The attractiveness of Ukrainian solar energy

n 2017, a new record for the capacity of solar power plants put into operation in Ukraine could be set. Almost every week there are reports of new projects and contracts, while more and more new solar energy facilities will be built by attracting foreign investment.

What is attractive in the solar energy industry in Ukraine?

Considering the investment attractiveness of projects in solar energy in our country, we should first of all note three factors: the effect of a green tariff, favorable geographical location and, as a result, a high internal rate of return (IRR).

Factor 1: green tariff

Ukraine is one of few countries in Europe with relatively high “green tariff”, when a government buys back all electric power, generated by solar power-stations. Ukrainian state pledged to keep green tariff rates valid till 1 January 2030.

There is an important issue, which must be taken into account about green tariff attractiveness: tariff rates are hardly pegged to Euro currency. This is very important, because in fact almost half of a project’s costs are paid for equipment in hard currency. Quite obvious fact, that western investors would never start to invest in Ukrainian solar energy with profits, pegged to hryvnia, especially considering inflation rates. Correlation of green tariff rates with euro currency is correct and reasonable motivation from the point of view of bringing foreign investments in.

Factor 2: climate

Ukraine is geographically located very advantageous in the context of introduction of solar technologies. First of all, there are plenty enough of sunny days from early spring till late autumn in our latitudes. Ukraine considerably excels Germany, recognized European leader of solar energy, by insolation rates (amount of solar radiation per square meter). But even large annual quantity of sunny days doesn’t make climate in Ukraine very hot, which is very important for work of a solar power-station. Productivity of modern photo-electric modules is strongly influenced by environment temperature: higher surface temperature makes solar panels into less electricity generation.

Factor 3: internal rate of return (IRR)

Actual rate of green tariff together with constantly reducing cost of equipment for solar power stations provides rapid recoupment of invested funds. Solar energy projects in Ukraine, implemented with bank credit investments, provide internal norm of profitability over 20%. This is very high rate. For comparison, in North America or Western Europe IRR up 10% is considered as very good rate. Exactly high internal norm of profitability to a large extent compensates those risks, which all investors in Ukraine are involuntary compelled to cope with: high corruption level, imperfection of legislative acts, political instability, combat engagements in АТО area etc.

Green tariff: how critical is its cancellation?

It is necessary to understand that green tariff is a stimulation method to develop alternative solar energy. First green tariff in Europe was entered by Germany (as far back as 1991), then Switzerland (in 1992) and Italy (in 1993) followed German experience. But we should remember that if in 1991 power capacity cost of a solar battery was about 10 dollars per 1 kW, then in 2013 it went down to 74 cents. Smart state support and stimulation allowed Germany (even with not the best sunny days quantity per year) to become the world leader in alternative energy already in mid-2000s. Thus being the first country, who entered green tariff, Germany also was among the first to cancell its validity. However, favourable tariff rates aren’t applicable only for new-built solar stations; “old” stations continue to use green tariff, although its exact rates were revised.

Only 45 countries in the world entered green tariff to support development of solar energy. And sooner or later they came to the necessity of additional adjusting (in other words, reduction) of green tariff rates. For example, Spain entered time limit within every annual period, when it was possible to generate and to sell electric power on green tariff. Actually it meant effective decline of green tariff rate by 10%. Other countries entered additional taxes (for example, on connection to general electric networks) instead of decreased green tariff rates.

If we talk about Ukraine, then green tariff was entered here in 2009, and thereafter it was revised just once, and this revision was effective only for solar power-stations with power capacity over 10 МW.

Green tariff rate decline is completely objective process, and Ukraine, as well as all other countries, would not succeed to avoid it. It is possible to consider following example as confirmation of the abovementioned thesis: in the whole world not a single large insurance company, working with insurance of investment risks (including both ordinary and political risks) does not include risks, related to cancellation or reduction of green tariff rate, into company’s insurance packages. So investors, already working many years at the market of alternative energy, are both mentally and financially ready to such turn of events. Risks of unplanned decline or cancellation of green tariff is already estimated and taken into account at investment attractiveness calculations for certain project.

It is necessary to understand that even complete cancellation of green tariff is not a disaster, because a station continues to work and there is a possibility to sell electric power by standard (non-green) tariff. Any solar power-station has minimal operational expenses on current activity. And these expenses are uncomparable with an amount of electric power that a station produces and that can be sold further. Only now such sale takes place at common (non-green) tariff, explicitly calculated and entered by NERC, as it takes place, for example, with thermal generation stations. Quite possible that this rate will be less that green tariff rates, actual for today, but it is a quite realistic scenario, that cost of electricity will grow and future sale prices will be comparable with nowadays green rates.

Another important issue is that quite soon Ukraine plans to implement world practice, namely direct agreements market. Novadays all generated amounts of electric power, irregardless of methods of its generation, legally gets into a common pool and then is being distributed among consumers. Market of direct agreements implies that consumers/enterprises will enter into direct contracts with electric power producers, choosing those, who will be able to offer the most optimal tariff rates. And in this very case solar energy can be very competitive. Especially if we take into account another important advantage of solar power-stations, which is their mobility. For example, some investors entered our market with equipment that was preliminary dismantled in other country. No wonder, that they carried additional expenses on dismantling and packing of solar panels, their transporting, re-installation and clearing of a station for operation. But green tariff rate successfully compensated such expenses. Other large advantage of solar energy is a possibility to place a solar power-station closer to potential consumers in order to bring down energy losses. There is quite a possibility that serious production facilities can become such consumers, including even continuous cycle production plants.

When electric power, generated from traditional sources, gets more expensive, application of solar batteries becomes more and more actual together with electric power accumulation systems.

Industrial enterprises, as well as small private objects, in very near future will be able to use solar electric power not only when its generated, but also later, when there is a necessity, but solar radiation is absent or low. Price dynamics on systems of accumulation and storage of electric power testifies in favor of such statement, with full replication of earlier price dynamics for solar power-stations equipment. Modernization of solar power-station, enabling complete power independence of an enterprise, is another alternative for photovoltaic stations, which now work on green tariff.

Summarizing the above, it is possible to say, that solar energy in Ukraine has potential, which is  independent from government control and related to world tendencies. And this fact makes the industry very interesting for investments and progressively opens Ukrainian market for investors from around the world.

Posted in all-news, Markets, News.

Leave a Reply