Prospects for the development of the solar energy industry

Dmytro Lukomskyi, the CEO of Avenston, an investor and top manager who got the Person of the Year award in the Eastern European sustainable energy industry at SEF Awards 2018 and SEF Awards 2019, covered for LDaily readers the issues of solar energy and their causes, as well as proposed solutions that will help the industry get out of the crisis.

LDaily: Dmytro, could you please tell us about Avenston? What is your competitive advantage?

D. Lukomskyi: The story of our group began back in 2007 with the implementation of several investment projects in Ukraine and the United States under the SolarUA brand. These projects were related to the production of photovoltaic components. In 2010, we founded Rentechno — a general contractor in the industry of solar energy. Our group completed the first projects for the construction of industrial solar power plants in 2011-2013. We aimed to benefit from the current feed-in tariff. In the 2015–2018 period, we witnessed a rapid growth of the solar energy market in Ukraine, new challenges for the industry and growing demand for general contracting and development services. In 2018, we established Avenston LLC to provide high-level customer services under market environment transformations. The company implements projects in the field of renewable energy sources and energy-efficient technologies.

First of all, one of the company’s competitive advantages is being present in this market for a long time. The development of solar energy in Ukraine skyrocketed in the second half of 2015, and we were in full swing building industrial facilities since 2011. We are aware of the frequent mistakes made at the stage of the company growth, and therefore are ready to offer our customers well-tested technical solutions in this area.

LDaily: Tell us, please, what is happening now in the solar generation market in Ukraine?

D. Lukomskyi: Unfortunately, this year brought significant changes to the solar energy market of Ukraine, most of which negatively affected the industry.

Until 2020, the entire solar energy market developed because there was state support — the feed-in tariff. The state used to stimulate industrial development and the construction of solar energy facilities.

Now the system of state support for the feed-in tariff is gradually being replaced by a new scheme when there are no fixed tariffs set by law but a system of auctions. It is a good system that has already shown its effectiveness in some countries. Unfortunately, we haven’t yet been able to fully implement the auction system in Ukraine. This led to a situation where the state support for the feed-in tariff is no longer relevant and doesn’t work anymore and the auction system has not come into power. No auctions have been held during the last two years. All the investors who wanted to build solar power plants and are focused on a new system have either frozen their projects or completely canceled them and decided to switch to other markets.

LDaily: In your opinion, what is the cause of these unclear rules of “green” auctions? Why is the system not working properly?

D. Lukomskyi: I think that one of the problems in our country and the market of solar energy and other renewable energy markets in particular is the lack of strategy for the development of “green” technologies at the state level. The visible changes in legislation are mostly situational measures. For example, the recent changes connected to the reduction of the feed-in tariff were a consequence of the fact that the state and many stakeholders in the solar energy market simply didn’t have enough time to prepare for the boom in the construction of new capacity. The entire energy infrastructure in Ukraine was not ready to accept such a large amount of electricity. So, there was a lack of strategy and understanding of what we want to achieve and what results of renewable energy we want to see in the energy balance of the country, in which regions and in what timeframe we want to achieve these goals. All this led us to introducing mechanisms that we see in other countries. At the same time, we don’t understand why they were introduced there, what history preceded it, and what was the outcome they anticipated. That’s why such mechanisms don’t stimulate the development of the industry but only harm it.

LDaily: And how do you cooperate with the state to solve this problem? Is there any negotiation process?

D. Lukomskyi: Our company is a member of the Ukrainian Association of Renewable Energy. I am a member of the board of this organization. We try not to work separately but to consolidate the interests of many industry players. Through the Association, we try to represent the interests of the industry and hope that due to the participation of many companies, this industry can be successful. Our association representatives are members of all public councils that discuss any changes and proposals in our field. We also work with Verkhovna Rada committees. However, unfortunately, this cooperation will hardly bring any quick results. It is a systematic work that will be fruitful in the long run. After all, solar energy means not only state support. If we look at the experience of other countries, renewable energy around the world now no longer receives subsidies from the state. The market begins to work on its own.

From our company’s and the Association’s perspective, it is more important to work on strategic issues that will allow the industry to develop, be successful and build new facilities, regardless of whether the state supports us or not, or what form of support will be introduced in the next few years.

LDaily: Could you please tell us if there is any progress in solving this problem?

D. Lukomskyi: The industry is experiencing a huge crisis this year. The solar energy market as the only structure in Ukraine has collapsed. Several segments develop and live by their own laws. What do I mean?

First of all, these are old projects that used the feed-in tariff. The current level of the feed-in tariff has decreased slightly, but the investors who have already begun to fund equipment and construction are likely to complete their projects. There are two ways for them. The first way is to complete these facilities by the end of October 2020 and get a very small reduction in the feed-in tariff (2%) to avoid a negative scenario. The second way is to complete the facilities by March 2021. In this case, the reduction of the feed-in tariff will be more significant — 30%. For large facilities with a capacity of dozens of megawatts, even such a reduction doesn’t make them unattractive for investment.

The second market segment is represented by projects with a capacity of up to 1 megawatt. By law, such solar power plants can continue their work at a feed-in tariff. Unfortunately, the situation with them is somewhat worse, as the number of specific capital expenditures is traditionally higher for the construction of smaller facilities. Even having the opportunity to use a “green” tariff, investors are in no hurry to invest in them.

If we talk about the solar energy industry without any state support or with minimal government intervention, building solar power plants for their own needs is a very interesting and promising segment. These are commercial solar power plants for enterprises and industrial facilities that have free roof areas. Since such power plants are built for their own needs, there is no need to invest in systems that must be connected to external networks (transformers, external cable lines, telemechanics systems and automated commercial electricity metering systems). This means that the cost of such facilities is significantly lower. Even without the “green” tariff but simply taking into account the current cost of electricity, the payback period of investments in such facilities is close to the payback period of facilities built under the “green” tariff. The latter previously paid off in 4.5-5.5 years. Today, solar power plants will pay off in 5.5-7 years without the feed-in tariff’s benefits. This is the most promising and interesting segment of the solar energy market, which is likely to develop more and more actively from year to year in Ukraine and around the world.

LDaily: What is the general structure of investments in solar generation in Ukraine?

D. Lukomskyi: Sure, the amount of investment depends on the project type — a ground or roof power plant. The sum depends on whether you need to add batteries to solar power plants. They are necessary if the company’s consumption schedule does not coincide with the schedule of solar generation. The battery is a potentially important part of the power generation system, which can greatly affect the final cost. If we talk about a solar power plant without batteries, its average cost in Ukraine will be around €550.000-650.000 per 1 MW of capacity or € 55.000-65.000 per 100 kW. These are approximate figures. They can be adjusted for each project individually depending on the technical task of the facility.

LDaily: Is it easy to build a solar power plant now? How fast can you get a building license?

D. Lukomskyi: It’s not easy to build a solar power plant but there are no unsolvable problems along the way. If you know the route and the order of obtaining permits, everything is quite simple. The key point is to well research this question.

As for the periods, the full cycle of a project usually takes nearly 8 months in case of using the feed-in tariff. The construction itself can take a month, two or three depending on the size of the object. There are still many formal procedures before getting to the construction, as well as procedures that must be completed after the commissioning of the facility — registering a license or the feed-in tariff, etc.

We have never encountered difficulties in obtaining licenses and permissions to operate under the feed-in tariff. Delays commonly occur at the stage of connecting the object to the networks of the transmission organization. The situation is as follows: if the technical conditions for connection to the networks were obtained correctly in the initial stages of the project, all the technical nuances were clarified, then everything is done very easily. If the technical conditions were drawn up in a hurry, without delving into technical issues, the commissioning process is often quite long for such projects. This means additional costs for investors. For this reason, we do not recommend dividing the project stages into separate parts and working with different contractors, as haste can lead to losses in the end. It is better to build a turnkey facility with one contractor, draw up documents correctly and lay down technical solutions at the very beginning of the project. In this case, you won’t face great difficulties.

LDaily: Which regions are in demand for the construction of solar power plants?

D. Lukomskyi: Initially, more facilities were built in the southern regions due to the fact that with the same amount of capital expenditures, the volume of generation on southern projects is higher and they pay off better. On average in Ukraine, the difference between the southern and northern regions is about 10-15% in terms of energy generation. Accordingly, investments are returning faster in the southern regions. However, someone in these regions already takes all convenient connection points for solar power plants. Therefore, in the last few years, investors have faced a situation where the level of generation is higher but the cost of connecting facilities to networks has also become quite high in the southern regions. Investors began to gradually move their projects to the northern part of the country. Currently, solar power plants have already been built in almost all regions of Rivne, Zhytomyr and Sumy. The climatic zone in which our country is located is very favorable for the construction of such facilities at any point.

LDaily: How many people willing to invest in Ukraine’s “green” energy now?

D. Lukomskyi: Very few people want to do it now. This year’s market volumes have declined significantly due to changes in legislation. I think that the results of 2020 will be at least five times worse than the results of 2019. Our industry is in a long crisis. There is a very sharp decline in activity. The market is dominated by old investors who are completing already launched projects but do not invest in new ones. So, there are very few people willing to invest, and their interest is shifting from the feed-in tariff for the construction of facilities for their own needs. Such solar power plants commonly have much less capacity. Anyway, there will be more and more such projects in the future.

LDaily: Could you please tell us, how has the coronavirus affected the solar energy market of Ukraine?

D. Lukomskyi: Rather no than yes. All these changes occurred at the beginning of the year, in January-February. When the quarantine began in March, the market has already stopped. We managed to complete our old projects and put them into operation, but could not start new ones. By saying “we”, I mean the whole industry and all its participants, not just our company.

The situation has stabilized now. For example, our company is launching three solar power plants in the Dnipro region, which we built for an investor from Turkey. They were finished last year, and since the connection to the networks was somewhat delayed, we are putting it into operation only now. Our investors and their representatives come to Ukraine about once a week without any problems, and there are no difficulties.

There were small delays in March-May, when the quarantine delayed the resolution of several organizational issues, as some government agencies worked remotely. We have also experienced the impact of delays in supplies from China. There was a period when Chinese equipment suppliers warned everyone about possible supply disruptions. Everything has stabilized since then.

LDaily: What are the soonest prospects for the solar energy market development? What market growth can you forecast in the long run?

D. Lukomskyi: As I have already mentioned, the market will decrease several times. At the same time, we will see the gradual replacement of high-capacity ground facilities that operated at a “green” tariff with projects for their own consumption and with lower capacity. Most likely, they will not be ground but roof objects. This is a global trend, the natural development of the market and an indicator that this market has become fully mature. In 2021, we forecast a gradual increase in the number of such projects.

In general, if we consider only the Ukrainian market, the current share of renewable energy sources is about 10% of the total country’s energy balance. I think that our country can accept 20-30% painlessly. It is only necessary to move from the large-scale generation concentrated in the southern regions to the medium and small production evenly distributed throughout Ukraine. If the share of solar and wind generation approaches 50% and above, huge investments at the state level will be necessary.

I notice significant prospects for the development of the solar energy industry and I hope that the current crisis will pass in a year or two, well, in a maximum of three, and we will see positive trends in the growth of solar generation again.

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