. This is a major breakthrough for top-priority projects.
“International financial institutions, such as the International Finance Corporation (IFC) and the European Bank for Reconstruction and Development (EBRD) are also interested in this. They are now not only watching and declaring an interest in energy efficiency but also issuing loans for specific projects. In particular, the EBRD decided to open a direct line of credit, because the scheme involving a Ukrainian intermediary bank has failed due to unattractive interest rates. This project is to be launched within a month.
“Moreover, an agreement was ratified on September 21, between Ukraine and the Nordic Environment Finance Corporation (NEFCO), which also provides funding for energy-efficiency projects.
“In other words, 2010 has become a year of concrete steps for this sector. And the next year is expected to further speed up the pace.”
BIOGAS PRODUCERS ALSO NEED THE “FEED-IN TARIFF”
How can the “feed-in tariff” boost the sector’s growth? What problems are still to be resolved?
“The 2009 ‘feed-in tariff’ lays the groundwork. But it is full of snags and lacunas which surface when investors get down to the implementation of projects. For this reason, the Ukrainian National Committee of the International Chamber of Commerce (ICC Ukraine), suggested forming a special commission on ecological investments, alternative and renewable sources of energy at the Entrepreneurs Council under the Cabinet of Ministers of Ukraine. This commission now comprises close to 150 experts who are focusing on the law ‘On the Feed-in Tariff.’ As a result, proposals have already been drawn up about making amendments to this law so that business might carry out projects to the fullest.
“The changes are, in particular, about expanding the range of renewable sources of energy which fall under the ‘feed-in tariff.’ Now it is biomass, solar and wind energy, as well as hydro energy. We suggest adding biogas. Ukraine has a huge quantity of wastes, both organic and solid domestic [an estimated 800 tons for every Ukrainian – Ed.], which are not disposed of. To dispose of them and obtain biogas to boot, we should create attractive investment conditions. So we suggest adopting a higher ‘feed-in tariff’ for biogas than the one for biomass because biogas production technologies are more expensive. Although business is beginning to invest in biogas production projects (for example, at pig and poultry farms), it is looking forward to changes to the ‘feed-in tariff’ in order to reclaim a part of funds.
“It is also necessary to approve an effective mechanism to provide power generation facilities with grid access. This still creates many problems in practice.
“We also suggest a mechanism to make up for investment expenses because, for example, the investor suffers considerable losses when he gets connected to the grid. Although the law says it is the duty of the state to do so, there is no mechanism for fulfilling it, as well as for compensating the investor for building this infrastructure. The Ministry of the Economy once drew up this kind of mechanism. But it was thrown away for proposing that investment expenditures be compensated for 25 years. Conversely, the investor expects to reach the break-even point in three to five years.”
Is this a realistic term for energy project recoupment?
“This term can be 2-2.5 years for biomass projects, while the average figure in the renewable energy sources sector is three to four years. But, again, this requires various incentives. So we suggest finding a mechanism for compensating investment expenditures within five years.
“We could also make use of the best foreign experience, for example, that of Austria. They approve the ‘feed-in tariff’ before, not after, a facility is commissioned. This is very important for attracting funds: now, when an investor gets a loan in Ukraine, he has no guarantees that he will be able to sell his electric power under the ‘feed-in tariff.’
“Ukraine’s Vice-Prime Minister Andrii Kliuiev has supported our proposals and instructed that they be taken into account when changes to the law are discussed. NAER is now coordinating them with the Cabinet of Ministers. We expect parliament to pass these amendments by the end of this year.”
ALTERNATIVE ENERGY REQUIRES AN ANNUAL BILLION HRYVNIAS
Officials are promising business people to carry out energy efficient and alternative projects as well as grant them tax preferences. Besides, this sector is now on the list of top-priority fields in which it is promised to invest about 100 billion hryvnias next year. How much do you think the sector really needs?
“For the sector to develop actively, each year it needs about one billion hryvnias of investments. There is a very powerful potential for increasing capacities. Besides, in the course of time, somewhere after 2012, there will emerge the problem of building new facilities to transmit the electricity produced.
“And it is very important to work out the realistic mechanisms of combining governmental and private funds. For example, the World Bank is now funding energy-related projects in Ukraine. But these funds are not utilized actively because they were made available under a state guarantee and, hence, loans go through the state bank only. And the latter is imposing very unattractive conditions on creditors. So companies ought to be furnished with better funding conditions.”
Can we see any geographical differentiation in such projects in Ukraine? In other words, have entrepreneurs and ordinary people in the provinces learned to take advantage of their locations and resources?
“Some geographical differentiation is already discernible. For instance, as far as small hydroelectric plants are concerned, investment projects are mostly concentrated in western Ukraine, where there are many small- and medium-sized rivers. If you take wind power generation, it is concentrated in the Crimea, Donetsk, Zaporizhia, and Kharkiv oblasts, and western Ukraine once more. If you take solar energy — Odesa, Mykolaiv, and Kherson oblasts, as well as the Crimea. Less powerful solar energy projects are found in other regions, too, but only the abovementioned ones are suitable for powerful projects. As for biomass (which uses woodwork and farming wastes), it is found throughout Ukraine. There is waste everywhere.
“Incidentally, we have initiated the drafting of the so-called map of Ukraine’s renewable energy potential. Together with regional administrations and NAER, we want to find, single out, and systematize the information about where and how these projects can be carried out. This will help Western investors to quickly find the right pattern of behavior.”
Are there any fresh showpiece projects which investors recently carried out?
“Among the ICC Ukraine-sponsored projects, there are the following fresh examples: a powerful French company, CNR, is planning to develop small hydroelectric plants in Chernivtsi oblast, where it is possible to build 26 stations of this kind and competition is not as bitter as in Transcarpathia or Ivano-Frankivsk oblast. We are now discussing with them the choice of concrete stations, grid access, etc.
“The Swiss company AEG is considering the possibility of reconstructing Ukraine’s old boiler rooms that work on coal or gas — they will switch to solid fuels, such as timber waste, hay and straw. This project is interesting because Ukraine has a very large number of such boiler rooms, and it will take less time to modernize them than to build new ones.
“We are also carrying out an interesting project in Ivano-Frankivsk oblast. It involves growing a special energy-related crop, miscanthus [also known as elephant grass. – Ed.], and subsequent generation of electric and thermal energy on its basis. We are going to purchase this crop in the UK.
“It is a very interesting shrub — once you have planted it, it will grow for 10 years and yield bumper crops. But its main distinguishing feature is a heating capacity that is 1.5 times greater than that of wood, while the cost of growing it is rather low.
“A conglomerate of British, American, and Ukrainian investors is interested in generating electric and thermal energy out of miscanthus and in making fuel pellets, because the existing raw material for them is now very expensive in Ukraine.”
In Turkey, you can see a water-heating metal drum and solar batteries on the roof of almost every building. In other words, the Turks can afford this kind of energy-efficient equipment. Is it possible to make it cheaper for Ukrainians? How can one increase the Ukrainians’ interest in installing wind plants, solar batteries, etc.?
“We have studied the experience of Turkey. Why are solar batteries and wind generators so widespread there? Because the state subsidized the purchase of special equipment and the manufacturers so they could benefit from making and selling them at reduced prices. The same pattern is applied in most European Union countries. In some countries, such subsidies reach 50 or even 70 percent of the equipment price.
“Besides, energy resources are more expensive there than in Ukraine. This is an additional incentive to launch alternative energy projects. As a result, alternative facilities have been installed at such a fast pace in the past three years that the EU is now thinking of how to slow down this process.
“So Ukraine does not need to ‘reinvent the wheel.’ All we have to do is use positive foreign experience after checking it for mistakes.
“After making a careful assessment, we recommend introducing 20-percent subsidies for the alternative energy equipment.”
