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Ukraine's Green Tariff: Great News in 2008 But What Happens in 2009?
Jon Queen, Dallas TX (16 Dec 2008)
On 25 September 2008, Ukraine's Verkhovna Rada adopted the Law "On Amendments to Certain Laws of Ukraine Concerning the Introduction of a Green Tariff" by an overwhelming 292 vote margin.
Nicknamed the "Green Tariff" within the Ukrainian investment community, the law aims to make investment into Ukraine's clean and renewable energy sectors more attractive by allowing these sectors to charge higher electricity tariffs to the wholesale energy market. Tariffs are set by the National Electricity Regulatory Commission of Ukraine ("NERC"). Energy producers eligible under the Green Tariff alternatively may opt out of selling to Ukraine's wholesale energy market and instead sell their electricity to private end users under independent, commercially negotiated contracts.
The Green Tariff covers "alternative" energy production facilities such as wind power plants, hydropower, biomass, biogas, and other methane utilization projects (except blast-furnace and coking gases). For hydropower plants, an eligible facility cannot exceed 10 MW in capacity.
According to the presently adopted language, NERC will fix the Green Tariff for 10 years although it may revise tariffs annually if it chooses. The Green Tariff shall be set at a level no more than double the average weighted tariff for electricity sold into the wholesale market, but no less than double the average tariff on electricity sold into the wholesale market the year previous to when the tariff was set.
Generally speaking, Ukraine's Green Tariff can be viewed as a landmark effort to take Ukraine's energy infrastructure and markets in a positive new direction. Enhanced tariffs should trigger enhanced investment activity in these sectors and a corresponding new level of new technology transfers, jobs, energy security, export possibilities, and capital injection into the economy. To actually achieve these possibilities, however, more work is required to take the Green Tariff from a conceptual legislative stage to a practical working stage.
President Victor Yushchenko still needs to sign off on the law. After the President approves the Green Tariff, NERC must draft additional regulations clarifying how the Green Tariff will operate in practice from a functional point of view. The definition of what constitutes renewable energy should also be re-examined and clarified, especially with regard to the 10 MW hydropower cut off that is inconsistent with key related investment markets (such as the Joint Implementation Mechanism under the Kyoto Protocol).
The investment community has responded positively thus far to the Green Tariff, despite the fact that it needs significant further work to become a functional market mechanism. Traditionally overlooked energy sectors in Ukraine, such as wind power, are now experiencing a brand new level of interest and activity. From a more grass roots point of view, it is clear that the Green Tariff buzzword has sustained investment interest in Ukraine's clean and renewable energy markets during the present financial downturn.
The Green Tariff could place Ukraine in a very strategic investment position compared to neighboring countries if it is finalized and implemented properly. Theoretically the Green Tariff could create a Pareto optimal outcome for the Ukrainian government, investors, individual energy consumers, and the environment. But with improper completion the Green Tariff will fall short of its intended effect and instead will represent an unfortunate example of missed opportunity. The energy community is cautiously optimistic, with several large domestic and foreign stakeholders offering their insights and advisory services to the government.
What will be the ultimate impact of the Green Tariff, and how will it affect Ukraine's energy markets in 2009? As with many things, the answer will depend in part on the future domestic political picture. Right now the Green Tariff represents a step in the right direction - one that hopefully will prompt astute and consistent follow-up measures in the near term.
